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Debt Reduction Facility - Questions and Answers

(as of 04/06/2007)

How is the DRF financed?

The DRF is financed from transfers from IBRD net income and grant contributions from other donors. At its inception, the DRF was funded with a US$100 million transfer from IBRD’s FY89 net income. This was subsequently replenished by US$350 million from IBRD’s net income over various years.  In addition, bilateral donors including Canada, Finland, France, Germany, Japan, Norway, Netherlands, Sweden, Switzerland and the UK have contributed funds to the DRF for support of buy-back operations; the European Commission, France, Germany, Switzerland and the United States have made contributions directly to debtor governments but in support of DRF-sponsored operations; and the Inter-American Development Bank has made a soft loan contribution directly to a debtor government in support of a DRF-sponsored operation.

How does the DRF work?

The DRF provides support not only to execute debt buy-backs but also to prepare them. Financial and legal advisers are hired by eligible Governments in accordance with the Bank’s procurement guidelines using grants provided by the DRF. Such advisers assist with the debt reconciliation process to determine the eligible amount; make informal contacts with creditors to determine market expectations; agree to a buy-back strategy with the Government, with IDA (as trustee of the DRF) and with co-financiers; provide advice on legal issues associated with executing the buy-back and extinguishing the purchased claims; draft the offering memorandum to creditors and other legal documents; and act as closing agents for the buy-back.

Who is eligible?

Eligible countries must be IDA-only eligible and must meet certain additional conditions.  Under current guidelines, all highly indebted IDA-only countries are eligible for DRF support provided:  (i) there is satisfactory performance under a medium term adjustment program; and (ii) the government is implementing a satisfactory strategy for debt management that seeks comprehensively to address commercial debt, provides substantial relief from official bilateral creditors, and enhances the country’s growth and development prospects.

What type of debt is eligible?

Eligible debt must be commercial, external and sovereign.  More specifically, eligible debt includes medium- and long-term debts of the public sector to commercial, external creditors that are non-collateralized and un-guaranteed; and short-term debt of similar type that has been in arrears for some time and where the existence of such debt is likely to impair the client country’s access to short-term credit on reasonable terms. Debt reduction has been largely through cash buy-backs at significant discounts.




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