Debt Concessionality

1
Debt Concessionality

• SNA Chapter 14 (external transactions)

2
Background

• Debt concessionality has gained increasing
  importance in the development arena
• 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)
• falls short of providing guidance on how such
  transfers should be measured or recorded.

3
Background

• 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.

4
Why is this Issue important

• The demand for data has increased tremendously
  since the 1993 SNA.
• Examples include
• 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.

5
Discussions on this issue

• BOPTEG discussed this issue in December 2004,
• considered that more investigation was recognized
  given the issues that arose during the
  discussion.
• IMF staff undertook further work consulting
• those with a policy interest in the IMF,
• government finance experts, and
• the debt experts from the relevant international
  agencies on the TFFS.

6
Discussions

• BOPCOM considered the issue in June 2005
• 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 OECDs
  Working Party on Financial Accounts in October
  2005
• few comments were received.

7
Current Practice

• DAC calculates concessionality as
• 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.
• At the Paris Club, debt reduction in present
  value terms is calculated
• The difference between the nominal value of the
  applicable debt and its present value using a
  market-based interest known as the OECDs
  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 alonethe grace period, the
  frequency of payments and the maturity period.

8
Possible treatments

• Record concessional debt in nominal value
• (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.

9
Option (a)

• 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.

10
Option (b)

• 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?
• 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 .

11
Option (c )

• For a new loan difference of two streams of
  interest paymentsone based market interest rate
  and the other the contractual interest ratewith
  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.

12
Option (d)

• 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.

13
Option (e)

• Record the loan at market-equivalent value
• In the standard presentation two credit entries
  for the debtor would need to be recorded
• 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
  market-equivalent rate as opposed to the
  contractual instrument rate.
• Such an approach is contra to the principle that
  loans are valued at nominal value

14
Questions for AEG

• 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?