Amendment to the Poverty Reduction and Growth Trust Instrument and Floor for the Six-Month Derived SDR Interest Rate

1. …

2. …

3. The Executive Board endorses staff’s understanding set out in SM/16/259 regarding the implications of a negative six month derived SDR interest rate on outstanding claims under PRGT borrowing agreements subject to this rate. (SM/16/259, 09/13/16)

Decision No. 16051-(16/86),

September 20, 2016

ATTACHMENT

Zero Percent Floor on Six-Month Derived SDR Interest Rate on Borrowed Resources for the PRGT¹

10. The six-months derived SDR interest rate formula, which is used in currency borrowing agreements for the PRGT, could result in a negative rate. Outstanding claims under loan and note purchase agreements to the PRGT are either remunerated at the official SDR rate in the case of agreements that, as a rule, provide for drawings in SDR, or at the six-month derived SDR rate, in the case of agreements that, as a rule, provide for drawings in currency (currency agreements). The six-month derived SDR interest rate is currently based on: (1) the U.S. treasury bill rate, (2) the Japanese treasury bill rate, (3) the Euribor, and (4) the Libor (all at six months maturity).² The percentage weight of each interest rate instrument in the calculation of the six-month derived SDR interest rate is based on the corresponding weight of each relevant currency in the valuation of the SDR. While the Executive Board adopted a floor of 0.05 percent or five basis points for the official SDR interest rate on October 24, 2014,³ there is no explicit floor on the six-month derived SDR interest rate. During the current mobilization round, staff has received questions from lenders using currency agreements on what would happen if the interest formula resulted in a negative rate during the low-interest rate environment.

11. In the view of staff, the current PRGT borrowing agreements and the PRGT Instrument provide no basis for charging PRGT lenders a negative rate and a zero percent interest rate floor would automatically be applied in the event the six-month derived SDR rate turned negative. While the interest rate formula for the six-month derived SDR rate could result in a negative rate, neither the PRGT borrowing agreements nor the PRGT Instrument contemplate that charges as a result of a negative interest rate be paid by creditors. In particular, the PRGT Instrument does not include any mechanism for interest payments by PRGT lenders. Furthermore, neither the PRGT Instrument nor the individual agreements require a minimum interest payment by the PRGT. Rather, the PRGT Instrument permits a zero percent interest rate on PRGT loans and has no requirement that remuneration be paid on PRGT borrowing. In light of the foregoing, staff is of the view that a zero percent interest rate floor should be applied to outstanding claims under PRGT loan and note purchase agreements in the event that the six-month derived SDR interest rate formula resulted in a negative rate. The Executive Board is asked to endorse this understanding in the proposed decision to this paper. Upon such endorsement, staff would inform all PRGT creditors using currency agreements of this approach, and new PRGT currency agreements would include a clause clarifying the zero percent floor in case the six-month derived SDR interest rate formula produces a negative rate.

¹ Ed. Note: Reproduced from SM/16/259, 09/13/16, pp. 7–8.

² Effective October 1, 2016, the six-month Chinese Treasury bill rate will be added to the six-month derived SDR interest rate and the Euribor will be replaced with the six-month Euro-denominated euro government bond yield for bonds rated AA and above, as published by the European Central Bank.

³ Ed. Note: See Decision No. 15676-(14/94), adopted October 24, 2014.