The provision of grants and debt relief to eligible ADF countries is intended to help bring their debt to sustainable levels and create fiscal space for priority development expenditures. The accumulation of new debts on non-concessional terms can undermine these objectives and introduce the risk of free-riding – a situation in which grants and debt relief provided by one or more parties cross-subsidize new borrowing from third party lenders on non-concessional terms. This risk is particularly high in resource rich countries in which non-concessional borrowing may be secured against future export receipts.
The Boards of Directors of the African Development Bank Group approved in 2008 the Bank Group Policy on Non-Concessional Debt Accumulation with the view to mitigating the impact of rapid accumulation of non-concessional debt on grant-eligible post-HIPC/MDRI debt relief ADF countries and guiding the use of its concessional resources. The policy, which is closely aligned with the World Bank’s IDA policy on non-concessional borrowing and the IMF’s external debt limit policy, is based on a two-pronged approach: enhancing creditor coordination around the joint IMF-World Bank Debt Sustainability Framework, and discouraging unchecked non-concessional debt accumulation by applying compliance measures, including volume discounts and hardening of borrowing terms of ADF loans.
In 2011, a number of amendments to the policy were introduced to provide a more flexible and streamlined approach. The amendments were aligned with the changes adopted by the IMF in regards to its external debt limit policy and concessionality framework, and brought the Bank’s policy up to date with current practices in supporting low income countries’ financing needs. The amendments focused on applying the IMF-World Bank framework while allowing the Bank Group to use informed judgment and take the specificity of African countries into account where applicable. This is consistent with the Bank Group’s commitments to the Paris and Accra declarations on donor harmonization and coordination.
Specifically, the following amendments to the 2008 Bank Group Policy on Non-Concessional Debt Accumulation Policy were adopted:
- More flexibility in determining the Bank Group concessionality limits, by replacing the single benchmark grant element of 35 per cent approach with a more nuanced concessionality framework, to better take into account the diversity of country circumstances as reflected in their debt vulnerability and their debt management capacity. For ADF-only countries with low risk of debt distress (green light countries), flexibility will be applied to accommodate their non-concessional borrowing needs consistent with the assessment of their debt management capacity, while for ADF-only countries assessed to have a moderate and high risk of debt distress (yellow light and red light countries), the previous minimum concessionality limit of 35 per cent will continue to apply with a limited flexibility. This amendment provided greater flexibility to nearly half of the ADF-only countries to access some level of non-concessional external debt; thereby enabling them to mobilize much-needed additional development resources.
- With the view to ensuring ADF resources are channeled to those countries that need concessional resources the most, and to reduce the risk of moral hazard with respect to borrowers, the amendments included a more streamlined mix of compliance measures that will be applied on a case-by-case basis to client countries that breach the policy, taking into account the scale of the breach. The compliance measures are intended to ensure consistency with application of the revised concessionality framework.
The Bank Group’s approach to mitigating the accumulation of unsustainable non-concessional debt by ADF countries continues to be anchored on the guiding principles of strong partnership and coordination, flexibility and country-differentiated approach, and effective and implementable measures. Within this broad framework, the four pillars of the 2008 Bank Group Policy on Non-Concessional Debt Accumulation will continue to apply:
- Strengthening partnerships and coordination with sister financial institutional and bilateral agencies, with the view to adopting a common strategy in dealing with the problem, including conducting Debt Sustainability Analysis, outreach and advocacy exercises;
- Maintaining a standing inter-departmental Committee to monitor the status of non-concessional borrowing;
- Ensuring the inclusion of and close monitoring of adherence to a clause requiring reporting on new non-concessional borrowing in all ADF grant/loan agreements for ADF-only borrowers; and
- Enhancing economic and debt management capacity building support at country and regional levels, in collaboration with other partners.
The policy on non-concessional borrowing should not be viewed in isolation, but within the broader context of the Bank Group’s efforts to support and facilitate regional member countries’ efforts to achieve their development goals. Management is acutely cognizant of the need for striking the right balance between the policy objectives of debt sustainability and financing for development. The amendments reflect the Bank Group’s attempt to move in this direction by adopting a country-differentiated concessionality framework that supports client countries’ debt sustainability. In view of the fast-changing global economic reality and the implications for development financing flows to African low income countries, the Bank Group’s approach and policy on non-concessional borrowing will be reviewed regularly to take into account lessons and policy frameworks that are more enabling to advance the development goals of its regional member countries.