and rationalize public expenditures, building on several years of fiscal support from the
IDB in concert with the IMF; and engagement with Caribbean countries, especially those
reliant on Petro Caribe (Venezuela’s program for subsidized petroleum imports), on
diversifying energy supplies

Key Institutional Reforms: The IDB continues to implement the commitments that the United
States and other shareholders negotiated in conjunction with the IDB’s ninth general capital
increase in 2010. IDB is working to strengthen its balance sheet through implementing exposure
exchange agreements with the World Bank and African Development Bank, as well as making
adjustments to the Grant Resources Facility that will allow the IDB to use its capital more
efficiently, while assuring grant resources are available as needed to support Haiti.

e Merger of IDB’s Concessional Window, the Fund for Special Operations (FSO): The
IDB Board of Governors approved the merger of the FSO with the IDB’s ordinary capital
on September 1, 2016, and the merger took effect on January 1, 2017. The merger will
enhance the IDB’s ability to provide concessional lending to the poorest and most
vulnerable countries in the region without a replenishment from donors. Concessional
borrowers will continue to receive the same terms on their borrowing and will be subject
to the same performance-based allocation system and debt sustainability framework to
determine their level of concessional finance. At the same time, the merger substantially
strengthens the IDB’s key capital adequacy ratios, bolstering the IDB’s ability to support
Latin American and Caribbean countries facing strong macroeconomic headwinds.

° Private Sector Reform: The newly consolidated Inter-American Investment Corporation
(IIC) was launched on January 1, 2016. The United States advocated for improved
development effectiveness and greater operational efficiency for the new private sector
entity, and is closely monitoring the implementation of the IIC reforms to promote the
achievement of those goals. During 2016, IIC consolidated its new management team,
created a new development effectiveness tool, strengthened its financial controls, |
strengthened and reorganized its risk function, and improved its environmental, social, |
and governance capabilities through staffing and training.

e Multilateral Investment Fund (MIF): YDB and ILC Governors approved a third and final
replenishment of the MIF to provide resources for 2019 through 2023 during the IDB
Annual Meeting in April 2017. The expectation is that the MIF will be funded with
internal IDB Group resources after this final replenishment period. As part of the
discussions, the MIF has developed a more efficient business model that will cut costs
and streamline staffing, and will put increased focus on scaling up and replicating
successful projects by other parts of the IDB Group and external MIF partners. The
United States successfully pressed for a more sustainable financing model for the MIF,
including an increased role in the financing of the MIF from regional borrowing
members.

North American Development Bank (NADB)

18



e Low Income Countries Debt Sustainability Framework. The joint IMF-World Bank Low
Income Countries Debt Sustainability Framework (LIC-DSF) has played an important
role in promoting sound debt management practices and avoiding unsustainable build-up
of debt in low income countries since 2005. The IMF began a review of the LIC-DSF in
2016, responding to concerns such as rising debt loads in LICs, increased non-
concessional lending, and greater market access. While the IMF Executive Board
concluded that the LIC-DSF is working well, it pointed to a few areas for improvement,
including: (1) developing realistic tools to address biases in baseline projections; (2)
revising stress tests to better take account of risks from contingent liabilities, export price
shocks, market access, and natural disasters; (3) better monitoring of market liquidity
riskThe Executive Board will consider a specific proposal for adjusting the LIC-DSF in
2017.

° Special Drawing Rights Basket. In October 2016, the IMF implemented its 2015
decision to add the Chinese RMB as the fifth currency in the SDR basket, joining the
USS. dollar, euro, Japanese yen, and British pound, after IMF staff had concluded a
technical assessment that the RMB had met the SDR basket requirements

e =PRGT Interest Rate Structure. In October 2016, the IMF approved a modification of the
mechanism governing the setting of interest rates for the IMF’s donor-financed
concessional lending window, the Poverty Reduction and Growth Trust (PRGT).5 The
IMF will set interest rates at zero for all IMF concessional loans under the PRGT for as
long as and whenever global market rates are below an established threshold. Zero rates
will apply through end-December 2018 and are likely to continue through 2020, based on
projections of global interest rates.

¢ Lessons from the Euro Area Programs. In July 2016, the IMF’s Independent Evaluation
Office (IEO) published a report on the IMF and the crises in Greece, Ireland, and
Portugal. The report provided valuable insights and lessons for the handling of crises in
members of currency unions. IMF Management is taking up a number of
recommendations from these analyses, including clarifying how guidelines on program
design apply to currency union members, establishing a policy on cooperation with
regional financing arrangements, and paying greater attention to prioritization of
structural reform measures with negative near-term fiscal impacts.

MULTILATERAL DEVELOPMENT BANKS (MDBs)

This section addresses key U.S. policy goals that the MDBs advance and details developments in
institutional reforms, priorities, performance, and effectiveness at the MDBs since the previous
NAC Report was issued.

U.S. participation in the MDBs (1) fosters U.S. national security by supporting MDB
engagement with fragile and conflict-affected states (¢.g., Ukraine, Iraq and Afghanistan) and

5 The PRGT provides concessional assistance to low-income members. It relies on a combination of grant and
market-based loan resources, provided by donors and internal IMF resources.



conflict-affected states, with a particular focus on strengthening governance, combatting
corruption, and job creation to reduce migration flows.

AfDF Replenishment: In 2016, donors concluded the fourteenth replenishment of the AfDF
(AfDF-14), which covers 2017-2019. Donors pledged $4.8 billion in grant and grant-equivalent
contributions for a total replenishment of $5.9 billion, including internally generated resources.

The AfDF-14 policy package builds on reforms introduced under AfDF-13. AfDF-14 will
emphasize fragility, providing half its financing to fragile and conflict-affected states. It will
also focus on private sector growth, including by providing $270 million to an innovative tool,
introduced on a pilot basis during AfDF-13, which reduces the risk of AfDB private sector
investments in AfDF countries. With strong support from the United States, AfDF-14 also
includes an enhanced focus on results and learning and will continue to allocate resources
principally on the basis of a performance-based allocation formula.

Institutional Reforms: The AfDB introduced a number of major insitutional reforms in 2016.
Three reforms stand out: (1) the introduction of five new strategic priorities for the AfDB (called
the “High 5s”) to further its selective focus; (2) the development of a new organizational and
business model; and (3) the hiring of a new senior management team.

The High 5 strategic priorities are energy, agriculture, industrialization, regional integration, and
quality of life. The AfDB will continue to focus on its comparative advantage in infrastructure
and will also integrate the cross-cutting themes of fragility, governance, climate resilience, and
gender across these five areas. The new business model is designed to improve the AfDB’s
efficiency and effectiveness. It realigns the AfDB’s organizational structure around the High 5s;
decentralizes a larger portion of AfDB staff and operations to the field to increase proximity to
clients; and redesigns and streamline policies and processes for more efficient decision-making
and a stronger performance-based culture. The United States has worked closely with AfDB
Management on the design and ongoing implementation of the new business model, with
particular attention to improving performance and results. A new Senior Vice President, six new
Vice Presidents, and a number of other senior staff joined the AfDB in 2016. The United States
successfully pushed for these appointments to take place on the basis of a competitive and
transparent hiring process.

The United States also collaborated with the AfDB on priorities in the energy sector and on
combatting illicit financial flows. The AfDB is a core partner with Power Africa. In addition to
collaborating on specific projects and business reforms to facilitate investment in the energy
sector across Sub-Saharan Africa, the AfDB and Power Africa have initiated regular technical
meetings on shared priorities. The AfDB is also a core partner in the Partnership for Illicit
Finance (PIF). Established by the United States and Senegal at the U.S.-Aftica Leaders Summit
in 2014, the PIF seeks to combat illicit finance through the creation and implementation of
National Action Plans. These National Action Plans set out specific actions for countries to take
to improve transparency, combat corruption and criminal activity, and increase government
accountability. In 2016, the AfDB and the United States also collaborated on the development of
the AfDB’s new illicit finance policy and strategy. The AfDB has committed to supporting PIF
action plan implementation through its illicit finance work.

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e The International Development Association (IDA) committed $16.2 billion in highly
concessional credits and grants to the 77 poorest countries. More than half of IDA’s
annual commitments ($8.7 billion) went to countries in Sub-Saharan Africa, followed by
South Asia (29 percent) and East Asia and Pacific (14 percent).

© The International Finance Corporation (IFC), the private sector arm of the World Bank,
approved $11.1 billion in long-term investments from its own resources. The IFC
mobilized an additional $7.7 billion from other investors for development projects. More
than 29 percent of the IFC’s projects, accounting for $5.5 billion in long-term '
investments, went to the world’s poorest countries.

e The Multilateral Investment Guarantee Agency (MIGA) provided a record $4.3 billion in
guarantees for political risk insurance and credit enhancement. Of MIGA’s FY 2016
projects, 53 percent were in the poorest countries, with 6 percent of new guarantees
supporting fragile and conflict-affected countries.

e For IBRD and IDA, health and other social services was the sector that received the
largest commitment (31 percent), followed by public administration, law, and justice (20
percent) and energy and mining (17 percent).

e The World Bank provided notable support in the following areas: launching a facility that
could provide up to $800 million in concessional loans to support Syrian refugees and
host communities in Jordan and Lebanon; providing additional “turnaround” support to
Guinea-Bissau and Madagascar to support their transitions to functioning states; and
approving nearly $1.6 billion for Iraq to support economic stabilization and energy
efficiency as it battles ISIL.

Key Institutional Reforms: In 2016, the World Bank advanced several major policy and
governance reviews, in addition to carrying out its regular lending activities.

¢ IDA Replenishment: In 2016, IDA donors and Management negotiated the IDA-18 |
replenishment, which will cover the period from July 2017 to June 2020. The i
overarching theme of IDA-18 is “Towards 2030: Investing in Growth, Resilience, and
Opportunity,” which reflects IDA’s pivotal role in helping the world’s poorest countries
achieve the Sustainable Development Goals (SDGs).

The replenishment is noteworthy because it will lead to a major change in IDA’s |
financial model, as IDA plans to issue debt backed by its equity (e.g., reflows and
investments) for the first time. In anticipation of this new model, IDA received a triple-A
rating from both Standard and Poor’s and Moody’s in September 2016, Market
borrowing will increase IDA’s overall commitment authority by more than 40 percent
percent to approximately $75 billion at the same or lower cost to donors.

By leveraging its equity, IDA will be able to invest more in transformative projects and
direct higher levels of concessional assistance to poorer and less creditworthy countries.
For example, for IDA-18, IDA Management will double resources for fragile and
conflict-affected states, establish a $2 billion set-aside for projects that benefit refugees

11



providing assistance that addresses the root causes of instability; (2) promotes U.S. economic
growth through exports by helping the MDBs boost demand from emerging markets; (3)
responds to global crises, such as the refugee crisis in the Middle East and North Africa, and
builds countries’ resilience to future crises; and (4) addresses critical global priorities, such as
energy security, food security, and environmental degradation.

The MDBs support broad-based and sustainable economic growth and job creation through
investments in areas such as infrastructure, health, and education. They also foster critical
private sector development and entrepreneurship. MDB concessional lending and grants are an
important source of financing for the development needs of fragile and post-conflict states and
for combating extreme poverty and hunger. MDB projects promote global stability, prosperity,
infrastructure development, and private sector growth in line with the ambitious 2030
Sustainable Development Agenda and the Sustainable Development Goals that world leaders
adopted in 2015.

The United States is the largest or joint largest shareholder at all of the MDBs in which it is a
member, except the African Development Bank, where the United States is the largest non-
Aftican shareholder. This status allows the United States to press MDB management for
institutional reforms, financial and political support for major U.S. priorities, and higher
standards in the international financial architecture. U.S. contributions to the MDBs leverage
additional contributions from other shareholders and the MDBs themselves, providing a level of
assistance that is significantly higher than what the United States could achieve bilaterally.

Over the past year, the United States worked to improve performance across all of the

MDBs. These efforts included urging the MDBs to make more optimal use of their existing
financial resources to expand the level of support available to developing countries and working
closely with the MDBs to update policies and practices on evaluation to build a stronger culture
of results and accountability. The United States also encouraged stronger attention to fiduciary,
environmental, and social standards, and to the necessary resourcing to implement these

safeguards.

Below are the major developments for the World Bank, African Development Bank, Asian
Development Bank, European Bank for Reconstruction and Development, Inter-American
Development Bank, and North American Development Bank.

World Bank

World Bank Performance in 2016: During the World Bank’s fiscal year 2016 (covering July
2015 — June 2016), the World Bank committed $64.2 billion in loans, technical assistance,
concessional credits, grants, equity investments, and guarantees.

© The International Bank for Reconstruction and Development (IBRD) approved $29.7
billion in loans and technical assistance to middle-income countries. Latin America and
the Caribbean (27 percent) and Europe and Central Asia (24 percent) received the largest
portion of the IBRD’s new commitments, followed by East Asia and Pacific (17 percent)
and Middle East and North Africa (17 percent).

10



Concurrently, in 2016, shareholders reached consensus on the World Bank’s “Forward
Look,” which sets forth a strategic vision for the World Bank’s role over the next 15
years. The key premise of the Forward Look is that the World Bank’s global breadth,
country depth, expertise, and public and private sector engagement uniquely position it to
address complex development challenges. To stay relevant, the World Bank proposes to
deepen its work across several areas, including enhancing its engagement on fragility,
conflict, and violence, including support for fragile states and refugees; shifting the IBRD
portfolio more towards IBRD-eligible countries with lower incomes; enhancing the
World Bank’s crisis response toolkit through the Global Crisis Response Platform;
strengthening its role in knowledge and evaluation; and increasing private sector
mobilization and facilitating public-private partnerships to deliver inclusive economic
opportunities.

e Re-election of President Kim: The World Bank Board unanimously re-elected Dr. Jim
Yong Kim as President of the World Bank for a new five-year term on September 27,
2016, following the nomination of Dr. Kim for a second term by the United States at the
beginning of the nomination period in August. Building on the changes made to make
the World Bank Presidential selection process more open and transparent, in 2016, the
Board published dates for key steps in the nomination and election process, allowed
nominations from any shareholder, and required candidates to publish a vision statement
and conduct interviews with the Board.

African Development Bank (AfDB)
Performance in 2016:

¢ AfDB financing commitments totaled $10.4 billion. Commitments from the AfDB’s non-
concessional window were $8.5 billion. Commitments from the concessional window,
the African Development Fund (AfDF), were $1.9 billion.

e Ofthe total AfDB non-concessional window commitments, sovereign loans and grants
accounted for $5.9 billion (69 percent) and private sector loans, investments, and
guarantees accounted for $2.6 billion (31 percent). New approvals continued to reflect
the AfDB’s selectivity in its choice of project sectors, with over forty percent of
financing directed to infrastructure projects (primarily transportation, energy, and water
supply and sanition). Other key sectors include finance (e.g., microcredits to small
businesses) and agriculture.

¢ Distribution of total A{DB commitments by sub-region: West Africa (26 percent); North
Africa (26 percent); East Africa (17 percent); multiple sub-regions (17 percent); Central
Africa (8 percent); and Southern Africa (6 percent).

© The AfDB provided notable support in the following areas: $1.8 billion in financing to
support transitions in Tunisia, Morocco, and Egypt, with projects focused on governance,
financial sector reform, and infrastructure development; $972 million in energy projects,
including support to Power Africa projects; and $620 million in financing to fragile and

13



REPORT TO CONGRESS FROM THE
CHAIRMAN OF THE NATIONAL ADVISORY COUNCIL
ON INTERNATIONAL MONETARY AND FINANCIAL POLICIES

A Report to Congress

consistent with

Section 1701 of the
International Financial Institutions Act,
as amended by the Omnibus Appropriations Act, 1999

United States Department of the Treasury
2017



on ensuring that AsDB’s lending levels remain in line with the projections that ASDB
Management presented to shareholders at the time the merger was approved.

Counter-Cyclical Response Facility: The United States and other shareholders sought to
improve the counter-cyclical response modalities that AsDB uses when its developing
member countries face crises. AsDB updated its policies to ensure improved engagement
and coordination with the IMF and to provide more explicit rules governing the use of
crisis response lending modalities.

Gender Reforms: The United States pressed AsDB to strengthen its attention to gender
equality in its lending activities and in the institution’s own human resource policies and
practices. To help improve the quality of AsDB’s work environment, especially for
female staff, ASDB conducted its first institutional gender assessment through the EDGE
(Economic Dividends for Gender Equality) certification program.

Election Reforms: In July 2016, ASDB Governors unanimously re-elected President
Takehiko Nakao to a second term. In advance of the election, the United States pursued
reforms to make the AsDB’s presidential election procedures more open and transparent.
For the 2016 election, the AsDB set out a timeframe for the nomination period and the
date of the election, required candidates to submit a vision statement to the Board and
Governors, and the Board held an interview session with President Nakao in advance of
the vote.

European Bank for Reconstruction and Development (EBRD)

Performance in 2016:

EBRD investments in 2016 reached $9.9 billion.

Top recipients of investments were Turkey (20 percent), Kazakhstan (11 percent), Poland
(8 percent), Egypt (8 percent), and Bulgaria (7 percent). The EBRD also continued to
increase investments in the early (less advanced) transition countries (ETCs), such as
Armenia, Georgia, and Moldova. Projects approved for the ETCs in 2016 accounted for
30 percent of the overall number of EBRD projects, with business volume at nearly $1
billion for this group.

EBRD business volume in 2016 was concentrated in the following sectors: financial
institutions (33 percent), corporate (26 percent), energy (23 percent), and infrastructure
(18 percent).

The EBRD provided notable support in the following areas: more than $600 million in
approvals for Ukraine to support the government’s reform efforts; more than $1.4 billion
in investments to support transition in Jordan, Egypt, Morocco, and Tunisia; support to
Jordan and Turkey to address the Syrian refugee crisis; and the achievement of a major
milestone for the safety of the Chernobyl nuclear reactor site with the sliding in place of
the new containment structure, the largest moveable land-based structure ever built.

16



Asian Development Bank (AsDB)
Performance in 2016:

© Total AsDB financing commitments were $17.5 billion. Commitments from ASDB’s non-
concessional window were $14.4 billion. Approvals for non-sovereign loans, guarantees,
and investments totaled $2.5 billion. The Asian Development Fund (AsDF) committed
$3.2 billion in concessional loans, grants, and technical assistance.

© Top recipients of ASDB commitments were India (17 percent), China (12 percent),
Azerbaijan (10 percent), Indonesia (10 percent), and Pakistan (9 percent).

© The AsDB’s 2016 commitments largely focused on infrastructure, particularly for energy
and transport (49 percent). The remaining commitments included financing for financial
management (12 percent), public sector management (11 percent), water and other
urban infrastructure (11 percent), agriculture (7 percent), education (4 percent), and
health (2 percent).

e The AsDB provided notable support in the following areas: $2.4 billion supporting water
projects like water supply, sanitation, irrigation, and flood management throughout Asia;
$375 million for projects to rehabilitate more than 3,000 kilometers (km) of power
distribution lines in Azerbaijan and expand the high-voltage transmission network in
Pakistan; and $76 million to rehabilitate and upgrade irrigation infrastructure, including
watershed management, in Afghanistan.

AsDF Replenishment: In 2016, donors concluded the eleventh replenishment of the ASDF
(AsDF-12), which covers 2017-2020. Following the merger between the AsDF concessional
lending resources and the AsDB’s Ordinary Capital Resources (OCR), the AsDF is now a grants-
only fund. Donors pledged $2.6 billion, while transfers from the OCR and income from liquidity
investment provide another $1.2 billion for a total replenishment of $3.8 billion.

AsDF-12 focuses on strengthening support for fragile and conflict affect states, with a top-up
allocation maintained for Afghanistan, and building capacity and resilience of small island states,
which will receive significantly higher levels of grant allocations during ASDF-12, AsDF will
continue to concentrate its work in infrastructure. Given the high vulnerability of AsDF
countries to natural disasters, AsDF-12 will introduce a pool of funding for countries to invest in
disaster risk preparedness, which can help reduce the costs of humanitarian assistance when
disasters occur.

Key Institutional Reforms: In addition to concluding the AsDF-12 replenishment, the United
States focused on several other areas of institutional reform at the AsDB in 2016.

e Capital Adequacy: The United States reviewed AsDB’s capital adequacy models to

ensure any ramp-up in assistance as a result of the merger of the OCR and AsDF lending
resources will remain financially sustainable. In particular, the United States has focused

15

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and their host communities in IDA countries, significantly increase the set-aside for
regional projects, provide an additional $1.3 billion for crisis response, and create a $2.5
billion private sector window that will work with the IFC and MIGA to scale-up private
investment in IDA countries. Lastly, IDA will be able to provide increased levels of non-
concessional finance to help smooth countries’ graduation from IDA and transition to
non-concessional development financing.

IDA-18’s policy commitments and resource allocation framework include: a special
theme on governance, with a focus on strengthening public financial management,
mobilizing domestic resources; as well as a heightened focus on private sector
development. IDA-18’s other special themes include fragility, conflict, and violence;
jobs and economic transformation; climate resilient development; and gender equality.

Safeguards Review: The World Bank approved a new set of environmental and social
risk management (i.e., “safeguards”) policies in 2016, concluding a multi-year process.
The safeguards are an essential tool for avoiding or mitigating environmental and social
risks and impacts in World Bank-financed projects and are key drivers of project impact,
quality, and sustainability. The new Environmental and Social Framework is an
integrated approach that improves clarity and coherence, and aims to increase the
efficiency and effectiveness of safeguards through risk-based allocations of
implementation resources. It expands the World Bank’s safeguards into several new
important areas and strengthens its approach to social assessments. In addition to
updating its policies, the World Bank is working to improve the implementation of
safeguards, especially in difficult areas such as resettlement. This includes strengthened
project monitoring, as well as implementation support and capacity building for
borrowers.

Global Crisis Response Platform: The World Bank established a new Global Crisis
Response Platform, which comprises several instruments to allow the World Bank to
more effectively address both immediate and protracted crises, such as pandemics,
natural disasters or refugees. Initial efforts under the platform have focused on assisting
frontline states hosting large numbers of Syrian refugees through a Concessional
Financing Facility. As noted above, the IDA-18 replenishment will create a set-aside for
IDA countries hosting large numbers of refugees.

Shareholding Review: The World Bank launched a shareholding review in 2015, These
reviews provide periodic opportunities to assess whether the World Bank has adequate
resources to fulfill its mission and whether shareholding is distributed equitably among
members. In 2015, World Bank Governors approved a multi-year roadmap to implement
the review with several key milestones. As the first step, in October 2016, World Bank
Governors welcomed a shareholding formula that provides a more transparent guide for
evaluating the distribution of shareholding and deciding on any potential realignments of
IBRD shareholding. The formula serves as a benchmark for each country’s level of
shareholding. However, the process for bringing countries’ actual levels of shareholding
more closely in line with the benchmark remains a subject for negotiation.

12



At the end of 2016, the IMF had 23 financing arrangements in place using its general resources
for a total of $153 billion, including four precautionary arrangements totaling $108 billion. New
financing arrangements executed during 2016 include Egypt, Iraq, Kenya, Jamaica, and Tunisia,
and the IMF renewed precautionary arrangements with Colombia, Mexico, and Morocco. In
addition, the IMF provided $364 million via its Rapid Financing Instrument for Ecuador. In
January 2017, the IMF renewed a precautionary arrangement with Poland.

With regard to the IMF’s concessional resources for low-income countries, at the end of 2016 the
IMF had 19 financing arrangements in place for a total of $3.6 billion. During 2016, the IMF
agreed on new concessional financing arrangements with Afghanistan, Central African Republic,
Cote d'Ivoire, Madagascar, Moldova, and Rwanda. In addition, the IMF provided a total of
$41.6 million in single-tranche Rapid Credit assistance for Haiti. In January 2017, the IMF
agreed on a new concessional financing arrangement with Niger.

With consistent pressure from the United States, the IMF has continued to hold its administrative
budget flat in real terms since 2012, with the exception of a $6 million increase for security-
related costs in the fiscal year that ended in April 2017.

The IMF also reviewed and reformed a number of key policies during 2016 and January 2017:

e Assessing Fiscal Space. In December 2016, the IMF adopted a framework to enhance
IMF surveillance and assessment of fiscal space. The IMF’s new framework allows for
the assessment of available fiscal space — which is broadly defined as the ability of a
government to increase spending or lower taxes without endangering market access and
debt sustainability — in a way that is comparable across countries and provides a
consistent approach to assess available space as an input to inform decisions about fiscal
policy.

e Post Program Monitoring. In July 2016, the IMF strengthened its Post Program
Monitoring (PPM) framework. PPM refers to enhanced economic monitoring of
countries with relatively large IMF credit outstanding. It promotes ongoing
macroeconomic sustainability after the expiration of a country’s IMF-supported program
and provides an early warning of policies that could jeopardize the IMF’s resources. A
strong PPM system provides an additional safeguard for U.S. financial commitments, as
it monitors IMF members’ policies and economic conditions, with a focus on assessing
the country’s capacity to repay obligations to the IMF.

e Institutional Views on Capital Flows. In December 2016, the IMF reviewed experience
with its Institutional View on Capital Flows, established in 2012. The Institutional View
calls on countries to rely on macroeconomic adjustment and strengthening of financial
sector supervision as a first line of defense against capital flow volatility, and resort to
capital flow restrictions only in a temporary, targeted, and transparent manner when
policy adjustment proves insufficient. The IMF’s review concluded that the Institutional
View remains relevant and there is no need for substantive adjustment, while also
clarifying that measures that restrict capital flows, even if taken for prudential purposes,
should be temporary and targeted.



Performance in 2016:

e NADB approved $102.4 million in financing in 2016. This included $97 million in loans,
and $3.2 million in grants and technical assistance.

e The sectoral breakdown of NADB’s outstanding portfolio (by volume) at the end of 2016
was wind energy (50 percent), solar energy (21 percent), water and wastewater (12
percent), air quality (7 percent), storm drainage (4 percent), and basic urban
infrastructure (3 percent).

e At the end of 2016, 56 percent (51 projects) of NADB’s outstanding portfolio was in
Mexico and 44 percent (20 projects)was in the United States.

Key Institutional Reforms: In 2016, NADB continued steps to strengthen its financial capacity,
including diversifying its portfolio by investing in more sub-sectors of environmental
infrastructure, such as desalination plants, urban mass transit, and energy efficiency programs for
commercial real estate; and increasing the portion of total project financing mobilized from
commercial financiers. Mexico provided its first contribution of $10 million to NADB’s general
capital increase that the Board approved in 2015.

The NADB and the Border Environment Cooperation Commission (BECC) also continued to
prepare for the merger of the two institutions, which the NADB/BECC Board of Directors
recommended in a resolution passed in December 2014. NADB and BECC took steps to
complete the operational integration, including fully implementing joint project development and
technical assistance work, fostering closer staff collaboration, and harmonizing human resources
policies. The two institutions work together on common projects and anticipate functioning
more efficiently as one institution.

NADB and BECC also enhanced results tracking and reporting, including refining the results
measurement system, completing a comprehensive evaluation on the results of NADB and
BECC’s investments in wastewater treatment in Baja California, and beginning similar work on
investments in renewable energy in the United States.

Report on IDA Contribution to Graduation

The U.S, Department of the Treasury presents this report consistent with 22 U.S.C. § 262r-
6(b)(2). That section directs the Secretary of the Treasury to report to Congress on how the
World Bank’s IDA-financed projects “contribute to the eventual graduation of a representative
sample of countries from reliance on financing on concessionary terms and international
development assistance.”

IDA provides highly concessional loans and grants to the poorest countries, with the aspiration
that the support will help spur growth and development that ultimately allows countries to

graduate from IDA. The United States believes that IDA should direct its scarce concessional
resources to the poorest countries that have the most limited access to other sources of finance.

19



Following Congressional approval of IMF quota and governance reforms in December 2015, the
United States consented to the reforms in January 2016, and the IMF implemented the reforms in
February 2016. These reforms (originally agreed upon in 2010): (1) doubled the IMF’s core
quota resources,’ with a corresponding rollback of the NAB; (2) amended the IMF’s Articles of
Agreement to move to an all-elected Executive Board; (3) increased the IMF’s legitimacy by
shifting more than 6 percent of quota shares to dynamic and under-represented emerging market
and developing countries; and (4) preserved the quota and voting shares of the poorest member
countries. Under the reforms, the United States retains its current seat in the Executive Board
and maintains its voting share above 15 percent preserving veto power without increasing the
overall financial commitment to the IMF. The increase in the U.S. quota is offset by a
corresponding decrease in U.S. participation in the NAB.

In February 2016, following the increase in the IMF’s core quota resources, the IMF reduced the
size of the NAB (as provided in the 2010 reform package), and deactivated it. The NAB is a set
of standing borrowing arrangements with 38 financially strong members, including the United
States, and provides an important supplement to the IMF’s core quota resources. A decision to
activate the NAB requires approval by an 85 percent share of the NAB membership. The United
States (with a 15.4 percent share of the NAB following implementation of the 2010 reforms) has
a veto over such decisions.

In November 2016, the IMF’s Executive Board approved the renewal of the NAB for another
five years starting in November 2017. The NAB entered into effect in November 1998 and has
been renewed continuously, helping to maintain the IMF’s lending capacity and provide
confidence that the IMF will continue to address the needs of its membership. Congressional
authorization for U.S. participation in the NAB expires in December 2022, unless renewed.

The delay in U.S. consent to the 2010 quota and governance reforms also delayed the IMF’s
quinquennial regular review of its quota resources. The fifteenth review of IMF quotas was
originally scheduled to conclude in 2015, but is now set to begin in late 2017 or early 2018 and
conclude in 2019.

IMF Financing and Policy Developments in 2016

The IMF plays a vital role in safeguarding the international financial system and promoting
financial stability through its principal activities of surveillance, financing, and technical
assistance. The IMF’s bilateral and multilateral surveillance is aimed at encouraging policies
that contribute to global growth and financial stability and discouraging policies that are not
sustainable or have harmful spillover effects on other countries. As the world’s first responder to
financial crises, IMF financing continues to play an importantrole in protecting the U.S.
economy — and the prosperity of American workers, households, and businesses — from the
destabilizing effects of crises abroad. The IMF complements its financing with expert analysis
and technical advice, and helps countries build capacity to manage their economies more

effectively.

+The IMF has also adjusted downward its access limits and thresholds for surcharges (both are expressed as a
percentage of a country’s quota), to take into account that country quotas have doubled, on average.

i
i



INTRODUCTION?

The international financial institutions (IFIs) play an essential role in support of U.S. national
interests at home and abroad. The IFIs further U.S. and global security interests, support U.S.
economic growth and jobs, and help maintain open markets and financial stability. The IFIs help
to fight poverty, enhance food security, and respond to emerging crises and emergency
situations, including natural disasters, pandemics, and the protracted displacement of refugees.

U.S. leadership was instrumental in founding and designing most of these institutions, and the
United States remains the largest or joint largest shareholder, except in the African Development
Bank where the United States is the most significant non-African shareholder. The United States
uses its shareholding, voice on the governance bodies, and convening power to proactively shape
IFI policies and activities in support of U.S. national security, economic interests, and values.

The United States needs to maintain its leadership position in the IFIs if they are to be effective
vehicles for supporting U.S. interests and responsive to U.S. calls for reform. Throughout 2016,
the United States promoted policy reforms across the IFIs to improve their governance, make
better use of their existing financial resources, strengthen their effectiveness, and improve their
efficiency while maintaining high fiduciary, social, and environmental standards.

This report covers the period from January 2016 through January 2017 and looks at prospects
for the remainder of 2017 for the International Monetary Fund (IMF) and the multilateral
development banks (MDBs), including the World Bank, African Development Bank, Asian
Development Bank, European Bank for Reconstruction and Development, Inter-American
Development Bank, International Fund for Agricultural Development, and North American
Development Bank. It also includes the Report to Congress on the International Development
Association’s Contributions to Graduation.

INTERNATIONAL MONETARY FUND (IMF)

Major Issues Affecting U.S. Participation in the IMF

The United States plays a key role in shaping IMF policy and institutional issues through its role
as the IMF’s largest shareholder, and participates in the IMF financially through a quota
subscription? and a contribution to the IMF’s financial backstop, the New Arrangements to
Borrow (NAB). The United States has a voting share of 16.5 percent, and because of this, is the
only IMF member country with the ability to veto major institutional decisions.

2 Section 1701 of the International Financial Institutions Act, as amended by section 583 of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act, 1999 (P.L. 105-277), requires the
Chairman of the National Advisory Council on International Monetary and Financial Policies (the Secretary of the
Treasury, as designated pursuant to Executive Order 11269 of February 14, 1966, as amended) to report
annually to Congress on the participation of the United States in the international financial institutions (IFIs).

3 Quotas are the metric used by the IMF to assign voting rights, to determine contributions to the IMF’s general
resources and to determine access to IMF financing.



e In response to strong guidance from the United States and other key shareholders, EBRD
management has not brought forward any new projects for Russia since July 2014.

Key Institutional Reforms: In response to the Syrian refugee crisis, the EBRD announced a
financing package of up to €900 million to support private sector and infrastructure projects in
Turkey and Jordan, frontline countries that are hosting millions of Syrian refugees. The EBRD
reaffirmed its fundamental mandate to support transition to market economies, and updated its
transition concept, further defining the components of a sustainable market economy. The
EBRD also launched an Operational Effectiveness and Efficiency program to improve internal
processes and reduce costs. In 2016, the EBRD rolled out its Strategy for the Promotion of
Gender Equality, focused on access to finance, access to employment and skills, and access to
services. In 2016, EBRD Governors elected Suma Chakrabarti for a second term as EBRD
President, following an improved presidential election process that increased competitiveness
and transparency.

Inter-American Development Bank (IDB)
Performance in 2016:

© The IDB committed $11.0 billion in loans and grants in 2016 to its 26 borrowing member
countries in Latin American and the Caribbean.

¢ The Inter-American Investment Corporation (IC), the private sector arm of the IDB
Group, approved $443 million in loans and equity investments in 2016. Slightly more
than half of IIC projects in 2016 went to the region's small and vulnerable countries. IIC
business volume was concentrated in the following clients: financial institutions (41
percent), infrastructure (41 percent), and the corporate sector (18 percent).

e The Multilateral Investment Fund (MIF) committed $86 million in grants, loans, and
equity to strengthen the business environment and benefit poor and low income
populations by working directly with businesses, farms, households, and public sector
partners.

© Top recipients of IDB lending in 2016 were Mexico (21 percent), Brazil (13 percent),
Argentina (12 percent), Colombia (10 percent), and Bolivia (7 percent). Small and
vulnerable borrowing countries received 38 percent of new loan approvals.

¢ IDB lending was spread across many sectors, with the largest amounts going to
reform/modernization of the state (34 percent), infrastructure and energy (30 percent),
and social investment (24 percent).

¢ The IDB provided notable support in the following areas: $510 million in commitments
for the Northern Triangle countries (El Salvador, Guatemala, and Honduras), coupled
with advice for the governments on the design of reform programs to address the root
causes of migration; $50 million to support Jamaica to strengthen its tax administration

17



Reviewing the process by which IDA helps its richer, more creditworthy clients sustainably
graduate from reliance on concessional resources was an important priority for the IDA-18
replenishment negotiations that occurred in 2016.

The IDA graduation process is normally triggered when a country’s per capita income exceeds
the “operational” graduation threshold (currently $1,185) for at least two consecutive years and
the country is deemed creditworthy enough to receive loans from the World Bank’s IBRD. The
process involves a phasing out of IDA lending and phasing in of IBRD lending. Before
graduation, there is typically an intermediate stage of undetermined length, known as “blend”
status, during which countries can access both IDA and IBRD resources. There are currently 18
blend countries: Bolivia, Cabo Verde, Cameroon, Republic of Congo, Dominica, Grenada,
Moldova, Mongolia, Nigeria, Pakistan, Papua New Guinea, Sri Lanka, St. Lucia, St. Vincent and
the Grenadines, Timor-Leste, Uzbekistan, Vietnam, and Zimbabwe.

IDA’s goal is to help countries achieve levels of growth and institutional capacity that allow
them to finance their development needs from a mix of non-concessional resources from the
public sector, market borrowing, private investment, and their own domestic resources. To date,
35 countries have graduated from IDA. Bolivia, Sri Lanka, and Vietnam will graduate at the
beginning of IDA-18 in July 2017. However, since there is a constraint on the amount of IBRD
lending they can access, these countries remain eligible for a limited amount of transitional
assistance from IDA during IDA-18 to avoid a precipitous drop in development resources. India
will complete this transition period and no longer be eligible for IDA transition assistance from
the beginning of IDA-18.

As part of the IDA-18 replenishment negotiations, IDA Management commited to make
recommendations to improve the management of the “blend” period so as to better prepare
countries for graduation from IDA.