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Document 52011SC0874
COMMISSION STAFF WORKING PAPER Criteria for determining the Use of Loans and Grants in EU Macro-Financial Assistance
COMMISSION STAFF WORKING PAPER Criteria for determining the Use of Loans and Grants in EU Macro-Financial Assistance
COMMISSION STAFF WORKING PAPER Criteria for determining the Use of Loans and Grants in EU Macro-Financial Assistance
/* SEC/2011/0874 final */
COMMISSION STAFF WORKING PAPER Criteria for determining the Use of Loans and Grants in EU Macro-Financial Assistance /* SEC/2011/0874 final */
Table of Contents 1..... Introduction.. 2 2..... Historical overview... 2 3..... Practices of other international
organisations. 3 4..... Criteria.. 6 4.1. Level
of economic and social development 7 4.2. Debt
sustainability and repayment capacity. 9 5..... The Commission’s approach.. 11 6..... Conclusion.. 14 Annex 1: World Bank country classification by income
group. 15 Annex 2: Countries eligible for the IMF’s PRGT. 18 Annex 3: DAC list of ODA recipients. 19 Annex 4: Selected debt indicators of MFA-eligible
countries/territories 20 1.
Introduction Macro-financial Assistance (MFA) from the EU can
take the form of loans or grants, or a combination of both. While eligibility
for MFA has been informally based on the “Genval criteria” (last stated in the
conclusions of the ECOFIN Council of 8 October 2002), these do not
precisely define the criteria on which to base the decision whether to provide
MFA in the form of a loan, a grant or a combination of the two. An accompanying
letter from the President of the Council to the President of the Commission[1] simply notes that “the
concessionary element shall be reserved to low income countries established
according to the country’s per capita income and creditworthiness and be
adapted to the debt repayment capacity of the beneficiary country concerned.” The present note explains the methodology that
the European Commission has developed over time to guide the decisions on the
use of loans or grants in MFA operations. This methodology was further
formalised and updated in a note that was endorsed by the Economic and
Financial Committee (EFC) in January 2011. Its main principles are also
expected to be reflected in the proposal of a Framework Regulation on MFA under
preparation. The note sets out with a brief historical
overview of the use of loans and grants in MFA, followed by a review of
practices employed by other international donors, notably the IFIs. Starting
from the premise that MFA – as an instrument of support in short-term and
transitory balance-of-payments difficulties – should by default take the form
of a loan, the methodology uses various criteria in order to determine possible
eligibility for MFA grants. A selection of indicators deemed best-suited to
guide decisions on whether to opt for a loan, a grant or a blend is used. The
results are then cross-checked against the treatment granted by the IMF and the
World Bank to the country in question, notably with regard to its access to the
concessional facilities of these institutions. For simplicity and completeness, the tables and
charts in this note include analysis on all candidate and potential candidate
countries and all ENP countries. In addition, Tajikistan and the Kyrgyz Republic appear as memorandum items, having either received or requested MFA from
the EU in the past. 2.
Historical overview Since 1990, 55 MFA decisions have been approved,
with total commitments amounting to EUR7.4bn and effective disbursements of
EUR5.3bn. Twenty-three countries have benefited from this assistance. The size
of individual MFA operations has ranged from EUR15m (Moldova in 1996, 2000 and
2002) to EUR870m (Hungary in 1990). The experience with MFA operations over the past
20 years shows that most MFA support (86% in terms of financial volume) has
taken the form of loans. However, while during the 1990s, nearly 95% of MFA
funding was lent to beneficiary countries, the first five years of the 2000s
saw a significant increase in grants: nearly half of all MFA funding took this
form (see left-hand side of Chart 1). This shift reflected in part the
increased number of operations in the Balkans during this period, combined with
the fact that many of them were in a post-conflict situation and had weak
repayment capacity. Meanwhile, during the recent resurgence in MFA operations
in the wake of the global economic crisis, loan financing has risen again, to
roughly three-quarters of total financial volume committed. This includes
substantial loans to Balkan countries (Serbia and Bosnia-Herzegovina), whose
debt servicing capacity has strengthened significantly since the initial MFA
operations in the region, and to Ukraine. Chart 1: Percentage of loans and grants (on a
commitment basis), 1990-2010 Financial volume || Number of operations Source: European Commission, Annual Reports on
Macro-Financial Assistance The share of grants is generally higher if
measured by the number of operations (see right-hand side of Chart 1) than if
measured by financial volume committed. This reflects the fact that grant
operations have tended to be of relatively small amounts, not least in light of
budgetary constraints. Over the entire lifespan of the MFA instrument, 54% of
operations (in number) took the form of
loans, 27% were grants and blend operations made up the remainder. 3.
Practices of other international organisations Different international organisations have
developed methodologies for classifying countries and, on that basis, for
determining the eligibility for certain types or terms of assistance. Notably,
the World Bank first divides recipient countries into those eligible for
IDA (the concessional arm of the Bank), IBRD (the arm responsible for
non-concessional lending) or “blend” financing.[2] Within the
IDA-only group, there is then a “traffic light” system to determine whether a
recipient country will receive all of its aid either in grants or concessional
loans or whether an (equal) split between the two will be applied. Furthermore,
the terms of IDA loans, while always concessional, are also differentiated
depending on beneficiary countries’ income levels. The World Bank’s official criteria for IDA
eligibility are per capita income[3] and creditworthiness for
IBRD lending as assessed by the IBRD’s credit risk department.[4]
While the two criteria are often related, the creditworthiness criterion is in
practice the more important one, as a World Bank beneficiary country can remain
IDA-eligible even if it has an average income level above the IDA income
cut-off, until it is sufficiently creditworthy to access IBRD loans; this is to
avoid a situation in which a country is cut off from World Bank financing
altogether.[5] By contrast, if a country
is sufficiently creditworthy for IBRD lending, it will not remain an IDA-only
country, even if its per capita income is below the threshold. Instead, it will
be a “blended” country, with access to both IBRD and IDA (e.g. India, Pakistan and Vietnam). That said, the category of “blend” countries is
not only composed of creditworthy countries with low average income levels. It
also comprises countries whose per capita income exceeds the IDA threshold
(e.g. Armenia, Bolivia and Georgia). This reflects a phased approach to
graduation from IDA, which seeks to ensure that a change in a country’s status
is permanent and to avoid sudden breaks in funding. Nonetheless, this
qualification should not mask the fact that the World Bank also applies a
degree of judgement, in addition to looking at objective criteria, in its
classification of countries, not least in the assessment of creditworthiness by
the IBRD’s credit risk department. The IMF uses a system modelled on that of
the World Bank to determine eligibility for funding from the Poverty Reduction
and Growth Trust (PRGT), its own concessional arm.[6]
The proximity in the methodology is intentional, aiming at ensuring broad
consistency between the eligibility for the concessional arms of both
institutions (see Table 1 for a comparison of categorisation of MFA-eligible
countries/territories across institutions). In other words, IDA-eligible
countries should normally also be PRGT-eligible. Specifically, a country is
PRGT-eligible if its per capita income is below the IDA cut-off level and
if it is unable to access international capital markets on a durable and
substantial basis. Conversely, this means that a country graduates
from PRGT if it meets one of the two preceding criteria. In order to ensure
that graduation is permanent, the IMF, akin to the World Bank, stipulates a
number of safeguards: ·
Per capita income must exceed the required
threshold for five consecutive years, must not have been on a declining trend
over this period and, at the time of presumed graduation, must be at least
twice as high as the IDA cut-off level. ·
The market access criterion is operationally
defined as a sovereign having borrowed on international private capital markets
in at least three of the last five years for which data are available, through
bonds or commercial loans, cumulatively at least 100% of its IMF quota.[7]
As an additional safeguard, a country with market access will only graduate out
of PRGT if its per capita income is at least 80% of the IDA cut-off and has not
been on a declining trend in the last five years. ·
A country must also be free from serious
short-term vulnerabilities in order to graduate. Finally, the list of official development
assistance (ODA) recipients compiled by the OECD’s Development
Assistance Committee (DAC) separates countries into four categories.[8]
First, all countries classified as least developed by the United Nations are
listed as such.[9] The remaining ODA
recipients are categorised as low income, lower middle income and upper middle
income.[10] The differentiation
between these three categories occurs solely on the basis of World Bank per
capita GNI data (Atlas method). The DAC list is normally updated every three
years, with the next revision scheduled for 2011. The most recent revision, of
September 2009 (see Annex 3), only added Kosovo[11]
to the list, but otherwise reproduced the previous list, published in August
2008, based on the same data (for 2007) and GNI per capita thresholds, in
keeping with the three-year rhythm. As the OECD itself does not provide financial
support to third countries (other than in the form of specific technical
assistance, on a small scale), the DAC list is conceived as a tool for
statistical and reporting purposes, rather than for an ex-ante decision on aid
eligibility. That said, it is being used by the EU to define developing
countries in the Development Cooperation Instrument. Table 1: Categorisation of MFA-eligible
countries/territories by other international organisations * Continued eligibility only due to short-term
vulnerabilities; otherwise graduated. † World Bank funding to the Palestinian Territories is provided
primarily by the special-purpose Trust Fund for Gaza and West Bank. IMF
activity in the Palestinian Territories is limited to technical assistance. Sources: World Bank, IMF, OECD 4.
Criteria This section introduces various indicators that can
be used to decide between loans and grants (or a combination thereof) in MFA
operations and discusses their strengths and limitations. Akin to the practice
of the IMF and the World Bank, and in line with the general orientations given
in the letter from the President of the Council to the President of the Commission
accompanying the Genval criteria, they are subdivided into two main areas: the
level of development of the recipient country; and its debt sustainability
and/or creditworthiness. 4.1.
Level of economic and social development
Per capita income
Gross national income (GNI) per capita is the
indicator most commonly used to gauge the level of development of a country. An
income measure, such as GNI, is more relevant than an output measure, such as
GDP, for a comparison of the level of economic development of countries and of
their residents’ average economic well-being, as it takes into account net
income transfers to other countries, such as dividend payments to foreign
owners of domestic companies and interest payments to foreign bondholders, thus
leaving only that part of economic output that is available to domestic
residents for spending or saving. For cross-border comparisons, each country’s GNI
per capita has to be converted into one currency. The two principal methods of
doing so are purchasing power parity (PPP) and market (or official) exchange
rates. Taking differences in price levels between countries into account, PPP
is more suitable for comparing standards of living across countries. A
PPP-based measure is also less prone to currency fluctuations than an
exchange-rate-based measure. However, as real and cross-border transactions
(export, import, remittances, interest payments, debt repayments etc) are
conducted using (market) exchange rates, an exchange-rate-based GNI per capita
measure gives a better picture of the average level of development of an
economy as regards its exchanges with the rest of the world. The international
benchmark for exchange-rate-based measures is the World Bank’s Atlas method,
which seeks to limit the influence of short-term currency volatility inter alia
by averaging market exchange rates over a period of three years. Another
advantage of the Atlas method relative to PPP is that data is consistently
available for all countries from a central source (the World Bank), whereas
data for per capita GNI on a PPP basis is less timely, more prone to
measurement errors and unavailable for some countries/territories. The
international standard for country classifications is therefore GNI per capita
converted through the Atlas method. Based on the latest available GNI data and
classification thresholds from the World Bank, three countries from the MFA
universe (Croatia, Iceland and Israel) are in the high income category, while
the other 22 are middle income countries (11 lower and 11 upper middle
income). The two Central Asian republics included in this note as memorandum
items are low income countries.
Poverty ratios
MFA is not an instrument of poverty reduction,
but of response to short-term balance-of-payments emergencies. Poverty ratios
should therefore in principle not feature as a criterion for MFA eligibility as
such. However, they can be relevant for decisions on the grant element of
individual MFA operations – as important indicators for the social and
developmental challenges of a country and as a gauge of the income
distribution, specifically at the low end of the spectrum. In particular, while
poverty is generally correlated with per capita income, the use of poverty
indicators alongside income measures ensures that countries for which this
correlation does not hold are identified. Table 2: Income per capita and poverty figures
of MFA-eligible countries/territories* * Data for GNI per
capita refer to 2009, while the columns on poverty show the latest available
World Bank data, which refer to 2005, 2006, 2007 or 2008, depending on the
country. Source: World Bank, World Development
Indicators Measures of absolute poverty set a certain
threshold (measured in PPP), which is uniform across countries, while poverty
can also be defined in relation to the country’s average income. As relative
poverty is not comparable across borders, the absolute measure is more relevant
as a criterion for determining eligibility across a number of countries. Data
on absolute poverty[12] are available from the
World Bank, albeit with gaps. For the MFA universe, the inclusion, alongside
per capita GNI, of (absolute) poverty data in the overall tally of countries’
levels of development does not change the picture substantially. This reflects
the significant degree of correlation between the two indicators. However, two
observations can be made. First, many European transition economies boast
relatively low poverty ratios compared with countries with similar per capita
income levels but different socio-economic legacies, reducing the case for
using grants. Second, in Armenia and Georgia, the incidence of poverty is high
by regional and per capita income standards (see Table 2), which, ceteris
paribus, should lend support to the consideration of a grant element in potential
MFA operations with these countries. As these examples illustrate and
notwithstanding the general correlation between the two, poverty ratios can
play a useful role as secondary indicators alongside GNI per capita to give a
fuller picture of a country’s level of economic and social development. 4.2.
Debt sustainability and repayment capacity As noted, a country’s debt sustainability and
repayment capacity is a key concern in a decision on whether to provide MFA as
a loan or a grant. Firstly, to extend more credit to a country than it can
sustainably service would be counterproductive in terms of the country’s
long-term external solvency and economic development; thus, the short-term help
that MFA is designed to provide would go to the detriment of key long-term
goals. Secondly, it would be against the direct self-interest of the EU, as the
lender, to extend a loan that runs a high risk of not being repaid. While no doubt important, debt sustainability is
also a complex concept. To analyse it, a solid basis of data on debt stocks and
future repayment flows is required, along with medium- to long-term projections
of corresponding revenue figures (exports for external debt sustainability;
public revenue for public debt sustainability) and a variety of other variables,
such as real GDP growth, interest rates, the current account and the primary
fiscal balance. The Bretton Woods institutions have developed a
methodology for Debt Sustainability Analysis (DSA) that classifies countries
into low, moderate or high risk of debt distress, or identifies them as
currently “in debt distress”. However, DSA are currently available for only a
limited number of MFA-eligible countries/territories. The IMF also addresses the issue of debt
sustainability beyond the group of low income countries, notably in reviews of
its Stand-by Arrangements and in reports summarising its Article IV
consultations with its members. In its analyses that concern countries with
access to capital markets, the Fund follows a slightly different methodological
framework than in its DSA for low income countries. Crucially, DSA conducted
for market-access countries omit a clear categorisation into risk levels by
country, partly for fear of market movements resulting from the publication of
these ‘ratings’. Overall, owing to their limited availability, IMF/World Bank
DSA scores are of little use for determining the grant eligibility within the
MFA universe as a whole. Still, it is clear that debt sustainability
(both public and external) is a key consideration when deciding whether it is
responsible to extend new credit to a borrower, as is the case when MFA takes
the form of a loan. It is therefore essential to include it among the
decision-making criteria. Despite the importance of projections for determining
whether a debt burden is sustainable, a combination of several objective,
backward-looking indicators can serve as a useful approximation of a country’s
debt situation, while still limiting discretion. Table 3 lists several indicators and discusses
their significance and limitations, including data availability problems. The
indicators essentially consist of ratios between a country’s debt and debt
service and corresponding variables of a country’s economic size and revenues
so as to show the burden that the debt in question (external or public) imposes
on the country. Table 3: Debt burden indicators || Significance || Limitations || Data availability External debt over GDP/GNI || Key variable for external debt sustainability, which sets the external debt stock in relation to the size of the economy || No clear threshold above which external indebtedness should be deemed problematic or unsustainable, as countries with a strong export base, a track record of economic growth and monetary credibility have significantly more leeway to accumulate external debt without facing refinancing problems || Available from the World Bank for 20 out of 25 MFA-eligible countries/ territories; most high income countries do not systematically collect external debt data External debt over exports || Key variable for external debt sustainability, which sets the external debt stock in relation to the key external revenue generator (exports) || No clear threshold above which external debt over exports should be deemed problematic or unsustainable, as debt stock figures give no indication about the financial terms of the debt (interest rates and maturities) || Available from the World Bank for 18 out of 25 MFA-eligible countries/ territories; most high income countries do not systematically collect external debt data Net present value of external debt over GNI || Key variable for external debt sustainability, which eliminates the shortcoming of looking at the external debt stock in nominal terms by calculating the payment stream in today’s prices || The net present value can vary significantly depending on the interest rate used to discount the payment stream || For the calculation of the net present value of outstanding debt, data on all future debt service payments (principal and interest) is required; such detailed data is unavailable on a broad basis External debt service ratio (debt service over exports) || Key variable for external debt sustainability, which sets the payments related to debt incurred in relation to the main corresponding revenue generator (exports) || Past debt service payments are not necessarily comparable to future payments || Available from the World Bank for 18 out of 25 MFA-eligible countries/ territories; most high income countries do not systematically collect external debt data Public debt over GDP || Key variable for public debt sustainability, which sets the public debt stock in relation to the size of the economy || No clear threshold above which public indebtedness should be deemed problematic or unsustainable; high income countries with a developed domestic capital market have significantly more leeway to accumulate public debt without facing refinancing problems || Not available on a comparable basis across countries from a standard international source; EBRD Transition Report contains public debt figures for 11 out of 25 MFA-eligible countries/ territories; IMF country reports contain data for most MFA-eligible countries/territories, albeit without necessarily applying a consistent methodology, but taking country idiosyncrasies into account Public external debt over GNI || Secondary variable for public and external debt sustainability; indicative where total public debt figures are unavailable, in particular for countries with poorly developed domestic capital markets || Public external indebtedness can be low, even if either total external or total public indebtedness is problematically high || Available from the World Bank for 17 out of 25 MFA-eligible countries/ territories; IMF country reports contain figures for public external indebtedness for some countries Public debt service to tax revenue || Key variable for public debt sustainability, which sets the payments related to debt incurred in relation to the main corresponding source of revenue (collected taxes) || Past debt service payments are not necessarily comparable to future payments || Data on public debt service, as well as on revenues, is patchy and of poor cross-border comparability In addition to the
indicators discussed in Table 3, a country’s export potential is a key factor
determining debt sustainability in the long term. It could be approximated by
country export forecasts. However, Commission forecasts for third countries’
exports normally span only 2‑3 years, whereas debt sustainability would
require a longer time horizon. Moreover, as a forward-looking indicator, it
leaves room for discretion in the same way as noted above for DSA in general,
thus in part defeating the purpose for the exercise of defining criteria, which
is to reduce discretion. There are also several widely used external
liquidity indicators, including the ratio of official reserves to external
debt, the so-called reserve cover ratio (official reserves over external debt
falling due within one year) and the share of short-term debt in total external
debt. However, as noted, all of these are liquidity, rather than solvency,
indicators and, as such, less relevant for an analysis of medium- to long-term
external debt sustainability. Indeed, countries are only considered for MFA if
they are in an acute balance-of-payments crisis. Liquidity indicators should
therefore, by definition, be problematically low for any MFA recipient. Thus,
these indicators are central for a decision on making MFA available, but are not
used for deciding whether MFA should take the form of a loan or a grant. 5.
The Commission’s approach As discussed in the previous section, various
indicators can add value in deciding on the appropriate form of MFA (loan,
grant or blend). However, no individual indicator suffices, on its own, to
decide on the form of the assistance. Rather, each indicator has to be read in
conjunction with others in order to be meaningful. The Commission’s approach uses
a selection of the indicators discussed above and synthesises the information
that they contain on the country’s level of economic and social development and
its debt sustainability. The aim is to guide decisions on the form of MFA,
while maintaining the necessary flexibility. Regarding economic and social development
criteria, GNI per capita (Atlas method), the most
widely used indicator, is used as a basis for a country’s positioning. As a
general rule, in order to be eligible for MFA grants, countries would in
principle have to be in the lower middle income category or below according to
the latest available data and classification thresholds from the World Bank. Poverty
ratios are also taken into consideration, complementing GNI per capita, to
the extent that they give a different picture of a country’s level of
development. The information provided by the economic and
social development indicators is then complemented with that on the recipient country’s debt sustainability. This second criterion looks in particular at the following five
debt burden indicators: external debt over GNI; external debt over exports;
public external debt over GNI; total public debt over GDP; and the external
debt service ratio (debt service over exports). This choice represents a
compromise between the significance and limitations of possible indicators, as
well as data availability considerations, as discussed in the previous section.
In addition, where available, the results of the DSA conducted by the IMF
and the World Bank, as well as other relevant analysis on the long-term debt
dynamics of the beneficiary countries, are taken into account. The information on development and debt
sustainability is then cross-checked against the status that the country in
question has in its cooperation with other international donors. In particular,
full or partial IDA eligibility and access to PRGT financing can
be considered as arguments to consider a grant element. In the case of
countries with access to IDA financing, IDA terms and, for
“blended” countries, the share of IDA financing in the total assistance
provided by the World Bank to the country is taken into account, wherever this
information is available. Finally, budgetary constraints, i.e. the
requirement to observe annual appropriations, within the framework provided by
the EU’s medium-term Financial Perspectives, also needs to be taken into
consideration, reflecting the fact that MFA grants are fully financed through
the EU budget, whereas loans have only limited and indirect budgetary
implications.[13] For example, in a situation of limited availability of funds under
the macroeconomic assistance line of the EU budget, it may be appropriate to
opt for a blend of MFA loans and grants, or even to consider a loan-only
operation, even if the beneficiary’s development and debt indicators would in
principle argue for a full grant. For illustrative purposes, Chart 2 plots
MFA-eligible countries/territories (plus the Kyrgyz Republic and Tajikistan, as memorandum items)
according to their per capita income (horizontal axis) and a combined score of
the five debt burden indicators identified above (vertical axis). This
“combined debt score”, which has been developed to enable the presentation of
the data in a chart, is the simple average of a score assigned to each
individual debt burden indicator (external debt over GNI; external debt over exports;
public external debt over GNI; total public debt over GDP; and the external
debt service ratio), depending on the extent to which its level falls into a
range that can be presumed to be “safe” (score: 2), “problematic”
(score: 0) or “intermediate” (score: 1). The indicative thresholds
are defined in Table 4, while Annex 4 contains the underlying data, as
well as the resulting individual and combined debt scores, for all MFA-eligible
countries/territories. Table 4: Indicative thresholds for five debt
burden indicators (for charting purposes) || Safe (2) || Intermediate (1) || Problematic (0) External debt over GNI || ≤15% || >15% and ≤50% || >50% External debt over exports || ≤25% || >25% and ≤80% || >80% Public external debt over GNI || ≤10% || >10% and ≤25% || >25% Total public debt over GDP || ≤15% || >15% and ≤40% || >40% External debt service ratio || ≤15% || >15% and ≤30% || >30% While the thresholds
are to some extent arbitrary, they have been chosen with due regard to past
experience of debt dynamics in countries at comparable stages of development
and, where applicable, to thresholds applied in the HIPC exercise of the
Bretton Woods institutions. Chart 2 illustrates in a simplified manner the
interplay of the two main criteria proposed here for a case-by-case decision on
the form of MFA. It thus gives a rough indication of which countries would
currently be candidates for receiving MFA only in the form of a pure loan
(countries in the top right-hand shaded area of the chart) and of those
countries for which a presumption of a grant should exist (bottom left shaded
area of the chart). Countries in the intermediate range may, on a case-by-case
basis, be deemed eligible for a grant element. Chart 2: Illustrative
scatter plot of MFA-eligible countries/territories* * For legibility reasons, countries with a per
capita income of more than USD9,000 (Croatia, Iceland, Israel and Libya) have been excluded from this chart. For the Palestinian Territories, a combined
debt score of zero has been assumed for charting purposes, reflecting a lack of
comparable debt burden data. Sources: ECFIN
calculation based on the World Bank’s World Development Indicators,
supplemented by IMF data 6.
Conclusion This document has explained the methodological
approach used for deciding whether a proposed MFA operation should take the
form of a loan, a grant or a blend of the two. Defining verifiable eligibility
criteria ex-ante increases the transparency of the MFA instrument and reduces
discretion and arbitrariness. The approach developed by the Commission is
consistent with those applied by the World Bank and the IMF. It is based on
objective indicators concerning countries’ level of development and debt
sustainability, cross-checked against the judgment of other multilateral donors,
notably the Bretton Woods institutions. It provides guidance on which countries
could be considered for a grant element in MFA, starting from the premise that
MFA should, by default, take the form of loans – in line with the nature of the
instrument, namely to help alleviate short-term and transitory
balance-of-payments difficulties. While it is generally good practice to use
verifiable criteria to determine eligibility for MFA grants, it is equally
necessary to retain a degree of flexibility. Notably, some room for political
discretion in the grant-versus-loan decision may in some cases be desirable,
strengthening the EU’s capacity to act in line with its
wider strategic interests. Last but not least,
discretion is also required in the interest of overall financial discipline,
notably to ensure that budgetary ceilings for providing MFA grants are
respected.
Annex 1:
World Bank country classification by income group
Annex 2:
Countries eligible for the IMF’s PRGT
Annex 3:
DAC list of ODA recipients
Annex 4: Selected debt
indicators of MFA-eligible countries/territories
Sources: Where available, data from the World
Bank’s World Development Indicators have been used. Most of these data refer to
2009. Any gaps in the World Bank data have been filled, where possible, with
latest available data from IMF country reports. The scores are based on ECFIN
calculations. [1] Regarding geographical eligibility, this letter specifies the
following. Two groups of countries are in principle eligible: i) the candidate
countries and potential candidate countries; and ii) the European countries of
the CIS and the Mediterranean countries concerned by the Barcelona process. The
letter further states that “certain other countries which are not covered by
the second group above may in very exceptional and duly justified circumstances
also become eligible.” Indeed, a number of operations have been approved in
favour of countries in the Southern Caucasus (which are now part of the
European Neighbourhood Policy, ENP) and Central Asia. [2] World Bank: “How we Classify Countries”, available on http://data.worldbank.org/about/country-classifications,
accessed on 29 November 2010. [3] The World Bank uses gross national income (GNI), converted into US
dollar on the basis of market or official exchange rate through the Atlas
method, which seeks to limit the influence of short-term currency volatility inter
alia by averaging conversion rates over a period of three years. While
recognising that income measures based on purchasing power parity (PPP) are
conceptually more suitable for comparing standards of living across countries,
the Bank uses the Atlas method because PPP-based income estimates tend to be
less reliable and less timely. The current operational cut-off for IDA
eligibility is a per capita GNI of USD1,165. [4] The IBRD’s creditworthiness assessment includes a combination of
quantitative and qualitative indicators in eight broad categories: political
risk; external debt and liquidity; fiscal policy and public debt burden;
balance of payments risk; economic structure and growth prospects; monetary and
exchange rate policy; financial sector risks; and corporate sector debt and
vulnerabilities. [5] Countries that remain IDA-eligible because they would otherwise
lose access to World Bank funding altogether are sometimes referred to as “gap
countries”; examples are Angola, Honduras and Moldova. See Annex 1 for the
World Bank’s latest full country classification. [6] The IMF upgraded its concessional financial facilities in 2009 in
response to the global financial crisis. The PRGT was established as part of
this reform, replacing and expanding the previous Poverty Reduction and Growth
Facility / Exogenous Shocks Facility (PRGF-ESF) Trust. PRGT eligibility
rules are described in “Eligibility to Use the Fund’s Facilities for Concessional
Financing”, IMF working paper 11 January 2010. For the latest PRGT
eligibility list, see Annex 2. [7] Sovereign guarantees of bonds or commercial loans are also taken
into account for this calculation. If a country falls short of the stipulated
thresholds of amount or duration, but is judged to have had the capacity to
reach them, it is also deemed to have met the market access criterion. [8] OECD: “DAC List of ODA Recipients used for 2008, 2009 and 2010
flows”, available on http://www.oecd.org/dac/stats/daclist,
accessed on 29 November 2010. [9] The criteria used by the UN to classify countries as least
developed are: GNI per capita; the Human Asset Index (itself based on
indicators of: nutrition; health; education; and adult literacy); and the
Economic Vulnerability Index (itself based on the following indicators:
population size; remoteness; merchandise export concentration; share of
agriculture, forestry and fisheries in gross domestic product; the share of the
population displaced by natural disasters; stability of agricultural
production; and stability of exports of goods and services). [10] High income countries are not ODA recipients and therefore not
included in the DAC list. [11] Under UNSCR 1244/1999. [12] In the Bank’s definition, anyone living on USD2 per day (PPP) or
less counts as poor (in absolute terms), while those living on USD1.25 per day
(PPP) or less count as extremely poor. These benchmarks are therefore used to
calculate the often-cited poverty and extreme poverty (headcount) ratios. [13] When MFA takes the form of a loan, the implications for the EU
budget are limited to the need to provision the Guarantee Fund the year after
the loan has been disbursed at a level of 9% of the amount disbursed. The
Guarantee Fund was established in 1994 to cover the risks of default on
external loans guaranteed by the EU budget (including MFA loans but also EIB
and Euratom loans). In the current Financial Perspective, which runs from 2007
to 2013, an annual amount of up to EUR200m has been foreseen for the
provisioning of the Fund, i.e. permitting net growth of the corresponding loan
portfolio by around EUR2.2bn each year.