Developing Countries: U.S. Financing for Multilateral Debt Relief
Initiative Currently Experiencing a Shortfall (24-JUL-08,	 
GAO-08-888R).							 
                                                                 
A buildup of foreign debt throughout the 1970s and		 
1980s--combined with low growth, falling commodity prices, and	 
other economic difficulties--left many poor countries with	 
significantly more debt than they could repay. International	 
efforts to provide debt relief to 41 such heavily indebted poor  
countries have been ongoing for over a decade, and these efforts 
culminated in the Multilateral Debt Relief Initiative (MDRI),	 
which was announced in 2005. MDRI eliminates eligible debt that  
countries owe to four international financial institutions--the  
World Bank's International Development Association (IDA), the	 
International Monetary Fund (IMF), the African Development Bank's
African Development Fund (ADF), and the Inter-American		 
Development Bank (IaDB). To receive MDRI debt relief, countries  
must first complete the Heavily Indebted Poor Countries (HIPC)	 
Initiative, which the World Bank and IMF created in 1996 to	 
relieve the debt burden of poor countries. In response to	 
concerns over the continuing vulnerability of these countries,	 
the World Bank and IMF enhanced the initiative to provide	 
additional debt relief in 1999. Recognizing that recipient	 
countries needed further assistance, MDRI was created to help	 
accelerate countries' progress toward achieving the United	 
Nations Millennium Development Goals. Of the 41 eligible	 
countries, 23 countries have received debt relief under both the 
MDRI and HIPC Initiatives, and another 10 countries are receiving
debt relief under just the HIPC Initiative. Donor governments	 
(including the U.S. government) have agreed to help fund	 
multilateral debt relief. Donor governments and each institution 
agree to the amount of MDRI costs each donor is to fund. To fund 
MDRI, governments may (1) provide funding in addition to their	 
regular contributions or replenishments to the institutions, (2) 
provide their regular contributions early and generate credits	 
through an approach known as early encashment, or (3) do both. If
a government uses these early encashment credits to fully fund	 
its share of MDRI, it is not required to provide additional	 
funding for MDRI. The U.S. Department of the Treasury (Treasury) 
is currently using early encashment to fund the U.S. MDRI	 
commitment. If the U.S. government provides full funding for IDA 
and ADF, then the early encashment approach will generate	 
sufficient funding to cover MDRI during the current replenishment
periods. However, in past replenishments, the U.S. government has
not fully funded its replenishment contributions to international
financial institutions on time, resulting in arrears to IDA and  
ADF totaling more than $400 million as of the end of fiscal year 
2007. We have previously reviewed the HIPC Initiative and other  
debt-related issues. In response to a Congressional request for  
this report, GAO (1) estimated the overall cost of MDRI for four 
international financial institutions (IDA, IMF, ADF, and IaDB),  
and (2) evaluated the United States' approach to funding its	 
share of MDRI costs.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-888R					        
    ACCNO:   A83054						        
  TITLE:     Developing Countries: U.S. Financing for Multilateral    
Debt Relief Initiative Currently Experiencing a Shortfall	 
     DATE:   07/24/2008 
  SUBJECT:   Appropriated funds 				 
	     Cost analysis					 
	     Cost sharing (finance)				 
	     Debt						 
	     Debt collection					 
	     Developing countries				 
	     Economic policies					 
	     Federal aid to foreign countries			 
	     Financial analysis 				 
	     Financial institutions				 
	     Financial management				 
	     Foreign economic assistance			 
	     International agreements				 
	     International cooperation				 
	     International economic relations			 
	     International organizations			 
	     International relations				 
	     Monetary policies					 
	     Program evaluation 				 
	     Program management 				 
	     Cost estimates					 
	     Foreign countries					 
	     Heavily Indebted Poor Countries Debt		 
	     Initiative 					 
                                                                 
	     Multilateral Debt Relief Initiative		 

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GAO-08-888R

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GAO-08-888R: 

United States Government Accountability Office: 
Washington, DC 20548: 

July 24, 2008: 

Congressional Requesters: 

Subject: Developing Countries: U.S. Financing for Multilateral Debt 
Relief Initiative Currently Experiencing a Shortfall: 

A buildup of foreign debt throughout the 1970s and 1980s--combined with 
low growth, falling commodity prices, and other economic difficulties-
-left many poor countries with significantly more debt than they could 
repay. International efforts to provide debt relief to 41 such heavily 
indebted poor countries have been ongoing for over a decade, and these 
efforts culminated in the Multilateral Debt Relief Initiative (MDRI), 
which was announced in 2005. MDRI eliminates eligible debt that 
countries owe to four international financial institutions--the World 
Bank's International Development Association (IDA), the International 
Monetary Fund (IMF), the African Development Bank's African Development 
Fund (ADF), and the Inter-American Development Bank (IaDB).[Footnote 1] 

To receive MDRI debt relief, countries must first complete the Heavily 
Indebted Poor Countries (HIPC) Initiative, which the World Bank and IMF 
created in 1996 to relieve the debt burden of poor countries. In 
response to concerns over the continuing vulnerability of these 
countries, the World Bank and IMF enhanced the initiative to provide 
additional debt relief in 1999. Recognizing that recipient countries 
needed further assistance, MDRI was created to help accelerate 
countries' progress toward achieving the United Nations Millennium 
Development Goals.[Footnote 2] Of the 41 eligible countries, 23 
countries have received debt relief under both the MDRI and HIPC 
Initiatives, and another 10 countries are receiving debt relief under 
just the HIPC Initiative. 

Donor governments (including the U.S. government) have agreed to help 
fund multilateral debt relief. Donor governments and each institution 
agree to the amount of MDRI costs each donor is to fund.[Footnote 3] To 
fund MDRI, governments may (1) provide funding in addition to their 
regular contributions or replenishments to the institutions,[Footnote 
4] (2) provide their regular contributions early and generate credits 
through an approach known as early encashment,[Footnote 5] or (3) do 
both. If a government uses these early encashment credits to fully fund 
its share of MDRI, it is not required to provide additional funding for 
MDRI. The U.S. Department of the Treasury (Treasury) is currently using 
early encashment to fund the U.S. MDRI commitment. If the U.S. 
government provides full funding for IDA and ADF, then the early 
encashment approach will generate sufficient funding to cover MDRI 
during the current replenishment periods. However, in past 
replenishments, the U.S. government has not fully funded its 
replenishment contributions to international financial institutions on 
time, resulting in arrears to IDA and ADF totaling more than $400 
million as of the end of fiscal year 2007. 

We have previously reviewed the HIPC Initiative and other debt-related 
issues.[Footnote 6] In response to your request for this report, we (1) 
estimated the overall cost of MDRI for four international financial 
institutions (IDA, IMF, ADF, and IaDB), and (2) evaluated the United 
States' approach to funding its share of MDRI costs. This is the first 
of two products we plan to issue in response to your interest in debt 
relief for poor countries. We plan to issue a report in early 2009 that 
will address financing for HIPC and MDRI, resources available to 
countries for spending on poverty-reducing activities, and tools to 
promote debt sustainability. Our 2009 report will provide details 
regarding debt relief provided under the HIPC Initiative, the U.S. 
contribution to this effort, and past and present HIPC Initiative 
funding tools. 

To estimate the overall cost of MDRI, we compiled and analyzed data 
from the October 2007 IMF and World Bank report Heavily Indebted Poor 
Countries (HIPC) Initiative and Multilateral Debt Relief Initiative 
(MDRI)--Status of Implementation. We supplemented this data with 
information from documents provided by Treasury and the U.S. Executive 
Director (USED) offices at the international financial institutions. To 
identify U.S. contributions to MDRI costs, we reviewed data derived 
from documents provided by Treasury and the World Bank and ADF, since 
the U.S. government is helping to fund debt relief from these two 
institutions. To evaluate the United States' approach to funding its 
IDA and ADF MDRI costs, we reviewed data derived from Treasury, World 
Bank, and ADF documents. We estimated future total U.S. commitments in 
each IDA and ADF replenishment period and then used this amount in a 
simulation model of the U.S. payment schedule in order to estimate the 
amount of early payment credits that would be earned annually if 
Treasury continued to use the early encashment approach. We compared 
the estimated credits earned for fiscal years 2005 through 2054 to the 
estimated U.S. MDRI commitments over the same period to determine if 
credits earned would be sufficient to fund these commitments. All 
figures provided in this report are expressed in end-2007 present value 
dollars unless otherwise noted.[Footnote 7] We assessed the reliability 
of the data analyzed and found the data to be sufficiently reliable for 
the purposes of this report. 

We conducted this performance audit from December 2007 through July 
2008 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. (See 
enclosure I for more detailed information regarding our scope and 
methodology.) 

Results in Brief: 

We estimate that IDA, IMF, ADF, and IaDB will provide, in present value 
dollars, almost $29 billion in MDRI debt relief for 41 countries over 
the next several decades, with the U.S. government contributing about 
15 percent of this amount.[Footnote 8] IDA is to provide the most debt 
relief, accounting for about $18.5 billion or about 64 percent, of the 
total. IMF is to provide about $4 billion in MDRI debt relief, and ADF 
and IaDB are to provide about $3.7 billion and $2.4 billion, 
respectively.[Footnote 9] As of the end of 2007, the 23 countries that 
were eligible for MDRI had realized about $1.7 billion (6 percent) of 
total planned debt relief from the four international financial 
institutions. The amount of debt relief realized to date is small 
compared to the total planned amount of MDRI debt relief because MDRI 
has only been operational since 2006 and because countries will only 
realize benefits over the next several decades as annual debt 
obligations that were irrevocably cancelled would have come due. Donor 
governments have agreed to fully fund MDRI debt relief on a "dollar- 
for-dollar" basis to IDA and ADF.[Footnote 10] We project that the U.S. 
government will provide about $3.8 billion to fund IDA MDRI costs and 
over $400 million for ADF MDRI debt relief, which represents about 19 
percent of MDRI debt relief provided by these two institutions and 
almost 15 percent of all MDRI debt relief provided.[Footnote 11] 

Based on our projections, Treasury's early encashment approach does not 
fully fund the U.S. share of IDA MDRI costs, and may not fully fund the 
U.S. share of ADF MDRI costs by 2013. We project that the U.S. 
government will face a shortfall of approximately $142 million in its 
existing IDA MDRI commitments by 2009 if it does not clear $152 million 
of accumulated payments not yet provided to IDA during the current 
replenishment period.[Footnote 12] Based on our assumptions about the 
growth of future U.S. commitments, and if the U.S. government fully 
funds its future IDA replenishment contributions and continues to use 
only early encashment, it could experience an IDA MDRI shortfall of 
$108 million by 2014. This shortfall would begin to decrease by 2026 as 
U.S. MDRI commitments begin to decline. By 2044, when all IDA MDRI 
loans are expected to have expired, we project that the U.S. government 
would have generated a surplus in that replenishment period. In 
addition, we project that the U.S. government would face a shortfall to 
ADF for its MDRI commitment by 2013 that would increase until 2025 
when, as with IDA, it would begin to decrease. By 2054, when all ADF 
MDRI loans are expected to have expired, we project that the U.S. 
government would have generated a surplus in that replenishment period. 
If the U.S. government does not pay its future contributions to IDA and 
ADF in full and on time, projected shortfalls in its IDA and ADF MDRI 
commitments could increase further. To offset these shortfalls, 
Treasury may need to request new appropriations, accelerate the early 
encashment schedule, or do both. 

Background: 

MDRI expands upon the HIPC Initiative and represents the most recent 
effort to provide debt relief to heavily indebted poor countries. To 
receive MDRI debt relief, a country must meet all HIPC Initiative 
criteria. At a country's "decision point," IDA and IMF use certain 
criteria[Footnote 13] to determine whether a country qualifies for HIPC 
Initiative debt relief. If a country is determined to qualify, it can 
begin to receive interim HIPC debt relief. Subsequently, at the 
"completion point," when IDA and IMF determine that the country has met 
additional criteria,[Footnote 14] the country can begin to receive full 
and irrevocable HIPC debt relief as well as additional debt relief 
under MDRI. As of June 2008, of the 41 countries that may benefit from 
debt relief efforts, 23 have reached the completion point,[Footnote 15] 
and 10 more have reached the decision point.[Footnote 16] An additional 
eight countries are considered "predecision point" countries and have 
not yet qualified for debt relief.[Footnote 17] In addition, IMF has 
determined that it will provide MDRI debt relief to member countries 
with debt outstanding to IMF and a per capita income below $380 per 
year that do not otherwise qualify for debt relief.[Footnote 18] 

IDA, IMF, ADF, and IaDB Are Estimated to Provide almost $29 Billion in 
MDRI Debt Relief: 

We estimate that IDA, IMF, ADF, and IaDB will provide almost $29 
billion in MDRI debt relief to eligible countries over the next several 
decades, with IDA providing almost two-thirds of this amount. As of the 
end of 2007, countries that had met program eligibility requirements 
had realized about $1.7 billion in debt relief, or almost 6 percent of 
the estimated total amount, from the four international financial 
institutions. Donor governments have agreed to provide funding on a 
dollar-for-dollar basis to IDA and ADF to fully cover their MDRI costs. 
We project that the U.S. government will provide about $3.8 billion to 
fund IDA debt relief costs and about $400 million for ADF debt relief, 
which represents about 19 percent of total IDA and ADF MDRI debt relief 
and almost 15 percent of all MDRI debt relief. 

Four International Financial Institutions Are Estimated to Provide 
almost $29 Billion in MDRI Debt Relief to Eligible Countries; Countries 
Have Already Realized $1.7 Billion: 

We estimate that IDA, IMF, ADF, and IaDB will provide, in present value 
dollars, a total of almost $29 billion in debt relief under MDRI over 
the next several decades. IDA is to provide about 64 percent, or about 
$18.5 billion, of the total amount. IMF is to provide the second- 
largest share, at approximately $4 billion. ADF is to provide about 
$3.7 billion, and IaDB, $2.4 billion (see fig. 1). 

Figure 1: Four International Financial Institutions' Shares of $29 
Billion in MDRI Debt Relief: 

[See PDF for image] 

This figure is a pie-chart depicting the following data: 

Four International Financial Institutions' Shares of $29 Billion in 
MDRI Debt Relief: 
IDA: $18.5 billion; 
IMF: $4.0 billion; 
ADF: $3.7 billion; 
IaDB: $2.4 billion. 

Source: GAO analysis of World Bank and IMF documents. 

Notes: 

(1) Amounts do not add to precisely $29 billion due to rounding. 

(2) This amount includes IMF debt relief provided for Cambodia and 
Tajikistan. 

(3) Amounts are in billions of end-2007 present value dollars. 

[End of figure] 

The total nominal dollar amount of MDRI debt relief is about $55 
billion, with IDA accounting for $37.6 billion, IMF providing $4.3 
billion, ADF providing $8.4 billion, and IaDB providing $4.4 billion. 

By the end of 2007, the 23 countries that had reached the completion 
point had realized debt relief of almost $1.7 billion (6 percent of 
total planned debt relief) as their cancelled debt payments came due. 
IMF provided over half, or about $940 million of MDRI debt relief, 
while IDA provided over $560 million. ADF and IaDB provided $82 million 
and $90 million, respectively, in debt relief. 

Because MDRI has only been operational since 2006, the amount of annual 
loan payments that would otherwise have already been due if the debts 
had not been forgiven under MDRI has been small compared to the overall 
amount of debt that has been cancelled. Furthermore, debt payments were 
originally structured so that countries were scheduled to make payments 
in limited amounts over many years. Therefore, although the four 
international institutions have already irrevocably cancelled all 
eligible debt, countries will only realize benefits as annual debt 
obligations would have come due over the next several decades. 

Donor Governments to Pay IDA and ADF Debt Relief under MDRI: 

Governments that provide funding to the international financial 
institutions have agreed to fund MDRI costs. IDA and ADF will receive 
such support, and donor governments have agreed to provide funding that 
will cover all MDRI costs on a dollar-for-dollar basis, in addition to 
their regular contributions to these two institutions. IMF and IaDB are 
currently using existing internal resources to fund MDRI and have not 
requested donor support. IMF has placed internal resources, including 
the profits from its 1999 and 2000 off-market gold sales, into trust 
funds to provide funding for MDRI debt relief. In order to obtain 
sufficient internal resources to fund debt relief, IaDB created a 
blended loan product made up of concessional funds and nonconcessional 
funds, according to Treasury officials. This blended product allows 
IaDB to continue to provide concessional lending while allowing 
borrowing countries to meet the concessional borrowing requirements set 
by IMF. Furthermore, Treasury officials noted that IaDB took other 
measures to obtain additional resources, such as canceling undisbursed 
portions of nonperforming concessional loans, to gain access to 
additional funding. 

We project that the U.S. government will provide, in present value 
terms, about $3.8 billion to fund IDA MDRI costs and over $400 million 
for ADF MDRI costs. Our total projected U.S. contribution of $4.2 
billion is about 19 percent of the $22.2 billion in planned debt relief 
for these two institutions and is to be provided over multiple decades 
to IDA and ADF.[Footnote 19] The U.S. contribution represents almost 15 
percent of total MDRI debt relief to be provided by all four 
institutions. 

U.S. Government Currently Has a Funding Shortfall for IDA MDRI and 
Could Experience Future Shortfalls: 

Treasury currently plans to fund U.S. commitments for MDRI by paying 
its regular contributions to IDA and ADF early. However, under this 
early encashment approach, the United States may have a $142 million 
shortfall in IDA MDRI obligations by 2009 and may not fully fund its 
share of ADF MDRI costs by 2013. The IDA shortfall is due to the U.S. 
government not fully funding its commitments to IDA, thus limiting its 
ability to earn sufficient credits to meet its MDRI commitments. Based 
on our projections, even if the U.S. government funds its future IDA 
and ADF replenishment contributions in full and on time and continues 
to use early encashment, MDRI shortfalls for both institutions could 
continue for over 20 years. If the U.S. government does not pay its IDA 
and ADF contributions in full and on time, its projected shortfalls in 
MDRI commitments would increase further. To offset these shortfalls, 
Treasury may need to request new appropriations, accelerate the early 
encashment schedule, or do both. 

Treasury Currently Funds MDRI Commitments by Paying Regular 
Contributions Early: 

Treasury currently funds U.S. commitments to MDRI using credits earned 
from paying its regular replenishment contributions to IDA and ADF 
early, through a process known as accelerated or early encashment. 
Although one replenishment funds 3 years of commitments for IDA and ADF 
operations, governments may pay their share of a replenishment over a 
longer period of time. For example, the standard payment (or 
encashment) schedule allows governments to pay their share of the 
current IDA replenishment (known as IDA14) over 9 years and the current 
ADF replenishment (known as ADF-10) over 10 years.[Footnote 20] To fund 
its MDRI commitments, Treasury decided to pay the U.S. share of its 
replenishments over 4 years, rather than over the standard 9 to 10 
years, beginning with IDA14 and ADF-10.[Footnote 21] Based on the 
methodology agreed upon by Treasury and IDA, an encashment credit is 
earned if the present value of the cumulative early encashment payment 
exceeds the present value of the cumulative standard encashment amount 
due in a replenishment period.[Footnote 22] Treasury expects the 
credits earned from early encashment to fully fund U.S. MDRI 
commitments for IDA14 ($232 million), IDA15 ($356 million), ADF-10 ($15 
million), and ADF-11 ($26 million).[Footnote 23] Treasury committed to 
financing MDRI over its full implementation period but has not 
identified a financing approach that extends beyond these replenishment 
periods. Treasury told us that financing future U.S. MDRI commitments 
through early encashment or other means would require new discussions 
with the Office of Management and Budget and possibly IDA and ADF. 

Current IDA MDRI Shortfall Due to U.S. Payments Not Provided to IDA: 

During the current IDA replenishment period (IDA14), which covers 
fiscal years 2006 through 2008, the U.S. government took several 
actions that have resulted in smaller payments to IDA than planned, 
thus contributing to its current shortfall to IDA for MDRI. A 
rescission of 1 percent reduced the fiscal year 2006 enacted 
appropriation of $950 million (the full amount pledged by the U.S. 
government) for IDA to $940.5 million.[Footnote 24] Additionally, the 
fiscal year 2006 appropriations law contained a requirement that 20 
percent of the appropriated funds to IDA be withheld from disbursement 
until Treasury could certify that the World Bank had met anticorruption 
provisions related to procurement.[Footnote 25] Since Treasury could 
not certify that the World Bank had met all the provisions, the 
subsequent fiscal year 2007 continuing resolution rescinded $31.35 
million from the fiscal year 2006 appropriation.[Footnote 26] The total 
fiscal year 2006 appropriation therefore totaled $909.15 million, 
$40.85 million less than IDA would consider due for that year. For 
fiscal year 2007, the foreign operations appropriation passed under a 
continuing resolution and set IDA funding at the fiscal year 2006 post 
rescission level, which was $940.5 million, adding $9.5 million to the 
arrears owed to IDA.[Footnote 27] The fiscal year 2008 appropriations 
law provides $950 million to IDA but includes a rescission of $7.7 
million. Together, these three amounts totaled about $58 million in 
reduced IDA funding. In addition, the 2008 appropriation law contains 
certain transparency and anticorruption provisions that the World Bank 
must meet or 20 percent of the funds must be withheld from 
disbursement.[Footnote 28] Under its current obligations, Treasury is 
withholding about $94 million (10 percent) from disbursement until the 
World Bank meets certain performance requirements. As a result, 
Treasury has not provided a total of about $152 million to IDA during 
the current replenishment period. We project a U.S. MDRI shortfall to 
IDA of about $142 million by July 2009[Footnote 29] if this funding is 
not provided.[Footnote 30] 

Credits Earned from Early Payments Are Insufficient to Fully Fund 
Future U.S. MDRI Commitments: 

If the United States provides its future payments to IDA in full and on 
time and only uses early encashment to finance MDRI, we project that 
credits earned from early encashment would be insufficient to fully 
fund U.S. MDRI obligations to IDA by 2014 and to ADF by 2013. 
Shortfalls to IDA would increase with each replenishment period, rising 
to $288 million by 2023, as shown in figure 2.[Footnote 31] 

Figure 2: Credits Earned from U.S. Early Encashment for IDA14 through 
IDA26: 

[See PDF for image] 

This figure is a line graph depicting the following data: 

Replenishment: IDA 14, 2006-2008; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$142. 

Replenishment: IDA 15, 2009-2011; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: $1. 

Replenishment: IDA 16, 2012-2014; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$108. 

Replenishment: IDA 17, 2015-2017; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$149. 

Replenishment: IDA 18, 2018-2020; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$170. 

Replenishment: IDA 19, 2021-2023; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$288; 

Replenishment: IDA 20, 2024-2026; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$269. 

Replenishment: IDA 21, 2027-2029; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$214. 

Replenishment: IDA 22, 2030-2032; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$108. 

Replenishment: IDA 23, 2033-2035; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
%1. 

Replenishment: IDA 24, 2036-2038; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
$92. 

Replenishment: IDA 25, 2039-2041; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
$143. 

Replenishment: IDA 26, 2042-2044; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
$168. 

Source: GAO analysis of Treasury and IDA data. 

Notes: 

(1) To project whether credits earned from early encashment would fully 
fund annual U.S. MDRI commitments, we used conservative assumptions 
regarding the growth rate of future U.S. replenishment obligations to 
IDA and assumed the U.S. government would continue meeting its funding 
obligations in full and on time under an early encashment schedule. We 
assumed that U.S. IDA commitments would grow at the same rate as 
corresponding projected total IDA commitments for IDA16 through IDA20. 
For the remaining replenishments, since projected total IDA commitments 
were not available, we estimated an average increase in nominal dollar 
replenishment of about 7.1 percent, the average growth rate of the 
prior five IDA commitments and projected U.S. IDA commitments for IDA21 
through IDA26. The discount rate is 3.5 percent for IDA14 and 4 percent 
for all other replenishments. Treasury's funding approach for IDA14 
involves a percentage breakdown of 80 percent-20 percent for each of 
the 3 years of replenishment funding. Under this approach, 80 percent 
of 1 year's funding is provided in the first year of the early 
encashment schedule and 20 percent in the second year. Under this 
funding stream, it will take 4 years to fully fund the United States' 3-
year replenishment contribution to IDA. For IDA15 and all future 
replenishment periods, the funding approach accelerates further to 90 
percent-10 percent over 4 years. 

(2) Treasury staff have emphasized that total IDA requirements could 
grow more slowly or decrease as countries graduate from IDA assistance 
or other events reduce IDA needs. This would have an impact on the 
amount of early encashment credits generated and could lead to higher 
level of shortfalls or reduction in surpluses. 

(3) Amounts are in millions of end-2007 present value U.S. dollars. 

[End of figure] 

The projected shortfalls in a replenishment period would begin to 
decrease by 2026 as U.S. MDRI obligations started to decline (based on 
the established contribution schedule). The United States would 
generate a surplus of $92 million during the 2036-2038 replenishment 
period. Furthermore, by 2044 (when all relevant IDA loans are expected 
to have expired for eligible countries), we project that the U.S. 
government would have generated a surplus of almost $168 million in the 
final replenishment period covering MDRI. 

Similarly, we project that the United States would experience a 
shortfall to ADF by 2013, if it continues to use an early encashment 
approach, although its $22 million accumulated surplus from previous 
replenishment periods could offset the shortfall. Nonetheless, the 
shortfalls would increase during subsequent replenishment periods, 
rising to almost $19 million by 2025, as shown in figure 3.[Footnote 
32] 

Figure 3: Credits Earned from U.S. Early Encashment for ADF-10 through 
ADF-26: 

[See PDF for image] 

This figure is a line graph depicting the following data: 

Replenishment: ADF-10, 2005-2007; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
$9. 

Replenishment: ADF-11, 2008-2010; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
$13. 

Replenishment: ADF-12, 2011-2013;
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$9. 

Replenishment: ADF-13, 2014-2016; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$15. 

Replenishment: ADF-14, 2017-2019; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$16. 

Replenishment: ADF-15, 2020-2022; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$17. 

Replenishment: ADF-16, 2023-2025; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$19. 

Replenishment: ADF-17, 2026-2028; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$17. 

Replenishment: ADF-18, 2029-2031; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$11. 

Replenishment: ADF-19, 2032-2034; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$7. 

Replenishment: ADF-20, 2035-2037;
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
-$3. 

Replenishment: ADF-21, 2038-2040;
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars:  
$2. 

Replenishment: ADF-22, 2041-2043; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
$6. 

Replenishment: ADF-23, 2044-2046; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
$8. 

Replenishment: ADF-24, 2047-2049; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
$9. 

Replenishment: ADF-25, 2050-2052; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
$10. 

Replenishment: ADF-26, 2053-2055; 
Surplus/Shortfall in millions of end-2007 present vaue U.S. dollars: 
$10. 

Source: GAO analysis of Treasury and IDA data. 

Notes: 

(1) To project whether credits earned from early encashment would fully 
fund annual U.S. MDRI commitments, we used conservative assumptions 
regarding the growth rate of future U.S. obligations to ADF and assumed 
the U.S. government would continue meeting its funding obligations in 
full and on time under an early encashment schedule. For ADF, we 
estimated an average increase in nominal dollar replenishment of 6.1 
percent, and used it to project U.S. ADF commitments from ADF-12 
through ADF-26. The discount rate is 3.1 percent for ADF-10 and 4.69 
percent for all other replenishments. The funding approach for ADF-10 
and ADF-11 involves a percentage breakdown of 60 percent-40 percent for 
each of the 3 years of replenishment funding. Under this approach, 60 
percent of 1 year's funding is provided in the first year of the early 
encashment schedule and 40 percent in the second year. Under this 
funding stream, it will take 4 years to fully fund the United States' 3-
year replenishment contribution to ADF. 

(2) Treasury staff have emphasized that total ADF requirements could 
grow more slowly or decrease as countries graduate from ADF assistance 
or other events reduce ADF needs. This would have an impact on the 
amount of early encashment credits generated, and could lead to higher 
level of shortfalls or reduction in surpluses. 

(3) Amounts are in millions of end-2007 present value U.S. dollars. 

[End of figure] 

The projected shortfalls in a replenishment period would then begin to 
decrease as U.S. MDRI obligations start to decline (based on the 
established contribution schedule). By 2040, the U.S. MDRI obligation 
shortfalls would end and, by 2054 (when all relevant ADF loans are 
expected to have expired for eligible countries), we project that the 
U.S. government would have generated a surplus of approximately $10 
million during the final replenishment period covering MDRI. 

The United States' Financing Shortfall for MDRI Could Increase If It 
Does Not Meet the Early Encashment Schedule: 

If the United States does not fully fund its early encashment schedules 
for IDA and ADF, its projected shortfalls for MDRI could increase 
further. For example, if the U.S. government were to pay 5 percent less 
than its annual committed amounts for IDA15, its IDA MDRI shortfall 
would be $176 million; if rescissions were to continue and exceed 8.8 
percent of the annual committed amount there would be no encashment 
credits generated to fund IDA MDRI obligations for that replenishment 
period. If the U.S. government were to pay 5 percent less than its 
annual committed amounts for ADF-11, its ADF MDRI surplus would be 
reduced to $11 million by 2010.[Footnote 33] To offset these 
shortfalls, Treasury may need to request new appropriations, accelerate 
the early encashment schedule, or do both. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Department of the Treasury. 
In its written comments, Treasury said it appreciated GAO's analysis of 
and contribution to this issue. Treasury also emphasized the analysis 
showing that continued arrears to the development banks jeopardize the 
ability of the United States to meet its commitments to debt relief. 
Treasury made two technical points stressing that (1) U.S. commitments 
to MDRI have been made in nominal dollars, and (2) U.S. contributions 
to IDA and ADF are negotiated on a replenishment-by-replenishment 
basis. In our report, we provide amounts in both present value and 
nominal value dollars where relevant. Since donor financing for MDRI 
debt relief will be provided over a 50-year period, we found it useful 
to take into consideration the time value of money and express costs in 
comparable present value dollars. We also note that contributions are 
negotiated for each replenishment. Treasury's letter is reprinted in 
enclosure II. Treasury staff also provided us with technical comments 
that we incorporated into the report as appropriate. 

We are sending copies of this report to other interested Members of 
Congress, the Secretary of the Treasury, the World Bank, IMF, AfDB, and 
IaDB. We will also provide copies to others on request. In addition, 
the report will be available at no charge on the GAO Web site at 
[hyperlink, http://www.gao.gov]. If you or your staffs have any 
questions about this report, please contact me at (202) 512-9601 or 
[email protected]. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. GAO staff who made major contributions to this report include 
Cheryl Goodman, Assistant Director; Leslie Holen; Bruce Kutnick; 
Farahnaaz Khakoo; and Debbie Chung. 

Signed by: 

Thomas Melito:
Director, International Affairs and Trade: 

List of Requesters: 

The Honorable Joseph R. Biden, Jr.
Chairman:
Committee on Foreign Relations:
United States Senate: 

The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives: 

The Honorable Luis Gutierrez:
Chairman:
Subcommittee on Domestic and International:
Monetary Policy, Trade, and Technology:
Committee on Financial Services:
House of Representatives: 

The Honorable Donald Payne:
Chairman:
Subcommittee on Africa and Global Health:
Committee on Foreign Affairs:
House of Representatives: 

The Honorable Maxine Waters:
House of Representatives: 

The Honorable Barbara Lee:
House of Representatives: 

Enclosure I: Objectives, Scope and Methodology: 

Our objectives were to (1) estimate the overall cost of the 
Multilateral Debt Relief Initiative (MDRI) for four international 
financial institutions: the World Bank's International Development 
Association (IDA), the International Monetary Fund (IMF), the African 
Development Bank's African Development Fund (ADF), and the Inter- 
American Development Bank (IaDB); and (2) evaluate the United States' 
approach to funding its share of MDRI costs. 

To estimate the overall cost of MDRI, we compiled and analyzed data 
from the October 2007 IMF and World Bank report Heavily Indebted Poor 
Countries (HIPC) Initiative and Multilateral Debt Relief Initiative 
(MDRI)--Status of Implementation. We also incorporated data from the 
October 2007 International Development Association Resource 
Mobilization report Multilateral Debt Relief Initiative (MDRI): Second 
Update on Debt Relief Costs and Donor Financing, as of September 30, 
2007. We supplemented these data with information from documents 
provided by the U.S. Department of the Treasury (Treasury) or the U.S. 
Executive Director's offices at the international financial 
institutions. Since debt relief will be delivered over 50 years, we are 
expressing all costs in end-2007 present value dollars. This process 
takes into consideration the time value of money and uses a discount 
rate of 4.6 percent. We used this discount rate because World Bank and 
IMF documents have used this rate for similar calculations. To estimate 
the U.S. contribution to MDRI costs, we reviewed data derived from 
documentation provided by Treasury as well as the World Bank and ADF 
since the U.S. government is helping to fund debt relief from these two 
institutions. Total U.S. costs are estimated by applying the projected 
U.S. share of total donor costs (20.3 percent for IDA and 11.8 percent 
for ADF) and are expressed in end-2007 present value dollars. We 
assessed the reliability of data analyzed and found the data to be 
sufficiently reliable for purposes of this report. 

To evaluate the United States' approach to funding these costs, we 
reviewed data derived from World Bank and ADF documentation provided by 
Treasury. In order to estimate credits earned from early U.S. payments, 
we needed to know the total U.S. replenishment commitment to IDA and 
ADF for this period; however, data on total U.S. commitments are not 
available beyond fiscal year 2011. Therefore, we estimated future total 
U.S. IDA commitments by applying the projected growth rate of total IDA 
commitments during the same period, assuming that they both grow at the 
same rate. However, total IDA commitment estimates were not available 
beyond 2026 (replenishment period IDA20); therefore, for all future 
replenishment periods we applied a projected growth rate of 7.1 
percent, the average increase in the nominal dollar replenishment of 
IDA16 through IDA20. We assumed that future U.S. ADF commitments would 
remain constant in real terms to that of ADF-12. We estimated future 
total U.S. ADF commitments would increase by 6.1 percent in every 
replenishment period.[Footnote 34] After estimating the total U.S. 
commitment to IDA and ADF, we used this amount in a simulation model of 
the U.S. payment schedule in order to determine the amount of credits 
that would be earned during each replenishment period. In estimating 
the credits, we used a 3.5 percent discount rate for IDA14 and 4 
percent for all other IDA replenishments, and a 3.1 percent discount 
rate for ADF-10 and 4.69 percent for all other ADF replenishments. 
Treasury provided us with the discount rates for IDA14 and IDA15, as 
well as ADF-10 and ADF-11. For future replenishments, we used the 
discount rates from the most current models (IDA15 and ADF-11). 

Treasury and IDA agreed upon an encashment method, whereby encashment 
credits are calculated by multiplying the credit face value percentage 
by the actual total U.S. payment for that replenishment period. The 
credit face value is equal to the difference between the present value 
of the total actual early encashment payments and the present value of 
the total standard schedule payment amount, divided by the present 
value of the total standard schedule payment amount. Treasury and ADF 
have agreed upon a similar method for calculating encashment credits 
with a subtle difference in the calculation of the credit face value. 
The credit face value is equal to the difference between the present 
value of the annual actual U.S. payment expressed in percentages of the 
total actual U.S. payment and the present value of the annual regular 
encashment schedule expressed in percentages of the total commitment, 
divided by the present value of the annual regular encashment schedule 
expressed in percentages of the total commitment. We compared the 
credits earned from fiscal years 2006 through 2044 (for IDA) or through 
2054 (for ADF) to the U.S. MDRI commitment over the same period to 
determine if credits earned are sufficient to fund U.S. MDRI costs. 
According to Treasury, encashment credits would be more than 
proportionately reduced if there are arrears in payments to IDA using 
this methodology. Additionally, we estimated future credits earned 
under a 5 percent rescission in the early encashment payments during 
IDA15 and ADF-11, and for IDA15 we estimated the level of rescission, 
which will lead to no early encashment credits. We assumed that for all 
other replenishment periods, the U.S. government fully funds its 
commitments to the institutions. The U.S. model was developed by the 
World Bank and provided by Treasury and the USED offices at the World 
Bank and ADF. All costs for these simulations are expressed in end-2007 
present value dollars. We assessed the reliability of data analyzed and 
found the data to be sufficiently reliable for purpose of this report. 

We conducted this performance audit from December 2007 through July 
2008 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

[End of enclosure] 

Enclosure II: Comments from the Department of the Treasury: 

Department Of The Treasury: 
Washington, D.C. 20220: 

July 10, 2008: 

Thomas Melito: 
Director, International Affairs and Trade: 
Government Accountability Office: 
441 G Street N.W. 
Washington, DC 20548: 

Dear Mr. Melito: 

Thank you for the opportunity to comment on your recent report 
regarding U.S. financing for the Multilateral Debt Relief Initiative. 

The United States has consistently provided strong international 
leadership on debt relief for the world's most heavily-indebted poor 
countries. In 2005, with strong bipartisan congressional support, the 
Administration initiated and negotiated the landmark Multilateral Debt 
Relief Initiative (MDRI), and continued this work through a related 
agreement in the Inter-American Development Bank. However, for the 
United States to provide credible leadership -- both on debt relief and 
more broadly within the international financial institutions -- we must 
fulfill our commitments to help finance these initiatives. As this 
report describes, continued arrears to the development banks jeopardize 
the ability of the United States to meet its commitments to debt relief 
We agree with your assessment that the risk of a near-term shortfall is 
greatest at the World Bank, where we anticipate the United States will 
have $385 million in arrears to the International Development 
Association (IDA) and up to $94 million in withheld payments by the end 
of fiscal year 2008. 

The findings of the report illustrate the importance of full funding of 
Treasury's budget requests for IDA and the African Development Fund 
(AfDF), not only because of the valuable new development assistance 
that these institutions provide, but also for the United States to meet 
its commitments to help finance debt relief. In fact, our fiscal year 
2009 budget request for payment of IDA arrears is specifically targeted 
at helping to fulfill our MDRI commitments. However, if the necessary 
appropriations are not made, the United States risks falling short on 
its commitments to MDRI, less than four years after this landmark 
international initiative began. 

There are two technical points that we would like to highlight 
regarding the report. First, it is important to note that while the 
report frequently uses "present value" dollars, U.S. funding 
commitments for MDRI are in nominal terms. The United States has 
committed to provide $7.6 billion for IDA and $1 billion for AfDF over 
four decades in order to help support approximately $55 billion in debt 
relief under MDRI. We understand your economic rationale for using 
present value terms, but focusing on the nominal amounts is extremely 
important as we seek to concretely meet U.S. commitments. 

A second point is regarding your assumptions on the growth rates of 
U.S. contributions to the IDA and AfDF replenishments. The United 
States determines its contributions to IDA and the AfDF on a 
replenishment-by-replenishment basis, based on an assessment of the 
needs and the policy frameworks in place at the time of replenishment 
negotiations (every three years). We realize that you needed to select 
certain assumptions in order to produce the long-term projections 
contained in this report. However, we must stress that the 
replenishment projections should not be viewed as a U.S. commitment or 
as prejudicing the outcome of future replenishment negotiations. 

We appreciate GAO's analysis and contribution to this issue, and look 
forward to continued work with Congress to ensure that the United 
States meets its commitments to debt relief. 

Sincerely, 

Signed by: 

Kenneth L. Peel: 
Deputy Assistant Secretary: 
Development Finance and Debt: 

[End of enclosure] 

Related GAO Products: 

Developing Countries: Challenges in Financing Poor Countries' Economic 
Growth and Debt Relief Targets. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-04-688T]. Washington, D.C.: April 20, 2004. 

Developing Countries: Achieving Poor Countries' Economic Growth and 
Debt Relief Targets Faces Significant Financing Challenges. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-04-405]. Washington, D.C.: April 
14, 2004. 

Developing Countries: Switching Some Multilateral Loans to Grants 
Lessens Poor Country Debt Burdens. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-02-593]. Washington, D.C.: April 19, 2002. 

Developing Countries: Challenges Confronting Debt Relief and IMF 
Lending to Poor Countries. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-01-745T]. Washington, D.C.: May 15, 2001. 

Developing Countries: Debt Relief Initiative for Poor Countries Faces 
Challenges. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/NSIAD-00-
161]. Washington, D.C.: June 29, 2000. 

Developing Countries: Status of the Heavily Indebted Poor Countries 
Debt Relief Initiative. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/NSIAD-98-229]. Washington, D.C.: September 30, 1998. 

Footnotes: 

[1] IaDB was not included in MDRI but decided in 2007 to provide 
equivalent debt relief under a similar initiative. IaDB's Fund for 
Special Operations is the entity responsible for providing debt relief. 
For the purpose of this report, references to MDRI also include the 
IaDB initiative. IMF, ADF, and IaDB plan to cancel all eligible debt 
that countries owed to them as of the end of 2004. IDA plans to cancel 
all eligible outstanding debt as of the end of 2003. 

[2] The United Nations Millennium Development Goals, which have a 
target completion date of 2015, are to (1) eradicate extreme poverty 
and hunger; (2) achieve universal primary education; (3) promote gender 
equality and empower women; (4) reduce child mortality; (5) improve 
maternal health; (6) combat HIV/AIDS, malaria, and other diseases; (7) 
ensure environmental sustainability; and (8) develop a global 
partnership for development. 

[3] Treasury officials have noted that the amount of funding each donor 
government actually provides may differ from the original estimates due 
to changes during MDRI implementation. For example, if fewer countries 
receive debt relief than projected in a particular year, MDRI costs 
will be lower for that year. 

[4] Replenishment refers to periodic contributions by member countries 
that are agreed upon by the institution's board of governors to fund 
concessional, or below market, lending operations over a specified 
period of time, normally every 3 years. 

[5] According to Treasury officials, the United States and Japan are 
the only donors that use early encashment of their regular 
replenishment contributions to pay their share of MDRI-related costs at 
the World Bank. 

[6] See Related GAO Products at the end of this report. Our previous 
work identified funding shortfalls associated with the HIPC Initiative. 

[7] The present value of debt is a measure that takes into account the 
concessional terms that underlie most of these countries' loans. 
Present value debt is defined as the sum of all future debt-service 
obligations (interest and principal) on existing debt, discounted at 
the market interest rate. The nominal value of the debt is greater than 
the present value. 

[8] IDA and IaDB loans are repaid over a period of up to 40 years. ADF 
and IMF loans are repaid over a period of up to 50 and 10 years, 
respectively. 

[9] The total nominal dollar amount of planned MDRI debt relief is 
almost $55 billion, with IDA accounting for $37.6 billion, IMF 
providing $4.3 billion, ADF providing $8.4 billion, and IaDB providing 
$4.4 billion. These nominal dollar amounts do not take into 
consideration the time value of money. 

[10] IMF and IaDB have used internal resources or made program 
alterations in order to fund all MDRI costs and, therefore, have not 
requested additional funding from donor countries for MDRI. 

[11] In nominal dollars, the U.S. government will provide about $7.6 
billion and $1 billion for IDA and ADF MDRI costs, respectively, for a 
total of $8.6 billion. 

[12] The U.S. government has accumulated almost $58 million in arrears 
to the current IDA replenishment period, which covers fiscal years 2006 
through 2008. Furthermore, under fiscal year 2008 obligations, Treasury 
is withholding about $94 million until the World Bank meets certain 
transparency and anticorruption requirements contained in U.S. law. If 
Treasury is unable to report that the World Bank has met the 
performance requirements, U.S. funding not yet provided to IDA could 
rise to $152 million. Treasury officials are holding discussions with 
the World Bank on meeting the established requirements in fiscal year 
2009. According to Treasury officials, while the U.S. government 
considers this funding to be "withheld payments," the World Bank 
considers it to be "arrears," as these payments are considered part of 
the expected U.S. commitment that has not been paid. IDA14 arrears and 
withholdings are expressed in nominal dollars. 

[13] These criteria are: (1) eligibility only for concessional 
financing from the World Bank and IMF, (2) an unsustainable debt 
burden, (3) a track record of reform and sound policies, and (4) 
development of a poverty reduction strategy paper. 

[14] These criteria are: (1) a further track record of good performance 
under IMF-and IDA-supported programs, (2) implementation of key reforms 
agreed upon at the decision point (known as floating completion point 
triggers), and (3) adoption and implementation of the poverty reduction 
strategy paper for at least 1 year. 

[15] Completion-point countries are Benin, Bolivia, Burkina Faso, 
Cameroon, Ethiopia, the Gambia, Ghana, Guyana, Honduras, Madagascar, 
Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Sao 
Tome and Principe, Senegal, Sierra Leone, Tanzania, Uganda, and Zambia. 

[16] Decision-point countries are Afghanistan, Burundi, Central African 
Republic, Chad, Republic of Congo, Democratic Republic of the Congo, 
Guinea, Guinea-Bissau, Haiti, and Liberia. 

[17] Predecision point countries are Comoros, Cote d'Ivoire, Eritrea, 
Kyrgyz Republic, Nepal, Somalia, Sudan, and Togo. 

[18] Using this criterion, IMF has identified two non-HIPC Initiative 
countries, Cambodia and Tajikistan, as eligible for MDRI debt relief. 
As of the end of September 2007, IMF had canceled $82 million and $100 
million of MDRI-eligible debt to these two countries, respectively. 

[19] For IDA MDRI, the U.S. share is 20.3 percent; for ADF MDRI, the 
U.S. share is 11.8 percent. 

[20] During the 3-year replenishment period, donors can provide their 
contributions by depositing promissory notes in three equal 
installments, though IDA and ADF withdraw (encash) these funds on a 
separate and longer schedule known as the standard encashment schedule. 

[21] In previous replenishment periods, Treasury followed a 6-year 
encashment schedule. 

[22] The United States has an agreement with IDA whereby credits from 
early encashment can be estimated on an annual basis; however, credits 
can only be realized at the end of each replenishment period. The 
surplus can generate credit by earning interest. The interest rate is 
the agreed-upon replenishment discount rate, which reflects the income 
earned by the international financial institutions as they invest the 
surplus funds. In general, the discount rate equals the projected 
inflation rate plus the real interest rate. 

[23] MDRI commitment amounts are expressed in nominal dollars. 

[24] Foreign Operations, Export Financing, and Related Programs 
Appropriations Act, fiscal year 2006, Pub. L. No. 109-102, 119 Stat. 
2172, 2193 (Nov. 14, 2005); Department of Defense, Emergency 
Supplemental Appropriations to Address Hurricanes in the Gulf of 
Mexico, and Pandemic Influenza Act, 2006, Pub. L. No. 109-148, sec. 
3801, 119 Stat. 2680, 2791 (Dec. 30, 2005). Amounts are expressed in 
nominal dollars. 

[25] Foreign Operations, Export Financing, and Related Programs 
Appropriations Act, fiscal year 2006. 

[26] Revised Continuing Appropriations Resolution, 2007, Pub. L. No. 
110-5, 121 Stat. 8, 24 (Feb. 15, 2007). Amounts are expressed in 
nominal dollars. Treasury noted that Congress withheld these funds from 
disbursement but also amended the fiscal year 2006 requirement by 
striking the word "certify" and requiring instead that Treasury give a 
report to Congress, which was submitted, on the extent to which the 
World Bank had completed the anticorruption provisions detailed in the 
previous year's appropriations law. 

[27] Revised Continuing Appropriations Resolution, fiscal year 2007. 

[28] Consolidated Appropriations Act, 2008, Pub. L. No. 110-161, 121 
Stat. 1844, 2311, 2352 (Dec. 26, 2007). 

[29] Since Treasury has chosen an early encashment schedule that goes 
beyond the 3-year replenishment period, the replenishment shortfall or 
surplus can accrue outside this 3-year time frame. For IDA14, Treasury 
staff confirmed that any shortfall or surplus would be accrued by 2009 
rather than 2008. The additional year is a result of the 4-year early 
encashment schedule, whereby the U.S. government would still be 
encashing a payment in the last year. For all other IDA replenishment 
periods, and for ADF as well, there is some uncertainty with regard to 
when MDRI shortfalls or surpluses occur. Therefore, throughout this 
report we will refer to the MDRI shortfall or surplus as accruing at 
the end of the 3-year replenishment period rather than at the end of 
the payment period. However, in our calculations we assume that all 
future total IDA shortfalls or surpluses accrue by the fourth year, as 
in IDA14, and by the fifth year of the ADF early encashment schedule, 
unless otherwise noted. Because the U.S. government begins its 4-year 
early encashment schedule for ADF in the second year of the 
replenishment period, we assume that the total ADF shortfall or surplus 
is accrued by the fifth year. 

[30] Treasury and the World Bank are currently discussing a fiscal year 
2008 congressional requirement to withhold $94 million from the World 
Bank. Treasury staff told us that although these provisions are 
difficult to implement quickly, they expect some of the provisions to 
be met by the World Bank in fiscal year 2009. For fiscal year 2009, 
Treasury has requested new appropriations to cover $42 million in 
arrears to IDA14. If this amount of funding is provided and if Treasury 
reports the World Bank's full compliance with the performance 
requirements and pays the full $94 million, the United States' 
remaining IDA14 arrears would total $16 million. In this case, the 
United States would not earn sufficient encashment credits to fully 
finance its MDRI obligations for IDA14 and experience a shortfall of 
about $7 million. Treasury and IDA agreed upon an encashment 
methodology for IDA14 whereby the United States is expected to fully 
fund its IDA commitment of $2.85 billion; otherwise, encashment credits 
would be more than proportionately reduced. IDA15 MDRI encashment 
credits would be totally eliminated if U.S. replenishment arrears were 
to exceed about 9 percent. Alternatively, the ADF has an encashment 
method whereby encashment credits are proportionately reduced if the 
United States has across the board rescissions. 

[31] For IDA, the baseline analysis shown in figure 2 assumes a 90 
percent-10 percent funding approach for IDA15 and onwards over a 4-year 
period. Under this approach, 90 percent of one year's funding is 
provided in the first year and 10 percent in the second year. Even if 
Treasury accelerated the early encashment schedule during IDA16 and 
subsequent replenishment periods to 100 percent over the 3-year 
replenishment period, it would still experience a shortfall of $99 
million that would rise to almost $288 million by 2023. The shortfall 
accrues on the third year under a 3-year early encashment schedule. 

[32] For ADF, the baseline analysis shown in figure 3 assumes a 60 
percent-40 percent funding approach for ADF-10 and onwards over a 4- 
year period. Even if Treasury accelerated this approach to 80 percent- 
20 percent (over 4 years) and then to 100 percent (over 3 years) during 
ADF-13 and subsequent replenishment periods, it would still experience 
shortfalls of $12 million under the 80 percent-20 percent approach and 
$9 million under the 100 percent approach during ADF-13. The shortfalls 
would rise by 2025 to almost $17 million under the 80-20 approach and 
$15 million under the 100 percent approach. The shortfall accrues on 
the fourth year under a 3-year early encashment schedule. 

[33] In this scenario, we estimate a 5 percent across the board 
rescission of U.S. contributions during IDA15 and ADF-11. In both 
cases, we assume all future replenishments periods are fully funded. 

[34] ADF assumes that baseline donor contributions will increase with 
inflation at the rate of 2 percent annum. 

[End of enclosure] 

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