Annex I. Assessments of Countries that Meet the Income or Market Access Criteria for Graduation
Armenia‘s GNI per capita reached US$3,360 in 2011, more than 40 percent above its graduation threshold (US$2,390). Income has been consistently above the IDA operational cutoff since 2004 and has not been on a declining trend for at least the last five years. Armenia has not established durable and sustainable market access.
Performance has strengthened in 2012. Growth has accelerated to over 6 percent, led by agriculture, agro-processing, mining, and services. Construction, a key driver of growth prior to the 2008–09 crisis, is stabilizing. Credit has continued to expand at a healthy pace, and the financial sector remains well capitalized. There have been no significant spillovers from the euro area crisis.
The impact of the 2008–09 global crisis was severe, with a substantial fall in GDP, sharply higher debt ratios, and an elevated poverty incidence. Following a countercyclical response, the authorities are now implementing a fiscal adjustment path to stabilize debt, supported under the 2010–13 Extended Fund Facility (EFF)/Extended Credit Facility (ECF) arrangement. As in 2011, consolidation will again be larger than expected in 2012, reflecting both spending restraint and revenue gains. External consolidation has also continued, supported by the fiscal adjustment, and reserves are adequate. Although the country faces vulnerabilities stemming from high dependence on remittances and a weak export base, the 2012 LIC-DSA maintained Armenia‘s low risk of debt distress rating.
In the view of the staff, vulnerabilities are being reduced, with fiscal and external consolidation efforts well on track. Per capita income is now so far above the graduation threshold that it seems very unlikely that, under a downside scenario, it would drop back below that threshold—i.e., there are no serious short-term vulnerabilities as defined under the framework.
Staff proposes the graduation of Armenia.
Per capita GNI reached US$2,860 in 2011, about 20 percent above its graduation threshold (US$2,390). Income has been above the IDA operational cutoff over the last eight years and has not been on a declining trend for at least the last five years.
Georgia‘s market access, measured by public sector issuance or guaranteeing of external bonds or by disbursements under public and publicly-guaranteed external commercial loans in international markets, amounted to more than 700 percent of its IMF quota cumulatively over 2007–2011, with access in four of these years—hence, the market access criterion was also met. A US$500 million Eurobond was issued in 2008 and a second one in 2011, and Georgia‘s sovereign credit rating has been stable for more than a year.
The economy has been growing strongly after a setback at the time of the 2008–09 global crisis. Real GDP growth is projected at 7 percent in 2012, the same as the 2011 outturn. Inflation is expected to moderate sharply to zero in 2012, from 8.5 percent in the previous year. The banking sector remains sound. Banks have sufficient levels of capital and liquidity while NPLs remain low.
Following a countercyclical response to the global crisis, fiscal consolidation is well on track, supported under the 2012–14 Stand-By Arrangement (SBA)/Standby Credit Facility (SCF). The deficit is projected to narrow to 3.6 percent of GDP in 2012 and 2.8 percent in 2013, with public debt falling to 32 percent of GDP in 2013. While the current account deficit remains high at 12½ percent of GDP in both 2011 and 2012, the bulk of its financing consists of foreign direct investment (FDI) and official inflows (though FDI has weakened recently, and part of the financing now relies on nonresident deposits). In the 2012 DSA, both external debt (around 80 percent of GDP including intercompany loans) and public debt are projected to decline over the medium term, and converge toward moderate levels even when subjected to standard shocks.
In the view of the staff, vulnerabilities are being contained, with fiscal consolidation efforts well on track. Per capita income is now so far above the graduation threshold that it seems very unlikely that, under a downside scenario, it would drop back below that threshold—i.e., there are no serious short-term vulnerabilities as defined under the framework.
Staff proposes the graduation of Georgia.
Ghana meets the market access criterion for graduation: market access as measured under the framework amounted to 354 percent of its IMF quota cumulatively over 2007–2011 (relative to a graduation threshold of 100 percent of quota). The minimum income level for graduation under the market access criterion is also met, with 2011 GNI per capita at US$1,410. Income has been on an increasing trend over the past five years.
GDP growth amounted to 14 percent in 2011, reflecting the start of oil production, and is estimated at 7 percent in 2012. The inflation rate (about 9 percent year on year) does not fully reflect underlying pressures, with dynamics in food prices and energy subsidies that keep prices temporarily below normal market levels. Non-food CPI inflation was 11.5 percent in January 2013, while a February fuel price increase of 20 percent is not yet reflected in the inflation data.
Serious short-term vulnerabilities persist and have recently increased in a pre-election environment. Significant fiscal policy slippages, including high public wage payments and energy subsidies, have pushed the cash deficit to an estimated 13.3 percent of non-oil GDP in 2012, up from 6.7 percent anticipated at the completion of the 2009–12 ECF-supported program. The cedi depreciated by about 20 percent in the first half of 2012 in an environment of loose monetary policy and election-related spending pressures. The slide was only halted by a significant monetary policy tightening at the cost of high (double-digit) real interest rates. The current account deficit has risen to an estimated 13 percent of GDP, with Ghana‘s economy remaining vulnerable to a protracted slowdown in external demand, a weakening of terms of trade, and a reversal of portfolio inflows. Official reserves of less than three months of imports are insufficient to provide a robust buffer against shocks. The financial sector remains underdeveloped, with many firms and individuals lacking access to financial markets. Non-performing loans, while declining, are still at 13 percent of total loans in 2012.
The most recent LIC-DSA confirmed Ghana‘s moderate risk of debt distress. The external debt stock has risen substantially since the Multilateral Debt Relief Initiative (MDRI) debt relief in 2005 to around 22 percent of GDP at end-2012. The large 2012 deficit was primarily financed by domestic debt, with net domestic financing exceeding an estimated 10 percent of non-oil GDP in 2012. As a result, domestic debt—which has more than doubled in percent of non-oil GDP since 2005—has continued to increase to about 28 percent of GDP at end-2012.
In the view of the staff, Ghana‘s market access is not sufficiently assured to qualify the country for graduation from PRGT eligibility given its serious short-term vulnerabilities, which, until they are addressed, may put at risk the country‘s ability to maintain market access.
Staff proposes maintaining Ghana’s PRGT eligibility given the presence of serious short-term vulnerabilities, with the expectation that it will be reassessed at the time of the next PRGT-eligibility review.
Per capita GNI reached US$7,220 in 2011, which is just over six times the IDA operational cutoff (US$7,170), and it has not been on a declining trend over the last five years.
Grenada was severely impacted by the global financial crisis. Following two years of contraction in 2009–10, a fragile recovery seems to be underway. Real GDP growth is projected at 1.5 percent in 2012 following a 1 percent expansion in 2011, with the recovery driven mainly by agriculture and tourism. Inflation is projected at about 3 percent in 2012, as in 2011.
The fiscal balance deteriorated significantly in 2011, reflecting expansionary fiscal policies. The authorities extended temporary tax breaks for the business sector, resulting in significant revenue shortfalls. Expenditures were also higher, reflecting acceleration of domestically financed capital projects as well as new schemes to provide temporary jobs to the unemployed. As a result, public and publicly-guaranteed debt increased to 103 percent of GDP by end-2011. Since mid-2011, no review has been completed under the three-year ECF arrangement approved in April 2010.
The economy remains vulnerable across several dimensions. The 2012 DSA concluded that the risk of debt distress remains high, and any significant shocks or fiscal slippages could put debt on an unsustainable path. Additional risks arise from the increase in debt service payments projected in the next several years. The current account deficit remains high, at 25 percent of GDP in 2011, raising concerns about its medium-term sustainability. The financial sector also remains vulnerable, with rising non-performing loans, and declining profitability. Region-wide financial sector issues (the insolvency of the two CL Financial Group-related insurance companies, British American Insurance Company Limited (BAICO) and Colonial Life Insurance Company (CLICO)) could add pressures to the already high public debt burden.
Grenada‘s short-term vulnerabilities remain significant, especially given very high public debt.
Staff proposes maintaining Grenada’s PRGT eligibility given the presence of serious short-term vulnerabilities, with the expectation that it will be reassessed at the time of the next PRGT-eligibility review.
Maldives‘ GNI per capita reached US$6,530 in 2011, more than five times the IDA operational cutoff, and it has been on an increasing trend over the past five years. Market access, measured by public sector issuance or guaranteeing of external bonds or by disbursements under public and publicly-guaranteed external commercial loans in international markets, amounted to more than 900 percent of its IMF quota cumulatively over 2007–2011, with access in at least three of these years—hence, Maldives met both the income and the market access criteria.
However, the ‘vulnerabilities’ criterion is not met. Maldives faces chronic fiscal and external imbalances. A Fund-supported program (under SBA and Exogenous Shock Facility (ESF) arrangements) approved in December 2009 aimed to address these imbalances but quickly went off track owing to significant fiscal slippages. The fiscal deficit is estimated to be around 13½ percent in 2012, with public debt reaching 80 percent of GDP in 2012.
After growing by about 7 percent in 2010 and 2011, the economy is projected to slow substantially to 3½ percent in 2012, and to recover only slowly thereafter. The current account deficit is projected to widen from 20 percent of GDP in 2011 to 29 percent in 2012, driven by lower tourism receipts and higher public imports. While the currency peg has historically kept inflation in check, a 20 percent devaluation adopted in April 2011 in response to building pressures on international reserves quickly passed through to domestic prices, causing inflation to surge to 17 percent by the end of the year. Inflation is projected to remain elevated at 8 percent by the end of 2012 due to high commodity prices and tax increases.
The banking system as a whole remains sound, but vulnerabilities remain. Financial supervision has been weak, particularly with respect to the main state bank. Many commercial banks are also not in compliance with prudential regulations.
The most recent DSA shows that Maldives‘ risk of external debt distress is high. Under the baseline scenario, reflecting current policies, the public external debt path is projected to worsen through 2030. The debt path is clearly not sustainable, and additional fiscal consolidation measures are needed in the near term.
The Maldives‘ short-term vulnerabilities clearly remain significant and neither the country‘s high income nor its market access is sufficient to qualify it for graduation from PRGT eligibility.
Staff proposes maintaining the Maldives’ PRGT eligibility given the presence of serious short-term vulnerabilities, with the expectation that it will be reassessed at the time of the next PRGT-eligibility review.
Vietnam‘s market access, measured by public and publicly-guaranteed external bonds and commercial loans inflows, amounted to more than 500 percent of the country‘s IMF quota cumulatively over 2007-2011, well above the graduation threshold of 100 percent of quota. However, credit agencies have just recently downgraded the country‘s credit rating for the first time since 2010, citing a stuttering economy and mounting contingent liabilities.
Vietnam‘s GNI per capita reached US$1,260 in 2011, which is above the minimum income threshold that applies to the market access criterion. Income has been on an increasing trend over the past five years.
Vietnam weathered the global crisis well, but the country has seen large swings in macroeconomic conditions in recent years, mainly due to policy reversals. Real GDP growth is projected to decline to 5 percent in both 2012 and 2013. Inflation has been volatile in recent years, and is projected at single digit levels by end-2012 after peaking above 20 percent in mid-2011. International reserves have recently recovered somewhat, but they remain low at around two months of imports by end-2012 (up from 1.4 months of imports at end-2010 and end-2011).
The fiscal deficit is projected to widen in 2012 from 3 percent of GDP in 2011 to 5½ percent in 2012, resulting in an increase in public debt to 53 percent of GDP by end-2012. Urgently needed structural reforms in the banking and state-owned enterprise sectors remain largely unaddressed. Following a credit boom and strong lending to state-owned enterprises in 2009–10, the banking system is characterized by poor asset quality, under-provisioning, low profitability, and foreign exchange risks. Weaknesses in the banking sector continue to undermine stability and constrain growth.
The 2012 LIC-DSA confirmed a low risk of external debt distress, but also concluded that the outlook for public debt calls for continued fiscal consolidation. Risks to debt sustainability arise from potential contingent liabilities stemming from both the financial sector and state-owned enterprises.
Vietnam‘s market access is not sufficient to qualify the country for graduation from PRGT eligibility given the country‘s serious short-term vulnerabilities, as well as signs of weakening prospects for future access of international financial markets.
Staff proposes maintaining Vietnam’s PRGT eligibility given the presence of serious short-term vulnerabilities, with the expectation that it will be reassessed at the time of the next PRGT-eligibility review.
Annex II. Countries that Meet the Criteria for Entry
The Republic of the Marshall Islands (Marshall Islands for short) is currently not PRGT-eligible, but it has IDA-only status under the small island economy exception. At US$3,910, GNI per capita is just over three times the IDA operational cutoff. The country has a population of around 50,000 people and does not have market access (see Table 2).
Marshall Islands remain highly dependent on foreign aid, mainly from the United States. Grants under the Compact Agreement with the United States are steadily declining and are set to expire in FY2023. The buildup in assets in the Compact Trust Fund set up to compensate for the expected loss in grants has been slow. While the economy experienced an impressive recovery after the recession in 2009, the rebound proved short lived, and near-term growth prospects are weak. Marshall Islands are also highly vulnerable to commodity price shocks, with food and fuel products constituting almost half of the CPI basket. Continued outward migration and climate change also pose long-term risks to growth. External debt amounted to 64 percent of GDP by end-September 2011, but most of it is on concessional terms and it is projected to decline. A formal DSA has not been conducted for Marshall Islands in recent years.
Staff proposes the immediate entry of Marshall Islands.
The Federated States of Micronesia (Micronesia hereafter) is currently not PRGT-eligible but it has IDA-only status under the small island economy exception. Its per capita GNI of US$2,900 is about 2½ times the IDA operational cutoff. The country has a population of around 100,000 people and does not have market access (see Table 2).
Micronesia remains highly dependent on foreign aid, mainly from the United States. Growth prospects are weak, owing to a lack of economic diversification and a sluggish private sector. With imports around 55 percent of GDP, the country remains highly vulnerable to commodity price fluctuations. Continued outward migration and climate change also pose long-term risks to the outlook. Grants under the Compact of Free Association Agreement with the United States are steadily declining and set to expire in FY2023, threatening long-term fiscal sustainability. Public debt is all external, much of it owed to the Asian Development Bank (ADB) on concessional terms. Gross public debt in FY2011 was at a manageable level of 28 percent of GDP. A formal DSA has not been conducted for Micronesia in recent years.
Staff proposes the immediate entry of Micronesia.
Tuvalu joined the IMF and the World Bank in June 2010—it is the smallest member of the Bretton Woods institutions, with a population of only 11,000 people. GNI per capita amounted to US$5,010 in 2011, or just over four times the IDA operational cutoff. In November 2011 Tuvalu was granted IDA-only status under the small island economies exception, in light of its limited diversification, vulnerability to disasters, and isolation. The country does not have market access (see Table 2).
The potential for economic diversification is minimal, and nearly all goods are imported, including petroleum products and food. Tuvalu is thus extremely vulnerable to international price fluctuations. With its highest elevation only 15 feet above sea level, it is also highly vulnerable to the effects of climate change and sea level rise. Real GDP growth has been slow since the global financial crisis. After two consecutive years of decline, the economy recovered in 2011, growing 1.1 percent. In the near term, real GDP growth is projected to remain around 1 percent.
The recent and first LIC-DSA for Tuvalu found a high risk of debt distress. External debt and debt service ratios breached many indicative thresholds under the baseline scenario, and stress tests confirmed that the debt burden is highly vulnerable to deteriorating macroeconomic conditions. The DSA also concluded that greater access to grants would be essential for Tuvalu to meet its development needs. Public and publicly-guaranteed debt stood at 50 percent of GDP in 2011, and it is projected to remain above 40 percent of GDP in the near term.
Staff proposes the immediate entry of Tuvalu.
Six members (Armenia, Dominica, Georgia, Grenada, Maldives, and St. Vincent and the Grenadines) met the income criteria in both the 2010 and the 2012 eligibility review but still could not graduate owing to serious short-term vulnerabilities.
So as to avoid unwarranted discontinuities in the application of the policy, paragraph 5 of the proposed decision A provides that these ratios of market access will be automatically reduced, pari passu, once a member‘s quota increase under the Fourteenth General Review becomes effective. In these circumstances, the level of market access required for graduation from PRGT-eligibility would be reduced to the equivalent of at least 50 percent of quota, and the level of market access for entry onto the PRGT-eligibility list would be reduced to less than 25 percent of quota. For members that do not increase their quotas under the Fourteenth General Review the applicable market access thresholds for graduation and for entry would remain at the equivalent of at least 100 percent of quota and of less than 50 percent of quota, respectively.
Detailed assessments of countries that meet the graduation criteria are provided in Annex I, while Annex II provides background information on the new entrants.
A similar deferral of the effectiveness of a graduation decision would apply with respect to the Policy Support Instrument (PSI).