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p. 4 of 10 BACK | NEXT Executive Summary I. The Context II. Present Bank Policies and Practices III. Graduation Policies of Other Multilateral Development Banks IV. Rationalizing the Bank's Classification and Graduation System V. Other Operational Implications VI.Conclusions VII. Recommendation

A Graduation Policy for the Bank's DMC's

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III. Graduation Policies of Other Multilateral Development Banks

A. World Bank Group

1. International Development Association (IDA)

24. IDA's policy is that concessional assistance, both in the form of resource transfer as well as technical assistance (TA), is designed to aid countries make the transition to International Bank for Reconstruction and Development (IBRD) lending and eventually to creditworthiness in international capital markets.
25. Graduation from IDA is based on per capita GNP and creditworthiness considerations. Until 1984, the per capita GNP benchmark for IDA eligibility was $250 at 1964 prices, adjusted annually for inflation. In 1984, a second informal benchmark was introduced in view of the increasing number of eligible borrowers and the limited resources available. The first explicit operational cutoff was $580 at 1987 prices, which when updated is $925 at 1997 prices. The original benchmark ($1,505 at 1997 prices) has been retained as a "historical" ceiling. The reason for not discarding the original benchmark is that the United Nations (UN) and other agencies use it to determine eligibility for other concessional assistance. Also, IBRD borrowers that are below the cutoff have access to loans on 20-year maturity terms.
26. Creditworthiness considerations have always guided IDA lending policies. IDA Articles of Agreement limit it from providing assistance if financing (i) is available from private sources on terms that are reasonable for the recipient, or (ii) could be provided by a loan of the type made by the IBRD. In some cases, countries with per capita incomes below the operational cutoff have not received IDA credits as they were creditworthy and were able to obtain substantial loans on nonconcessional terms, including loans from IBRD. The Philippines and Thailand obtained their last IDA credits in fiscal year (FY) 1979, and Indonesia 20 in FY 1980, despite having per capita incomes below the formal eligibility guidelines at that time.
27. Conversely, some countries that are above the operational cutoff have not been graduated from concessional funding. IDA recognizes two specific exceptions to the application of the operational cutoff, both based on the principle that a member of the World Bank group should not be left without access to either IDA or IBRD, provided its performance is adequate. The first is that under exceptional circumstances, temporary access to IDA may be extended to countries whose per capita income is above the operational cutoff, but whose creditworthiness for IBRD lending is limited. Such countries would be expected to be undertaking major adjustment efforts, designed at least in part to restore creditworthiness within a reasonable period of time. The second exception relates to the small island economies and is based on three considerations. First, these island economies share most of the problems of low income countries (export concentration, high cost of infrastructure, and limited skills and institutions). Second, they are vulnerable to natural disasters, are isolated, lack natural resources, and do not have access to commercial credit. Third, their average level of per capita income is often heavily skewed by large numbers of foreign residents with incomes that are considerably higher than the average. Eligibility for the small island exception is decided by the IDA Board of Governors at the beginning of each IDA replenishment, based on the recommendations of management. Some of the small island economies are also classified as least developed countries by the United Nations. IDA charges LLDCs the same terms for IDA credits as other IDA-only countries.²¹
28. Graduation from IDA is usually not a sudden process. Transition to IBRD lending usually takes place well before countries reach the IDA eligibility limit through a blending of IBRD and IDA resources.

2. International Bank for Reconstruction and Development (IBRD)

29. According to IBRD policy, graduation reflects the achievements of a country in reaching a certain level of development, management capacity, and access to capital markets. The policy also states that graduation from IBRD borrowing does not imply that the development process is complete. Rather, it implies that the special financial and technical support that IBRD provides to a graduating country is no longer justified in view of the demand from other members on limited IBRD financial and staff resources. Further, because graduation is the culmination of a process extending over many years, it is neither abrupt nor unpredictable. IBRD countries progress through a sequence of increasingly harder terms (i.e., shorter maturity and grace periods) before they finally graduate from IBRD assistance. The per capita GNP limits are $1,505 or less for 20-year IBRD terms; $1,506-$3,125 for 17-year IBRD terms, and $3,126 or more for 15-year IBRD terms.
30. When a country reaches a GNP per capita benchmark ($5,445 at 1997 prices), IBRD analyzes its readiness for graduation. The analysis focuses on (i) determining whether the country has access to external capital markets on reasonable terms, and (ii) the progress the country has made in establishing economic and social institutions. Recognizing that countries reaching the graduation threshold may differ in the extent of their progress towards developing key institutions for economic and social development, IBRD takes a flexible approach to determining the pace of graduation. Graduation from new IBRD lending normally occurs within five years after a country crosses the graduation benchmark, with variations according to country-specific conditions.
31. In regard to the procedure for graduating countries, until 1984, if a country had reached the GNP per capita benchmark, the World Bank management sent a graduation paper to its board for formal approval. Since 1984, the board is simply informed of the graduation when the last loan is extended to the country. Over the past ten years, five countries²² have graduated from IBRD. Following graduation, IBRD is prepared to provide TA on a reimbursable basis. Graduates from IBRD continue to be eligible for International Finance Corporation (IFC) operations for several years.

B. Inter-American Development Bank (IaDB)

32. IaDB has a four-tier (Groups A, B, C, and D) country classification system to determine eligibility of its members for assistance from its three sources: The Fund for Special Operations (FSO); the Intermediate Financing Facility (IFF); and Ordinary Capital (OC). Resources from FSO, IaDB’s soft loan window, are distributed among the poorest, least developed borrowing countries. These are classified as Group D countries and are typically the IDA-only countries of the region. A country that uses FSO may also be eligible for OC resources. IaDB management makes decisions regarding country creditworthiness and the prudence of extending OC lending to FSO-eligible countries on a case-by-case basis. Further, countries in Groups C and D are eligible to borrow from IFF, IaDB's "Third Window." In allocating IFF resources, priority is given to countries that are not eligible for FSO. Groups A and B are eligible only for OC borrowing. While IaDB has an informal process of assessing the needs of its member countries for assistance, it does not have a formal graduation policy.

C. African Development Bank (AfDB)

33. ADB has a three-tier classification system²³ to determine the eligibility of its member countries to borrow from the African Development Fund, its concessional window. The classification is based on the World Bank's classification system. Thus, AfDB’s 39 Category A countries are those deemed lacking creditworthiness for nonconcessional financing by the World Bank (i.e., IDA-only countries); the 3 Category B countries are deemed creditworthy for blend financing by the World Bank; and the 11 Category C countries are IBRD-only countries. In Category B, AfDB reserves concessional resources for activities targeted at poverty reduction.

D. European Bank for Reconstruction and Development (EBRD)

34. EBRD provides loans on nonconcessional terms only. The EBRD board has recently approved a policy on graduation of its countries of operation. This policy is based on EBRD’s charter mandate of advancing transition towards market-oriented economies. The EBRD concept of graduation rests on three principles: (i) transition impact, (ii) additionality, and (iii) sound banking. Transition impact is defined as the effect of a project on the economy or society, in particular on the transition process itself. Additionality is defined as the effect of EBRD on the project. The sound banking principle requires assurance that EBRD’s investment is secure. These principles are used toward phased graduation across market segments within a country. As a country advances, it will have fewer and fewer segments in which the principles of transition and additionality are met. Eventually, the country will graduate from EBRD operations entirely. None of EBRD's countries of operation are expected to graduate in this sense within the next few years.

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