FILIPINO taxpayers would be forced to pay higher for loans secured from the Asian Development Bank (ADB) if the Philippines becomes an upper middle-income (UMI) country by January 2021.
Under the new rules set by ADB, UMI countries with a gross national income (GNI) per capita of $6,976 to $12,375 (using 2018 prices) will now pay up to 30 basis points additional maturity premium depending on the loan tenor.
The Philippines is considered a lower middle-income country by the Manila-based multilateral development bank. Based on World Bank estimates, the country’s GNI per capita is $3,830.
“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,” ADB President Takehiko Nakao said.
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, while Group B countries have access to both concessional and market-based loans. Group C countries have access only to market-based loans.
The Philippines is part of Group C countries that have four subcategories based on GNI per-capita thresholds.
Group C1 countries are lower- middle countries with incomes below $3,995 (about P202,879.68 at current exchange rates). The Philippines falls under this subcategory. Group C2 countries are UMI countries with income between $3,996 to $6,975.
Group C3 countries are the UMI countries with per- capita income between $6,976 to $12,375, while Group C4 countries are high-income countries with incomes above $12,375.
ADB said the new pricing framework will be more favorable to 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 supplement existing Technical Assistance Special Funds to support policy advice, institution building and knowledge sharing in the region’s developing member-countries.
The pricing framework will also help build reserves for expanding ADB’s lending capacity in the long term.
“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,” he added.
ADB said the reform reflects the transformation of the Asia and the Pacific region in the past 50 years. Most ADB recipient countries are currently middle-income countries.
These countries, though with relatively higher income and strong financial capacity, 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.
ADB is also implementing reforms in its procurement framework, digital transformation and human resource management modernization, among others.
In May 2019, the Department of Finance (DOF) said the Philippines is prepared for the possibility of graduating from ADB concessional financing once it becomes an UMI country.
In an interview, Finance Undersecretary Mark Joven told the BusinessMirror that while the government does not yet know the “state of play” when the country reaches UMI-country status, the government is making the necessary preparations that would enable the country to finance its development needs in the future.
Joven said these preparation measures include fiscal policy reforms that seek to strengthen the capability of the government to general funds, as well as efforts to fast-track “game changing infrastructure projects” that will bring the country “to a higher level of play.”
He said, however, that denying concessional loans to UMI countries should not be done given the development challenges UMI countries still face. He said that it does not mean that when a country reaches UMI-country status, it has already addressed its development constraints.
He said that no less than the World Bank said UMI countries have “unfinished development agendas” and are still prone to global shocks. The World Bank said UMI countries face “many second-generation challenges” that could undermine their growth.
The World Bank said these second-generation challenges are “inequality, unplanned urbanization, gaps in public-sector performance, weak private sector, low levels of innovation and an overall lack of global competitiveness.”