Go to content

2. Graduation from IDA

Lele et al. (2017) documents the history of the World Bank’s concessional aid window and issues relating to IDA graduation since 1945. More than one trillion USD has been allocated to developing countries on relatively favorable terms, of which 68 percent and 32 percent has been provided on IBRD and IDA terms, respectively. IDA is primarily funded by contributions from the governments of its member countries, and donors meet every three years to replenish IDA resources and review its future policies. Since the end of the Second World War a total of 112 countries have been supported on IDA terms.

The most recent replenishment of IDA’s resources - the 18th replenishment (IDA18) – took place in 2016. It was decided that resources should to a larger extent address fragility, conflict and violence. Moreover, a Private Sector Window (PSW) was introduced together with the International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA) to scale up private sector development.

Eligibility for IDA support depends on a country’s relative poverty defined as a threshold for gross national income (GNI) per capita. However, a country above the operational threshold can be given transitional support for the duration of a replenishment period, which can subsequently be renegotiated during the following replenishment meetings. In such cases, countries will face conditions that are stricter than under IDA, but leaner compared to IBRD terms.

Initially, the IDA-eligibility threshold was quite low, but during the 1980s it was realized that available IDA resources were sufficient to fund programs in all countries below this eligibility ceiling. A decision was therefore made to adjust the GNI per capita criterion to a so-called “operational cutoff” that is currently serving as the eligibility benchmark. To this end, it should be noted that if the operational cutoff had maintained its relative value in relation to the global GNI per capita, a significantly larger proportion of countries would be eligible for IDA today. Ghana would be one of these countries, along with most of the countries currently labelled as “Blend” countries in the World Bank system. Moreover, Moss and Leo (2011) show that if the recent trend increase in the operational cutoff continues, no country will fall below IDA’s eligibility criteria within a decade. This has led Morris and Gleave (2015) to argue that it is time for an increase in the IDA-eligibility cutoff. Furthermore, Kanbur (2014) notes that in times of a growing disconnect between poor countries and poor people, a continued focus on GNI per capita as the operational cutoff will be an insufficient targeting tool in times of increasing within-country inequality. This has led to several analyses arguing that a re-thinking of IDA graduation policies is needed (see e.g. Rogerson (2017) and UN (2018)).

Since 1945, 41 countries have graduated from IDA (28 before 1990 and 13 after 1990). Some countries have both re-entered (11 cases) and re-graduated (3 cases) from IDA, indicating that graduation from IDA is by no means a signal of a non-turbulent process towards increased prosperity. Throughout, IDA graduation decisions have generally followed the simple GNI per capita benchmark for the operational cutoff. As such, IDA resources can in principle only be accessed until the GNI per capita is continuously above the operational cutoff for three years. The operational cutoff for FY18 is a 2016 GNI per capita of USD 1,165 using the World Bank’s Atlas method for converting GNI per capita from local currency to USD.[6]

Table 1 shows that Ghana has been above the operational threshold for the past three years and it has therefore naturally moved into the category of “Blend” countries, meaning that Ghana is still under IDA repayment terms (see Table 2), but with reduced grace periods (from 6 to 5 years) and years to maturity (from 38 to 30 years).

Table 1: Operational Cutoff related to Ghana’s GNI per capita
  Operational
Cutoff
Ghana
GNI per capita
IDA terms
FY2016 1,215 1,620 Yes
FY2017 1,185 1,480 Yes
FY2018 1,165 1,380 Yes

Source: World Bank documents on IBRD/IDA and Blend Countries lending eligibility and repayment terms. Although Ghana is under IDA repayment terms, grace periods are 5 years with 30 years to maturity (same as for “Blend” countries). Under normal IDA eligibility, grace periods are 6 years with 38 years to maturity.

Table 2: World Bank lending terms – IDA vs. Blend Conditions
  Maturity Grace Principle repayments Interest rate and Service charge
IDA 38 6 3.125% for yrs. 6-38 0.75%
Blend 30 5 3.30% for yrs. 6-25 6.80% for yrs. 26-30 2.00%

Source: World Bank documents on IDA Lending Terms FY 2018.

According to World Bank documents on IBRD/IDA and Blend Countries lending eligibility and repayment terms, Ghana is in income category 3 with a GNI per capita of USD 1,380. As such, Ghana does not fulfill the requirements for IDA, but has been classified as eligible for IDA on the basis of (a) relative poverty and (b) lack of creditworthiness. However, since the operational cutoff has been met, the repayment terms on outstanding IDA debt have been tightened through the so-called accelerated repayment clause, which will increase the restraint on fiscal management as the amortization share of the government budget will increase. Moreover, in addition to the accelerated repayments, the implication is that Ghana is no longer eligible for debt relief, which the country has benefited significantly from in previous years.

Since reaching the IDA-eligibility cutoff, Ghana’s external debt stock has approximately doubled, while debt service as a share of total government expenditures has tripled in the same period (see Appendix Table 2). These increases in the debt stock and repayments cannot alone be explained by Ghana’s graduation, but the increasing debt service requirements have to be managed through sustainable fiscal management in order not to accumulate an unsustainable external debt burden[7].

Although IDA support to Ghana is phased out gradually and in a predictable manner, the move from low-income to lower middle-income country status may thus have several side effects. First, as post-graduation debt service requirements are increasing, Ghana will face fiscal management challenges if public investment levels are to be sustained in the longer term, which is a precondition for achieving the SDGs. Second, besides a potential decline in ODA, the composition of development finance may fundamentally change, as emphasized in Guillaumont (2015) showing that IDA graduation may not only alter the size but also the composition of aid allocations, including allocations between sectors. Third, graduation will increase the demand for alternative sources of external financing. Ghana has structural current account deficits and is vulnerable to shocks to foreign financing. It will therefore be critically important for Ghana to mobilize alternative external financing sources to substitute for the decline in ODA. The following will look into each of these side effects in detail.


[6] For a precise description of the Atlas method, see the World Bank homepage (https://datahelpdesk.worldbank.org/knowledgebase/articles/378832-the-world-bank-atlas-method-detailedmethodology).

[7] The most recent debt sustainability analysis, from April 1st, 2018, concluded that Ghana continues to be at high risk of external debt distress (IMF, 2018). See e.g. also Reinhart and Rogoff (2010) on the debt burden’s potential harmful effect on countries’ future growth prospects.

Top

This page forms part of the publication "Evaluation Study – Graduation and Development Finance in the SDG Era – A Case Study of Ghana, May 2018" as chapter 2 of 9.
Version no. 1.0, 2018-06-27
Publication may be found at the address http://www.netpublikationer.dk/um/evaluation_case_study_ghana_may_2018/index.html