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2. Debt concessionality

 The issue

Debt concessionality has gained prominence in discussions on assessing the amount of transfers, notably to developing countries. Debt concessionality arises when a creditor lends below market terms. Such action derives an element of transfer to the debtor similar to a subsidy in production1. There are many reasons why creditors lend at below market terms. Government or its units usually provide loans at low or zero interest terms with the aim of providing a benefit to the recipient or to encourage some action by the recipient. Industrialized countries lend to developing countries at below market terms for development reasons.  

The demand for data on transfers has increased tremendously after the Millennium Development Goals (MDGs) declaration in 2000. The MDGs sets the level of concessional lending to developing countries as one of the indicators of monitoring the development targets.  The HIPC debt sustainability discussions focus on a specific threshold of debt concessionality. However, while it is recognized that lending at concessional terms derives a transfer to the debtor, there is no consistent definition or measure of debt concessionality. The need for clear guidance on debt concessionality has been highlighted. For example, the lack of a unique definition of concessionality, was highlighted as a key difficulty2 in the discussions leading to the replenishment of the World Bank’s IDA 14.  

While the main manuals on macroeconomic datasets recognize the notion of transfers in lending, none has a systematic framework for recording these transfers either in flows or positions. The 1993 SNA recognizes the subsidy element of concessional loans but only for loans to employees, with the concessionality recorded as being in wages and salaries in kind (see paragraph 7.42); however, the guidelines offer no explicit explanation of the adjustment to interest required by a double-entry accounting system. Like the 1993 SNA, the Government Finance Statistics Manual (GFSM) 2001, recognizes the subsidy element of concessional loans to employees as being in wages and salaries in kind in paragraph 6.14 of the manual. The Balance of Payments Manual, Fifth Edition (BPM5) recognizes that concessional loans encompass a transfer element that needs to be imputed (see paragraph 104) but does not elaborate on how this should be done. The External Debt Statistics: Guide for Compilers and Users (Debt Guide) recognizes concessional debt but falls short of defining debt concessionality (see Debt Guide paragraph 6.22).  

There is need, therefore, to provide a consistent definition and measurement of concessionality and to possibly account for these transfers explicitly in national accounts, including extending the proposed treatment to the other macroeconomic datasets as a way to promote consistency of treatment. The key issues in debt concessionality are the recognition of what debt concessionality—irrespective whether the debt is new or is being rescheduled— involves, and the measurement of the transfers in economic accounts arising from such concessionality.
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1 See 1993 SNA paragraph 7.76 (b)
2 See IDA 14 (November 2004).  Debt Sustainability and Financing Terms in IDA14: Further consideration on Issues and Options, paragraph 17.



 Reasons for inclusion in the Research Agenda

In December 2004, the Balance of Payments Technical Expert Group (BOPTEG) discussed the issue on debt concessionality and recognized that while there is no agreed definition of concessional loans, the existing guidance in the Debt Guide, and features such as an intention of the creditor to convey a benefit in a noncommercial setting, such as official loans , could be drawn upon in drafting the revised BPM5. The need for further investigation was recognized.  

Debt concessionality was further discussed by the IMF Committee on Balance of Payments Statistics (Committee) in June 2005 but no consensus was reached to include transfers arising from debt concessionality in the core accounts. In January 2006, the Advisory Group on National Accounts came to a similar conclusion. It was agreed that further research was needed, and that in the meantime, if the transfer element was considered important for some countries, it could be provided as supplementary item to the balance of payments─calculated as a one-off transfer 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.  

In the discussions, there was a division of opinion as to whether transfers from debt concessionality should be current or capital; a concern that some of the proposals discussed could potentially run counter to some core national accounting principles; and reservations on the measurement of the transfers, for instance, the difficulties in obtaining a relevant market reference rate especially if the debtor was unable to access capital markets.  

Based on the above, it is evident that debt concessionality has become an important statistical subject but there is very limited international guidance on how transfers arising from it should be recognized and measured. There is need therefore for more research in this subject with a view to providing international definition and statistical methodology.  
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1 Official creditors are defined in paragraph 6.5 of the Debt Guide.



 References

Balance of Payments Manual, Fifth Edition, IMF, (1993)
Debt Sustainability and Financing Terms in IDA14: Further consideration on Issues and Options, International Development Association (2004)
Debt Relief Under the HIPC Initiative: Context and Outlook for Debt Sustainability and Resource Flows, IMF (2001)
External Debt Statistics: Guide for Compilers and Users, IMF, (2003)
Enhanced HIPC Initiative-Creditor Participation Issues, International Development Association and International Monetary Fund, April 8, 2003
Enhanced HIPC Initiative - Guide Book, IMF  
Global Finland: http://global.finland.fi/uutiset/teksti_popup.php?id=1797
Government Finance Statistics Manual, IMF, (2001)
Grants and Concessionality in IDA 13: International Development Association (2001)
Lissandro Abrego and Doris Ross, Debt Relief Under the HIPC Initiative: Context and Outlook for Debt Sustainability and Resource Flows, IMF Working Paper WP/01/44, September 2001
Millennium Development Goals: (http://www.un.org/millenniumgoals)
System of National Accounts, 1993



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