middot Country Performance and IDA Lending

International Development Association January 1998

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Country Performance and IDA Lending

1 IDAs effectiveness in supporting its borrowers towards achieving their development objectives is defined largely by the ability of those countries to maintain a sound economic policy environment Donors have therefore agreed that the allocation of IDAs lending resources should be determined primarily by the policy performance of its borrowers

2 This note describes how IDA carries out this mandate It looks at the criteria by which policy performance in individual countries is assessed (Section I) It then turns to IDAs lending and how this is linked to country performance through the Country Assistance Strategy (Section II) Finally it highlights for Deputies attention the issues which emerge in maintaining the performance - lending link (Section III)

3 Linking IDAs lending to borrowers performance is an iterative process It involves reconciling the top-down performance-based allocation of IDAs available resources with the particular circumstances of each borrower as assessed bottom-up through the country assistance strategy The result is a set of country lending programs which remain firmly anchored in borrowers policy performance and their capacity for utilizing IDAs resources effectively while reflecting the flexibility required to respond to a wide range of country circumstances

bull 1 Assessing Country Performance

4 The first cornerstone linking IDAs lending and borrower performance is the annual country performance assessment The quality of each borrowers economic and social policies is assessed against a set of Bank-wide agreed criteria for promoting growth and poverty reduction The aim is to establish cross-country comparability among borrowers as a basis for later allocating IDAs fixed pool ofresources among them

5 The assessment is focused on policy adoption and implementation rather than economic outcomes which are the product not only of country policies but also of exogenous developments such as terms of trade shifts or weather conditions Action taken in the most recent calendar year is the focus of the assessment though it is viewed in the perspective of more than a single year so as to capture progress in adopting suitable policies and the effectiveness of those policies as they are implemented

6 The major element of the assessment concerns borrowers development policies as these have the most direct impact in stimulating labor-demanding growth and poverty reduction Staff evaluate these in terms of eight broad structural policy areas (Figure 1) They also evaluate the

bull I A recent study by the Banks research department of the factors responsible for aid effectiveness again confrrms the important role of country policies as a detenninant of effectiveness The study fmds that aid can have a significant impact on countries growth perfonnance but only where a good policy environment is in place See D Dollar and C Burnside Aid Policies and Growth June 1997

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extent to which the borrower has maintained macroeconomic stability as this is a sine qua non for sustained growth and poverty reduction Finally the performance of the borrowers IDA portfolio is factored into the assessment as indicative of its ability to implement development projects and programs effectively This part of the assessment performed independently is drawn from the Banks Annual Review of Portfolio Performance Y Over two-thirds of the rating is determined by the quality of the countrys development policies while the remainder IS

determined by macroeconomic and portfolio implementation performance

Figure 1 Country Performance Criteria

Development Policies Are policies adequate in promoting employment-generating growth and in providing public services and safety nets for the relative benefit ofthe poor

bull Private Sector Development Are the trade and exchange system product andfactor markets financial sector services environmental policies and the legal and regulatory framework conducive to private sector development

Criteria Competition Policy and Incentives Product and factor markets legal and regulatory framework for business Trade and Exchange System Trade policy foreign exchange system Financial Sector Efficiency scope of financial services Environment National strategy project impact assessments

bull Public Sector Efficiency Is public sector management including management ofthe parastatals efficient and equitable in providing economic services and infrastructure Does public expenditure policy make efficient use of budgetary resources Is it adequately focused on the needs ofthe poor Criteria

Public Expenditure and Civil Administration Expenditure volume and composition public investment programming tax policy civil administration Public Enterprises and Privatization Budgetary effects management privatization strategy

bull Social Policies Poverty Reduction Strategy Are social strategies and safety nets wellformulated and adequately fonded Do poverty analysis and monitoring provide a basis for effective poverty reduction efforts Criteria

Social Services Safety Nets Sector strategies subsidies safety nets Poverty Analysis Monitoring National strategy monitoring instruments

Macroeconomic Stability Arefiscal and monetary policies sustainable Do they adequately serve macroeconomic stability and investor confidence

Criteria Inflation debt management fiscal deficit external deficit

Portfolio Performance

Criterion IDA portfolio performance (AARP)

7 Clearly assessing each countrys policy performance is a complex task It requires in-depth examination and careful consideration of country circumstances Staff of the Banks

Y For a full discussion see IDA Portfolio Review January 1998 prepared for the IDA12 Deputies meeting February 26-27 1998

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regional departments under the coordination of pRMl examine in detail and regional context a set of specific criteria within each broad policy area These criteria have been agreed among Bank economists across all regions as essential for promoting growth and poverty reduction For example the category Competition Policy and Incentives covers all aspects of the incentives system for private sector activity as well as the legal and regulatory framework governing it The criteria themselves are periodically refmed as experience is gained in applying them across the widely diverse spectrum ofIDAs borrowers

8 Consistent with IDAs mandate every one of the performance criteria is designed to capture the extent to which the borrowers policies are well formulated and effective in addressing poverty in that area A separate criterion is therefore not identified for gauging each countrys pro-poor status Similarly governance issues (transparency and government commitment to implement policies) is an integral part of the assessment of each criterion and is not evaluated as a separate item

9 To illustrate three sets of policies particularly important to a wide number of IDA borrowers are discussed further below

bull Competition Policy and Incentives Good performance in IDA countries on this score means above all maintaining producer incentives in the agricultural sectorshysatisfactory product prices and open marketing arrangements which are key to laborshydemanding growth Performance here is relatively good on the part of many borrowers This is particularly the case in Africa where Cote dIvoire Ghana Kenya Zambia and others have given high priority to strengthening agricultural producer incentives under their structural adjustment programs IDA borrower performance in ensuring adequate incentives to small business and opening up labor markets however is comparatively weak In the ECA region in particular performance on this score tends to be very weak even among otherwise good performers such as Armenia Georgia and Kyrgyz Republic

bull Public Expenditure Management Notwithstanding its importance the performance of IDA countries in this area is typically weak With only limited domestic resources at their disposal governments typically find it difficult to reconcile their many spending demands on the one hand and the need for overall fiscal restraint on the other As a result development priorities are often underfunded For example government wage bills in virtually all countries squeeze funding for operations and maintenance ofbasic services and infrastructure to unsatisfactory levels Only a few countries have made significant progress towards reversing that situation among them Malawi and Mauritania Elsewhere other large competing claims may also be at work such as defense needs in Pakistan or transfers to the parastatals sector in Zimbabwe and others

~1 PRM the Poverty Reduction and Economic Management Vice-Presidency

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bull Social Services Even where the overall level of spending in the social sectors is adequate the intra-sectoral composition of spending may be inconsistent with the countrys development priorities lbis problem is observed widely even among some of IDAs better performers such as Bolivia and Honduras and in many countries throughout Africa It stems from a lack of political commitment to primary education and basic health over higher-level services and to ensuring adequate services in remote areas which are typically inhabited by the poor On the whole IDA borrowers in Africa even otherwise good performers such as Cote dIvoire register at best only fair performance in the provision of social services By contrast a number of large borrowers in South Asia generally show very good performance largely for reasons of culture and tradition

10 The Overall Assessment The point-by-point assessment of a countrys performance is folded into a composite rating which ranges from poor to very good Because country performance is continually evolving ratings of a given year can provide only a snapshot of each borrowers performance over time The following chart shows the distribution of borrowers from the top to the lowest quintiles as assessed in mid-1997

Top

Upper

Figure 2 Country Performance W

Annenia Benin Bhutan Bolivia China Cote dIvoire Georgiamiddot Indiamiddot Kyrgyz Rep Lesotho FYR Macedonia Malawi Maldives Nicaragua Sri Lanka Uganda

Bangladesh Cape Verde Eritrea Ghana GuyanaHondllrasK~aIqrilgtatiLLaosMa~ Senegal Tonga Vanllatu Vietnam ZambiaZimbabwe

Blend Borrower In non-accrual The Republic of Congo was moved to non accrual status as ofDecember 1997 ryen Recent performance as assessed mid-1997 by the criteria appearing in Figure L Countries within each quintile are listed

alphabetically

11 Summary Observations The annual performance assessments of recent years show several important trends

bull About 20-25 percent of all IDA borrowers are regularly rated as very good performers Together they represent about 35 percent of IDAs lending Borrowers consistently rated as very good over the past 3-4 years include Armenia Benin Bhutan Bolivia China Cote dIvoire India Kyrgyz Republic Lesotho Maldives

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Nicaragua and Uganda About 10 percent of all borrowers are rated as very weak These are typically countries in civil conflict or emerging from conflict And a similar share are in non-accrual status or otherwise inactive borrowers

bull Countries registering in the upper ranks are distributed quite evenly across geographic regions Otherwise few generalizations can be drawn Country performance is not correlated with income population size or creditworthiness

bull The performance of countries in the upper and lower ranges tends to vary little from year to year In very few cases has performance shifted decidedly upward or downward Improvement tends to be gradual as registered recently by Bangladesh and Senegal Significant downward shifts though rare tend to be abrupt prompted by domestic conflict as in Albania and Sierra Leone in 1996

bull In the great majority of IDA borrowers performance tends to be weak on structural policies particularly with respect to civil administration privatization and other aspects of public sector management This is frequently the case even where performance on macro policies is relatively strong The divergence is observed particularly in Africa where first generation policy reforms heavily directed towards liberalizing trade prices and exchange rates are in many countries complete or well advanced But reforms on the structural side have proved difficult and remain incomplete even in better performers such as Benin Kenya and Senegal

bull The relatively large number of borrowers which fall in the mid-ranges also tend to be weak on structural policies though without the offsetting effect of stronger performance on the macro side Among them those which register towards the lower side ie in the fourth quintile such as Cambodia Cameroon Guinea and Tanzania typically lack firm political consensus on policy reform and their performance is consequently mixed at best

II Linking Performance Assessments to IDAs Lending Commitments

12 IDAs lending in the aggregate and to individual countries is the outcome of the top down application of IDAs performance-based criteria for allocating resources among its borrowers together with a bottom up accounting for individual country needs and circumstances The top down dimension begins with the country performance assessment described above The individual performance ratings are then translated into an indicative lending allocation for each borrower as described following The allocation is then further tailored in the CAS from a bottom up perspective ensuring that IDAs lending is consistent with individual countries opportunities and constraints in using these resources effectively

Allocating IDAs Resources

13 On the basis of its updated performance assessment every eligible IDA borrower is allocated annually a three-year resource envelope for planning purposes This indicative allocation which is determined on a per capita basis represents the level of lending that can be

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justified by the countrys relative policy performance given IDAs overall resource availability As allocations are thus made on a rolling three-year basis the annual pace of lending they imply for each borrower is continually adjusted with successive country performance assessments In addition to country policy performance the borrowers per capita GNP a measure of its relative income is also taken into account (inversely) in determining its indicative allocation For Blend borrowers the indicative allocations of IDA resources further takes into account their partial creditworthiness for IBRD lending ~

14 The borrowers performance-based indicative allocation serves as a reference point for planning purposes While it may subsequently be adjusted to meet country-specific circumstances the indicative allocation remains the anchor around which the country lending program is dimensioned The indicative allocation is thus key to maintaining the strong link between country performance and IDAs actual lending outcomes

15 The emphasis on country performance as a determinant ofIDAs lending has grown in recent years The 1997 Strategic Compact further strengthens the linkage As Figure 3 shows allocations to poor performers are proportionately reduced under the terms of the Compact while those to the better performers are moderately increased The size of the shift is significant allocations to borrowers in the two lowest performance quintiles are reduced by an average of close to 25 percent The resources consequently released to performers in the upper three quintiles yield an increase in their allocations by an average of 1 0 percent~

~I IDA allocations for Blends may also reflect guidelines which IDAs donors have determined in the context of replenishment agreements For example allocations for China and India have been capped in absolute terms rather than being calculated on a per capita basis given the exceptional population size of those countries It is further noted that two borrowers which are currently Blends China and Egypt are due to be graduated from IDA as of endshyFY99 IDA borrowers among the transition economies of Eastern Europe and the FSU which are classified as Blends (Armenia Azerbaijan Bosnia-Herzegovina FYR Macedonia Georgia Kyrgyz Republic and Moldova) include some where recovery remains fragile and no IBRD borrowing is currently being undertaken For a full discussion of Blend borrowers including the determination of IDA allocations to them see Lending to the Blend Borrowers (IDASEC M97-563) December 171997

yen For countries of very small population size the allocation process provides for a minimum allocation per annum reognizing that projects must be a minimum size to be cost-effective These minimum requirements can result in relatively high per capita lending for very small countries Although as many as 13 of IDAs 80 borrowers have populations ofless than one million (including 8 small island economies) together they represent less than one percent of IDAs total lending

sectI The Compact target is for per capita lending to IDA-only countries in the two lowest performance quintiles to be one-third the average compared with about half in recent years Exceptions can be made for countries showing prospects for improved performance such as following the cessation of civil conflict

IDA AIanlln

Poor Very Good

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16 The dominant role of policy performance in the determination of borrowers indicative allocations can

Figure 3 Relationship of Country Performance and Indicative Lending

Allocations be illustrated by cross-country comparisons For example between Average per

two countries of the same population capita pa

size a good performer such as Malawi receives more than double the indicative allocation of a weak performer such as Cambodia

17 Given the fact that IDA eligibility is guided by an operational cut-off (US$925 per capita GNP in 1996) borrowers GNP per capita though a factor has a much lesser impact on its indicative allocation Between borrowers registering similar policy performance but standing at opposite ends of IDAs per capita income spectrum the increment in the

allocation of the poorer country would be about 20 percent

The Role ofCAS

18 Indicative lending allocations being based on relative country 1997 Performance Rating

performance ensure equity among borrowers but they do not always capture the varied opportunities and constraints which individual borrowers face in actually utilizing external funding such as IDAs Tailoring the scale ofIDAs lending to these opportunities and constraints at the country level is an important part of ensuring that the most effective use is made of IDAs resources That is the task of the Country Assistance Strategy~

The GNP per capita factor was initially intended to provide a modest bias in favor of the poorest of the poor However its role has remained small in recognition of the fact that the income criterion for IDA eligibility itself limits its borrowers to the worlds poorest countries The Strategic Compacts stronger emphasis on perfonnance as a detenninant of IDAs allocations has the effect of further reducing the role of GNP per capita Per capita income among IDA-eligible borrowers ranges from US $930 in Bolivia (IDA-only) to just US $90 in Mozambique with the

median being US $360 (all in 1996 US dollars) Lending to Bolivia is expected to be phased down over a five-year period since its GNP per capita slightly exceeds the current IDA eligibility cut-off of US$925 though its creditworthiness has not yet been established

In contrast with the annual country perfonnance assessments and indicative lending allocations CAS are prepared for respective borrowers at intervals of 1-3 years

11

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19 The CAS represents the bottom up dimension in deploying IDAs resources among its pool of borrowers It weighs each borrowers economic policy environment macro economic prospects and the volume of resources it can apply effectively towards its development objectives It provides a vehicle for management for planning country programs and in justifying these programs to IDAs Executive Directors

20 The borrowers indicative allocation serves as a reJerence point for establishing the appropriate volume of IDA lending proposed in the CAS In principle the Base Case scenario or the most likely path of IDAs assistance to the country over the time period covered by the CAS is logically proposed at the level of the indicative allocItion The assumption is that at a given level of performance the borrower is most likely to utilize the corresponding level of resources effectively

21 Depending on the circumstances of the borrower however the CAS may propose a level of lending significantly above or below that implied by its indicative allocation The CAS sets out the justification for the adjustment on the basis of country-specific factors such as absorptive capacity constraints or on the other hand exceptional financing requirements

22 What explains such variations in lending to individual countries as against their performance-based indicative allocations

23 First the CAS may propose lending commitments significantly larger than the borrowers indicative allocation in order to meet temporary incremental financing needs These are most frequently of two types

bull Exceptional often debt-related balance-oj-payments financing Lending plans for Cote dIvoire Honduras Zambia and others have provided for relatively high levels of lending typically 15-25 percent higher than their indicative allocations alone imply as part of broader donor efforts to address their financing needs conditional on satisfactory performance in policy reform

bull Borrower reactivation or other prospective petjormance turnaround For some borrowers incremental allocations have been needed for start-up support to rehabilitate essential infrastructure and social services following civil conflict as in the case of Mozambique or political transition as in Armenia Kyrgyz Republic and Georgia Exceptional lending allocations have also been required in a number of cases-most recently Bosnia-Herzegovina and the Republic of Congo (Brazzaville)-shyto enable those countries to become current in their debt service obligations to multilateral lenders

As alternatives to the Base Case the CAS also proposes High Case and Low Case scenarios Should country perfonnance improve as indicated by specified triggers IDAs lending responds by rising to the High Case set out in the CAS If perfonnance falters lending drops to the Low Case typically a core program of modestly scaled projects in the social sectors agriculture or light infrastructure

21

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24 For other borrowers the CAS may propose lending at a level below the performanceshy based indicative allocation Major borrowers which have borrowed well below their indicative

allocations in recent years are Bangladesh Ethiopia and Vietnam They are generally good performers and in principle good performance is indicative of a borrowers capacity for utilizing resources effectively But performance is not uniform on the many points assessed For example there may be weaknesses in an area such as investment programming which is key to the borrowers ability to utilize IDAs resources effectively

bull Lending plans which are below indicative levels are most frequently explained by limitations in borrowers technical and institutional capacity Though broadly characteristic of many IDA borrowers these constraints are manifest quite differently in different countries In Bangladesh for example pervasive inefficiency in the civil administration is observed to pose a particularly heavy impediment in implementing investment projects In other countries Ethiopia among them the capacity constraint is technical in nature government services responsible are relatively new or otherwise lacking in operational experience

bull Policy differences with borrowers in particular areas of economic reform or in particular sectors represent a second set of factors which may limit country lending plans to levels below those otherwise indicated by a countrys overall performance record IDAs differences with Vietnam in the recent past regarding privatization and other reforms affecting the role of the state in the economy are an example In other countries it may be a key sector that is the source of major policy differences The education sector is traditionally a case in point as it was for some time in Senegal and Mali for example Governance issues may pose a similar constraint Where powerful vested interests are involved for example the preparation of related lending operations may be may be slow or periodically interrupted and lending plans adjusted downward accordingly This situation applies to a number of borrowers even some where performance is relatively strong overall including Sri Lanka and Kenya

bull A third set of factors which may constrain IDAs lending plans even in some of its better perfonning borrowers is related to domestic capacity for financing and supervising investment projects New project interventions which might otherwise be supported by IDA may have to be postponed for lack of budgetary counterparts and local staff resources for project supervision The issue is widely encountered through IDA countries and is particularly pronounced in where donor presence is large as in Bangladesh Malawi Mozambique and Uganda among others Each of these countries is actively working to expand its capacity to utilize donor funds effectively however and IDA is supporting these efforts In the case of Bangladesh in particular these efforts are expected to yield a significant increase in the countrys capacity to absorb IDA resources effectively over the coming few years Similarly expanded capacity is foreseen for the near term in Ethiopia and Vietnam

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Lending Commitments and the Performance Factor

25 The process of fonnulating individual country lending programs in the context of CAS results in varying departures from the strictly perfonnance-based indicative allocation of IDA funds This demonstrates IDAs ability to respond flexibly to different needs and circumstance at the country level as described above Notwithstanding this flexibility country policy perfonnance is clearly the dominant factor throughout IDAs allocation and planning process As a result its actual lending commitments remain finnly tied to the relative quality of individual borrower perfonnance

26 Figure 4 maps the relationship between country perfonnance and IDAs lending commitments As readily noted there are no borrowers appearing in the upper left quadrant and poorer perfonners receive relatively small allocations while better perfonners receive significantly more

Figure 4 Performance and Lending Commitments

Poor Very Gomiddotod 1995-97 Average Performance Rating

bull Africa bull Others

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27 The performancemiddot lending relationship is further illustrated in Figure 5 which reflects the econometric relationship between relative country performance and IDAs actual lending over the past three years (FY95-97) Different specifications for the performance-lending relationship confirm that they are significantly and robustly relatedlQ

Figure 5 Performance and Lending Commitments

Lending per capita pa FY95-97

Poor Very Gcod 1995-97 Average Performance Rating

~~~~~--------~

28 The relationship of IDAs lending and country performance is being progressively tightened That is IDA is directing proportionately larger amounts to those countries demonstrating good performance In the IDA 10 period (FY94-96) top performers received nearly 60 percent more in new commitments per capita than average performers The premium in the IDA9 period (FY91-93) was only 20 percent And as indicated in Figure 6 IDAs lending to borrowers in the top two performance quintiles rose steeply in FY97 pushing the average of the past three years to a full two-thirds ofIDAs total new lending

Syen The relationship for 62 borrowers active during the FY95-97 period is particularly strong when a binary variable is introduced to reflect constraints on four large blend borrowers (India China Pakistan and Egypt) and three countries facing serious absorptive capacity constraints (Bangladesh Ethiopia and Vietnam)

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extent to which the borrower has maintained macroeconomic stability as this is a sine qua non for sustained growth and poverty reduction Finally the performance of the borrowers IDA portfolio is factored into the assessment as indicative of its ability to implement development projects and programs effectively This part of the assessment performed independently is drawn from the Banks Annual Review of Portfolio Performance Y Over two-thirds of the rating is determined by the quality of the countrys development policies while the remainder IS

determined by macroeconomic and portfolio implementation performance

Figure 1 Country Performance Criteria

Development Policies Are policies adequate in promoting employment-generating growth and in providing public services and safety nets for the relative benefit ofthe poor

bull Private Sector Development Are the trade and exchange system product andfactor markets financial sector services environmental policies and the legal and regulatory framework conducive to private sector development

Criteria Competition Policy and Incentives Product and factor markets legal and regulatory framework for business Trade and Exchange System Trade policy foreign exchange system Financial Sector Efficiency scope of financial services Environment National strategy project impact assessments

bull Public Sector Efficiency Is public sector management including management ofthe parastatals efficient and equitable in providing economic services and infrastructure Does public expenditure policy make efficient use of budgetary resources Is it adequately focused on the needs ofthe poor Criteria

Public Expenditure and Civil Administration Expenditure volume and composition public investment programming tax policy civil administration Public Enterprises and Privatization Budgetary effects management privatization strategy

bull Social Policies Poverty Reduction Strategy Are social strategies and safety nets wellformulated and adequately fonded Do poverty analysis and monitoring provide a basis for effective poverty reduction efforts Criteria

Social Services Safety Nets Sector strategies subsidies safety nets Poverty Analysis Monitoring National strategy monitoring instruments

Macroeconomic Stability Arefiscal and monetary policies sustainable Do they adequately serve macroeconomic stability and investor confidence

Criteria Inflation debt management fiscal deficit external deficit

Portfolio Performance

Criterion IDA portfolio performance (AARP)

7 Clearly assessing each countrys policy performance is a complex task It requires in-depth examination and careful consideration of country circumstances Staff of the Banks

Y For a full discussion see IDA Portfolio Review January 1998 prepared for the IDA12 Deputies meeting February 26-27 1998

-3shy

regional departments under the coordination of pRMl examine in detail and regional context a set of specific criteria within each broad policy area These criteria have been agreed among Bank economists across all regions as essential for promoting growth and poverty reduction For example the category Competition Policy and Incentives covers all aspects of the incentives system for private sector activity as well as the legal and regulatory framework governing it The criteria themselves are periodically refmed as experience is gained in applying them across the widely diverse spectrum ofIDAs borrowers

8 Consistent with IDAs mandate every one of the performance criteria is designed to capture the extent to which the borrowers policies are well formulated and effective in addressing poverty in that area A separate criterion is therefore not identified for gauging each countrys pro-poor status Similarly governance issues (transparency and government commitment to implement policies) is an integral part of the assessment of each criterion and is not evaluated as a separate item

9 To illustrate three sets of policies particularly important to a wide number of IDA borrowers are discussed further below

bull Competition Policy and Incentives Good performance in IDA countries on this score means above all maintaining producer incentives in the agricultural sectorshysatisfactory product prices and open marketing arrangements which are key to laborshydemanding growth Performance here is relatively good on the part of many borrowers This is particularly the case in Africa where Cote dIvoire Ghana Kenya Zambia and others have given high priority to strengthening agricultural producer incentives under their structural adjustment programs IDA borrower performance in ensuring adequate incentives to small business and opening up labor markets however is comparatively weak In the ECA region in particular performance on this score tends to be very weak even among otherwise good performers such as Armenia Georgia and Kyrgyz Republic

bull Public Expenditure Management Notwithstanding its importance the performance of IDA countries in this area is typically weak With only limited domestic resources at their disposal governments typically find it difficult to reconcile their many spending demands on the one hand and the need for overall fiscal restraint on the other As a result development priorities are often underfunded For example government wage bills in virtually all countries squeeze funding for operations and maintenance ofbasic services and infrastructure to unsatisfactory levels Only a few countries have made significant progress towards reversing that situation among them Malawi and Mauritania Elsewhere other large competing claims may also be at work such as defense needs in Pakistan or transfers to the parastatals sector in Zimbabwe and others

~1 PRM the Poverty Reduction and Economic Management Vice-Presidency

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bull Social Services Even where the overall level of spending in the social sectors is adequate the intra-sectoral composition of spending may be inconsistent with the countrys development priorities lbis problem is observed widely even among some of IDAs better performers such as Bolivia and Honduras and in many countries throughout Africa It stems from a lack of political commitment to primary education and basic health over higher-level services and to ensuring adequate services in remote areas which are typically inhabited by the poor On the whole IDA borrowers in Africa even otherwise good performers such as Cote dIvoire register at best only fair performance in the provision of social services By contrast a number of large borrowers in South Asia generally show very good performance largely for reasons of culture and tradition

10 The Overall Assessment The point-by-point assessment of a countrys performance is folded into a composite rating which ranges from poor to very good Because country performance is continually evolving ratings of a given year can provide only a snapshot of each borrowers performance over time The following chart shows the distribution of borrowers from the top to the lowest quintiles as assessed in mid-1997

Top

Upper

Figure 2 Country Performance W

Annenia Benin Bhutan Bolivia China Cote dIvoire Georgiamiddot Indiamiddot Kyrgyz Rep Lesotho FYR Macedonia Malawi Maldives Nicaragua Sri Lanka Uganda

Bangladesh Cape Verde Eritrea Ghana GuyanaHondllrasK~aIqrilgtatiLLaosMa~ Senegal Tonga Vanllatu Vietnam ZambiaZimbabwe

Blend Borrower In non-accrual The Republic of Congo was moved to non accrual status as ofDecember 1997 ryen Recent performance as assessed mid-1997 by the criteria appearing in Figure L Countries within each quintile are listed

alphabetically

11 Summary Observations The annual performance assessments of recent years show several important trends

bull About 20-25 percent of all IDA borrowers are regularly rated as very good performers Together they represent about 35 percent of IDAs lending Borrowers consistently rated as very good over the past 3-4 years include Armenia Benin Bhutan Bolivia China Cote dIvoire India Kyrgyz Republic Lesotho Maldives

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Nicaragua and Uganda About 10 percent of all borrowers are rated as very weak These are typically countries in civil conflict or emerging from conflict And a similar share are in non-accrual status or otherwise inactive borrowers

bull Countries registering in the upper ranks are distributed quite evenly across geographic regions Otherwise few generalizations can be drawn Country performance is not correlated with income population size or creditworthiness

bull The performance of countries in the upper and lower ranges tends to vary little from year to year In very few cases has performance shifted decidedly upward or downward Improvement tends to be gradual as registered recently by Bangladesh and Senegal Significant downward shifts though rare tend to be abrupt prompted by domestic conflict as in Albania and Sierra Leone in 1996

bull In the great majority of IDA borrowers performance tends to be weak on structural policies particularly with respect to civil administration privatization and other aspects of public sector management This is frequently the case even where performance on macro policies is relatively strong The divergence is observed particularly in Africa where first generation policy reforms heavily directed towards liberalizing trade prices and exchange rates are in many countries complete or well advanced But reforms on the structural side have proved difficult and remain incomplete even in better performers such as Benin Kenya and Senegal

bull The relatively large number of borrowers which fall in the mid-ranges also tend to be weak on structural policies though without the offsetting effect of stronger performance on the macro side Among them those which register towards the lower side ie in the fourth quintile such as Cambodia Cameroon Guinea and Tanzania typically lack firm political consensus on policy reform and their performance is consequently mixed at best

II Linking Performance Assessments to IDAs Lending Commitments

12 IDAs lending in the aggregate and to individual countries is the outcome of the top down application of IDAs performance-based criteria for allocating resources among its borrowers together with a bottom up accounting for individual country needs and circumstances The top down dimension begins with the country performance assessment described above The individual performance ratings are then translated into an indicative lending allocation for each borrower as described following The allocation is then further tailored in the CAS from a bottom up perspective ensuring that IDAs lending is consistent with individual countries opportunities and constraints in using these resources effectively

Allocating IDAs Resources

13 On the basis of its updated performance assessment every eligible IDA borrower is allocated annually a three-year resource envelope for planning purposes This indicative allocation which is determined on a per capita basis represents the level of lending that can be

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justified by the countrys relative policy performance given IDAs overall resource availability As allocations are thus made on a rolling three-year basis the annual pace of lending they imply for each borrower is continually adjusted with successive country performance assessments In addition to country policy performance the borrowers per capita GNP a measure of its relative income is also taken into account (inversely) in determining its indicative allocation For Blend borrowers the indicative allocations of IDA resources further takes into account their partial creditworthiness for IBRD lending ~

14 The borrowers performance-based indicative allocation serves as a reference point for planning purposes While it may subsequently be adjusted to meet country-specific circumstances the indicative allocation remains the anchor around which the country lending program is dimensioned The indicative allocation is thus key to maintaining the strong link between country performance and IDAs actual lending outcomes

15 The emphasis on country performance as a determinant ofIDAs lending has grown in recent years The 1997 Strategic Compact further strengthens the linkage As Figure 3 shows allocations to poor performers are proportionately reduced under the terms of the Compact while those to the better performers are moderately increased The size of the shift is significant allocations to borrowers in the two lowest performance quintiles are reduced by an average of close to 25 percent The resources consequently released to performers in the upper three quintiles yield an increase in their allocations by an average of 1 0 percent~

~I IDA allocations for Blends may also reflect guidelines which IDAs donors have determined in the context of replenishment agreements For example allocations for China and India have been capped in absolute terms rather than being calculated on a per capita basis given the exceptional population size of those countries It is further noted that two borrowers which are currently Blends China and Egypt are due to be graduated from IDA as of endshyFY99 IDA borrowers among the transition economies of Eastern Europe and the FSU which are classified as Blends (Armenia Azerbaijan Bosnia-Herzegovina FYR Macedonia Georgia Kyrgyz Republic and Moldova) include some where recovery remains fragile and no IBRD borrowing is currently being undertaken For a full discussion of Blend borrowers including the determination of IDA allocations to them see Lending to the Blend Borrowers (IDASEC M97-563) December 171997

yen For countries of very small population size the allocation process provides for a minimum allocation per annum reognizing that projects must be a minimum size to be cost-effective These minimum requirements can result in relatively high per capita lending for very small countries Although as many as 13 of IDAs 80 borrowers have populations ofless than one million (including 8 small island economies) together they represent less than one percent of IDAs total lending

sectI The Compact target is for per capita lending to IDA-only countries in the two lowest performance quintiles to be one-third the average compared with about half in recent years Exceptions can be made for countries showing prospects for improved performance such as following the cessation of civil conflict

IDA AIanlln

Poor Very Good

-7shy

16 The dominant role of policy performance in the determination of borrowers indicative allocations can

Figure 3 Relationship of Country Performance and Indicative Lending

Allocations be illustrated by cross-country comparisons For example between Average per

two countries of the same population capita pa

size a good performer such as Malawi receives more than double the indicative allocation of a weak performer such as Cambodia

17 Given the fact that IDA eligibility is guided by an operational cut-off (US$925 per capita GNP in 1996) borrowers GNP per capita though a factor has a much lesser impact on its indicative allocation Between borrowers registering similar policy performance but standing at opposite ends of IDAs per capita income spectrum the increment in the

allocation of the poorer country would be about 20 percent

The Role ofCAS

18 Indicative lending allocations being based on relative country 1997 Performance Rating

performance ensure equity among borrowers but they do not always capture the varied opportunities and constraints which individual borrowers face in actually utilizing external funding such as IDAs Tailoring the scale ofIDAs lending to these opportunities and constraints at the country level is an important part of ensuring that the most effective use is made of IDAs resources That is the task of the Country Assistance Strategy~

The GNP per capita factor was initially intended to provide a modest bias in favor of the poorest of the poor However its role has remained small in recognition of the fact that the income criterion for IDA eligibility itself limits its borrowers to the worlds poorest countries The Strategic Compacts stronger emphasis on perfonnance as a detenninant of IDAs allocations has the effect of further reducing the role of GNP per capita Per capita income among IDA-eligible borrowers ranges from US $930 in Bolivia (IDA-only) to just US $90 in Mozambique with the

median being US $360 (all in 1996 US dollars) Lending to Bolivia is expected to be phased down over a five-year period since its GNP per capita slightly exceeds the current IDA eligibility cut-off of US$925 though its creditworthiness has not yet been established

In contrast with the annual country perfonnance assessments and indicative lending allocations CAS are prepared for respective borrowers at intervals of 1-3 years

11

-8shy

19 The CAS represents the bottom up dimension in deploying IDAs resources among its pool of borrowers It weighs each borrowers economic policy environment macro economic prospects and the volume of resources it can apply effectively towards its development objectives It provides a vehicle for management for planning country programs and in justifying these programs to IDAs Executive Directors

20 The borrowers indicative allocation serves as a reJerence point for establishing the appropriate volume of IDA lending proposed in the CAS In principle the Base Case scenario or the most likely path of IDAs assistance to the country over the time period covered by the CAS is logically proposed at the level of the indicative allocItion The assumption is that at a given level of performance the borrower is most likely to utilize the corresponding level of resources effectively

21 Depending on the circumstances of the borrower however the CAS may propose a level of lending significantly above or below that implied by its indicative allocation The CAS sets out the justification for the adjustment on the basis of country-specific factors such as absorptive capacity constraints or on the other hand exceptional financing requirements

22 What explains such variations in lending to individual countries as against their performance-based indicative allocations

23 First the CAS may propose lending commitments significantly larger than the borrowers indicative allocation in order to meet temporary incremental financing needs These are most frequently of two types

bull Exceptional often debt-related balance-oj-payments financing Lending plans for Cote dIvoire Honduras Zambia and others have provided for relatively high levels of lending typically 15-25 percent higher than their indicative allocations alone imply as part of broader donor efforts to address their financing needs conditional on satisfactory performance in policy reform

bull Borrower reactivation or other prospective petjormance turnaround For some borrowers incremental allocations have been needed for start-up support to rehabilitate essential infrastructure and social services following civil conflict as in the case of Mozambique or political transition as in Armenia Kyrgyz Republic and Georgia Exceptional lending allocations have also been required in a number of cases-most recently Bosnia-Herzegovina and the Republic of Congo (Brazzaville)-shyto enable those countries to become current in their debt service obligations to multilateral lenders

As alternatives to the Base Case the CAS also proposes High Case and Low Case scenarios Should country perfonnance improve as indicated by specified triggers IDAs lending responds by rising to the High Case set out in the CAS If perfonnance falters lending drops to the Low Case typically a core program of modestly scaled projects in the social sectors agriculture or light infrastructure

21

-9shy

24 For other borrowers the CAS may propose lending at a level below the performanceshy based indicative allocation Major borrowers which have borrowed well below their indicative

allocations in recent years are Bangladesh Ethiopia and Vietnam They are generally good performers and in principle good performance is indicative of a borrowers capacity for utilizing resources effectively But performance is not uniform on the many points assessed For example there may be weaknesses in an area such as investment programming which is key to the borrowers ability to utilize IDAs resources effectively

bull Lending plans which are below indicative levels are most frequently explained by limitations in borrowers technical and institutional capacity Though broadly characteristic of many IDA borrowers these constraints are manifest quite differently in different countries In Bangladesh for example pervasive inefficiency in the civil administration is observed to pose a particularly heavy impediment in implementing investment projects In other countries Ethiopia among them the capacity constraint is technical in nature government services responsible are relatively new or otherwise lacking in operational experience

bull Policy differences with borrowers in particular areas of economic reform or in particular sectors represent a second set of factors which may limit country lending plans to levels below those otherwise indicated by a countrys overall performance record IDAs differences with Vietnam in the recent past regarding privatization and other reforms affecting the role of the state in the economy are an example In other countries it may be a key sector that is the source of major policy differences The education sector is traditionally a case in point as it was for some time in Senegal and Mali for example Governance issues may pose a similar constraint Where powerful vested interests are involved for example the preparation of related lending operations may be may be slow or periodically interrupted and lending plans adjusted downward accordingly This situation applies to a number of borrowers even some where performance is relatively strong overall including Sri Lanka and Kenya

bull A third set of factors which may constrain IDAs lending plans even in some of its better perfonning borrowers is related to domestic capacity for financing and supervising investment projects New project interventions which might otherwise be supported by IDA may have to be postponed for lack of budgetary counterparts and local staff resources for project supervision The issue is widely encountered through IDA countries and is particularly pronounced in where donor presence is large as in Bangladesh Malawi Mozambique and Uganda among others Each of these countries is actively working to expand its capacity to utilize donor funds effectively however and IDA is supporting these efforts In the case of Bangladesh in particular these efforts are expected to yield a significant increase in the countrys capacity to absorb IDA resources effectively over the coming few years Similarly expanded capacity is foreseen for the near term in Ethiopia and Vietnam

-10shy

Lending Commitments and the Performance Factor

25 The process of fonnulating individual country lending programs in the context of CAS results in varying departures from the strictly perfonnance-based indicative allocation of IDA funds This demonstrates IDAs ability to respond flexibly to different needs and circumstance at the country level as described above Notwithstanding this flexibility country policy perfonnance is clearly the dominant factor throughout IDAs allocation and planning process As a result its actual lending commitments remain finnly tied to the relative quality of individual borrower perfonnance

26 Figure 4 maps the relationship between country perfonnance and IDAs lending commitments As readily noted there are no borrowers appearing in the upper left quadrant and poorer perfonners receive relatively small allocations while better perfonners receive significantly more

Figure 4 Performance and Lending Commitments

Poor Very Gomiddotod 1995-97 Average Performance Rating

bull Africa bull Others

-11shy

27 The performancemiddot lending relationship is further illustrated in Figure 5 which reflects the econometric relationship between relative country performance and IDAs actual lending over the past three years (FY95-97) Different specifications for the performance-lending relationship confirm that they are significantly and robustly relatedlQ

Figure 5 Performance and Lending Commitments

Lending per capita pa FY95-97

Poor Very Gcod 1995-97 Average Performance Rating

~~~~~--------~

28 The relationship of IDAs lending and country performance is being progressively tightened That is IDA is directing proportionately larger amounts to those countries demonstrating good performance In the IDA 10 period (FY94-96) top performers received nearly 60 percent more in new commitments per capita than average performers The premium in the IDA9 period (FY91-93) was only 20 percent And as indicated in Figure 6 IDAs lending to borrowers in the top two performance quintiles rose steeply in FY97 pushing the average of the past three years to a full two-thirds ofIDAs total new lending

Syen The relationship for 62 borrowers active during the FY95-97 period is particularly strong when a binary variable is introduced to reflect constraints on four large blend borrowers (India China Pakistan and Egypt) and three countries facing serious absorptive capacity constraints (Bangladesh Ethiopia and Vietnam)

-3shy

regional departments under the coordination of pRMl examine in detail and regional context a set of specific criteria within each broad policy area These criteria have been agreed among Bank economists across all regions as essential for promoting growth and poverty reduction For example the category Competition Policy and Incentives covers all aspects of the incentives system for private sector activity as well as the legal and regulatory framework governing it The criteria themselves are periodically refmed as experience is gained in applying them across the widely diverse spectrum ofIDAs borrowers

8 Consistent with IDAs mandate every one of the performance criteria is designed to capture the extent to which the borrowers policies are well formulated and effective in addressing poverty in that area A separate criterion is therefore not identified for gauging each countrys pro-poor status Similarly governance issues (transparency and government commitment to implement policies) is an integral part of the assessment of each criterion and is not evaluated as a separate item

9 To illustrate three sets of policies particularly important to a wide number of IDA borrowers are discussed further below

bull Competition Policy and Incentives Good performance in IDA countries on this score means above all maintaining producer incentives in the agricultural sectorshysatisfactory product prices and open marketing arrangements which are key to laborshydemanding growth Performance here is relatively good on the part of many borrowers This is particularly the case in Africa where Cote dIvoire Ghana Kenya Zambia and others have given high priority to strengthening agricultural producer incentives under their structural adjustment programs IDA borrower performance in ensuring adequate incentives to small business and opening up labor markets however is comparatively weak In the ECA region in particular performance on this score tends to be very weak even among otherwise good performers such as Armenia Georgia and Kyrgyz Republic

bull Public Expenditure Management Notwithstanding its importance the performance of IDA countries in this area is typically weak With only limited domestic resources at their disposal governments typically find it difficult to reconcile their many spending demands on the one hand and the need for overall fiscal restraint on the other As a result development priorities are often underfunded For example government wage bills in virtually all countries squeeze funding for operations and maintenance ofbasic services and infrastructure to unsatisfactory levels Only a few countries have made significant progress towards reversing that situation among them Malawi and Mauritania Elsewhere other large competing claims may also be at work such as defense needs in Pakistan or transfers to the parastatals sector in Zimbabwe and others

~1 PRM the Poverty Reduction and Economic Management Vice-Presidency

-4shy

bull Social Services Even where the overall level of spending in the social sectors is adequate the intra-sectoral composition of spending may be inconsistent with the countrys development priorities lbis problem is observed widely even among some of IDAs better performers such as Bolivia and Honduras and in many countries throughout Africa It stems from a lack of political commitment to primary education and basic health over higher-level services and to ensuring adequate services in remote areas which are typically inhabited by the poor On the whole IDA borrowers in Africa even otherwise good performers such as Cote dIvoire register at best only fair performance in the provision of social services By contrast a number of large borrowers in South Asia generally show very good performance largely for reasons of culture and tradition

10 The Overall Assessment The point-by-point assessment of a countrys performance is folded into a composite rating which ranges from poor to very good Because country performance is continually evolving ratings of a given year can provide only a snapshot of each borrowers performance over time The following chart shows the distribution of borrowers from the top to the lowest quintiles as assessed in mid-1997

Top

Upper

Figure 2 Country Performance W

Annenia Benin Bhutan Bolivia China Cote dIvoire Georgiamiddot Indiamiddot Kyrgyz Rep Lesotho FYR Macedonia Malawi Maldives Nicaragua Sri Lanka Uganda

Bangladesh Cape Verde Eritrea Ghana GuyanaHondllrasK~aIqrilgtatiLLaosMa~ Senegal Tonga Vanllatu Vietnam ZambiaZimbabwe

Blend Borrower In non-accrual The Republic of Congo was moved to non accrual status as ofDecember 1997 ryen Recent performance as assessed mid-1997 by the criteria appearing in Figure L Countries within each quintile are listed

alphabetically

11 Summary Observations The annual performance assessments of recent years show several important trends

bull About 20-25 percent of all IDA borrowers are regularly rated as very good performers Together they represent about 35 percent of IDAs lending Borrowers consistently rated as very good over the past 3-4 years include Armenia Benin Bhutan Bolivia China Cote dIvoire India Kyrgyz Republic Lesotho Maldives

-5shy

Nicaragua and Uganda About 10 percent of all borrowers are rated as very weak These are typically countries in civil conflict or emerging from conflict And a similar share are in non-accrual status or otherwise inactive borrowers

bull Countries registering in the upper ranks are distributed quite evenly across geographic regions Otherwise few generalizations can be drawn Country performance is not correlated with income population size or creditworthiness

bull The performance of countries in the upper and lower ranges tends to vary little from year to year In very few cases has performance shifted decidedly upward or downward Improvement tends to be gradual as registered recently by Bangladesh and Senegal Significant downward shifts though rare tend to be abrupt prompted by domestic conflict as in Albania and Sierra Leone in 1996

bull In the great majority of IDA borrowers performance tends to be weak on structural policies particularly with respect to civil administration privatization and other aspects of public sector management This is frequently the case even where performance on macro policies is relatively strong The divergence is observed particularly in Africa where first generation policy reforms heavily directed towards liberalizing trade prices and exchange rates are in many countries complete or well advanced But reforms on the structural side have proved difficult and remain incomplete even in better performers such as Benin Kenya and Senegal

bull The relatively large number of borrowers which fall in the mid-ranges also tend to be weak on structural policies though without the offsetting effect of stronger performance on the macro side Among them those which register towards the lower side ie in the fourth quintile such as Cambodia Cameroon Guinea and Tanzania typically lack firm political consensus on policy reform and their performance is consequently mixed at best

II Linking Performance Assessments to IDAs Lending Commitments

12 IDAs lending in the aggregate and to individual countries is the outcome of the top down application of IDAs performance-based criteria for allocating resources among its borrowers together with a bottom up accounting for individual country needs and circumstances The top down dimension begins with the country performance assessment described above The individual performance ratings are then translated into an indicative lending allocation for each borrower as described following The allocation is then further tailored in the CAS from a bottom up perspective ensuring that IDAs lending is consistent with individual countries opportunities and constraints in using these resources effectively

Allocating IDAs Resources

13 On the basis of its updated performance assessment every eligible IDA borrower is allocated annually a three-year resource envelope for planning purposes This indicative allocation which is determined on a per capita basis represents the level of lending that can be

-6shy

justified by the countrys relative policy performance given IDAs overall resource availability As allocations are thus made on a rolling three-year basis the annual pace of lending they imply for each borrower is continually adjusted with successive country performance assessments In addition to country policy performance the borrowers per capita GNP a measure of its relative income is also taken into account (inversely) in determining its indicative allocation For Blend borrowers the indicative allocations of IDA resources further takes into account their partial creditworthiness for IBRD lending ~

14 The borrowers performance-based indicative allocation serves as a reference point for planning purposes While it may subsequently be adjusted to meet country-specific circumstances the indicative allocation remains the anchor around which the country lending program is dimensioned The indicative allocation is thus key to maintaining the strong link between country performance and IDAs actual lending outcomes

15 The emphasis on country performance as a determinant ofIDAs lending has grown in recent years The 1997 Strategic Compact further strengthens the linkage As Figure 3 shows allocations to poor performers are proportionately reduced under the terms of the Compact while those to the better performers are moderately increased The size of the shift is significant allocations to borrowers in the two lowest performance quintiles are reduced by an average of close to 25 percent The resources consequently released to performers in the upper three quintiles yield an increase in their allocations by an average of 1 0 percent~

~I IDA allocations for Blends may also reflect guidelines which IDAs donors have determined in the context of replenishment agreements For example allocations for China and India have been capped in absolute terms rather than being calculated on a per capita basis given the exceptional population size of those countries It is further noted that two borrowers which are currently Blends China and Egypt are due to be graduated from IDA as of endshyFY99 IDA borrowers among the transition economies of Eastern Europe and the FSU which are classified as Blends (Armenia Azerbaijan Bosnia-Herzegovina FYR Macedonia Georgia Kyrgyz Republic and Moldova) include some where recovery remains fragile and no IBRD borrowing is currently being undertaken For a full discussion of Blend borrowers including the determination of IDA allocations to them see Lending to the Blend Borrowers (IDASEC M97-563) December 171997

yen For countries of very small population size the allocation process provides for a minimum allocation per annum reognizing that projects must be a minimum size to be cost-effective These minimum requirements can result in relatively high per capita lending for very small countries Although as many as 13 of IDAs 80 borrowers have populations ofless than one million (including 8 small island economies) together they represent less than one percent of IDAs total lending

sectI The Compact target is for per capita lending to IDA-only countries in the two lowest performance quintiles to be one-third the average compared with about half in recent years Exceptions can be made for countries showing prospects for improved performance such as following the cessation of civil conflict

IDA AIanlln

Poor Very Good

-7shy

16 The dominant role of policy performance in the determination of borrowers indicative allocations can

Figure 3 Relationship of Country Performance and Indicative Lending

Allocations be illustrated by cross-country comparisons For example between Average per

two countries of the same population capita pa

size a good performer such as Malawi receives more than double the indicative allocation of a weak performer such as Cambodia

17 Given the fact that IDA eligibility is guided by an operational cut-off (US$925 per capita GNP in 1996) borrowers GNP per capita though a factor has a much lesser impact on its indicative allocation Between borrowers registering similar policy performance but standing at opposite ends of IDAs per capita income spectrum the increment in the

allocation of the poorer country would be about 20 percent

The Role ofCAS

18 Indicative lending allocations being based on relative country 1997 Performance Rating

performance ensure equity among borrowers but they do not always capture the varied opportunities and constraints which individual borrowers face in actually utilizing external funding such as IDAs Tailoring the scale ofIDAs lending to these opportunities and constraints at the country level is an important part of ensuring that the most effective use is made of IDAs resources That is the task of the Country Assistance Strategy~

The GNP per capita factor was initially intended to provide a modest bias in favor of the poorest of the poor However its role has remained small in recognition of the fact that the income criterion for IDA eligibility itself limits its borrowers to the worlds poorest countries The Strategic Compacts stronger emphasis on perfonnance as a detenninant of IDAs allocations has the effect of further reducing the role of GNP per capita Per capita income among IDA-eligible borrowers ranges from US $930 in Bolivia (IDA-only) to just US $90 in Mozambique with the

median being US $360 (all in 1996 US dollars) Lending to Bolivia is expected to be phased down over a five-year period since its GNP per capita slightly exceeds the current IDA eligibility cut-off of US$925 though its creditworthiness has not yet been established

In contrast with the annual country perfonnance assessments and indicative lending allocations CAS are prepared for respective borrowers at intervals of 1-3 years

11

-8shy

19 The CAS represents the bottom up dimension in deploying IDAs resources among its pool of borrowers It weighs each borrowers economic policy environment macro economic prospects and the volume of resources it can apply effectively towards its development objectives It provides a vehicle for management for planning country programs and in justifying these programs to IDAs Executive Directors

20 The borrowers indicative allocation serves as a reJerence point for establishing the appropriate volume of IDA lending proposed in the CAS In principle the Base Case scenario or the most likely path of IDAs assistance to the country over the time period covered by the CAS is logically proposed at the level of the indicative allocItion The assumption is that at a given level of performance the borrower is most likely to utilize the corresponding level of resources effectively

21 Depending on the circumstances of the borrower however the CAS may propose a level of lending significantly above or below that implied by its indicative allocation The CAS sets out the justification for the adjustment on the basis of country-specific factors such as absorptive capacity constraints or on the other hand exceptional financing requirements

22 What explains such variations in lending to individual countries as against their performance-based indicative allocations

23 First the CAS may propose lending commitments significantly larger than the borrowers indicative allocation in order to meet temporary incremental financing needs These are most frequently of two types

bull Exceptional often debt-related balance-oj-payments financing Lending plans for Cote dIvoire Honduras Zambia and others have provided for relatively high levels of lending typically 15-25 percent higher than their indicative allocations alone imply as part of broader donor efforts to address their financing needs conditional on satisfactory performance in policy reform

bull Borrower reactivation or other prospective petjormance turnaround For some borrowers incremental allocations have been needed for start-up support to rehabilitate essential infrastructure and social services following civil conflict as in the case of Mozambique or political transition as in Armenia Kyrgyz Republic and Georgia Exceptional lending allocations have also been required in a number of cases-most recently Bosnia-Herzegovina and the Republic of Congo (Brazzaville)-shyto enable those countries to become current in their debt service obligations to multilateral lenders

As alternatives to the Base Case the CAS also proposes High Case and Low Case scenarios Should country perfonnance improve as indicated by specified triggers IDAs lending responds by rising to the High Case set out in the CAS If perfonnance falters lending drops to the Low Case typically a core program of modestly scaled projects in the social sectors agriculture or light infrastructure

21

-9shy

24 For other borrowers the CAS may propose lending at a level below the performanceshy based indicative allocation Major borrowers which have borrowed well below their indicative

allocations in recent years are Bangladesh Ethiopia and Vietnam They are generally good performers and in principle good performance is indicative of a borrowers capacity for utilizing resources effectively But performance is not uniform on the many points assessed For example there may be weaknesses in an area such as investment programming which is key to the borrowers ability to utilize IDAs resources effectively

bull Lending plans which are below indicative levels are most frequently explained by limitations in borrowers technical and institutional capacity Though broadly characteristic of many IDA borrowers these constraints are manifest quite differently in different countries In Bangladesh for example pervasive inefficiency in the civil administration is observed to pose a particularly heavy impediment in implementing investment projects In other countries Ethiopia among them the capacity constraint is technical in nature government services responsible are relatively new or otherwise lacking in operational experience

bull Policy differences with borrowers in particular areas of economic reform or in particular sectors represent a second set of factors which may limit country lending plans to levels below those otherwise indicated by a countrys overall performance record IDAs differences with Vietnam in the recent past regarding privatization and other reforms affecting the role of the state in the economy are an example In other countries it may be a key sector that is the source of major policy differences The education sector is traditionally a case in point as it was for some time in Senegal and Mali for example Governance issues may pose a similar constraint Where powerful vested interests are involved for example the preparation of related lending operations may be may be slow or periodically interrupted and lending plans adjusted downward accordingly This situation applies to a number of borrowers even some where performance is relatively strong overall including Sri Lanka and Kenya

bull A third set of factors which may constrain IDAs lending plans even in some of its better perfonning borrowers is related to domestic capacity for financing and supervising investment projects New project interventions which might otherwise be supported by IDA may have to be postponed for lack of budgetary counterparts and local staff resources for project supervision The issue is widely encountered through IDA countries and is particularly pronounced in where donor presence is large as in Bangladesh Malawi Mozambique and Uganda among others Each of these countries is actively working to expand its capacity to utilize donor funds effectively however and IDA is supporting these efforts In the case of Bangladesh in particular these efforts are expected to yield a significant increase in the countrys capacity to absorb IDA resources effectively over the coming few years Similarly expanded capacity is foreseen for the near term in Ethiopia and Vietnam

-10shy

Lending Commitments and the Performance Factor

25 The process of fonnulating individual country lending programs in the context of CAS results in varying departures from the strictly perfonnance-based indicative allocation of IDA funds This demonstrates IDAs ability to respond flexibly to different needs and circumstance at the country level as described above Notwithstanding this flexibility country policy perfonnance is clearly the dominant factor throughout IDAs allocation and planning process As a result its actual lending commitments remain finnly tied to the relative quality of individual borrower perfonnance

26 Figure 4 maps the relationship between country perfonnance and IDAs lending commitments As readily noted there are no borrowers appearing in the upper left quadrant and poorer perfonners receive relatively small allocations while better perfonners receive significantly more

Figure 4 Performance and Lending Commitments

Poor Very Gomiddotod 1995-97 Average Performance Rating

bull Africa bull Others

-11shy

27 The performancemiddot lending relationship is further illustrated in Figure 5 which reflects the econometric relationship between relative country performance and IDAs actual lending over the past three years (FY95-97) Different specifications for the performance-lending relationship confirm that they are significantly and robustly relatedlQ

Figure 5 Performance and Lending Commitments

Lending per capita pa FY95-97

Poor Very Gcod 1995-97 Average Performance Rating

~~~~~--------~

28 The relationship of IDAs lending and country performance is being progressively tightened That is IDA is directing proportionately larger amounts to those countries demonstrating good performance In the IDA 10 period (FY94-96) top performers received nearly 60 percent more in new commitments per capita than average performers The premium in the IDA9 period (FY91-93) was only 20 percent And as indicated in Figure 6 IDAs lending to borrowers in the top two performance quintiles rose steeply in FY97 pushing the average of the past three years to a full two-thirds ofIDAs total new lending

Syen The relationship for 62 borrowers active during the FY95-97 period is particularly strong when a binary variable is introduced to reflect constraints on four large blend borrowers (India China Pakistan and Egypt) and three countries facing serious absorptive capacity constraints (Bangladesh Ethiopia and Vietnam)

-4shy

bull Social Services Even where the overall level of spending in the social sectors is adequate the intra-sectoral composition of spending may be inconsistent with the countrys development priorities lbis problem is observed widely even among some of IDAs better performers such as Bolivia and Honduras and in many countries throughout Africa It stems from a lack of political commitment to primary education and basic health over higher-level services and to ensuring adequate services in remote areas which are typically inhabited by the poor On the whole IDA borrowers in Africa even otherwise good performers such as Cote dIvoire register at best only fair performance in the provision of social services By contrast a number of large borrowers in South Asia generally show very good performance largely for reasons of culture and tradition

10 The Overall Assessment The point-by-point assessment of a countrys performance is folded into a composite rating which ranges from poor to very good Because country performance is continually evolving ratings of a given year can provide only a snapshot of each borrowers performance over time The following chart shows the distribution of borrowers from the top to the lowest quintiles as assessed in mid-1997

Top

Upper

Figure 2 Country Performance W

Annenia Benin Bhutan Bolivia China Cote dIvoire Georgiamiddot Indiamiddot Kyrgyz Rep Lesotho FYR Macedonia Malawi Maldives Nicaragua Sri Lanka Uganda

Bangladesh Cape Verde Eritrea Ghana GuyanaHondllrasK~aIqrilgtatiLLaosMa~ Senegal Tonga Vanllatu Vietnam ZambiaZimbabwe

Blend Borrower In non-accrual The Republic of Congo was moved to non accrual status as ofDecember 1997 ryen Recent performance as assessed mid-1997 by the criteria appearing in Figure L Countries within each quintile are listed

alphabetically

11 Summary Observations The annual performance assessments of recent years show several important trends

bull About 20-25 percent of all IDA borrowers are regularly rated as very good performers Together they represent about 35 percent of IDAs lending Borrowers consistently rated as very good over the past 3-4 years include Armenia Benin Bhutan Bolivia China Cote dIvoire India Kyrgyz Republic Lesotho Maldives

-5shy

Nicaragua and Uganda About 10 percent of all borrowers are rated as very weak These are typically countries in civil conflict or emerging from conflict And a similar share are in non-accrual status or otherwise inactive borrowers

bull Countries registering in the upper ranks are distributed quite evenly across geographic regions Otherwise few generalizations can be drawn Country performance is not correlated with income population size or creditworthiness

bull The performance of countries in the upper and lower ranges tends to vary little from year to year In very few cases has performance shifted decidedly upward or downward Improvement tends to be gradual as registered recently by Bangladesh and Senegal Significant downward shifts though rare tend to be abrupt prompted by domestic conflict as in Albania and Sierra Leone in 1996

bull In the great majority of IDA borrowers performance tends to be weak on structural policies particularly with respect to civil administration privatization and other aspects of public sector management This is frequently the case even where performance on macro policies is relatively strong The divergence is observed particularly in Africa where first generation policy reforms heavily directed towards liberalizing trade prices and exchange rates are in many countries complete or well advanced But reforms on the structural side have proved difficult and remain incomplete even in better performers such as Benin Kenya and Senegal

bull The relatively large number of borrowers which fall in the mid-ranges also tend to be weak on structural policies though without the offsetting effect of stronger performance on the macro side Among them those which register towards the lower side ie in the fourth quintile such as Cambodia Cameroon Guinea and Tanzania typically lack firm political consensus on policy reform and their performance is consequently mixed at best

II Linking Performance Assessments to IDAs Lending Commitments

12 IDAs lending in the aggregate and to individual countries is the outcome of the top down application of IDAs performance-based criteria for allocating resources among its borrowers together with a bottom up accounting for individual country needs and circumstances The top down dimension begins with the country performance assessment described above The individual performance ratings are then translated into an indicative lending allocation for each borrower as described following The allocation is then further tailored in the CAS from a bottom up perspective ensuring that IDAs lending is consistent with individual countries opportunities and constraints in using these resources effectively

Allocating IDAs Resources

13 On the basis of its updated performance assessment every eligible IDA borrower is allocated annually a three-year resource envelope for planning purposes This indicative allocation which is determined on a per capita basis represents the level of lending that can be

-6shy

justified by the countrys relative policy performance given IDAs overall resource availability As allocations are thus made on a rolling three-year basis the annual pace of lending they imply for each borrower is continually adjusted with successive country performance assessments In addition to country policy performance the borrowers per capita GNP a measure of its relative income is also taken into account (inversely) in determining its indicative allocation For Blend borrowers the indicative allocations of IDA resources further takes into account their partial creditworthiness for IBRD lending ~

14 The borrowers performance-based indicative allocation serves as a reference point for planning purposes While it may subsequently be adjusted to meet country-specific circumstances the indicative allocation remains the anchor around which the country lending program is dimensioned The indicative allocation is thus key to maintaining the strong link between country performance and IDAs actual lending outcomes

15 The emphasis on country performance as a determinant ofIDAs lending has grown in recent years The 1997 Strategic Compact further strengthens the linkage As Figure 3 shows allocations to poor performers are proportionately reduced under the terms of the Compact while those to the better performers are moderately increased The size of the shift is significant allocations to borrowers in the two lowest performance quintiles are reduced by an average of close to 25 percent The resources consequently released to performers in the upper three quintiles yield an increase in their allocations by an average of 1 0 percent~

~I IDA allocations for Blends may also reflect guidelines which IDAs donors have determined in the context of replenishment agreements For example allocations for China and India have been capped in absolute terms rather than being calculated on a per capita basis given the exceptional population size of those countries It is further noted that two borrowers which are currently Blends China and Egypt are due to be graduated from IDA as of endshyFY99 IDA borrowers among the transition economies of Eastern Europe and the FSU which are classified as Blends (Armenia Azerbaijan Bosnia-Herzegovina FYR Macedonia Georgia Kyrgyz Republic and Moldova) include some where recovery remains fragile and no IBRD borrowing is currently being undertaken For a full discussion of Blend borrowers including the determination of IDA allocations to them see Lending to the Blend Borrowers (IDASEC M97-563) December 171997

yen For countries of very small population size the allocation process provides for a minimum allocation per annum reognizing that projects must be a minimum size to be cost-effective These minimum requirements can result in relatively high per capita lending for very small countries Although as many as 13 of IDAs 80 borrowers have populations ofless than one million (including 8 small island economies) together they represent less than one percent of IDAs total lending

sectI The Compact target is for per capita lending to IDA-only countries in the two lowest performance quintiles to be one-third the average compared with about half in recent years Exceptions can be made for countries showing prospects for improved performance such as following the cessation of civil conflict

IDA AIanlln

Poor Very Good

-7shy

16 The dominant role of policy performance in the determination of borrowers indicative allocations can

Figure 3 Relationship of Country Performance and Indicative Lending

Allocations be illustrated by cross-country comparisons For example between Average per

two countries of the same population capita pa

size a good performer such as Malawi receives more than double the indicative allocation of a weak performer such as Cambodia

17 Given the fact that IDA eligibility is guided by an operational cut-off (US$925 per capita GNP in 1996) borrowers GNP per capita though a factor has a much lesser impact on its indicative allocation Between borrowers registering similar policy performance but standing at opposite ends of IDAs per capita income spectrum the increment in the

allocation of the poorer country would be about 20 percent

The Role ofCAS

18 Indicative lending allocations being based on relative country 1997 Performance Rating

performance ensure equity among borrowers but they do not always capture the varied opportunities and constraints which individual borrowers face in actually utilizing external funding such as IDAs Tailoring the scale ofIDAs lending to these opportunities and constraints at the country level is an important part of ensuring that the most effective use is made of IDAs resources That is the task of the Country Assistance Strategy~

The GNP per capita factor was initially intended to provide a modest bias in favor of the poorest of the poor However its role has remained small in recognition of the fact that the income criterion for IDA eligibility itself limits its borrowers to the worlds poorest countries The Strategic Compacts stronger emphasis on perfonnance as a detenninant of IDAs allocations has the effect of further reducing the role of GNP per capita Per capita income among IDA-eligible borrowers ranges from US $930 in Bolivia (IDA-only) to just US $90 in Mozambique with the

median being US $360 (all in 1996 US dollars) Lending to Bolivia is expected to be phased down over a five-year period since its GNP per capita slightly exceeds the current IDA eligibility cut-off of US$925 though its creditworthiness has not yet been established

In contrast with the annual country perfonnance assessments and indicative lending allocations CAS are prepared for respective borrowers at intervals of 1-3 years

11

-8shy

19 The CAS represents the bottom up dimension in deploying IDAs resources among its pool of borrowers It weighs each borrowers economic policy environment macro economic prospects and the volume of resources it can apply effectively towards its development objectives It provides a vehicle for management for planning country programs and in justifying these programs to IDAs Executive Directors

20 The borrowers indicative allocation serves as a reJerence point for establishing the appropriate volume of IDA lending proposed in the CAS In principle the Base Case scenario or the most likely path of IDAs assistance to the country over the time period covered by the CAS is logically proposed at the level of the indicative allocItion The assumption is that at a given level of performance the borrower is most likely to utilize the corresponding level of resources effectively

21 Depending on the circumstances of the borrower however the CAS may propose a level of lending significantly above or below that implied by its indicative allocation The CAS sets out the justification for the adjustment on the basis of country-specific factors such as absorptive capacity constraints or on the other hand exceptional financing requirements

22 What explains such variations in lending to individual countries as against their performance-based indicative allocations

23 First the CAS may propose lending commitments significantly larger than the borrowers indicative allocation in order to meet temporary incremental financing needs These are most frequently of two types

bull Exceptional often debt-related balance-oj-payments financing Lending plans for Cote dIvoire Honduras Zambia and others have provided for relatively high levels of lending typically 15-25 percent higher than their indicative allocations alone imply as part of broader donor efforts to address their financing needs conditional on satisfactory performance in policy reform

bull Borrower reactivation or other prospective petjormance turnaround For some borrowers incremental allocations have been needed for start-up support to rehabilitate essential infrastructure and social services following civil conflict as in the case of Mozambique or political transition as in Armenia Kyrgyz Republic and Georgia Exceptional lending allocations have also been required in a number of cases-most recently Bosnia-Herzegovina and the Republic of Congo (Brazzaville)-shyto enable those countries to become current in their debt service obligations to multilateral lenders

As alternatives to the Base Case the CAS also proposes High Case and Low Case scenarios Should country perfonnance improve as indicated by specified triggers IDAs lending responds by rising to the High Case set out in the CAS If perfonnance falters lending drops to the Low Case typically a core program of modestly scaled projects in the social sectors agriculture or light infrastructure

21

-9shy

24 For other borrowers the CAS may propose lending at a level below the performanceshy based indicative allocation Major borrowers which have borrowed well below their indicative

allocations in recent years are Bangladesh Ethiopia and Vietnam They are generally good performers and in principle good performance is indicative of a borrowers capacity for utilizing resources effectively But performance is not uniform on the many points assessed For example there may be weaknesses in an area such as investment programming which is key to the borrowers ability to utilize IDAs resources effectively

bull Lending plans which are below indicative levels are most frequently explained by limitations in borrowers technical and institutional capacity Though broadly characteristic of many IDA borrowers these constraints are manifest quite differently in different countries In Bangladesh for example pervasive inefficiency in the civil administration is observed to pose a particularly heavy impediment in implementing investment projects In other countries Ethiopia among them the capacity constraint is technical in nature government services responsible are relatively new or otherwise lacking in operational experience

bull Policy differences with borrowers in particular areas of economic reform or in particular sectors represent a second set of factors which may limit country lending plans to levels below those otherwise indicated by a countrys overall performance record IDAs differences with Vietnam in the recent past regarding privatization and other reforms affecting the role of the state in the economy are an example In other countries it may be a key sector that is the source of major policy differences The education sector is traditionally a case in point as it was for some time in Senegal and Mali for example Governance issues may pose a similar constraint Where powerful vested interests are involved for example the preparation of related lending operations may be may be slow or periodically interrupted and lending plans adjusted downward accordingly This situation applies to a number of borrowers even some where performance is relatively strong overall including Sri Lanka and Kenya

bull A third set of factors which may constrain IDAs lending plans even in some of its better perfonning borrowers is related to domestic capacity for financing and supervising investment projects New project interventions which might otherwise be supported by IDA may have to be postponed for lack of budgetary counterparts and local staff resources for project supervision The issue is widely encountered through IDA countries and is particularly pronounced in where donor presence is large as in Bangladesh Malawi Mozambique and Uganda among others Each of these countries is actively working to expand its capacity to utilize donor funds effectively however and IDA is supporting these efforts In the case of Bangladesh in particular these efforts are expected to yield a significant increase in the countrys capacity to absorb IDA resources effectively over the coming few years Similarly expanded capacity is foreseen for the near term in Ethiopia and Vietnam

-10shy

Lending Commitments and the Performance Factor

25 The process of fonnulating individual country lending programs in the context of CAS results in varying departures from the strictly perfonnance-based indicative allocation of IDA funds This demonstrates IDAs ability to respond flexibly to different needs and circumstance at the country level as described above Notwithstanding this flexibility country policy perfonnance is clearly the dominant factor throughout IDAs allocation and planning process As a result its actual lending commitments remain finnly tied to the relative quality of individual borrower perfonnance

26 Figure 4 maps the relationship between country perfonnance and IDAs lending commitments As readily noted there are no borrowers appearing in the upper left quadrant and poorer perfonners receive relatively small allocations while better perfonners receive significantly more

Figure 4 Performance and Lending Commitments

Poor Very Gomiddotod 1995-97 Average Performance Rating

bull Africa bull Others

-11shy

27 The performancemiddot lending relationship is further illustrated in Figure 5 which reflects the econometric relationship between relative country performance and IDAs actual lending over the past three years (FY95-97) Different specifications for the performance-lending relationship confirm that they are significantly and robustly relatedlQ

Figure 5 Performance and Lending Commitments

Lending per capita pa FY95-97

Poor Very Gcod 1995-97 Average Performance Rating

~~~~~--------~

28 The relationship of IDAs lending and country performance is being progressively tightened That is IDA is directing proportionately larger amounts to those countries demonstrating good performance In the IDA 10 period (FY94-96) top performers received nearly 60 percent more in new commitments per capita than average performers The premium in the IDA9 period (FY91-93) was only 20 percent And as indicated in Figure 6 IDAs lending to borrowers in the top two performance quintiles rose steeply in FY97 pushing the average of the past three years to a full two-thirds ofIDAs total new lending

Syen The relationship for 62 borrowers active during the FY95-97 period is particularly strong when a binary variable is introduced to reflect constraints on four large blend borrowers (India China Pakistan and Egypt) and three countries facing serious absorptive capacity constraints (Bangladesh Ethiopia and Vietnam)

-5shy

Nicaragua and Uganda About 10 percent of all borrowers are rated as very weak These are typically countries in civil conflict or emerging from conflict And a similar share are in non-accrual status or otherwise inactive borrowers

bull Countries registering in the upper ranks are distributed quite evenly across geographic regions Otherwise few generalizations can be drawn Country performance is not correlated with income population size or creditworthiness

bull The performance of countries in the upper and lower ranges tends to vary little from year to year In very few cases has performance shifted decidedly upward or downward Improvement tends to be gradual as registered recently by Bangladesh and Senegal Significant downward shifts though rare tend to be abrupt prompted by domestic conflict as in Albania and Sierra Leone in 1996

bull In the great majority of IDA borrowers performance tends to be weak on structural policies particularly with respect to civil administration privatization and other aspects of public sector management This is frequently the case even where performance on macro policies is relatively strong The divergence is observed particularly in Africa where first generation policy reforms heavily directed towards liberalizing trade prices and exchange rates are in many countries complete or well advanced But reforms on the structural side have proved difficult and remain incomplete even in better performers such as Benin Kenya and Senegal

bull The relatively large number of borrowers which fall in the mid-ranges also tend to be weak on structural policies though without the offsetting effect of stronger performance on the macro side Among them those which register towards the lower side ie in the fourth quintile such as Cambodia Cameroon Guinea and Tanzania typically lack firm political consensus on policy reform and their performance is consequently mixed at best

II Linking Performance Assessments to IDAs Lending Commitments

12 IDAs lending in the aggregate and to individual countries is the outcome of the top down application of IDAs performance-based criteria for allocating resources among its borrowers together with a bottom up accounting for individual country needs and circumstances The top down dimension begins with the country performance assessment described above The individual performance ratings are then translated into an indicative lending allocation for each borrower as described following The allocation is then further tailored in the CAS from a bottom up perspective ensuring that IDAs lending is consistent with individual countries opportunities and constraints in using these resources effectively

Allocating IDAs Resources

13 On the basis of its updated performance assessment every eligible IDA borrower is allocated annually a three-year resource envelope for planning purposes This indicative allocation which is determined on a per capita basis represents the level of lending that can be

-6shy

justified by the countrys relative policy performance given IDAs overall resource availability As allocations are thus made on a rolling three-year basis the annual pace of lending they imply for each borrower is continually adjusted with successive country performance assessments In addition to country policy performance the borrowers per capita GNP a measure of its relative income is also taken into account (inversely) in determining its indicative allocation For Blend borrowers the indicative allocations of IDA resources further takes into account their partial creditworthiness for IBRD lending ~

14 The borrowers performance-based indicative allocation serves as a reference point for planning purposes While it may subsequently be adjusted to meet country-specific circumstances the indicative allocation remains the anchor around which the country lending program is dimensioned The indicative allocation is thus key to maintaining the strong link between country performance and IDAs actual lending outcomes

15 The emphasis on country performance as a determinant ofIDAs lending has grown in recent years The 1997 Strategic Compact further strengthens the linkage As Figure 3 shows allocations to poor performers are proportionately reduced under the terms of the Compact while those to the better performers are moderately increased The size of the shift is significant allocations to borrowers in the two lowest performance quintiles are reduced by an average of close to 25 percent The resources consequently released to performers in the upper three quintiles yield an increase in their allocations by an average of 1 0 percent~

~I IDA allocations for Blends may also reflect guidelines which IDAs donors have determined in the context of replenishment agreements For example allocations for China and India have been capped in absolute terms rather than being calculated on a per capita basis given the exceptional population size of those countries It is further noted that two borrowers which are currently Blends China and Egypt are due to be graduated from IDA as of endshyFY99 IDA borrowers among the transition economies of Eastern Europe and the FSU which are classified as Blends (Armenia Azerbaijan Bosnia-Herzegovina FYR Macedonia Georgia Kyrgyz Republic and Moldova) include some where recovery remains fragile and no IBRD borrowing is currently being undertaken For a full discussion of Blend borrowers including the determination of IDA allocations to them see Lending to the Blend Borrowers (IDASEC M97-563) December 171997

yen For countries of very small population size the allocation process provides for a minimum allocation per annum reognizing that projects must be a minimum size to be cost-effective These minimum requirements can result in relatively high per capita lending for very small countries Although as many as 13 of IDAs 80 borrowers have populations ofless than one million (including 8 small island economies) together they represent less than one percent of IDAs total lending

sectI The Compact target is for per capita lending to IDA-only countries in the two lowest performance quintiles to be one-third the average compared with about half in recent years Exceptions can be made for countries showing prospects for improved performance such as following the cessation of civil conflict

IDA AIanlln

Poor Very Good

-7shy

16 The dominant role of policy performance in the determination of borrowers indicative allocations can

Figure 3 Relationship of Country Performance and Indicative Lending

Allocations be illustrated by cross-country comparisons For example between Average per

two countries of the same population capita pa

size a good performer such as Malawi receives more than double the indicative allocation of a weak performer such as Cambodia

17 Given the fact that IDA eligibility is guided by an operational cut-off (US$925 per capita GNP in 1996) borrowers GNP per capita though a factor has a much lesser impact on its indicative allocation Between borrowers registering similar policy performance but standing at opposite ends of IDAs per capita income spectrum the increment in the

allocation of the poorer country would be about 20 percent

The Role ofCAS

18 Indicative lending allocations being based on relative country 1997 Performance Rating

performance ensure equity among borrowers but they do not always capture the varied opportunities and constraints which individual borrowers face in actually utilizing external funding such as IDAs Tailoring the scale ofIDAs lending to these opportunities and constraints at the country level is an important part of ensuring that the most effective use is made of IDAs resources That is the task of the Country Assistance Strategy~

The GNP per capita factor was initially intended to provide a modest bias in favor of the poorest of the poor However its role has remained small in recognition of the fact that the income criterion for IDA eligibility itself limits its borrowers to the worlds poorest countries The Strategic Compacts stronger emphasis on perfonnance as a detenninant of IDAs allocations has the effect of further reducing the role of GNP per capita Per capita income among IDA-eligible borrowers ranges from US $930 in Bolivia (IDA-only) to just US $90 in Mozambique with the

median being US $360 (all in 1996 US dollars) Lending to Bolivia is expected to be phased down over a five-year period since its GNP per capita slightly exceeds the current IDA eligibility cut-off of US$925 though its creditworthiness has not yet been established

In contrast with the annual country perfonnance assessments and indicative lending allocations CAS are prepared for respective borrowers at intervals of 1-3 years

11

-8shy

19 The CAS represents the bottom up dimension in deploying IDAs resources among its pool of borrowers It weighs each borrowers economic policy environment macro economic prospects and the volume of resources it can apply effectively towards its development objectives It provides a vehicle for management for planning country programs and in justifying these programs to IDAs Executive Directors

20 The borrowers indicative allocation serves as a reJerence point for establishing the appropriate volume of IDA lending proposed in the CAS In principle the Base Case scenario or the most likely path of IDAs assistance to the country over the time period covered by the CAS is logically proposed at the level of the indicative allocItion The assumption is that at a given level of performance the borrower is most likely to utilize the corresponding level of resources effectively

21 Depending on the circumstances of the borrower however the CAS may propose a level of lending significantly above or below that implied by its indicative allocation The CAS sets out the justification for the adjustment on the basis of country-specific factors such as absorptive capacity constraints or on the other hand exceptional financing requirements

22 What explains such variations in lending to individual countries as against their performance-based indicative allocations

23 First the CAS may propose lending commitments significantly larger than the borrowers indicative allocation in order to meet temporary incremental financing needs These are most frequently of two types

bull Exceptional often debt-related balance-oj-payments financing Lending plans for Cote dIvoire Honduras Zambia and others have provided for relatively high levels of lending typically 15-25 percent higher than their indicative allocations alone imply as part of broader donor efforts to address their financing needs conditional on satisfactory performance in policy reform

bull Borrower reactivation or other prospective petjormance turnaround For some borrowers incremental allocations have been needed for start-up support to rehabilitate essential infrastructure and social services following civil conflict as in the case of Mozambique or political transition as in Armenia Kyrgyz Republic and Georgia Exceptional lending allocations have also been required in a number of cases-most recently Bosnia-Herzegovina and the Republic of Congo (Brazzaville)-shyto enable those countries to become current in their debt service obligations to multilateral lenders

As alternatives to the Base Case the CAS also proposes High Case and Low Case scenarios Should country perfonnance improve as indicated by specified triggers IDAs lending responds by rising to the High Case set out in the CAS If perfonnance falters lending drops to the Low Case typically a core program of modestly scaled projects in the social sectors agriculture or light infrastructure

21

-9shy

24 For other borrowers the CAS may propose lending at a level below the performanceshy based indicative allocation Major borrowers which have borrowed well below their indicative

allocations in recent years are Bangladesh Ethiopia and Vietnam They are generally good performers and in principle good performance is indicative of a borrowers capacity for utilizing resources effectively But performance is not uniform on the many points assessed For example there may be weaknesses in an area such as investment programming which is key to the borrowers ability to utilize IDAs resources effectively

bull Lending plans which are below indicative levels are most frequently explained by limitations in borrowers technical and institutional capacity Though broadly characteristic of many IDA borrowers these constraints are manifest quite differently in different countries In Bangladesh for example pervasive inefficiency in the civil administration is observed to pose a particularly heavy impediment in implementing investment projects In other countries Ethiopia among them the capacity constraint is technical in nature government services responsible are relatively new or otherwise lacking in operational experience

bull Policy differences with borrowers in particular areas of economic reform or in particular sectors represent a second set of factors which may limit country lending plans to levels below those otherwise indicated by a countrys overall performance record IDAs differences with Vietnam in the recent past regarding privatization and other reforms affecting the role of the state in the economy are an example In other countries it may be a key sector that is the source of major policy differences The education sector is traditionally a case in point as it was for some time in Senegal and Mali for example Governance issues may pose a similar constraint Where powerful vested interests are involved for example the preparation of related lending operations may be may be slow or periodically interrupted and lending plans adjusted downward accordingly This situation applies to a number of borrowers even some where performance is relatively strong overall including Sri Lanka and Kenya

bull A third set of factors which may constrain IDAs lending plans even in some of its better perfonning borrowers is related to domestic capacity for financing and supervising investment projects New project interventions which might otherwise be supported by IDA may have to be postponed for lack of budgetary counterparts and local staff resources for project supervision The issue is widely encountered through IDA countries and is particularly pronounced in where donor presence is large as in Bangladesh Malawi Mozambique and Uganda among others Each of these countries is actively working to expand its capacity to utilize donor funds effectively however and IDA is supporting these efforts In the case of Bangladesh in particular these efforts are expected to yield a significant increase in the countrys capacity to absorb IDA resources effectively over the coming few years Similarly expanded capacity is foreseen for the near term in Ethiopia and Vietnam

-10shy

Lending Commitments and the Performance Factor

25 The process of fonnulating individual country lending programs in the context of CAS results in varying departures from the strictly perfonnance-based indicative allocation of IDA funds This demonstrates IDAs ability to respond flexibly to different needs and circumstance at the country level as described above Notwithstanding this flexibility country policy perfonnance is clearly the dominant factor throughout IDAs allocation and planning process As a result its actual lending commitments remain finnly tied to the relative quality of individual borrower perfonnance

26 Figure 4 maps the relationship between country perfonnance and IDAs lending commitments As readily noted there are no borrowers appearing in the upper left quadrant and poorer perfonners receive relatively small allocations while better perfonners receive significantly more

Figure 4 Performance and Lending Commitments

Poor Very Gomiddotod 1995-97 Average Performance Rating

bull Africa bull Others

-11shy

27 The performancemiddot lending relationship is further illustrated in Figure 5 which reflects the econometric relationship between relative country performance and IDAs actual lending over the past three years (FY95-97) Different specifications for the performance-lending relationship confirm that they are significantly and robustly relatedlQ

Figure 5 Performance and Lending Commitments

Lending per capita pa FY95-97

Poor Very Gcod 1995-97 Average Performance Rating

~~~~~--------~

28 The relationship of IDAs lending and country performance is being progressively tightened That is IDA is directing proportionately larger amounts to those countries demonstrating good performance In the IDA 10 period (FY94-96) top performers received nearly 60 percent more in new commitments per capita than average performers The premium in the IDA9 period (FY91-93) was only 20 percent And as indicated in Figure 6 IDAs lending to borrowers in the top two performance quintiles rose steeply in FY97 pushing the average of the past three years to a full two-thirds ofIDAs total new lending

Syen The relationship for 62 borrowers active during the FY95-97 period is particularly strong when a binary variable is introduced to reflect constraints on four large blend borrowers (India China Pakistan and Egypt) and three countries facing serious absorptive capacity constraints (Bangladesh Ethiopia and Vietnam)

-6shy

justified by the countrys relative policy performance given IDAs overall resource availability As allocations are thus made on a rolling three-year basis the annual pace of lending they imply for each borrower is continually adjusted with successive country performance assessments In addition to country policy performance the borrowers per capita GNP a measure of its relative income is also taken into account (inversely) in determining its indicative allocation For Blend borrowers the indicative allocations of IDA resources further takes into account their partial creditworthiness for IBRD lending ~

14 The borrowers performance-based indicative allocation serves as a reference point for planning purposes While it may subsequently be adjusted to meet country-specific circumstances the indicative allocation remains the anchor around which the country lending program is dimensioned The indicative allocation is thus key to maintaining the strong link between country performance and IDAs actual lending outcomes

15 The emphasis on country performance as a determinant ofIDAs lending has grown in recent years The 1997 Strategic Compact further strengthens the linkage As Figure 3 shows allocations to poor performers are proportionately reduced under the terms of the Compact while those to the better performers are moderately increased The size of the shift is significant allocations to borrowers in the two lowest performance quintiles are reduced by an average of close to 25 percent The resources consequently released to performers in the upper three quintiles yield an increase in their allocations by an average of 1 0 percent~

~I IDA allocations for Blends may also reflect guidelines which IDAs donors have determined in the context of replenishment agreements For example allocations for China and India have been capped in absolute terms rather than being calculated on a per capita basis given the exceptional population size of those countries It is further noted that two borrowers which are currently Blends China and Egypt are due to be graduated from IDA as of endshyFY99 IDA borrowers among the transition economies of Eastern Europe and the FSU which are classified as Blends (Armenia Azerbaijan Bosnia-Herzegovina FYR Macedonia Georgia Kyrgyz Republic and Moldova) include some where recovery remains fragile and no IBRD borrowing is currently being undertaken For a full discussion of Blend borrowers including the determination of IDA allocations to them see Lending to the Blend Borrowers (IDASEC M97-563) December 171997

yen For countries of very small population size the allocation process provides for a minimum allocation per annum reognizing that projects must be a minimum size to be cost-effective These minimum requirements can result in relatively high per capita lending for very small countries Although as many as 13 of IDAs 80 borrowers have populations ofless than one million (including 8 small island economies) together they represent less than one percent of IDAs total lending

sectI The Compact target is for per capita lending to IDA-only countries in the two lowest performance quintiles to be one-third the average compared with about half in recent years Exceptions can be made for countries showing prospects for improved performance such as following the cessation of civil conflict

IDA AIanlln

Poor Very Good

-7shy

16 The dominant role of policy performance in the determination of borrowers indicative allocations can

Figure 3 Relationship of Country Performance and Indicative Lending

Allocations be illustrated by cross-country comparisons For example between Average per

two countries of the same population capita pa

size a good performer such as Malawi receives more than double the indicative allocation of a weak performer such as Cambodia

17 Given the fact that IDA eligibility is guided by an operational cut-off (US$925 per capita GNP in 1996) borrowers GNP per capita though a factor has a much lesser impact on its indicative allocation Between borrowers registering similar policy performance but standing at opposite ends of IDAs per capita income spectrum the increment in the

allocation of the poorer country would be about 20 percent

The Role ofCAS

18 Indicative lending allocations being based on relative country 1997 Performance Rating

performance ensure equity among borrowers but they do not always capture the varied opportunities and constraints which individual borrowers face in actually utilizing external funding such as IDAs Tailoring the scale ofIDAs lending to these opportunities and constraints at the country level is an important part of ensuring that the most effective use is made of IDAs resources That is the task of the Country Assistance Strategy~

The GNP per capita factor was initially intended to provide a modest bias in favor of the poorest of the poor However its role has remained small in recognition of the fact that the income criterion for IDA eligibility itself limits its borrowers to the worlds poorest countries The Strategic Compacts stronger emphasis on perfonnance as a detenninant of IDAs allocations has the effect of further reducing the role of GNP per capita Per capita income among IDA-eligible borrowers ranges from US $930 in Bolivia (IDA-only) to just US $90 in Mozambique with the

median being US $360 (all in 1996 US dollars) Lending to Bolivia is expected to be phased down over a five-year period since its GNP per capita slightly exceeds the current IDA eligibility cut-off of US$925 though its creditworthiness has not yet been established

In contrast with the annual country perfonnance assessments and indicative lending allocations CAS are prepared for respective borrowers at intervals of 1-3 years

11

-8shy

19 The CAS represents the bottom up dimension in deploying IDAs resources among its pool of borrowers It weighs each borrowers economic policy environment macro economic prospects and the volume of resources it can apply effectively towards its development objectives It provides a vehicle for management for planning country programs and in justifying these programs to IDAs Executive Directors

20 The borrowers indicative allocation serves as a reJerence point for establishing the appropriate volume of IDA lending proposed in the CAS In principle the Base Case scenario or the most likely path of IDAs assistance to the country over the time period covered by the CAS is logically proposed at the level of the indicative allocItion The assumption is that at a given level of performance the borrower is most likely to utilize the corresponding level of resources effectively

21 Depending on the circumstances of the borrower however the CAS may propose a level of lending significantly above or below that implied by its indicative allocation The CAS sets out the justification for the adjustment on the basis of country-specific factors such as absorptive capacity constraints or on the other hand exceptional financing requirements

22 What explains such variations in lending to individual countries as against their performance-based indicative allocations

23 First the CAS may propose lending commitments significantly larger than the borrowers indicative allocation in order to meet temporary incremental financing needs These are most frequently of two types

bull Exceptional often debt-related balance-oj-payments financing Lending plans for Cote dIvoire Honduras Zambia and others have provided for relatively high levels of lending typically 15-25 percent higher than their indicative allocations alone imply as part of broader donor efforts to address their financing needs conditional on satisfactory performance in policy reform

bull Borrower reactivation or other prospective petjormance turnaround For some borrowers incremental allocations have been needed for start-up support to rehabilitate essential infrastructure and social services following civil conflict as in the case of Mozambique or political transition as in Armenia Kyrgyz Republic and Georgia Exceptional lending allocations have also been required in a number of cases-most recently Bosnia-Herzegovina and the Republic of Congo (Brazzaville)-shyto enable those countries to become current in their debt service obligations to multilateral lenders

As alternatives to the Base Case the CAS also proposes High Case and Low Case scenarios Should country perfonnance improve as indicated by specified triggers IDAs lending responds by rising to the High Case set out in the CAS If perfonnance falters lending drops to the Low Case typically a core program of modestly scaled projects in the social sectors agriculture or light infrastructure

21

-9shy

24 For other borrowers the CAS may propose lending at a level below the performanceshy based indicative allocation Major borrowers which have borrowed well below their indicative

allocations in recent years are Bangladesh Ethiopia and Vietnam They are generally good performers and in principle good performance is indicative of a borrowers capacity for utilizing resources effectively But performance is not uniform on the many points assessed For example there may be weaknesses in an area such as investment programming which is key to the borrowers ability to utilize IDAs resources effectively

bull Lending plans which are below indicative levels are most frequently explained by limitations in borrowers technical and institutional capacity Though broadly characteristic of many IDA borrowers these constraints are manifest quite differently in different countries In Bangladesh for example pervasive inefficiency in the civil administration is observed to pose a particularly heavy impediment in implementing investment projects In other countries Ethiopia among them the capacity constraint is technical in nature government services responsible are relatively new or otherwise lacking in operational experience

bull Policy differences with borrowers in particular areas of economic reform or in particular sectors represent a second set of factors which may limit country lending plans to levels below those otherwise indicated by a countrys overall performance record IDAs differences with Vietnam in the recent past regarding privatization and other reforms affecting the role of the state in the economy are an example In other countries it may be a key sector that is the source of major policy differences The education sector is traditionally a case in point as it was for some time in Senegal and Mali for example Governance issues may pose a similar constraint Where powerful vested interests are involved for example the preparation of related lending operations may be may be slow or periodically interrupted and lending plans adjusted downward accordingly This situation applies to a number of borrowers even some where performance is relatively strong overall including Sri Lanka and Kenya

bull A third set of factors which may constrain IDAs lending plans even in some of its better perfonning borrowers is related to domestic capacity for financing and supervising investment projects New project interventions which might otherwise be supported by IDA may have to be postponed for lack of budgetary counterparts and local staff resources for project supervision The issue is widely encountered through IDA countries and is particularly pronounced in where donor presence is large as in Bangladesh Malawi Mozambique and Uganda among others Each of these countries is actively working to expand its capacity to utilize donor funds effectively however and IDA is supporting these efforts In the case of Bangladesh in particular these efforts are expected to yield a significant increase in the countrys capacity to absorb IDA resources effectively over the coming few years Similarly expanded capacity is foreseen for the near term in Ethiopia and Vietnam

-10shy

Lending Commitments and the Performance Factor

25 The process of fonnulating individual country lending programs in the context of CAS results in varying departures from the strictly perfonnance-based indicative allocation of IDA funds This demonstrates IDAs ability to respond flexibly to different needs and circumstance at the country level as described above Notwithstanding this flexibility country policy perfonnance is clearly the dominant factor throughout IDAs allocation and planning process As a result its actual lending commitments remain finnly tied to the relative quality of individual borrower perfonnance

26 Figure 4 maps the relationship between country perfonnance and IDAs lending commitments As readily noted there are no borrowers appearing in the upper left quadrant and poorer perfonners receive relatively small allocations while better perfonners receive significantly more

Figure 4 Performance and Lending Commitments

Poor Very Gomiddotod 1995-97 Average Performance Rating

bull Africa bull Others

-11shy

27 The performancemiddot lending relationship is further illustrated in Figure 5 which reflects the econometric relationship between relative country performance and IDAs actual lending over the past three years (FY95-97) Different specifications for the performance-lending relationship confirm that they are significantly and robustly relatedlQ

Figure 5 Performance and Lending Commitments

Lending per capita pa FY95-97

Poor Very Gcod 1995-97 Average Performance Rating

~~~~~--------~

28 The relationship of IDAs lending and country performance is being progressively tightened That is IDA is directing proportionately larger amounts to those countries demonstrating good performance In the IDA 10 period (FY94-96) top performers received nearly 60 percent more in new commitments per capita than average performers The premium in the IDA9 period (FY91-93) was only 20 percent And as indicated in Figure 6 IDAs lending to borrowers in the top two performance quintiles rose steeply in FY97 pushing the average of the past three years to a full two-thirds ofIDAs total new lending

Syen The relationship for 62 borrowers active during the FY95-97 period is particularly strong when a binary variable is introduced to reflect constraints on four large blend borrowers (India China Pakistan and Egypt) and three countries facing serious absorptive capacity constraints (Bangladesh Ethiopia and Vietnam)

IDA AIanlln

Poor Very Good

-7shy

16 The dominant role of policy performance in the determination of borrowers indicative allocations can

Figure 3 Relationship of Country Performance and Indicative Lending

Allocations be illustrated by cross-country comparisons For example between Average per

two countries of the same population capita pa

size a good performer such as Malawi receives more than double the indicative allocation of a weak performer such as Cambodia

17 Given the fact that IDA eligibility is guided by an operational cut-off (US$925 per capita GNP in 1996) borrowers GNP per capita though a factor has a much lesser impact on its indicative allocation Between borrowers registering similar policy performance but standing at opposite ends of IDAs per capita income spectrum the increment in the

allocation of the poorer country would be about 20 percent

The Role ofCAS

18 Indicative lending allocations being based on relative country 1997 Performance Rating

performance ensure equity among borrowers but they do not always capture the varied opportunities and constraints which individual borrowers face in actually utilizing external funding such as IDAs Tailoring the scale ofIDAs lending to these opportunities and constraints at the country level is an important part of ensuring that the most effective use is made of IDAs resources That is the task of the Country Assistance Strategy~

The GNP per capita factor was initially intended to provide a modest bias in favor of the poorest of the poor However its role has remained small in recognition of the fact that the income criterion for IDA eligibility itself limits its borrowers to the worlds poorest countries The Strategic Compacts stronger emphasis on perfonnance as a detenninant of IDAs allocations has the effect of further reducing the role of GNP per capita Per capita income among IDA-eligible borrowers ranges from US $930 in Bolivia (IDA-only) to just US $90 in Mozambique with the

median being US $360 (all in 1996 US dollars) Lending to Bolivia is expected to be phased down over a five-year period since its GNP per capita slightly exceeds the current IDA eligibility cut-off of US$925 though its creditworthiness has not yet been established

In contrast with the annual country perfonnance assessments and indicative lending allocations CAS are prepared for respective borrowers at intervals of 1-3 years

11

-8shy

19 The CAS represents the bottom up dimension in deploying IDAs resources among its pool of borrowers It weighs each borrowers economic policy environment macro economic prospects and the volume of resources it can apply effectively towards its development objectives It provides a vehicle for management for planning country programs and in justifying these programs to IDAs Executive Directors

20 The borrowers indicative allocation serves as a reJerence point for establishing the appropriate volume of IDA lending proposed in the CAS In principle the Base Case scenario or the most likely path of IDAs assistance to the country over the time period covered by the CAS is logically proposed at the level of the indicative allocItion The assumption is that at a given level of performance the borrower is most likely to utilize the corresponding level of resources effectively

21 Depending on the circumstances of the borrower however the CAS may propose a level of lending significantly above or below that implied by its indicative allocation The CAS sets out the justification for the adjustment on the basis of country-specific factors such as absorptive capacity constraints or on the other hand exceptional financing requirements

22 What explains such variations in lending to individual countries as against their performance-based indicative allocations

23 First the CAS may propose lending commitments significantly larger than the borrowers indicative allocation in order to meet temporary incremental financing needs These are most frequently of two types

bull Exceptional often debt-related balance-oj-payments financing Lending plans for Cote dIvoire Honduras Zambia and others have provided for relatively high levels of lending typically 15-25 percent higher than their indicative allocations alone imply as part of broader donor efforts to address their financing needs conditional on satisfactory performance in policy reform

bull Borrower reactivation or other prospective petjormance turnaround For some borrowers incremental allocations have been needed for start-up support to rehabilitate essential infrastructure and social services following civil conflict as in the case of Mozambique or political transition as in Armenia Kyrgyz Republic and Georgia Exceptional lending allocations have also been required in a number of cases-most recently Bosnia-Herzegovina and the Republic of Congo (Brazzaville)-shyto enable those countries to become current in their debt service obligations to multilateral lenders

As alternatives to the Base Case the CAS also proposes High Case and Low Case scenarios Should country perfonnance improve as indicated by specified triggers IDAs lending responds by rising to the High Case set out in the CAS If perfonnance falters lending drops to the Low Case typically a core program of modestly scaled projects in the social sectors agriculture or light infrastructure

21

-9shy

24 For other borrowers the CAS may propose lending at a level below the performanceshy based indicative allocation Major borrowers which have borrowed well below their indicative

allocations in recent years are Bangladesh Ethiopia and Vietnam They are generally good performers and in principle good performance is indicative of a borrowers capacity for utilizing resources effectively But performance is not uniform on the many points assessed For example there may be weaknesses in an area such as investment programming which is key to the borrowers ability to utilize IDAs resources effectively

bull Lending plans which are below indicative levels are most frequently explained by limitations in borrowers technical and institutional capacity Though broadly characteristic of many IDA borrowers these constraints are manifest quite differently in different countries In Bangladesh for example pervasive inefficiency in the civil administration is observed to pose a particularly heavy impediment in implementing investment projects In other countries Ethiopia among them the capacity constraint is technical in nature government services responsible are relatively new or otherwise lacking in operational experience

bull Policy differences with borrowers in particular areas of economic reform or in particular sectors represent a second set of factors which may limit country lending plans to levels below those otherwise indicated by a countrys overall performance record IDAs differences with Vietnam in the recent past regarding privatization and other reforms affecting the role of the state in the economy are an example In other countries it may be a key sector that is the source of major policy differences The education sector is traditionally a case in point as it was for some time in Senegal and Mali for example Governance issues may pose a similar constraint Where powerful vested interests are involved for example the preparation of related lending operations may be may be slow or periodically interrupted and lending plans adjusted downward accordingly This situation applies to a number of borrowers even some where performance is relatively strong overall including Sri Lanka and Kenya

bull A third set of factors which may constrain IDAs lending plans even in some of its better perfonning borrowers is related to domestic capacity for financing and supervising investment projects New project interventions which might otherwise be supported by IDA may have to be postponed for lack of budgetary counterparts and local staff resources for project supervision The issue is widely encountered through IDA countries and is particularly pronounced in where donor presence is large as in Bangladesh Malawi Mozambique and Uganda among others Each of these countries is actively working to expand its capacity to utilize donor funds effectively however and IDA is supporting these efforts In the case of Bangladesh in particular these efforts are expected to yield a significant increase in the countrys capacity to absorb IDA resources effectively over the coming few years Similarly expanded capacity is foreseen for the near term in Ethiopia and Vietnam

-10shy

Lending Commitments and the Performance Factor

25 The process of fonnulating individual country lending programs in the context of CAS results in varying departures from the strictly perfonnance-based indicative allocation of IDA funds This demonstrates IDAs ability to respond flexibly to different needs and circumstance at the country level as described above Notwithstanding this flexibility country policy perfonnance is clearly the dominant factor throughout IDAs allocation and planning process As a result its actual lending commitments remain finnly tied to the relative quality of individual borrower perfonnance

26 Figure 4 maps the relationship between country perfonnance and IDAs lending commitments As readily noted there are no borrowers appearing in the upper left quadrant and poorer perfonners receive relatively small allocations while better perfonners receive significantly more

Figure 4 Performance and Lending Commitments

Poor Very Gomiddotod 1995-97 Average Performance Rating

bull Africa bull Others

-11shy

27 The performancemiddot lending relationship is further illustrated in Figure 5 which reflects the econometric relationship between relative country performance and IDAs actual lending over the past three years (FY95-97) Different specifications for the performance-lending relationship confirm that they are significantly and robustly relatedlQ

Figure 5 Performance and Lending Commitments

Lending per capita pa FY95-97

Poor Very Gcod 1995-97 Average Performance Rating

~~~~~--------~

28 The relationship of IDAs lending and country performance is being progressively tightened That is IDA is directing proportionately larger amounts to those countries demonstrating good performance In the IDA 10 period (FY94-96) top performers received nearly 60 percent more in new commitments per capita than average performers The premium in the IDA9 period (FY91-93) was only 20 percent And as indicated in Figure 6 IDAs lending to borrowers in the top two performance quintiles rose steeply in FY97 pushing the average of the past three years to a full two-thirds ofIDAs total new lending

Syen The relationship for 62 borrowers active during the FY95-97 period is particularly strong when a binary variable is introduced to reflect constraints on four large blend borrowers (India China Pakistan and Egypt) and three countries facing serious absorptive capacity constraints (Bangladesh Ethiopia and Vietnam)

-8shy

19 The CAS represents the bottom up dimension in deploying IDAs resources among its pool of borrowers It weighs each borrowers economic policy environment macro economic prospects and the volume of resources it can apply effectively towards its development objectives It provides a vehicle for management for planning country programs and in justifying these programs to IDAs Executive Directors

20 The borrowers indicative allocation serves as a reJerence point for establishing the appropriate volume of IDA lending proposed in the CAS In principle the Base Case scenario or the most likely path of IDAs assistance to the country over the time period covered by the CAS is logically proposed at the level of the indicative allocItion The assumption is that at a given level of performance the borrower is most likely to utilize the corresponding level of resources effectively

21 Depending on the circumstances of the borrower however the CAS may propose a level of lending significantly above or below that implied by its indicative allocation The CAS sets out the justification for the adjustment on the basis of country-specific factors such as absorptive capacity constraints or on the other hand exceptional financing requirements

22 What explains such variations in lending to individual countries as against their performance-based indicative allocations

23 First the CAS may propose lending commitments significantly larger than the borrowers indicative allocation in order to meet temporary incremental financing needs These are most frequently of two types

bull Exceptional often debt-related balance-oj-payments financing Lending plans for Cote dIvoire Honduras Zambia and others have provided for relatively high levels of lending typically 15-25 percent higher than their indicative allocations alone imply as part of broader donor efforts to address their financing needs conditional on satisfactory performance in policy reform

bull Borrower reactivation or other prospective petjormance turnaround For some borrowers incremental allocations have been needed for start-up support to rehabilitate essential infrastructure and social services following civil conflict as in the case of Mozambique or political transition as in Armenia Kyrgyz Republic and Georgia Exceptional lending allocations have also been required in a number of cases-most recently Bosnia-Herzegovina and the Republic of Congo (Brazzaville)-shyto enable those countries to become current in their debt service obligations to multilateral lenders

As alternatives to the Base Case the CAS also proposes High Case and Low Case scenarios Should country perfonnance improve as indicated by specified triggers IDAs lending responds by rising to the High Case set out in the CAS If perfonnance falters lending drops to the Low Case typically a core program of modestly scaled projects in the social sectors agriculture or light infrastructure

21

-9shy

24 For other borrowers the CAS may propose lending at a level below the performanceshy based indicative allocation Major borrowers which have borrowed well below their indicative

allocations in recent years are Bangladesh Ethiopia and Vietnam They are generally good performers and in principle good performance is indicative of a borrowers capacity for utilizing resources effectively But performance is not uniform on the many points assessed For example there may be weaknesses in an area such as investment programming which is key to the borrowers ability to utilize IDAs resources effectively

bull Lending plans which are below indicative levels are most frequently explained by limitations in borrowers technical and institutional capacity Though broadly characteristic of many IDA borrowers these constraints are manifest quite differently in different countries In Bangladesh for example pervasive inefficiency in the civil administration is observed to pose a particularly heavy impediment in implementing investment projects In other countries Ethiopia among them the capacity constraint is technical in nature government services responsible are relatively new or otherwise lacking in operational experience

bull Policy differences with borrowers in particular areas of economic reform or in particular sectors represent a second set of factors which may limit country lending plans to levels below those otherwise indicated by a countrys overall performance record IDAs differences with Vietnam in the recent past regarding privatization and other reforms affecting the role of the state in the economy are an example In other countries it may be a key sector that is the source of major policy differences The education sector is traditionally a case in point as it was for some time in Senegal and Mali for example Governance issues may pose a similar constraint Where powerful vested interests are involved for example the preparation of related lending operations may be may be slow or periodically interrupted and lending plans adjusted downward accordingly This situation applies to a number of borrowers even some where performance is relatively strong overall including Sri Lanka and Kenya

bull A third set of factors which may constrain IDAs lending plans even in some of its better perfonning borrowers is related to domestic capacity for financing and supervising investment projects New project interventions which might otherwise be supported by IDA may have to be postponed for lack of budgetary counterparts and local staff resources for project supervision The issue is widely encountered through IDA countries and is particularly pronounced in where donor presence is large as in Bangladesh Malawi Mozambique and Uganda among others Each of these countries is actively working to expand its capacity to utilize donor funds effectively however and IDA is supporting these efforts In the case of Bangladesh in particular these efforts are expected to yield a significant increase in the countrys capacity to absorb IDA resources effectively over the coming few years Similarly expanded capacity is foreseen for the near term in Ethiopia and Vietnam

-10shy

Lending Commitments and the Performance Factor

25 The process of fonnulating individual country lending programs in the context of CAS results in varying departures from the strictly perfonnance-based indicative allocation of IDA funds This demonstrates IDAs ability to respond flexibly to different needs and circumstance at the country level as described above Notwithstanding this flexibility country policy perfonnance is clearly the dominant factor throughout IDAs allocation and planning process As a result its actual lending commitments remain finnly tied to the relative quality of individual borrower perfonnance

26 Figure 4 maps the relationship between country perfonnance and IDAs lending commitments As readily noted there are no borrowers appearing in the upper left quadrant and poorer perfonners receive relatively small allocations while better perfonners receive significantly more

Figure 4 Performance and Lending Commitments

Poor Very Gomiddotod 1995-97 Average Performance Rating

bull Africa bull Others

-11shy

27 The performancemiddot lending relationship is further illustrated in Figure 5 which reflects the econometric relationship between relative country performance and IDAs actual lending over the past three years (FY95-97) Different specifications for the performance-lending relationship confirm that they are significantly and robustly relatedlQ

Figure 5 Performance and Lending Commitments

Lending per capita pa FY95-97

Poor Very Gcod 1995-97 Average Performance Rating

~~~~~--------~

28 The relationship of IDAs lending and country performance is being progressively tightened That is IDA is directing proportionately larger amounts to those countries demonstrating good performance In the IDA 10 period (FY94-96) top performers received nearly 60 percent more in new commitments per capita than average performers The premium in the IDA9 period (FY91-93) was only 20 percent And as indicated in Figure 6 IDAs lending to borrowers in the top two performance quintiles rose steeply in FY97 pushing the average of the past three years to a full two-thirds ofIDAs total new lending

Syen The relationship for 62 borrowers active during the FY95-97 period is particularly strong when a binary variable is introduced to reflect constraints on four large blend borrowers (India China Pakistan and Egypt) and three countries facing serious absorptive capacity constraints (Bangladesh Ethiopia and Vietnam)

-9shy

24 For other borrowers the CAS may propose lending at a level below the performanceshy based indicative allocation Major borrowers which have borrowed well below their indicative

allocations in recent years are Bangladesh Ethiopia and Vietnam They are generally good performers and in principle good performance is indicative of a borrowers capacity for utilizing resources effectively But performance is not uniform on the many points assessed For example there may be weaknesses in an area such as investment programming which is key to the borrowers ability to utilize IDAs resources effectively

bull Lending plans which are below indicative levels are most frequently explained by limitations in borrowers technical and institutional capacity Though broadly characteristic of many IDA borrowers these constraints are manifest quite differently in different countries In Bangladesh for example pervasive inefficiency in the civil administration is observed to pose a particularly heavy impediment in implementing investment projects In other countries Ethiopia among them the capacity constraint is technical in nature government services responsible are relatively new or otherwise lacking in operational experience

bull Policy differences with borrowers in particular areas of economic reform or in particular sectors represent a second set of factors which may limit country lending plans to levels below those otherwise indicated by a countrys overall performance record IDAs differences with Vietnam in the recent past regarding privatization and other reforms affecting the role of the state in the economy are an example In other countries it may be a key sector that is the source of major policy differences The education sector is traditionally a case in point as it was for some time in Senegal and Mali for example Governance issues may pose a similar constraint Where powerful vested interests are involved for example the preparation of related lending operations may be may be slow or periodically interrupted and lending plans adjusted downward accordingly This situation applies to a number of borrowers even some where performance is relatively strong overall including Sri Lanka and Kenya

bull A third set of factors which may constrain IDAs lending plans even in some of its better perfonning borrowers is related to domestic capacity for financing and supervising investment projects New project interventions which might otherwise be supported by IDA may have to be postponed for lack of budgetary counterparts and local staff resources for project supervision The issue is widely encountered through IDA countries and is particularly pronounced in where donor presence is large as in Bangladesh Malawi Mozambique and Uganda among others Each of these countries is actively working to expand its capacity to utilize donor funds effectively however and IDA is supporting these efforts In the case of Bangladesh in particular these efforts are expected to yield a significant increase in the countrys capacity to absorb IDA resources effectively over the coming few years Similarly expanded capacity is foreseen for the near term in Ethiopia and Vietnam

-10shy

Lending Commitments and the Performance Factor

25 The process of fonnulating individual country lending programs in the context of CAS results in varying departures from the strictly perfonnance-based indicative allocation of IDA funds This demonstrates IDAs ability to respond flexibly to different needs and circumstance at the country level as described above Notwithstanding this flexibility country policy perfonnance is clearly the dominant factor throughout IDAs allocation and planning process As a result its actual lending commitments remain finnly tied to the relative quality of individual borrower perfonnance

26 Figure 4 maps the relationship between country perfonnance and IDAs lending commitments As readily noted there are no borrowers appearing in the upper left quadrant and poorer perfonners receive relatively small allocations while better perfonners receive significantly more

Figure 4 Performance and Lending Commitments

Poor Very Gomiddotod 1995-97 Average Performance Rating

bull Africa bull Others

-11shy

27 The performancemiddot lending relationship is further illustrated in Figure 5 which reflects the econometric relationship between relative country performance and IDAs actual lending over the past three years (FY95-97) Different specifications for the performance-lending relationship confirm that they are significantly and robustly relatedlQ

Figure 5 Performance and Lending Commitments

Lending per capita pa FY95-97

Poor Very Gcod 1995-97 Average Performance Rating

~~~~~--------~

28 The relationship of IDAs lending and country performance is being progressively tightened That is IDA is directing proportionately larger amounts to those countries demonstrating good performance In the IDA 10 period (FY94-96) top performers received nearly 60 percent more in new commitments per capita than average performers The premium in the IDA9 period (FY91-93) was only 20 percent And as indicated in Figure 6 IDAs lending to borrowers in the top two performance quintiles rose steeply in FY97 pushing the average of the past three years to a full two-thirds ofIDAs total new lending

Syen The relationship for 62 borrowers active during the FY95-97 period is particularly strong when a binary variable is introduced to reflect constraints on four large blend borrowers (India China Pakistan and Egypt) and three countries facing serious absorptive capacity constraints (Bangladesh Ethiopia and Vietnam)

-10shy

Lending Commitments and the Performance Factor

25 The process of fonnulating individual country lending programs in the context of CAS results in varying departures from the strictly perfonnance-based indicative allocation of IDA funds This demonstrates IDAs ability to respond flexibly to different needs and circumstance at the country level as described above Notwithstanding this flexibility country policy perfonnance is clearly the dominant factor throughout IDAs allocation and planning process As a result its actual lending commitments remain finnly tied to the relative quality of individual borrower perfonnance

26 Figure 4 maps the relationship between country perfonnance and IDAs lending commitments As readily noted there are no borrowers appearing in the upper left quadrant and poorer perfonners receive relatively small allocations while better perfonners receive significantly more

Figure 4 Performance and Lending Commitments

Poor Very Gomiddotod 1995-97 Average Performance Rating

bull Africa bull Others

-11shy

27 The performancemiddot lending relationship is further illustrated in Figure 5 which reflects the econometric relationship between relative country performance and IDAs actual lending over the past three years (FY95-97) Different specifications for the performance-lending relationship confirm that they are significantly and robustly relatedlQ

Figure 5 Performance and Lending Commitments

Lending per capita pa FY95-97

Poor Very Gcod 1995-97 Average Performance Rating

~~~~~--------~

28 The relationship of IDAs lending and country performance is being progressively tightened That is IDA is directing proportionately larger amounts to those countries demonstrating good performance In the IDA 10 period (FY94-96) top performers received nearly 60 percent more in new commitments per capita than average performers The premium in the IDA9 period (FY91-93) was only 20 percent And as indicated in Figure 6 IDAs lending to borrowers in the top two performance quintiles rose steeply in FY97 pushing the average of the past three years to a full two-thirds ofIDAs total new lending

Syen The relationship for 62 borrowers active during the FY95-97 period is particularly strong when a binary variable is introduced to reflect constraints on four large blend borrowers (India China Pakistan and Egypt) and three countries facing serious absorptive capacity constraints (Bangladesh Ethiopia and Vietnam)

-11shy

27 The performancemiddot lending relationship is further illustrated in Figure 5 which reflects the econometric relationship between relative country performance and IDAs actual lending over the past three years (FY95-97) Different specifications for the performance-lending relationship confirm that they are significantly and robustly relatedlQ

Figure 5 Performance and Lending Commitments

Lending per capita pa FY95-97

Poor Very Gcod 1995-97 Average Performance Rating

~~~~~--------~

28 The relationship of IDAs lending and country performance is being progressively tightened That is IDA is directing proportionately larger amounts to those countries demonstrating good performance In the IDA 10 period (FY94-96) top performers received nearly 60 percent more in new commitments per capita than average performers The premium in the IDA9 period (FY91-93) was only 20 percent And as indicated in Figure 6 IDAs lending to borrowers in the top two performance quintiles rose steeply in FY97 pushing the average of the past three years to a full two-thirds ofIDAs total new lending

Syen The relationship for 62 borrowers active during the FY95-97 period is particularly strong when a binary variable is introduced to reflect constraints on four large blend borrowers (India China Pakistan and Egypt) and three countries facing serious absorptive capacity constraints (Bangladesh Ethiopia and Vietnam)

-12shy

Figure 6 IDA Lending and Country Performance al

FY93-95 FY94-96 FY95-97

No Per of No Per of No Per of

Performance of capita pa IDA of capita pa IDA of capita pa IDA

quintiles Countries ($) Resources Countries ($) Resources Countries ($) Resources

Top 11 109 32 11 127 31 11 124 35 Upper 11 82 22 11 91 22 11 98 32 Middle 11 71 31 11 94 27 11 61 12 Lower 10 58 12 11 68 18 11 53 19 Lowest 10 12 3 10 11 2 10 10 2

Total 53 66 100 54 79 100 54 70 100

aJ Based on data for IDA-only countries excluding those with population ofless

than one million includes ECA countries with no IBRD Lending

III Conclusions and Issues

29 This paper has described how IDA aims to ensure that its resources are well utilized It notes that

bull The present perfonnance assessment system is comprehensive and effective In

ranking borrowers in tenns of their relative policy and portfolio perfonnance

bull While the resource allocations that flow from this assessment are detennined flexibly so as to accommodate specific country needs~ in line with IDAs mandate the perfonnance - lending link is robust

30 Deputies views are sought on the following

bull Absolute ceilings on lending to certain large blend countries have resulted in very small levels of lending per capita even when perfonnance is well above average In India for example IDAs lending commitments are below US$l per capita per annum less than one-tenth that of an IDA-only country with comparable perfonnance and per capita income

bull Allocations are determined in per capita tenns Adjustments are made in the case of countries of extreme population size For very small countries allocations are adjusted upward to provide funding adequate to meet minimum project size requirements Allocations are adjusted downward to avoid under-utilization in the case highly populous IDA-only borrowers in much the same way that they are capped in the case of the larger blend borrowers

~13-

bull IDA eligibility is provided in exceptional cases where GNP per capita is above the operational out off but the country is not yet creditworthy for IBRD lending At present Bolivia and eight small island economies are in this category The rationale for each case is explained in the respective CAS documents

bull Determining an appropriate volume of lending in the case of reactivating borrowers and other turnaround situations requires careful case-by-case assessment of borrower needs and commitment While such borrowers have not been in a position to establish a performance track record IDAs management does provide funding where new policy initiatives would be likely to founder without external support At the same time performance in these cases is closely monitored

bull Finally there is the question of IDAs role in countries having poor policy performance These are essentially in two categories In countries where wellshytargeted interventions can be mounted effectively IDAs relatively small lending programs are accompanied by non-lending services aimed at supporting an eventual improvement in policy performance These are typically countries in intermittent internal conflict such as Cambodia Central African Republic Haiti and Tajikistan

By contrast IDA resources are not allocated where poor governance precludes all new lending as in Nigeria and Myanmar Inactive borrowers such as these together with countries in nonshy

bull accrual status--currently 8 countries in all with a combined population of about 275 millionshyreceive no IDA funds IDA is nonetheless actively supporting DR Congo and Liberia in formulating their reconstruction plans and is monitoring developments elsewhere among the inactive borrowers so that it can respond effectively should circumstances change The status of IDAs lending to countries which are currently inactive borrowers is shown in Figure 7 below

Figure 7 Inactive Borrowers

Last Portfolio Status Arrears (Sm) pound

1996 Credit of Amount (Sm) It

POQulation AQQroval Projects i DOD Undisb IDA IBRD Afghanistan 241 FY79 0 75 00 II Congo DR 453 FY92 0 1225 23 79 72 Congo Rep of 27 FY96 2 165 50 077 6

Liberia bull 28 FY85 0 102 29 18 241 Myanmar 459 FY88 0 727 00 Nigeria 1144 FY93 11 410 3649

Somalia bull 98 FY90 0 406 04 42

Sudan bull 273 FY92 0 1198 00 83 4

Total 2724 13 4307 3756 234 323

bull Countries in non-accrual status as ofend-December 1991 aJ As ofend-June 1991 QI As ofend-December 1991 cI Overdue more than 180 days

~13-

bull IDA eligibility is provided in exceptional cases where GNP per capita is above the operational out off but the country is not yet creditworthy for IBRD lending At present Bolivia and eight small island economies are in this category The rationale for each case is explained in the respective CAS documents

bull Determining an appropriate volume of lending in the case of reactivating borrowers and other turnaround situations requires careful case-by-case assessment of borrower needs and commitment While such borrowers have not been in a position to establish a performance track record IDAs management does provide funding where new policy initiatives would be likely to founder without external support At the same time performance in these cases is closely monitored

bull Finally there is the question of IDAs role in countries having poor policy performance These are essentially in two categories In countries where wellshytargeted interventions can be mounted effectively IDAs relatively small lending programs are accompanied by non-lending services aimed at supporting an eventual improvement in policy performance These are typically countries in intermittent internal conflict such as Cambodia Central African Republic Haiti and Tajikistan

By contrast IDA resources are not allocated where poor governance precludes all new lending as in Nigeria and Myanmar Inactive borrowers such as these together with countries in nonshy

bull accrual status--currently 8 countries in all with a combined population of about 275 millionshyreceive no IDA funds IDA is nonetheless actively supporting DR Congo and Liberia in formulating their reconstruction plans and is monitoring developments elsewhere among the inactive borrowers so that it can respond effectively should circumstances change The status of IDAs lending to countries which are currently inactive borrowers is shown in Figure 7 below

Figure 7 Inactive Borrowers

Last Portfolio Status Arrears (Sm) pound

1996 Credit of Amount (Sm) It

POQulation AQQroval Projects i DOD Undisb IDA IBRD Afghanistan 241 FY79 0 75 00 II Congo DR 453 FY92 0 1225 23 79 72 Congo Rep of 27 FY96 2 165 50 077 6

Liberia bull 28 FY85 0 102 29 18 241 Myanmar 459 FY88 0 727 00 Nigeria 1144 FY93 11 410 3649

Somalia bull 98 FY90 0 406 04 42

Sudan bull 273 FY92 0 1198 00 83 4

Total 2724 13 4307 3756 234 323

bull Countries in non-accrual status as ofend-December 1991 aJ As ofend-June 1991 QI As ofend-December 1991 cI Overdue more than 180 days