A Graduation Policy for the Bank's DMCs

Table of Contents

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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

VI. Conclusions

94. In view of the changing patterns in the debt repayment capacities of DMCs in the region, there is a strong case for reengineering the classification system (last reviewed in 1977) to better address present realities. The revised system will provide a formal framework in which countries graduate through a sequence of stages in Bank financing, culminating in graduation from regular Bank assistance.

A. Graduation from ADF

95. Based on the Bank's policy that country criteria should be the primary consideration for access to/graduation from ADF, the decision matrix (Table 1) shows the basis of the policy framework. This matrix has been designed for the joint application of two main country criteria, per capita GNP and debt repayment capacity. In the past, debt repayment capacity has been assessed on a qualitative basis. The qualitative basis has been refined and a quantitative dimension has been added to provide a more systematic assessment of debt repayment capacity. Based on this, the current blend group (Group B) is proposed to be split into two categories: (i) ADF with limited OCR (Group B1), and (ii) OCR with limited ADF (Group B2).

96. The criteria and the structure of the matrix have been developed to provide a stable policy platform over time for eligibility for and graduation from ADF. However, the application of the criteria at different points, and consequently their location in the decision matrix, would change in time to match changing economic circumstances of DMCs. Also, movement across the decision matrix would not be irreversible. It is proposed that the periodic review of eligibility for ADF would coincide with the ADF replenishment exercise.

97. Applying the methodology to current data yields the results in Table 2. The application of the decision matrix implies the following:

Kazakhstan, Papua New Guinea, Philippines, and Uzbekistan, will graduate from ADF-OCR blend to OCR-only. Phase out of ADF has been completed for all these countries except Papua New Guinea which will be allowed two years for the phase out. All the above DMCs, together with Thailand (a DMC that ceased to have access to ADF in 1983 but has remained in Group B), will be graduated to Group C.
Indonesia will be on watchlist for the effectivity of graduation out of ADF. It will be classified as Group B2 for the present.
People�s Republic of China and India will graduate to Group B2 and be eligible for OCR with limited ADF but as mandated by donors, will not have access to ADF during the ADF VII period.
Pakistan will continue to receive a blend of ADF and OCR resources and will be graduated to Group B1. Bangladesh, Cook Islands, Marshall Islands, Micronesia, Sri Lanka, Tonga, and Viet Nam will graduate from ADF-only (Group A) to ADF with limited amounts of OCR (Group B1). However, limited OCR eligibility for Cook Islands will be applied only after the external debt position of the country improves.

Normally, OCR funding to Group A (ADF-only) countries that have weak debt repayment capacity will not be encouraged. However, an exception could be made in projects that generate foreign exchange earnings in excess of the foreign exchange debt repayment requirements. (para. 47).

B. Graduation from Regular Bank Assistance

98. A formal policy is proposed for graduating countries from Bank regular assistance (paras. 67-74). Typically, graduation from regular Bank assistance will take place after the required criteria are met for four successive years. The following nonborrowing economies, namely, Hong Kong, China; Republic of Korea; Singapore; and Taipei,China will be graduated on the effectivity of this policy since they have met this four-year requirement. Graduation will not be a termination of a DMC's relationship with the Bank. Rather, it will be a new phase in the relationship, with implications for regional cooperation.

C. Ceiling on Bank Financing of Project Costs

99. In step with graduation from a higher level of concessional funding to a lower level, the applicable cost-sharing limits for project and TA financing will normally be lowered. For project financing, however, the existing provision of flexibility to take into account country and project considerations will be retained. For Group B1 DMCs, the limit will fall from 80 percent to 70 percent. For Group B2, the applicable ceiling would be 60 percent. The lower ceilings for countries that have been reclassified would be effected in phased manner, with a 5 percentage point reduction per year.

D. Norms for TA Cost Sharing

100. New norms have been proposed for cost sharing in TAs (para. 91). Government contribution to TAs should be at least 15 percent of the total TA costs for Group A, 20 percent for Group B1 and B2, and 30 percent for Group C. However, such contribution will be subject to the limit of total TA costs minus foreign exchange costs and costs of domestic consultants.

E. Domestic Preference Scheme for Procurement of Goods and Civil Works

101. Pending review of the policy for domestic preference in procurement of goods and civil works, the status quo will be maintained in regard to the current eligibility of individual DMCs under the domestic preference scheme.

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V. Other Operational Implications