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p. 2 of 6 BACK | NEXT I. Introduction II. ADB’s Classification Policy III. Key Facts of Azerbaijan IV. Criteria for Classification of Azerbaijan V. Operatinoal Implications VI. Recommendation

The Country Classification of Azerbaijan

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II. ADB’s Classification Policy

2. Since 1998, ADB has adopted a new classification system, moving from the former three-tier classification scheme into a four-tier scheme. The change was intended to balance the access to ADB resources more equally over time by adding one more group and to allow graduation from one tier to another. The movement in the matrix is bi-directional: a country can move up and down the ladder, and leave the scheme entirely. To avoid frequent movements between groups, a time lag of four years is recommended before a reclassification should take place.

3. All DMCs have been classified in line with the new graduation policy in 1998 (Appendix 1). Countries that had recently been moved from one group to a higher one were given sufficient time to adapt to the new situation. The consequences for these countries were individually discussed in the 1998 policy paper.

4. The framework of the graduation paper provides the classification procedure described in this paragraph. On the basis of the UN classification of low income and less developed countries (LLDCs), DMCs are first divided into LLDC countries and others. Then, two criteria are applied: per capita gross national product (GNP) and debt-repayment capacity. The criteria are arrived at through a two-stage process. In the first stage, the per capita GNP operational cut off is applied to divide borrowing DMCs into two categories (i.e., those below and those above the cut off). In the second stage, within each income category (i.e., below and above the per capita GNP cut off) countries are further differentiated on the basis of debt repayment capacity as weak, limited or adequate.

5. The joint application of these three steps yields the following system of DMC eligibility for the Asian Development Fund (ADF) and Ordinary Capital Resources (OCR): (i) ADF-only (Group A); (ii) ADF with limited amounts of OCR (Group B1); (iii) OCR with limited amounts of ADF (Group B2); and (iv) OCR-only (Group C). The table shows the decision matrix used for classifying DMCs.

6. To determine the per capita GNP, the International Development Assistance (IDA) operational cutoff has been adopted. IDA's current cutoff is $885 in 1999 prices. The debt repayment capacity comprises a quantitative and qualitative determinant. The quantitative component uses four indicators: debt sustainability, private capital inflows, gross domestic saving rate, and size of economy. The qualitative assessment captures five indicators: the categorization as a heavily indebted poor country by the World Bank and the International Monetary Fund (IMF), volatility of export growth, main external financing source, degree of access to IDA funds, and whether sovereign borrowing by the country is rated by Moody's and Standard and Poor's.

7. The system of country classification has an additional impact on operations in regard to cost sharing and levying domestic preferences. The minimum government contribution to total costs of technical assistance (TA) for Group A is at least 15 percent; for Group B1 and B2, 20 percent; and for Group C, 30 percent. The cost-sharing limit for project financing is 80 percent for Group A, 70 percent for Group B1, 60 percent for Group B2, and 40 percent for Group C.^c

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