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					            Asset Liability Management Framework

            Consultation on 7th Replenishment – 2nd Session
            Rome, 21-22 April 2005




 enabling
the
 rural
     poor
       to
overcome

 poverty
                                                                        2
            Recommendation from Consultation on             6th
            Replenishment

                      Consultation on 6th Replenishment



                     Review of Investment Policy in 2003:
                               •Security of Investments
                        •Periodic Reporting to Executive Board
                          •Asset Liability Management (ALM)
 enabling
the
 rural                             ALM Review
                     December 2003: Endorsed by Executive Board
     poor
       to
overcome                                           June 2004:
              4 Action Points            Executive Board Informal Seminar
                                           on Implementation Status
 poverty
                                                                 3

            Asset Liability Management (ALM)


              Asset Liability Management (ALM):
                    The ongoing process of formulating,
                     implementing, monitoring and revising
                     strategies on assets and liabilities to
                     achieve an organization’s financial
                     objectives, given the organization’s risk
 enabling            tolerances and other constraints
the
 rural
     poor     Goal of IFAD ALM:
       to           Optimize the use of resources by
                     maximising loan and grant approvals while
overcome
                     minimising financial risks
 poverty
                                                                    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
                  Proposal for 7th Replenishment discussions
  poverty
                                                         5

            Financial Resource Management and
            the Definition of Committable Resources

              Current practice:

                 Full upfront financial backing:
                  Committable resources include cash,
                  investments and promissory notes

 enabling        Advance commitment authority (ACA):
the               Maximum 3 years of loan reflows (6th
 rural            Replenishment resolution)
     poor
       to
overcome

 poverty
                                                                         6

            Financial Resource Management and
            the Definition of Committable Resources (cont’d)

             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

 enabling  Calibrates liquidity to meet disbursement requirements
            (loans, grants, administrative expenditures)
the
 rural     Uses earlier Members’ contributions more efficiently
     poor   (contributions receivables but also loan repayments)
       to  Benefits from 28 years track records (only 2.7% of loans
overcome    require an allowance)

  poverty       Reallocates assets from investment portfolio to loans
                 outstanding
                                                                                         7

            Financial Resource Management and
            the Definition of Committable Resources (cont’d)

            BALANCE SHEET                             COMMITTABLE RESOURCES
                                                                       Current     Proposed
            31 December 2004                                         Definition    Definition

            Cash & investments        2 722   Cash & investments        2 722          2 722
            Promissory notes (net)      270   Promissory notes (net)      268            268
            Contrib. receivables (net) 258    Contrib.receivables (net)     -            258
            Other receivables           154   Other receivables           154            154
            Loans outstanding (net) 3 799     Loans outstanding (net)       -            919
 enabling   TOTAL ASSETS              7 203   TOTAL ASSETS              3 144          4 321
the
                                              Less-
 rural      Payables & liabilities   264      Payables, liabilities and PDFF 268         268
     poor   Undisbursed grants        36      General Reserve                95           95
            Contributions          4 668      Undisbursed loans
       to   Fully committed                      and grants               2 918        2 918
                retained earnings  2 140      NET RESOURCES                (137)       1 040
overcome    General Reserve            95
            TOTAL LIABILITIES,                ACA approved by EB            137          n.a.
 poverty    CONTRIBUTIONS,                    ACA ceiling                   653          n.a.
            RETAINED EARNINGS 7 203           Unused ACA                    516          n.a.
                                                                                                           8


               Comparison of IFAD with other IFI’s

            IFAD generally has a more conservative approach than other IFIs

                                  IFAD             IDA           FSO            AsDF              AfDF
            ALM Framework
            Status                 Yes             Yes          FSO: No         Under                Yes
                               (since 2004)                   IADB: Yes;      discussion
                                                              makes FSO
                                                              investment
                                                               decisions

 enabling   Included in Committable Resources
the         a. Contributions Yes but excl.
                                receivables
                                                   Yes            Yes        Yes but excl.
                                                                              receivables
                                                                                                     Yes

 rural                         against IOCs                                  against IOCs

     poor   b. Loan reflows     ACA (3 yrs     95% principal   Unlimited     85% principal      85% principal
                               principal and     (interest at  subject to   (interest at other (interest at other
       to                         interest)  other conditions) liquidity       conditions)        conditions)
                                                 subject to      policy        subject to         subject to
overcome                                      liquidity policy              liquidity policy liquidity policy

            c. Invest.income       Yes             Yes            Yes             Yes                Yes
 poverty
            d. Transfers           n.a.            Yes            Yes             Yes                Yes
               from Bank
                                                                                9


            Scenario for 7th Replenishment

              Comparing the proposed ALM definition versus current
               definition of committable resources:

                  Achievable annual loan and grant approvals

                  Liquidity
 enabling
the               Balance Sheet - composition of assets
 rural
     poor     Assuming:
              - 10% annual growth in loan and grant approvals in 7th Repl.
       to     - 7th Repl. of USD 800 million
overcome      - ALM definition is limited to 5 yrs of net future loan reflows


 poverty
                                                                                                      10


              Scenario for 7th Replenishment (cont’d)

             Achievable annual loan and grant approvals:
            Current definition:
                   10% annual growth in approvals in 7th Repl.
                   Approvals remaining during 8th Repl. at the end level of 7th Repl. with
                   an 8th Repl. of USD 1.1 billion (or requiring an 8th Repl. of USD 1.65 billion
                   to maintain 10% growth)
            ALM definition:
                   10% annual growth sustained in 7th and 8th Repl. with an 8th Repl.
                   of USD 1.1 billion
 enabling
                                  Achievable Annual Loan and Grant Approvals
the                         1 100
 rural                      1 000
              USD million




                             900
     poor                    800
       to                    700
                             600
overcome                     500
                                                                           Current Annual Approvals

                             400
                                2005   2006   2007     2008      2009    2010     2011     2012
 poverty
                                                     7th Repl.                8th Repl.
                                              ALM definition      Current definition
                                                                                                             11


              Scenario for 7th Replenishment (cont’d)


                   Liquidity – based on achievable loan and grant approvals:
                          Current definition:   ample liquidity
                          ALM definition:     lower but sustainable liquidity

                                                    Liquidity
                                               (Total investment portfolio)
                          2 800
                                                                                Current Liquidity Level
            USD million




 enabling                 2 600

the                       2 400
 rural                    2 200
     poor
                          2 000
       to
                          1 800
overcome                     2007       2008            2009         2010             2011            2012

                                      7th Repl.                                   8th Repl.
 poverty
                                               ALM definition                 Current definition
                                                                                                                     12


              Scenario for 7th 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


                          7 500
 enabling
            USD million




the                                                                                      66%             ↑ 67%
 rural                    5 000       65%
                                    Current
                                                         65%
                                                        ALM                            Current            ALM
                                   Definition         Definition                      Definition        Definition
     poor
       to                              30%               30%                             28%              ↓ 27%
overcome                     0
                                    Current             ALM                            Current              ALM
                                   Definition         Definition                      Definition          Definition
 poverty
                                       End of 7th Repl.                                        End of 8th Repl.
                           Loans outstanding           Contributions incl. other receivables       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
 enabling      Proceeding cautiously and gradually towards a more
the            dynamic financial resource management (like other IFIs)
 rural         within a sound ALM framework
     poor
       to
overcome                                                        ?     Dynamic
                    Approvals




                                                                      approach

                                   Current
 poverty                          approach

              IFAD Inception in 1977          IFAD 28 Years in 2005
            Asset Liability Management Framework

            7th Replenishment Consultations – 2nd Session
            Rome, 21-22 April 2005




 enabling
the
 rural
     poor
       to
overcome

 poverty

				
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