ADB hikes borrowing costs for DMCs

MANILA,Philippines — The Asian Development Bank (ADB) will raise the cost of borrowing for developing member countries (DMCs) with higher incomes to boost its technical assistance fund.

In a statement, the Manila-based multilateral bank said it approved Tuesday a new pricing structure effective on Jan. 1, 2021, for DMCs borrowing only market-based loans.

Recipients of ADB funds are divided into three groups according to their per capita income levels and creditworthiness.

Group A countries are eligible for Asian Development Fund (ADF) grants and concessional loans, Group B countries have access to both concessional and market-based loans, and Group C countries have access only to market-based loans.

The financing terms offered to Group A and B countries are already diversified with a combination of grants, concessional loans, and market-based loans.

Group C countries – where the Philippines belongs – have a wider spread of per capita incomes, but are all offered the same financing terms.

In the new pricing framework, Group C countries will be divided into several sub-groups according to their gross national income (GNI) – lower middle-income, upper middle-income, and high-income.

The sub-groups will be created as such: Group C1 countries are lower middle countries (<$3,995), Group C2 with income between $3,996–$6,975, Group C3 countries with income of $6,976–$12,375 and C4 countries are high-income countries (> $12,375).

Higher income sub-groups will pay higher maturity premiums for longer term loans. For instance, countries with GNI per capita of $6,976 to $12,375 (in 2018 prices) will pay up to 30 basis points additional maturity premium depending on the loan tenor.

The Philippines has a GNI per capita of $3,830 as of 2018, classifying it as a lower middle income economy.

ADB said the new pricing framework would provide more favorable terms to more vulnerable countries such as small island developing states and countries transitioning from Group B to Group C.

The additional income from the new pricing will be used to supplement existing Technical Assistance Special Funds to support policy advice, institution building, and knowledge sharing in ADB’s DMCs. The pricing framework will also help build reserves for expanding ADB’s lending capacity in the long term.

“The current flat pricing structure offered to our recipient countries borrowing only market-based loans does not reflect the high level of diversity among these countries in their income levels, capacities to mobilize domestic resources, and access to capital markets,” said ADB president Takehiko Nakao.

“The new structure will enable us to continue engaging with countries at a more advanced stage of development on terms that remain fair and competitive with other multilateral development banks, and contribute to ADB’s long-term sustainability.”

ADB said this reform reflects a regional landscape that has changed over the past 50 years as the situation in Asia and the Pacific region is now different compared to 1966 when ADB was established.

Most ADB recipient countries are currently middle-income countries with relatively higher income and strong financial capacity. However, they still need ADB’s support to tackle pockets of poverty, strengthen institutions, and address climate change and other areas with externalities.

ADB’s Strategy 2030, approved in July 2018, set out the direction for ADB to apply differentiated approaches to various groups of countries.

The diversification of financing terms is part of the comprehensive institutional reforms that started with the merging of ADF lending operations with the ordinary capital resources balance sheet at the start of 2017, which significantly increased lending for all ADB recipient countries.