## 6.1.5. Treatment of IDA Reverse Graduates & Fifth Dimension Recipients

One of the criteria used to determine a country's eligibility for IDA funds is lack of creditworthiness for IBRD funds. Thus the question arises as to how one should treat IDA-eligible nations with outstanding IBRD loans, since these countries are by one measure already deemed IBRD uncreditworthy. The approach used above is to treat them in the same way as other IBRD borrowers, since we are still interested in the likelihood that these countries default. However, with countries which "reverse graduate", whereby they become reeligible for IDA credits due to a drop in per capita GNP and other events, it may be argued that if it were not for their access to IDA funding, these countries would default on their IBRD loans. If so, we may consider reverse graduates as additional defaults for the purposes of modeling. Table 7 reports the results from combining reverse graduates with IBRD defaulters. The problem is that there are then more reverse graduate country-year observations than actual defaults, and the model becomes more one of modeling reverse graduates. Thus we find unsurprisingly GNP per capita and export growth to be important, whereby for modeling defaults alone they were not. Thus this approach does not appear to be a fruitful one, although it does indicate that IIBRD defaulters and Reverse Graduates do not form a homogeneous pool.

Another aspect of this is the use of so called Fifth Dimension Funds, whereby IDA reflows are used to cover the IBRD debt service interest payments for IDA-only countries. Under the Fifth Dimension, IDA supplied about $1.0 billion for SPA<sup>20</sup> countries to pay off IBRD debt, with donors contributing another $0.2 billion. Many of these recipients were IDA countries that received enclave loans, which are now being amortized, so the role of Fifth Dimension funding may diminish in the future. Nevertheless, historically it may have been important in preventing IBRD default, and there may be lessons from this experience which can be applied to other forms of debt relief. Thus there is a case to be made for considering carefully these countries also as defaulters. This has not been done in the present study due to time delays in obtaining historical records of Fifth Dimension recipients, but may provide an avenue for future refinement of this model.

# 6.1.6. Modeling IBRD Default 5-years in advance.

The analysis in this paper attempts to ascertain the determinants of default one year in advance. With good forecasts of the regressors one can use the resulting models to determine default several years in advance, but the political variables, in particular, may be difficult to forecast, and macro forecasting beyond two to three years can be very inaccurate. Nonetheless, the relatively long maturity of IBRD loans makes it necessary to determine future creditworthiness beyond a one or two year horizon. In Table 8 we report random effects panel logit estimates used in modeling default to the IBRD as a function of variables lagged five years. We use the annual average growth in per capita GNP over

> 20 Special Program of Assistance (SPA) was launched in 1987 as a donor-coordinated response to the Africa continentwide debt and development crisis. The Eligibility criteria for SPA are 1) low-income, in terms of IDA eligibility, 2)debt distress, in terms of a debt service ratio of 30% or more, and 3) an adjustment program supported by the IMF and IDA. See the SPA website at http:/lafr.worldbank.org/aftkl/spal.htm for more information on the SPA.

23