From: The President July 19,2019 Memorandum Subject: IBRD Lending Rates and Spreads Applicable on or after July 1, 2019 I. Introduction IBRD promotes poverty reduction and supports sustainable economic and institutional development of member countries by providing financing and related operational assistance through its three main financing instruments - Investment Project Financing, Development Policy Financing, and Program-for-Results. IBRD currently offers financing of these instruments through one loan product, the IBRD Flexible Loan (IFL), to eligible members.t' IFL is made available with a wide choice of financial terms that are tailored to the needs of the financing or the member country's overall debt management strategy. The standard financing terms of IFL can be categorized as (i) IFL Variable Spread. featuring variable spreads over a market reference rate ("Reference Rate"), and (ii) IFL Fixed Spread, featuring fixed spreads over the Reference Rate. The Reference Rate varies by currency and currently is 6-month LIBOR for USO, JPY and GBP and 6-month EURIBOR for EUR, subject to a replacement in certain circumstances, including the outcome of the current benchmark rate reform.3 IBRD provides the Executive Directors and Borrowers with regular updates of the lending rates and spreads applicable to its loan products as set out in the terms of each product. The rate updates are pursuant to the standard loan pricing as defined in the Bank Policy and Directive Financial Terms and Conditions of Bank Financing4• This note summarizes the lending rates and spreads applicable to IBRD loans with rate setting between July 1, 2019, and September 30, 2019. II. IBRD Flexible Loan Rates and Spreads IBRD differentiates its loan pricing based on national income and other factors of each Borrower (see Annex 2) through the maturity premium. 5 Borrowers are classified into four pricing groups, whose applicable maturity premium is differentiated by exemptions, discounts or surcharges specific to each 1 Aside from IFLs, there are a few historic currency pool-based products, which have been discontinued but require rate resetting in IBRD's portfolio. The only outstanding currency pool loans (CPL) with variable rate terms are the loans to Zimbabwe, which are currently in non-accrual status. There are also IFL and CPL loans whose rates are fixed for the life of the loan through conversion and hedging. 2 In addition, IBRD offers other financial products, including conversions and hedging products, guarantees, and disaster risk financing. 3 "Proposed Modifications to the IBRD and IDA General Conditions to add flexibility in reference rate replacement provisions," R2018-0235, October 18, 2018. 4 Policy "Financial Terms and Conditions of Bank Financing", effective July 1, 2019, and Directive "Financial Terms and Conditions of Bank Financing", effective July I, 2019. 5 "Implementation of IBRD Pricing Measures included in 2018 Capital Package," R2018-0128, May 31, 2018. 2 pricing group. The classification of the member countries by pricing group is updated annually and becomes effective on July I of each year (see Annex 2 for FY20 Country Groups for IBRD Financing). The maturity premium schedule applies uniformly to both IFL Variable Spread and IFL Fixed Spread terms and offers all borrowers the flexibility to choose a desired maturity at the differentiated pricing level." Tables I and 2 provide the details of the pricing group-specific maturity premium schedules. The details of rate structure and current pricing of IFLs are provided in sections A and B below. A. IFL Variable Spread The pricing principle of IFL Variable Spread is to pass through changes in IBRD's funding cost to Borrowers. The IFL Variable Spread consists of the following components: Lending Rate/FL variable Spread =TT+ afs +els+ mp spread where rr = Reference Rate, which varies by currency choice; afs = average funding spread relative to the Reference Rate (rr), which is calculated every January I, April 1, July 1 and October I, based on the actual average funding cost incurred during the preceding six-month period; els= contractual lending spread, approved by the Executive Directors and reviewed annually; and mp= maturity premium charged on loans based on average maturities, Borrower's income and other factors, approved by the Executive Directors and reviewed annually. Among these components, the contractual lending spread (els) and the maturity premium (mp) are determined at loan signing and remain constant over the life of the loan; the Reference Rate (rr) and the average funding spread (aft) are determined on each interest rate reset date and are applicable for the following six months. The aft component is recalculated and announced on a quarterly basis. 7 The calculation frequency of aft does not affect the schedule of loan interest rate resets which for most loans occur on repayment dates twice a year. 6 The current pricing strategy provide more flexibility compared to the income-based pricing which IBRD previously offered between 1975-2008, which limited the above-Graduation Discussion Income (GDI) countries' access to longer maturity terms. 7 Pursuant to the Memorandum to the Executive Directors on "Increasing the Frequency of Variable Spread Reset for IBRD IFLs" (R2017-034/1, March 8, 2017). Prior to March 2017, the recalculation of afs was done on a semi-annual basis. Increasing the reset frequency enhances the cost pass-through mechanism of afs. 3 Table 1 below summarizes the variable spreads currently available for new commitments as of July 1, 2019. 8 The variable spread effective between July 1, 2019 and September 30, 2019 decreased for all maturity buckets and pricing groups by one basis point relative to the last quarterly update on lending rates and spreads due to one basis point decrease of afs. These spreads will be used for the rate setting dates between July 1, 2019 and September 30, 2019. See Figure A 1-1 (Annex 1) for the historical spread analysis of IFL. Table I. IFL Variable Spread Applicable as of July I, 2019 (in basis points) Greater than Greater than Greater than Greater than Greater than 8 years and Average Maturity 8 and up to 10 and up to 12 and up to 15 and up to 18 and up to below 10 years 12 years 15 years 18 years 20 years Average Funding Spread -I -I -I -I -I -I Contractual Lending Spread 50 50 50 50 50 50 Maturity Premium (Group C)' 0 10 30 50 70 90 Adjustment Lo Maturity Premium Group A (Exemption) 0 0 -10 -20 -30 -40 Group 8 (Discount) 0 0 -5 -10 -15 -20 Group D (Surcharge) 5 5 10 15 20 25 Total Spread - Current Quarter2.3-' Group A 49 59 69 79 89 99 Group B 49 59 74 89 104 119 Group C 49 59 79 99 119 139 Group D 54 64 89 114 139 164 Total Spread - Prior Quarter+" Group A 50 60 70 80 90 100 Group B 50 60 75 90 105 120 Group C 50 60 80 100 120 140 Group D 55 65 90 115 140 165 Notes: I. The maturity premium and its associated adjustments are applicable to loans for which an Invitation to Negotiate was issued (i) on or after July I, 2018; or (ii) prior to July I, 2018, and which have been approved on or after October I, 2018. 2. The total spread is applicable to the loans meeting the criteria described under Note I. The total spread does not include the Single Borrower Limit (SBL) surcharge for SBL-eligible countries on their final USD2.5 billion of exposure to the !BRO. 3. See Table A 1-1 (Annex I) for the complete set of spreads applicable to all active variable spread loans effective July I, 2019. 4. The lending rate of a loan is determined based on the Reference Rate and the total spread effective on the rate setting date, subject to a floor of zero percent on the overall rate. See Figure A 1-1 (Annex I) for historical IFL spreads and Figure A 1-2 (Annex I) for historical IFL rates inclusive of Reference Rates and the total spread. 8 See Table Al-I (Annex I) for the complete listing of the variable spreads applicable to IFLs and VSLs for rate resetting dates between July I, 2019 and September 30, 2019. 4 B. IFL Fixed Spread The pricing principle of IFL Fixed Spread is to insulate Borrowers from changes in IBRD's funding cost in return for the payment of a market risk premium. The IFL Fixed Spread consists of the following components: Lending Rate/FL Fixed spread = rr + pf s +els+ mp+ mrp + bsa spread where rr = Reference Rate, which varies by currency choice; pfs = projected U.S. dollar (USD) funding spread to the Reference Rate (rr) over the life of the loan; els = contractual lending spread, approved by the Executive Directors and reviewed annually; mp= maturity premium charged on loans based on average maturities, Borrower's income and other factors, approved by the Executive Directors and reviewed annually; mrp = market risk premium reflecting funding and refinancing risks of providing loans with a fixed spread; and bsa = projected basis swap adjustment (spread) applied to non-USD loans (currently EUR, GBP and JPY) to adjust the projected USD funding spread for other currencies. IBRD's Management regularly reviews the technical components of the fixed spread-i.e., the projected funding spread (pfs), the market risk premium (mrp), and the basis swap adjustment (bsa)-to ensure that they reflect underlying market conditions. The fixed spread for a loan is determined at loan signing and remains constant over the life of the loan. The current level of the technical components has been in effect since December 5, 2018. 5 Table 2 below summarizes the fixed spreads available for new commitments of IFL Fixed Spread as of July 1, 2019. Table 2. IFL Fixed Spread Applicable as of July I, 2019 (for USO-denominated Loans) (in basis points) Greater than Greater than Greater than Greater than Greater than 8 years and Average Maturity 8 and up to 10 and up to 12 and up to 15 and up to 18 and up to below 10 years 12 years 15 years 18 years 20 years Projected USD Funding Spread 5 15 15 20 25 25 Market Risk Premium 10 10 10 IO 15 15 Contractual Lending Spread 50 50 50 50 50 50 Maturity Premium (Group C)' 0 10 30 50 70 90 Adjustment to Standard Maturity Premium: Group A Exemption 0 0 -IO -20 -30 -40 Group B Discount 0 0 -5 -IO -15 -20 Group D Surcharge 5 5 /0 15 20 25 Total Spread - Current Quarter+' Group A 65 85 95 110 130 140 Group B 65 85 100 120 145 160 Group C 65 85 105 130 160 180 Group D 70 90 115 145 180 205 Total Spread - Prior Quarter':' Group A 65 85 95 110 130 140 Group B 65 85 100 120 145 160 Group C 65 85 105 130 160 180 Group D 70 90 115 145 180 205 Notes: I. The maturity premium and its associated adjustments are applicable to loans for which an Invitation to Negotiate was issued (i) on or after July I, 2018; or ( ii) prior to July I, 2018, and which have been approved on or after October I, 2018. Group A pricing applies to the loans not meeting these criteria. 2. The total spread is applicable to USO-denominated loans signed on or after December 5, 2018. A basis swap adjustment of -0.15% is applicable to EUR-fixed spread, -0.35% is applicable to the JPY fixed spread, and -0.05% is applicable to GBP-fixed spread. The total spread does not include the SBL surcharge applicable for exposure beyond the SBL of IBRD. 3. The lending rate of a loan is determined based on the Reference Rate and the total spread effective on the rate setting date subject to a floor of zero on the overall rate. 4. The total prior spread applicable as of April I, 2019 to USO-denominated loans meeting the criteria described under Note I. 6 III. Use of IBRD Spreads for IDA18 Non-Concessional Financing In ID Al 8, the terms of ID A's non-concessional financing are aligned with the terms of IBRD IFLs. Accordingly, the above described IBRD IFL rates and spreads for the pricing group A are applicable to all IDA non-concessional financing.t'? IV. Notification to Borrowers IBRD will notify current Borrowers, as required, of the rates and spreads (both inclusive of waivers for eligible borrowers) applicable for the interest periods beginning on or after July 1, 2019. David Malpass World Bank Group President by Bernard Lauwers Acting Managing Director and WBG Chief Financial Officer 9 See "Implementation of ID A's Hybrid Financial Model," IDA/R2017-0077, March 23, 2017. 10 See Annex 2 of Bank Directive, "Financial Terms and Conditions of Bank Financing," effective July 1, 2019. 7 Annex 1 Figure Al-1. Historical Trend of IPL Spreads (a) Variable Spreads (b) Fixed Spreads by Average Maturity by Average Maturity bps 200 150 100 ;.,-' 50 0 ,"' ,"' ,~ ,~ ," ," " \-> \~ef " \'>' " \~ " \'> <' \'> " \'>' --upto8y --8-IOy --I0-12y --upto8y --8-IOy --I0-12y --12-15y --15-18y --18-20y --12-15y --15-18y --18-20y Notes: I. On March 23, 2017, IBRD's Executive Directors approved a change in the calculation frequency of the average funding spread component of the !FL Variable Spread from semi-annually to quarterly starting from April I, 2017. 2. On June 26, 2018, IBRD's Executive Directors approved the implementation of the pricing measures as part of the 2018 Capital Package. The maturity premium was increased for loans with average maturities longer than l O years but exemptions, discounts, or surcharges to the maturity premium would apply to eligible countries based on income and other factors. This change came into effect on July l, 2018. 3. Periodically, Management adjusts the technical component of the fixed spread over the Reference Rate to reflect the changes in the projected funding spread. The current level of the projected funding spread has been in effect since December 5, 2018. 4. The spreads after July l, 2018 represent the spreads applicable for loans to Group C countries, which are not eligible for Exemptions, Discounts, or Surcharges to the maturity premium. 5. The spreads represented in both charts exclude the SBL charges for SBL-eligible countries on their final USD 2.5 billion of exposure to the IBRD; the spreads represented in the right chart (b) also exclude the basis swap adjustments. 8 Figure Al-2. Historical Trend of IFL Rates applied to USD Loans with Average Maturity of 18 to 20 years !FL FS I 8-20yrs -1•, ............... USO 6M LIBOR !0o •• • ············· 0°'o ~''-:: ....:'',;;;; ,.;;; v- Notes: I. The rates after July I, 2018 represent the rates applicable for loans to Group C countries, which are not eligible for Exemptions, Discounts, or Surcharges to the maturity premium. 2. The average maturity of 18 to 20 years indicates the maximum rates applied for each rate setting period. The rates do not include the Single Borrower Limit (SBL) surcharges applicable for exposure beyond SBL of IBRD. 3. IFL FS rates are the rates made available for newly signed !FL FS commitments. The applicable rate of an outstanding !FL FS depends on the dates of Invitation to Negotiate, approval, and/or signing of the loan. !FL VS rates are the rates applied to all rate-resetting !FL VS subject to note# I. 4. USO six-month LIBOR refers to the London interbank offered rate for deposits, published two London banking days prior to the first and fifteenth day of each month. 9 Table Al-1. Variable spreads applicable to IFLs and VSLs for rate resetting between July 1, 2019 and September 30, 2019. (All spreads are in basis points.) Funding Contractual Loan Pricing Maturity Total Eligibility Criteria Cost/Cost of Lending Product Group Premium Spread/Rate* Borrowing Spread Loans for which lnvitation to Negotiate was A 0 49 issued (i) on or after July I, 2018; or (ii) B 0 49 IFL VS prior to July I, 2018 and which were -I 50 approved after September 30, 2018 with C 0 49 average maturity of 8 years or less D 5 54 Loans for which Invitation to Negotiate was A IO 59 issued (i) on or after July I, 20 I 8; or (ii) B 10 59 prior to July I, 2018 and which were IFL VS -I 50 approved after September 30, 2018 with C IO 59 average maturity greater than 8 years and up D 15 64 to IO years Loans for which lnvitation to Negotiate was A 20 69 issued (i) on or after July I, 2018; or (ii) B 25 74 prior to July I, 2018 and which were IFL VS -l 50 approved after September 30, 2018 with C 30 79 average maturity greater than l O years and D 40 89 up to 12 years Loans for which lnvitation to Negotiate was A 30 79 issued (i) on or after July I, 2018; or (ii) prior to July l, 2018 and which were B 40 89 IFL VS -l 50 approved after September 30, 2018 with C 50 99 average maturity greater than 12 years and D 65 114 up to 15 years Loans for which [nvitation to Negotiate was A 40 89 issued (i) on or after July I, 20 l 8; or (ii) B 55 104 prior to July l, 2018 and which were IFL VS -l 50 approved after September 30, 2018 with C 70 119 average maturity greater than 15 years and D 90 139 up to 18 years Loans for which Invitation to Negotiate was A 50 99 issued (i) on or after July I, 2018; or (ii) B 70 119 prior to July l, 2018 and which were IFL VS -I 50 approved after September 30, 2018 with C 90 139 average maturity greater than 18 years and D 115 164 up to 20 years Loans for which lnvitation to Negotiate was issued prior to July I, 2018; and which were [FL VS approved between July I, 2014 and ALL -l 50 0 49 September 30, 2018 with average maturity of 8 years or less Loans for which lnvitation to Negotiate was issued prior to July I, 2018; and which were IFL VS approved between July I, 2014 and ALL -I 50 10 59 September 30, 2018 with average maturity greater than 8 years and up to l O years Loans for which lnvitation to Negotiate was issued prior to July I, 2018; and which were IFL VS approved between July I, 2014 and ALL -l 50 20 69 September 30, 2018 with average maturity greater than IO years and up to 12 years IO Loans for which Invitation to Negotiate was issued prior to July I, 2018; and which were !FL VS approved between July I, 2014 and ALL -1 so 30 79 September 30, 2018 with average maturity greater than 12 years and up to IS years Loans for which Invitation to Negotiate was issued prior to July I, 2018; and which were !FL VS approved between July I, 2014 and ALL -I so 40 89 September 30, 2018 with average maturity greater than I S years and up to 18 years Loans for which Invitation to Negotiate was issued prior to July I, 2018; and which were !FL VS approved between July I, 2014 and ALL -I so so 99 September 30, 2018 with average maturity greater than 18 years and up to 20 years Loans approved between June 30, 20 IO and !FL VS** June 30, 2014 with average maturity of 12 ALL -I so 0 49 years or less Loans approved between June 30, 20 l O and IFL VS** June 30, 2014 with average maturity greater ALL -I so 10 59 than 12 years and up to I S years Loans approved between June 30, 20 IO and LFL VS** June 30, 2014 with average maturity greater ALL -I so 20 69 than IS years and up to I 8 years Loans for which Invitation to Negotiate was issued (i) on or after July 23, 2009; or(ii) IFL VS prior to July 23, 2009, and which were not ALL -I so NIA 49 approved by November 30, 2009 Loans for which Invitation to Negotiate was !FL VS issued Prior to July 23, 2009, and which ALL -I 30 NIA 29 were approved by November 30, 2009 VSL*** Loans signed on or after September 28, 2007 ALL -1 30 NIA 29 Loans for which Invitation to Negotiate was VSL*** issued: On or after July 31, 1998 and signed ALL -1 74t NIA 73 before September 28, 2007 Loans for which Invitation to Negotiate was VSL*** ALL -I 49t NIA 48 issued: Prior to July 31, 1998 Notes: * Total spread does not include the SBL surcharge applicable for exposure beyond the SBL of !BRD. ** Includes loans for which the invitation to negotiate was issued before June 30, 2014 and that have been approved by the !BRD Board of Directors on or before September 30, 2014. *** Rates do not take interest waivers into account for loans signed before September 28, 2007. Interest waivers do not apply on loans signed on or after September 28, 2007. t The contractuallending spread is adjusted to account for the different day count conventions between borrowing transactions and !BRD's loans. Since July I, 2008, as part of the migration into a unified loan product (IFL), all loans under the !FL program, and VS Ls signed on or after September 28, 2007, have a contractual lending spread that is not adjusted for day count (see "Proposal to Extend Maturity Limits for New lBRD Loans and Guarantees and to Simplify and Consolidate IBRD Loans into a Unified Single Product Line," R2008-0007, January I 8, 2008). 11 Annex 2 FY20 Country Groups for IBRD Pricing Group A: Blends, Small State Economies, Fragile and Conflict-Affected Situations, recent/new IDA graduates Angola (Recent IDA Graduate) Georgia (Recent IDA Graduate) Palau (Small State) Antigua and Barbuda (Small State) Grenada (Small State, Blend) Papua New Guinea (FCS, Blend) Armenia (Recent IDA Graduate) India (Recent IDA Graduate) Seychelles (Small State) Belize (Small State) Iraq (FCS) Sri Lanka (Recent IDA Graduate) Bolivia (Recent IDA Graduate) Kenya (Blend) St. Kitts and Nevis (Small State) Bosnia and Herzegovina (Recent Lebanon (FCS) St. Lucia (Small State, Blend) IDA Graduate) Libya (FCS) St. Vincent and the Grenadines Cabo Verde (Small State, Blend) Mauritius (Small State) (Small State, Blend) Cameroon (Blend) Moldova (Blend) Suriname (Small State) Congo, Republic (FCS, Blend) Mongolia (Blend) Timor-Leste (Small State, Blend) Dominica (Small St, Blend) Montenegro (Small State) Trinidad and Tobago (Small State) Equatorial Guinea (Small State) Nauru (Small State) Uzbekistan (Blend) Eswatini (Small State) Nigeria (Blend) Vietnam (Recent IDA Graduate) Fiji (Small State, Blend) Pakistan (Blend) Zimbabwe (FCS, Blend) Group B: Countries below Graduation Discussion Income (GDI) Albania Guatemala Philippines Algeria Indonesia Serbia Azerbaijan Iran, Islamic Republic of South Africa Belarus Jamaica Thailand Colombia Jordan Tunisia Dominican Republic Morocco Turkmenistan Ecuador Namibia Ukraine Egypt, Arab Republic of North Macedonia . Venezuela, RB de El Salvador Paraguay Gabon Peru Group C: Countries above GDI and below High-Income Category Argentina Costa Rica Russian Federation Botswana Kazakhstan Turkey Brazil Malaysia Bulgaria Mexico China Romania Group D: Countries in the High-Income Category Chile Panama Uruguay Croatia Poland Source: "Bank Directive, Financial Terms and Conditions of Bank Financing," July I, 20 I 9.