Transcript m4DebtConcessionality

Debt Concessionality
SNA Chapter 14 (external transactions)
Background
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Debt concessionality has gained increasing
importance in the development arena
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relating to debt relief to HIPC (heavily indebted poor
countries) Initiative
1993 SNA hardly discusses the issue, although it
recognizes a subsidy element in concessional loans to
employees (para 7.42), as does GFSM 2001 (para
6.14).
BPM5 recognizes that concessional loans encompass
a transfer element (para 104)
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falls short of providing guidance on how such transfers
should be measured or recorded.
Background
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The paper sets out five possible ways of treating debt
concessionality for noncommercial official lending.
It concludes that the measurement of debt
concessionality for these loans be recorded in a
supplementary item and be in line with approach
used by those measuring debt relief.
Why is this Issue important
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The demand for data has increased
tremendously since the 1993 SNA.
Examples include:
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The Millennium Development Goals incorporate
debt relief and concessional lending among its
indicators for monitoring debt sustainability.
The HIPC debt sustainability discussions focuses
on specific amounts of debt concessionality.
Need to develop a consistent definition
regardless of whether the debt is new or
being rescheduled.
Discussions on this issue
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BOPTEG discussed this issue in December
2004,
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considered that more investigation was recognized
given the issues that arose during the discussion.
IMF staff undertook further work consulting
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those with a policy interest in the IMF,
government finance experts, and
the debt experts from the relevant international
agencies on the TFFS.
Discussions
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BOPCOM considered the issue in June 2005
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no consensus to include transfers arising from
concessionality into the core accounts, and so
preferred a supplementary item, and
was divided as to whether such transfers should
be current or capital.
The BOPCOM paper was presented to the
OECD’s Working Party on Financial Accounts
in October 2005
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few comments were received.
Current Practice
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DAC calculates concessionality as
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At the Paris Club, debt reduction in present value
terms is calculated
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the difference between the nominal value and the present value of
the debt service as of the date of disbursement based on a
discount rate applicable to the currency of the transaction and
expressed as a percentage of the nominal value.
The difference between the nominal value of the applicable debt
and its present value using a market-based interest known as the
OECD’s Commercial Interest Reference Rate (CIRR) is the amount
of debt relief derived.
As noted by World Bank and others, transfers arising
from concessionality are not limited to interest rate
alone—the grace period, the frequency of payments
and the maturity period.
Possible treatments
Record concessional debt in nominal value
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(a) without accounting for the transfer element in interest rate.
(b) but account for the difference between the market interest
rate and the contractual interest rate on the debt as an on-going
current transfer.
(c ) but account for the concessional interest by recording a
capital transfer at the point of loan origination equal to the
present value of interest cost savings.
(d) but record one-off transfers at the point of loan origination
equal to the difference between the nominal value of the debt
and its present value using a relevant market discount rate, as a
supplementary item.
(e) Record concessional debt at market-equivalent value but
account for the concessionality element by recording one-off
capital transfer at the point of origination.
Option (a)
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This is no change
But because of the interest described above in data
on debt concessionality, was never seriously
considered by any group that considered the topic.
Option (b)
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Has the logic that the debtor is accruing less in
interest than at the market rate.
But how is the market rate to be determined?:
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Should it be fixed at the time of the contract, the problem of
recording transfer based on market rates no longer relevant
Or should the market rate change with market conditions. After a
period of time may not be concessional, could switch between
concessional or not, but the two parties are locked into the same
loan.
Rather, if there are no conditions attached to the
stream of future interest payments (BPM5 para 546)
it is plausible to say that transfers arising from
interest concessionality occur at the time of debt
contract .
Option (c )
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For a new loan: difference of two streams of interest
payments—one based market interest rate and the
other the contractual interest rate—with the value of
the transfer calculated as the present value of the
difference.
Such transfers could be recorded in the year they
occur (i.e., when the contract becomes effective) as a
memorandum item.
This option is simple to implement and consistent
with the concept of change of economic ownership.
However, transfers do not arise from interest rate
alone but are determined by many variables including
the grace period, frequency of payments and
maturity period.
Option (d)
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Include transfers arising from concessional loans as a
supplementary item,
 transfer value calculated as a capital transfer the same as
for DAC and the Paris Club (Table 1 in the paper)
If loan is retired before maturity and replaced by a new loan,
adjustment of the previously recorded transfers is required.
This approach consistent with practice described above and also
supported within IMF by Policy and Review Department.
However, problem of appropriate discount rate: possibilities
include the CIRR used in HIPC debt sustainability calculations.
As a supplementary item allows these transfers to be measured
and data disseminated, and compilers can develop their
approaches overtime.
Option (e)
Record the loan at market-equivalent value
In the standard presentation two credit entries for
the debtor would need to be recorded—
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one under loans equal to the present value of the concessional
debt, and
another under capital transfers equal to the difference between
the nominal value of the debt and its the present value using the
market-equivalent rate as a discount factor.
Interest on the loan would accrue at the marketequivalent rate as opposed to the contractual
instrument rate.
Such an approach is contra to the principle that
loans are valued at nominal value
Questions for AEG
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Is the approach to defining these
concessional loans, drawing on the work of
the External Debt Guide (noncommercial,
official loans) acceptable?
Would option d) be an acceptable outcome?
Does the AEG consider that further work
should be encouraged to obtain better
measures of appropriate market equivalent
rates, to be used as the discount factor, but
regard the CIRR as an acceptable proxy in
the absence of other information?