Asset Liability Management Framework Consultation on 7 th

Asset Liability Management Framework Consultation on 7 th Replenishment – 2 nd Session Rome, 21 -22 April 2005 enabling the rural poor to overcome poverty

Recommendation from Consultation on Replenishment 6 th 2 Consultation on 6 th Replenishment Review of Investment Policy in 2003: • Security of Investments • Periodic Reporting to Executive Board • Asset Liability Management (ALM) enabling the rural poor to overcome poverty ALM Review December 2003: Endorsed by Executive Board 4 Action Points June 2004: Executive Board Informal Seminar on Implementation Status

Asset Liability Management (ALM): § The ongoing process of formulating, enabling the rural poor to overcome poverty implementing, monitoring and revising strategies on assets and liabilities to achieve an organization’s financial objectives, given the organization’s risk tolerances and other constraints Goal of IFAD ALM: § Optimize the use of resources by maximising loan and grant approvals while minimising financial risks 3

4 Implementation of ALM Framework: 4 Action Points Action 1: ALM section created in Treasury Focal point for IFAD’s ALM functionality Expanded financial model to align it to ALM framework Action 2: Reduced currency risk Elimination of unhedged currency exposures enabling the Action 3: Reduced market risk rural Liquidation of remaining equities portfolio poor An allocation to Held-to-Maturity investments to overcome Action 4: Definition of committable resources poverty Proposal for 7 th Replenishment discussions

Financial Resource Management and the Definition of Committable Resources Current practice: enabling the rural poor to overcome poverty § Full upfront financial backing: Committable resources include cash, investments and promissory notes § Advance commitment authority (ACA): Maximum 3 years of loan reflows (6 th Replenishment resolution) 5

Financial Resource Management and the Definition of Committable Resources (cont’d) 6 Proposed ALM definition of committable resources: § Include contributions receivables and portion of loan receivables (both net of allowances) Advantages: § Increases new loan and grant approvals liquidity to meet disbursement requirements enabling § Calibrates (loans, grants, administrative expenditures) the rural § Uses earlier Members’ contributions more efficiently (contributions receivables but also loan repayments) poor to § Benefits from 28 years track records (only 2. 7% of loans require an allowance) overcome assets from investment portfolio to loans poverty § Reallocates outstanding

Financial Resource Management and the Definition of Committable Resources (cont’d) BALANCE SHEET COMMITTABLE RESOURCES Current Definition Proposed Definition Cash & investments 2 722 Promissory notes (net) 268 Contrib. receivables (net) Other receivables 154 Loans outstanding (net) TOTAL ASSETS 3 144 2 722 268 258 154 919 4 321 31 December 2004 enabling the rural poor to overcome poverty Cash & investments 2 722 Promissory notes (net) 270 Contrib. receivables (net) 258 Other receivables 154 Loans outstanding (net) 3 799 TOTAL ASSETS 7 203 7 Less. Payables & liabilities 264 Undisbursed grants 36 Contributions 4 668 Fully committed retained earnings 2 140 General Reserve 95 TOTAL LIABILITIES, CONTRIBUTIONS, RETAINED EARNINGS 7 203 Payables, liabilities and PDFF 268 General Reserve Undisbursed loans and grants NET RESOURCES ACA approved by EB ACA ceiling Unused ACA 95 2 918 (137) 137 653 516 268 95 2 918 1 040 n. a.

8 Comparison of IFAD with other IFI’s IFAD generally has a more conservative approach than other IFIs IFAD IDA FSO As. DF Af. DF FSO: No IADB: Yes; makes FSO investment decisions Under discussion Yes Yes but excl. receivables against IOCs Yes 85% principal ALM Framework Status enabling the rural poor to overcome poverty Yes (since 2004) Yes Included in Committable Resources a. Contributions Yes but excl. Yes receivables against IOCs b. Loan reflows ACA (3 yrs 95% principal Unlimited principal and (interest at subject to interest) other conditions ) liquidity subject to policy liquidity policy (interest at other conditions) subject to liquidity policy c. Invest. income Yes Yes Yes d. Transfers from Bank n. a. Yes Yes

9 Scenario for 7 th Replenishment Comparing the proposed ALM definition versus current definition of committable resources: enabling the rural poor to overcome poverty § Achievable annual loan and grant approvals § Liquidity § Balance Sheet - composition of assets Assuming: - 10% annual growth in loan and grant approvals in 7 th Repl. - 7 th Repl. of USD 800 million - ALM definition is limited to 5 yrs of net future loan reflows

10 Scenario for 7 th Replenishment (cont’d) § Achievable annual loan and grant approvals: Current definition: 10% annual growth in approvals in 7 th Repl. Approvals remaining during 8 th Repl. at the end level of 7 th Repl. with an 8 th Repl. of USD 1. 1 billion (or requiring an 8 th Repl. of USD 1. 65 billion to maintain 10% growth) ALM definition: poverty Achievable Annual Loan and Grant Approvals USD million enabling the rural poor to overcome 10% annual growth sustained in 7 th and 8 th Repl. with an 8 th Repl. of USD 1. 1 billion 1 100 1 000 900 800 700 600 500 400 2005 Current Annual Approvals 2006 2007 2008 7 th Repl. ALM definition 2009 2010 2011 8 th Repl. Current definition 2012

11 Scenario for 7 th Replenishment (cont’d) § Liquidity – based on achievable loan and grant approvals: Current definition: ample liquidity ALM definition: lower but sustainable liquidity Liquidity enabling the rural poor to overcome poverty USD million 2 800 (Total investment portfolio) Current Liquidity Level 2 600 2 400 2 200 2 000 1 800 2007 2008 2009 7 th Repl. ALM definition 2010 2011 8 th Repl. Current definition 2012

12 Scenario for 7 th Replenishment (cont’d) § Result of ALM definition of committable resources: ability to approve more loans and grants reallocation from investment portfolio to loans outstanding Balance Sheet - Composition of Assets (Based on achievable loan and grant approvals) 10 000 poverty 7 500 USD million enabling the rural poor to overcome 5 000 65% Current Definition 30% 66% ↑ 67% ALM Definition Current Definition ALM Definition 30% 28% 65% ↓ 27% 0 Current Definition ALM Definition End of 7 th Repl. Loans outstanding Current Definition Contributions incl. other receivables ALM Definition End of 8 th Repl. Investment portfolio

13 Asset Liability Management (ALM) Conclusions: To support increased demand for rural poverty reduction, IFAD could increase its loans and grants approvals by: Revisiting its definition of committable resources poverty Proceeding cautiously and gradually towards a more dynamic financial resource management (like other IFIs) within a sound ALM framework Approvals enabling the rural poor to overcome ? Current approach IFAD Inception in 1977 IFAD 28 Years in 2005 Dynamic approach

Asset Liability Management Framework 7 th Replenishment Consultations – 2 nd Session Rome, 21 -22 April 2005 enabling the rural poor to overcome poverty