The Non-Concessional Borrowing Policy (NCBP) was adopted by IDA’s Executive Directors in July 2006 and applies to (pdf) countries eligible for IDA grants and to IDA-only recipients of assistance under the Multilateral Debt Relief Initiative (MDRI). Debt relief under the Highly-Indebted Poor Country (HIPC) initiative and the MDRI has increased beneficiary countries’ borrowing space. While this development is positive, it raises concerns regarding potential mismanagement of this new borrowing space that could result in rapid re-accumulation of external debt as well as increased demand for IDA grants, which are allocated on the basis of countries risk of debt distress.
The NCBP is a two-pronged policy involving creditor outreach as well as measures aimed at borrowers to reduce the risk of overborrowing. Through creditor outreach the NCBP aims to encourage other creditors to incorporate debt sustainability considerations and the information provided by the Debt Sustainability Framework (DSF) into their lending decisions. The second prong, aimed at borrowers, includes capacity building efforts to help countries manage their debt and a renewed emphasis on improved adherence to reporting requirements. The second prong also involves IDA responses for cases in which the NCBP is breached, such as reductions in volumes, or adjustment of IDA lending terms.
A key building block of the NCBP is the establishment of debt limits for countries subject to the policy. The minimum grant element required under the NCBP of 35 percent or higher, should a higher minimum level be required under an existing IMF arrangement. However, the NCBP is not a blanket restriction on non-concessional borrowing. It includes a differentiated methodology for setting debt limits based on a country's macroeconomic and public financial management capacity and debt vulnerability. Eligibility to the different Non-Concessional Borrowing Options is updated each fiscal year.
Following the reform of the IMF's Debt Limits Policy (DLP) in 2014, adjustments to the implementation arrangement for the NCBP have been introduced to enhance flexibility and transparency and to harmonize with the DLP (see 2015 IDA NCBP Review and Update).