International Development Association: Management’s Discussion & Analysis and Financial Statements, Study notes of Financial Statement Analysis

Download International Development Association: Management’s Discussion & Analysis and Financial Statements and more Study notes Financial Statement Analysis in PDF only on Docsity! International Development Association Management’s Discussion & Analysis and Financial Statements June 30, 2021 Management’s Discussion and Analysis Section I: Executive Summary IDA Management’s Discussion and Analysis: June 30, 2021 3 Section I: Executive Summary Owned by its 173 members, IDA, an entity rated triple-A by the major rating agencies, and one of the five institutions of the World Bank Group (WBG1), has been providing financing and knowledge services to many of the world’s developing countries for 60 years. Each organization is legally and financially independent from IDA, with separate assets and liabilities, and IDA is not liable for their obligations. With its many years of experience and its depth of knowledge in the international development arena, IDA plays a key role in achieving the WBG goal of helping countries achieve better development outcomes. IDA contributes to the WBG’s twin goals of ending extreme poverty and promoting shared prosperity by providing loans, grants, and guarantees to countries to help meet their development needs and by leveraging its experience and expertise to provide technical assistance and policy advice. It also supports countries with disaster risk financing and insurance against natural disasters and health-related crises and facilitates financing through trust fund partnerships. IDA and its affiliated organizations seek to help countries achieve improvements in growth, job creation, poverty reduction, governance, the environment, climate adaptation and resilience, human capital, infrastructure, and debt transparency. To meet its development goals, the WBG has been increasing its focus on country programs in order to improve growth and development outcomes. The World Bank’s operational realignment, which came into effect on July 1, 2020, places country-driven development at the center of the delivery model, while strengthening thought leadership on development issues of critical importance to sustainable growth and poverty alleviation. Support continues to be prioritized for countries at lower levels of income, and fragile and conflict-affected states. The realignment strengthens the focus on Africa by creating two Vice Presidencies, one focused on Western and Central Africa and the other on Eastern and Southern Africa. In March 2020, IDA’s Nineteenth Replenishment of Resources (IDA19) was approved by the Board of Governors. The IDA19 financing framework is an integrated package that will continue to leverage IDA’s strong equity base. The first year of the implementation of IDA19 commenced in FY21 which coincided with the onset of the coronavirus disease (COVID-19) crisis. In order to enable IDA to continue meeting the heightened financing needs for IDA resources, IDA members agreed in April 2021 to launch the twentieth IDA replenishment (IDA20), which will commence one year earlier, in FY23. The IDA19 implementation period will be shortened to two years (FY21-FY22), and $12.5 billion of resources originally projected for use in FY23 will be available for financing in FY22. In response to the global outbreak of COVID-19 and to support global public goods, IDA has been working in solidarity with partners at global and country levels to support its borrowing countries. A significant portion of the FY21 commitments supported COVID-19 related efforts. IDA’s operational response includes three stages: a) Relief stage that involves emergency response to the health threat, b) Restructuring stage that focuses on strengthening health systems, restoring human capital, and restructuring of firms and sectors, and c) Resilient recovery stage that entails new opportunities to build a more sustainable, inclusive and resilient future. Each stage is structured through four thematic crisis response pillars: i) Saving lives, ii) Protecting the poor and vulnerable, iii) Ensuring sustainable business growth and job creation, and iv) Strengthening policies, institutions, and investment for rebuilding better. 1 The other WBG institutions are the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). Management’s Discussion and Analysis Section I: Executive Summary 4 IDA Management’s Discussion and Analysis: June 30, 2021 Summary of Financial Results Net Loss and Adjusted Net Income Net Loss: For the fiscal year ended June 30, 2021, IDA reported a net loss of $433 million, compared to a net loss of $1,114 million in FY20. The decrease was primarily driven by the increase in unrealized mark-to-market gains on the non-trading portfolios partially offset by an increase in development grant expenses during the year. See Section IV: Financial Results. Adjusted Net Income: For the fiscal year ended June 30, 2021, IDA’s adjusted net income was $394 million, a decrease of $330 million from the prior year ($724 million). The decrease was primarily due to lower net investment revenue and higher provision for losses on loans and other exposures, partially offset by higher net interest revenue on loans. See Section IV: Financial Results. In millions of U.S. dollars Lending Operations IDA made $36.0 billion of net commitments in FY21, of which $23.9 billion were loan and guarantee commitments. The remainder were grant commitments, which are recorded as an expense in IDA’s Statement of Income once all conditions are met, generally at the time of disbursement. The FY21 net commitments reflected the strong support IDA provided to its client countries during the COVID pandemic including $2.5 billion of newly approved financing for vaccines as of June 30, 2021, benefiting 41countries. IDA’s net loans outstanding increased by $16.8 billion, to $177.8 billion as of June 30, 2021, from $161.0 billion as of June 30, 2020. See Section IV: Financial Results. The decrease in development grant expenses from FY19 to FY20 was due to the timing of the recognition of the grant expenses as a result of the implementation of a new accounting standard in FY20. In billions of U.S. dollars a. Includes loans, grants, and guarantees Net Investment Portfolio As of June 30, 2021, the net investment portfolio was $37.9 billion, compared with $35.6 billion as of June 30, 2020. See Section VII: Investment Activities. The primary objective of IDA’s investment strategy is principal protection. As of June 30, 2021, 68% of IDA’s investment portfolio was held in instruments rated AA or above (See Table 30). In billions of U.S. dollars (8,000) (4,000) 0 4,000 8,000 FY17 FY18 FY19 FY20 FY21 Adjusted Net Income (Loss) Net Income (Loss) 0 8 16 24 32 40 FY17 FY18 FY19 FY20 FY21 Net Commitments Gross Disbursements Net Disbursements 0 40 80 120 160 200 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Net Loans Outstanding 0 8 16 24 32 40 FY17 FY18 FY19 FY20 FY21 Net Grant Commitments Grant Expense 0 15 30 45 60 75 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Net Investment Portfolio a Management’s Discussion and Analysis Section I: Executive Summary IDA Management’s Discussion and Analysis: June 30, 2021 5 Borrowing Portfolio Market borrowings: As of June 30, 2021, the total market borrowings portfolio outstanding was $20.6 billion, an increase of $8.6 billion compared with June 30, 2020 ($12.0 billion). See Section IV: Financial Results. Concessional Partner Loans: As of June 30, 2021, total borrowings from members - concessional partner loans (CPLs) - were $7.7 billion, an increase of $0.1 billion compared with June 30, 2020 ($7.6 billion). See Section IV: Financial Results. In billions of U.S. dollars Equity and Capital Adequacy As of June 30, 2021, IDA’s equity was $180.9 billion, an increase of $12.7 billion from June 30, 2020. See Section IV: Financial Results. In billions of U.S. dollars The Deployable Strategic Capital (DSC) ratio, IDA’s main capital adequacy measure, was 30.4% as of June 30, 2021, above the zero percent policy minimum. The decrease of 5.4 percentage points from June 30, 2020 is primarily driven by a refinement of the DSC framework during FY21 which includes additional capital requirements for approved but not yet expensed grants. While grants are now expensed at disbursement rather than commitment under an accounting standard, IDA has now taken the grants into account upon commitment, consistent with prior practice. IDA’s capital continues to be adequate to support its operations. See Table 27. Ratio in percentages 0 15 30 45 60 75 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Borrowing portfolio 0 50 100 150 200 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Equity Minimum Ratio = 0% 0% 15% 30% 45% Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Deployable Strategic Capital Ratio Management’s Discussion and Analysis Section III: IDA’s Financial Resources 8 IDA Management’s Discussion and Analysis: June 30, 2021 Section III: IDA’s Financial Resources IDA’s replenishments have grown from $1.0 billion for the initial replenishment to $82.0 billion in IDA19. Members’ subscriptions and contributions receivable for each replenishment are settled through payment of cash or deposit of nonnegotiable, non-interest-bearing demand notes which become due throughout the replenishment period, generally three years. The notes are encashed by IDA on a pro rata basis over a 9 to 11-year period which generally corresponds with the disbursement period of the loans and grants. IDA19 Funding IDA’s financing resource envelope available for lending and grant commitments is based on the long-term outlook of IDA’s financial sustainability. This takes into account the amount of member contributions and the concessionality of the proposed financing to borrowers, market conditions, and capital adequacy requirements. Allocation of IDA19 Resources IDA financing is provided in the form of loans, grants, and guarantees. Most of IDA’s resources are allocated to eligible members through IDA Country Allocations that provide unearmarked support. IDA Country Allocations are determined using the Performance Based Allocation (PBA) system, which takes into account the country’s performance rating (CPR), population size and per capita income, and complemented by the FCV envelope. The rest of IDA support is provided through five IDA Windows dedicated to addressing specific development priorities, and an Arrears Clearance Set-Aside that provides exceptional support for countries to fully reengage with the World Bank. The allocation framework is agreed for each replenishment cycle. IDA responds to specific needs of its members through the following five IDA Windows: Table 1: Adjusted IDA19 Resource Allocation In billions of U.S. dollars Allocation USD equivalent a Country Allocation Envelope $ 56.0 IDA Concessional Windows 10.4 Non-concessional Window 3.2 Private Sector Window 1.7 Total IDA19 Allocation $ 71.3 a. U.S. dollar amounts are based on IDA19 reference rate of USD/SDR 1.38318. The U.S. dollar amounts are provided for illustrative purposes only. Management’s Discussion and Analysis Section III: IDA’s Financial Resources IDA Management’s Discussion and Analysis: June 30, 2021 9 Table 2: Cumulative Net Commitments under IDA19 In millions of U.S. dollars As of June 30, 2021 Loans and Guarantees Grants Total Concessional financing IDA Country Allocations $ 20,476 $ 9,171 $ 29,647 IDA Concessional Windows Regional Window 1,171 1,002 2,173 Window for Host Communities and Refugees - 628 628 Crisis Response Window 445 320 765 Arrears Clearance - 1,000 1,000 Non-concessional financing 1,815 - 1,815 Total Net Commitments a $ 23,907 $ 12,121 $ 36,028 a. Commitments are net of full cancellations/terminations approved in the same fiscal year. Commitments exclude IFC-MIGA Private Sector Window (PSW) activities Eligibility for IDA’s resources is determined primarily by a member’s relative poverty. Relative poverty is defined as Gross National Income (GNI) per capita below an established threshold and is updated annually. For FY22, the threshold is $1,205 (FY21: $1,185). As of July 1, 2021, 74 countries are eligible to borrow from IDA on concessional terms as follows: IDA eligible countries IDA-only 41 countries that (a) have not exceeded the IDA operational cut-off GNI per capita for more than two consecutive years; and (b) are not creditworthy to borrow from IBRD. This includes: 11 Small Island Economies that have per capita incomes above the IDA operational cut-off for more than two consecutive years, but that have been granted the status of an “IDA-only Country” under the Small Island Economies Exception. 2 countries with loans in nonaccrual status, which were classified as “IDA-only” at the time they became nonaccrual countries. Gap 16 countries that are (a) determined by IDA to be eligible for IDA financing; (b) determined by IDA to have a GNI per capita that has exceeded the cut-off for IDA eligibility for more than two consecutive years; and (c) not currently determined by IBRD to be creditworthy to borrow from IBRD. This includes 3 Small States that are not island states. Blend 14 countries that are determined: (a) by IDA to be eligible for IDA financing; and (b) by IBRD to be creditworthy for borrowing IBRD loans. This includes 6 Small Island Economies and 1 Small State that is not an island state. 1 country with loans in nonaccrual status, which was classified as “Blend” at the time it became a nonaccrual country. Allocation - Performance Based Allocation (PBA) System IDA’s resources are allocated to eligible members, using its PBA system and the allocation framework agreed during each replenishment. These allocations depend on several factors: the overall availability of IDA’s resources, individual country needs, their policy performance and institutional capacity, and each country’s performance relative to others. The PBA system is designed to provide resources where they are likely to be most helpful in reducing poverty. Under the PBA, the main factor that determines the allocation of IDA’s core concessional resources among eligible countries is their performance in the Country Policy and Institutional Assessment (CPIA). The CPIA reflects the results of an exercise that rates eligible countries against a set of criteria including economic management; structural policies; policies for social inclusion and equity; and public-sector management and institutions. The CPIA and portfolio performance together constitute the IDA Country Performance Rating (CPR). In addition to the CPR, population, and per capita income are factored into a country’s allocation, along with the annual base allocation (SDR15 million per country). In addition, country allocations provide the FCV envelope to enhance support for eligible countries facing different FCV risks. The Sustainable Development Finance Policy (SDFP), which became effective at the beginning of IDA19, aims to incentivize IDA-eligible countries to move towards transparent, sustainable financing and to promote coordination between IDA and other creditors in support of these countries’ efforts to address their debt-related vulnerabilities. A set-aside from or a discount of IDA’s country allocation are used to incentivize satisfactory implementation of Performance and Policy Actions (PPAs). Countries which demonstrate Management’s Discussion and Analysis Section III: IDA’s Financial Resources 10 IDA Management’s Discussion and Analysis: June 30, 2021 satisfactory progress in implementing their PPAs have access to their full annual country allocation. Countries that do not satisfactorily implement their PPAs will either have a share of their country allocation set aside or their country allocation will be reduced. In recognition of the change in IDA’s business model starting in IDA18, and to ensure that its lending decisions are compatible with the capital adequacy requirements of a triple-A rating, the allocation framework for IDA19 is aligned with the Single Borrower Limit (SBL) and capital adequacy requirements under the DSC Framework, see Section IX: Risk Management. Concessional Financing Concessional financing is provided in the form of loans, grants and guarantees. Eligibility and percentage of allocation for grants for IDA-only countries is based on an assessment of the country’s risk of debt distress, where the higher the risk assessment, the greater the proportion of grant financing. Gap and Blend countries are only eligible for grant financing via the Window for Host Communities and Refugees, if applicable. Country Allocation Envelope represents $56.0 billion of the adjusted IDA19 resource envelope and is allocated based on the PBA. The amount available for each country is a function of the country’s CPR rating, population, and per capita income, complemented by the FCV envelope. IDA Concessional Windows allow IDA to respond to specific needs of its members. In IDA19, $10.4 billion of the adjusted IDA19 resource envelope will be used to fund the following windows. • $5.6 billion of Regional Window; • $1.3 billion of Window for Host Communities and Refugees; • $2.5 billion of Crisis Response Window; • $1.0 billion of Arrears Clearance Set- Aside (Arrears Clearance Framework). Regional Window The Regional Window was developed as a funding mechanism to provide additional resources to finance projects that help low‐income countries achieve their regional integration objectives. IDA fosters regional integration by playing three overlapping roles: • supporting an enabling environment through advisory and analytical work; • financing projects through policy and investment loans; and • convening state and nonstate actors for coordination and collective actions. Window for Host Communities and Refugees (WHR) The Window for Host Communities and Refugees will support operations that promote medium-to long-term development opportunities for refugee and host communities in IDA countries. The purpose of the WHR is to support refugee hosting countries to: • create social and economic development opportunities for refugee and host communities; • facilitate solutions that include sustainable socio-economic inclusion of refugees in the host country and/or their return to the country of origin; and • strengthen country preparedness for increased or potential new refugee flow. Crisis Response Window The primary objective of the CRW is to provide IDA countries with additional resources that will help them to respond to major natural disasters, or public health emergencies and severe economic crises, so that they can return to their long-term development paths. The $2.5 billion window under the adjusted IDA19 resource envelope includes an allocation of up to $1.0 billion under the CRW Early Response Financing (ERF) which will support IDA countries’ response to slower-onset crises, namely disease outbreaks and food insecurity. Arrears Clearance Framework IDA has a policy of not providing financing to borrowers who are overdue on their payments to IDA or IBRD. However, it may engage with these countries under limited and clearly defined circumstances. IDA’s arrears clearance Management’s Discussion and Analysis Section IV: Financial Results IDA Management’s Discussion and Analysis: June 30, 2021 13 Section IV: Financial Results Summary of Financial Results IDA had a net loss of $433 million in FY21 compared with a net loss of $1,114 million in FY20 (See Table 4). The decrease in net loss was primarily driven by: • $1.1 billion of unrealized mark-to-market gains on non-trading portfolios in FY21 ($0.7 billion unrealized mark-to-market losses in FY20). In FY21, the gains were primarily from the Capital Value Protection Program (CVP) portfolio, due to the upward movement in U.S. dollar interest rates; • $0.4 billion increase in the release of provision for losses on loans and other exposures mainly due to a release of $0.8 billion of loan loss provision due to Sudan’s arrears clearance; partially offset by, • $1.4 billion increase in development grant expenses primarily due to the disbursement of $1.3 billion of development grants to Sudan in support of the re-engagement and reform program after its arrears clearance. Adjusted Net Income Adjusted Net Income, a non-GAAP measure, reflects the economic results of IDA’s operations and is used by IDA’s management and the Board as a financial sustainability measure. ANI is defined as IDA’s net income, adjusted to exclude the following items. • Development financing activities directly funded by contributions from members: These mainly comprise of development grants, provision for HIPC / MDRI debt relief, and amortization of discounts on CPL. For financial reporting, these activities are treated as expenses, while contributions from members which finance these activities, are reflected directly in IDA’s equity since they carry voting rights. • Contributions/grants received from affiliated organizations or other similar contributions: These mainly comprise contributions from IBRD, IFC and other contributions from trust funds. These are intended to finance development activities similar to member contributions but are not directly included in equity as they do not carry voting rights. • Non-functional currency translation adjustment (gains) losses: These represent unrealized exchange rate gains/losses resulting from the translation of loans, borrowings, development grants payable and all other assets and liabilities still held on IDA’s Balance Sheet, that are denominated in currencies other than the component currencies of SDR. • Unrealized mark-to-market gains/losses on non-trading portfolios: These mainly comprise unrealized mark-to- market gains and losses on the asset/liability management (ALM), borrowing, and non-trading investment portfolios. For the purpose of ANI, the result of loan revenue hedges is not part of the adjustment related to unrealized mark-to-market gains/losses on non-trading portfolio since the objective of the loan revenue hedges is to stabilize IDA’s revenue against any currency risk. • Pension, Post-Employment Benefit Plan (PEBP) and Post-Retirement Contribution Reserve (PCRF) adjustments: While IDA is not a participating sponsor to these benefit plans, IDA shares in the costs and reimburses IBRD for its proportionate share of any contributions made to these plans by IBRD, as part of a Board-approved cost sharing ratio. The Pension adjustment reflects the difference between IDA’s share of cash contributions to both the pension plans and PCRF, and the accounting expense, as well as the investment revenue earned on those assets related to the PEBP and PCRF. The PCRF was established by the Board to stabilize contributions to the pension and post-retirement benefits plans. Management has designated the income from these assets to meet the needs of the pension plans. As a result, PEBP and PCRF investment revenue is excluded from adjusted net income. • Other Adjustments: Under certain arrangements (such as Externally Funded Outputs (EFOs)), IDA receives a share of the revenue earned from agreements with donors under which funds received are to be used to finance specified outputs or services. These funds may be utilized only for the purposes specified in the agreements and are therefore considered contractually restricted until applied for these purposes. Income attributable to these arrangements is excluded from reported income when determining adjusted net income since there is no discretion about the use of these funds. Management’s Discussion and Analysis Section IV: Financial Results 14 IDA Management’s Discussion and Analysis: June 30, 2021 IDA’s adjusted net income was $394 million in FY21 compared with $724 million in FY20 (See Table 4). The decrease was primarily driven by: • $275 million decrease in net interest revenue on investments due to lower interest rate environment during the year; • $40 million of unrealized mark-to-market losses on investments-trading, excluding IDA’s share of PEBP returns, in FY21, compared to $187 million of unrealized mark-to-market gains in FY20, reflecting the increase in yield curves during the year; • $253 million increase in provision for losses on loans and other exposures, excluding provision for debt relief under HIPC/MDRI; partially offset by, • $366 million increase in net interest revenue on loans, mainly driven by the recognition of $244 million of service charge revenue when Sudan paid all the overdue principal and service charges due to IDA. Table 4: Condensed Statement of Income In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Negative Impact Positive Impact Interest Revenue Loans, net $ 2,050 $ 1,684 Investments, net 147 422 Asset/liability management derivatives, net (14) (22) Borrowing expenses, net (187) (241) Interest Revenue, net of borrowing expenses $ 1,996 $ 1,843 Provision for losses on loans and other exposures, release 539 170 Other revenue (expenses), net (Table 11) 56 (10) Net non-interest expenses (Table 10) (1,612) (1,508) Transfers from affiliated organizations and others 544 252 Non-functional currency translation adjustment (losses) gains, net (372) 95 Unrealized mark-to-market gains on investments-trading portfolio, net a 144 207 Unrealized mark-to-market gains (losses) on non-trading portfolios, net 1,102 (688) Development grants (2,830) (1,475) Net Loss $ (433) $ (1,114) Adjustments to reconcile net (loss) income to adjusted net income: Expenses relating to development financing activities directly funded by contributions from members 2,070 1,389 Contributions from affiliated organizations and others (544) (252) Non-functional currency translation adjustment losses (gains), net 372 (95) Unrealized mark-to-market (gains) losses on non-trading portfolios, net b (1,118) 731 Pension, PEBP and PCRF adjustments 42 71 EFO revenue 5 (6) Adjusted Net Income $ 394 724 a. Includes IDA’s share of returns from Post-Employment Benefit Plan (PEBP) and Post-Retirement Contribution Reserve Fund (PCRF) assets – $184 million of returns (FY20 - $20 million of returns). b. Excludes $16 million of losses from revenue-related forward currency contracts (FY20 - $43 million of gains). Management’s Discussion and Analysis Section IV: Financial Results IDA Management’s Discussion and Analysis: June 30, 2021 15 Table 5: Condensed Balance Sheet In millions of U.S. dollars As of June 30, 2021 2020 Decrease Increase Assets Due from banks $ 496 $ 674 Investments 37,376 34,670 Net loans outstanding a 177,779 160,961 Derivative assets, net 249 136 Other assets 3,424 3,031 Total assets $ 219,324 $ 199,472 Liabilities Borrowings $ 28,314 $ 19,766 Derivative liabilities, net 408 590 Other liabilities 9,726 10,945 Equity 180,876 168,171 Total liabilities and equity $ 219,324 $ 199,472 a. The fair value of IDA loans was $164,606 million as of June 30, 2021 ($149,597 million – June 30, 2020). Equity See Table 6 below for the change in IDA’s equity during FY21: Table 6: Changes in Equity In millions of U.S. dollars Equity as of June 30, 2020 $ 168,171 Activity during the year: Subscriptions and contributions paid-in 9,109 Nonnegotiable, noninterest-bearing demand obligations (753) Change in Accumulated deficit (1,235) Change in Accumulated other comprehensive income (loss) 5,583 Change in Deferred amounts to maintain value of currency holdings 1 Total activity 12,705 Equity as of June 30, 2021 $ 180,876 Total Assets As of June 30, 2021, total assets were $219.3 billion, an increase of $19.8 billion from June 30, 2020 ($199.5 billion). The increase was primarily driven by the increase in net loans outstanding and net investment portfolio, as discussed below. Results from Lending Activities Loan Portfolio and Grant Activity As of June 30, 2021, IDA’s net loans outstanding (after accumulated provision for losses on loans) was $177.8 billion, higher by $16.8 billion compared with June 30, 2020. The increase was mainly due to $10.2 billion in net loan disbursements and currency translation gains of $5.9 billion, consistent with the 3.7% appreciation of the SDR against the U.S. dollar during the year. As of June 30, 2021, 90% of IDA’s total loans outstanding were denominated in SDR. For the regional presentation of total loans outstanding, see Notes to the Financial Statements for the year ended June 30, 2021, Note D – Loans and Other Exposures – Table D8. 19,852 12,705 (1,219) (182) 8,548 19,852 393 113 16,818 2,706 (178) Management’s Discussion and Analysis Section IV: Financial Results 18 IDA Management’s Discussion and Analysis: June 30, 2021 is a function of IBRD's financial results. On January 25, 2021, IBRD’s Board of Governors approved a transfer of $331 million to IDA which was received by IDA on February 1, 2021. On June 21, 2021, IFC’s Board of Governors approved a transfer of $213 million to IDA which was received by IDA on June 25, 2021. Net Non-Interest Expense As shown in Table 10, IDA’s net non-interest expenses are primarily comprised of administrative expenses, net of revenue from externally funded activities. IBRD and IDA's administrative budget is a single resource envelope that funds the combined work programs of IBRD and IDA. The allocation of administrative expenses between IBRD and IDA is based on an agreed cost and revenue sharing methodology, approved by their Boards, which is primarily driven by the relative level of activities relating to lending, knowledge services and other services between the two institutions. The administrative expenses shown in the table below include costs related to IDA-executed trust funds and other externally funded activities. See Table 10 for a comparison of the main sources of administrative expenses and revenue from externally funded activities in FY21 and FY20. IDA’s net non-interest expenses were $1,612 million in FY21, compared to $1,508 million in FY20. The key drivers during the year were: • increase in pension costs driven by a decrease in the discount rate resulting in higher service cost and higher amortization of unrecognized actuarial losses, offset by; • decrease in travel costs due to COVID-19, and; • decrease in the share of costs allocated to IDA. Table 10: Net Non-Interest Expenses In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Administrative expenses: Staff costs $ 1,121 $ 1,114 $ 7 Travel 15 135 (120) Consultant and contractual services 544 536 8 Pension and other post-retirement benefits 494 357 137 Communications and technology 68 63 5 Premises and equipment 135 151 (16) Other expenses 29 33 (4) Total administrative expenses $ 2,406 $ 2,389 $ 17 Contributions to special programs 20 21 (1) Revenue from externally funded activities: Reimbursable advisory services (46) (65) 19 Reimbursable revenue - IDA-executed trust funds (553) (586) 33 Revenue – trust funds administration (38) (41) 3 Restricted revenue (15) (28) 13 Other revenue (162) (182) 20 Total revenue from externally funded activities $ (814) $ (902) $ 88 Total Net Non-Interest Expenses (Table 4) $ 1,612 $ 1,508 $ 104 During FY21, IDA’s net other revenue increased by $66 million. The main driver was the PPA grant activity, including cancellations and refinancing of PPA grants previously approved. Table 11: Other Revenue (Expenses), net In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Other (primarily PPA grants) $ 20 $ (40) $ 60 Guarantee fees 17 15 2 Commitment charges 19 15 4 Other Revenue (Expenses), net (Table 4) $ 56 $ (10) $ 66 Management’s Discussion and Analysis Section IV: Financial Results IDA Management’s Discussion and Analysis: June 30, 2021 19 IDA’s goal is to have its net administrative expenses covered by its loan revenue (loan interest, service, commitment, and guarantee fees). Thus, IDA monitors its net administrative expenses as a percentage of its loan revenue, using a measure referred to as the budget anchor. In FY21, IDA’s budget anchor was 66.7%, lower by 14.3 percentage points compared to FY20 primarily due to higher interest revenue from loans. See Table 12. Table 12: Budget Anchor In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Total net Non-interest Expenses (Table 10) $ 1,612 $ 1,508 $ 104 Pension and EFO adjustments a (231) (85) (146) Net administrative expenses for Budget Anchor $ 1,381 $ 1,423 $ (42) Interest Revenue from Loans, net (Table 4) $ 2,050 $ 1,684 $ 366 Commitment fee and Guarantee fee revenue (Table 11) 36 30 6 (Losses) gains on revenue-hedging forward currency contracts (16) 43 (59) Total revenue for Budget Anchor $ 2,070 $ 1,757 $ 313 Budget Anchor 66.7% 81.0% -14.3% a. These adjustments are made to arrive at net administrative expenses used for adjusted net income purposes. Figure 5: Budget Anchor In millions of U.S. dollars, except ratio in percentages Provision for losses on loans and other exposures In FY21, IDA recorded a release of provision for losses on loans and other exposures of $539 million compared to $170 million of release in FY20 (see Notes to the Financial Statements for the year ended June 30, 2021, Note D – Loans and Other Exposures – Table D5). The movement is primarily attributed to: • the release of provision for HIPC debt relief of $819 million when Sudan paid all its overdue principal and charges due to IDA in March 2021; offset by, • an increase in exposure comprised of volume of loans as well as inclusion of signed commitments in the provisioning under the Current Expected Credit Losses (CECL) methodology which became effective July 1, 2020. (see section X: Critical Accounting Policies and the Use of Estimates). Table 13: Provision for losses on loans and other exposures In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Provision for losses on loans and other exposures, release (charge) Loans and other exposures $ (289) $ (36) $ (253) Debt relief under HIPC/MDRI 828 206 622 Total $ 539 $ 170 $ 369 97.6% 81.0% 66.7% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 0 500 1,000 1,500 2,000 FY19 FY20 FY21 Net administrative expenses for budget anchor Budget Anchor Revenue Budget Anchor Management’s Discussion and Analysis Section IV: Financial Results 20 IDA Management’s Discussion and Analysis: June 30, 2021 Unrealized mark-to-market gains (losses) on non-trading portfolios, net During FY21, the non-trading portfolios had $1,102 million of net unrealized mark-to-market gains ($688 million net unrealized mark-to-market losses in FY20). The increase was mainly driven by unrealized mark-to-market gains from the derivatives held for the CVP portfolio due to the increase in U.S. dollar interest rates. Table 14: Unrealized Mark-to-Market gains (losses) on non-trading portfolios, net In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Asset-liability management $ 1,080 $ (699) $ 1,779 Investment portfolio (12) 29 (41) Other a 34 (18) 52 Total $ 1,102 $ (688) $ 1,790 a. Other comprises mark-to-market gains or losses on the borrowing and loan portfolios and on PSW. Non-functional currency translation adjustment gains (losses), net These represent unrealized exchange rate gains/losses resulting from the translation of loans, borrowings, and all other assets and liabilities held on IDA’s Balance Sheet, that are denominated in currencies other than the SDR and its component currencies. During FY21, translation adjustment losses on non-functional currencies were $372 million as most of the non-functional currencies appreciated against the U.S. dollar, IDA’s reporting currency. In comparison, in FY20, the translation adjustment gains were $95 million due to the depreciation of most of these non-functional currencies against the U.S. dollar. Management’s Discussion and Analysis Section V: Development Activities, Products and Programs IDA Management’s Discussion and Analysis: June 30, 2021 23 Table 15: Cumulative Loans approved under Single Currency program In billions of U.S. dollar equivalent value As of June 30, 2021 Euro $ 21.9 U.S. dollar 19.0 Japanese Yen 0.5 Total $ 41.4 Of the above, loans outstanding at the end of the year $ 15.3 Table 16: Summary of Financial Terms for IDA Lending Products, effective July 1, 2021 a. Prior to July 1, 2017, IDA offered Hard-Term loans to Blend Countries (excluding Small Island Economies). They had a single currency option, and had terms equivalent to IBRD’s fixed spread loans, less 200 bps, a variable option was also available. Hard-term loans are no longer offered. b. There is an implicit floor of zero on the overall interest rate in IDA’s non-concessional loans. Effective April 1, 2021, loans with fixed spread terms were suspended. See the implications of alternative reference rate changes in Section IX: Risk Management. c. The volume of committed and undisbursed CAT DDOs financed by IDA is limited to 0.5 percent of the country’s GDP or USD 250 million, whichever is lower. The CAT DDO may be renewed once, for a maximum of six years in total. Charges on Loans and Grants Service charges and interest income earned on IDA’s loans are reported as Interest revenue on loans in the Statement of Income. Commitment charges earned on loans and grants (if any) are reported as non-interest revenue in the Statement of Income. Service Charge: A service charge is levied on the principal amount disbursed and outstanding on all Regular, Small Economy, and Blend term loans, regardless of repayment terms, at 0.75% per annum. Interest: Interest is charged on all loans subject to blend terms approved from IDA16, hard-term loans, and non- concessional loans. Further, loans offered under non-concessional terms are available at variable interest rates on IBRD terms. All other rates are fixed. Commitment Charge: A commitment charge, which is payable on any undisbursed loan or grant amount, is set by the Board at the beginning of each fiscal year. Commitment charges are set at a level to ensure that net loan revenue covers administrative expenses over the medium term. From FY09 to FY21, the commitment charge on undisbursed concessional loans had been set at nil, and for grants it had been set at nil from FY03 to FY21. For FY22, commitment charges remain set at nil, the same level as FY21. The commitment charge on non-concessional loans is aligned to IBRD terms, which include a commitment charge of 0.25%. Instrument type a Currencies Maturity/Grace Period Current Charges Interest rates Grant SDR Not applicable None Not applicable Regular-Term loan SDR, USD, EUR, GBP, JPY 38/6 years 75bps SDR equivalent service charge Not applicable Regular-Small Economy loan SDR, USD, EUR, GBP, JPY 40/10 years 75bps SDR equivalent service charge Not applicable Blend-Term loan SDR, USD, EUR, GBP, JPY 30/5 years 75bps SDR equivalent service charge 1.25% SDR equivalent interest rate Non-concessional loans - Scale-up Window (SUW) USD, EUR, GBP, JPY Up to 35 years maximum; up to 20 years average maturity 25 bps one-time front- end fee 25 bps commitment fee IBRD Flexible Loan terms b Catastrophe Deferred Draw Down Option (CAT DDO) c SDR, USD, EUR, GBP, JPY Before Drawdown: Front end fee and renewal fee are set at 0.5% and 0.25% respectively under SUW option, and at 0% under PBA or Undisbursed balances option. After Drawdown: - Under PBA or Undisbursed balances option - IDA concessional rates would apply. - Under SUW option - non-concessional rates would apply. Management’s Discussion and Analysis Section V: Development Activities, Products and Programs 24 IDA Management’s Discussion and Analysis: June 30, 2021 Repayment Terms Loans approved through June 30, 1987 have a final maturity of 50 years, including a grace period of 10 years. In recent replenishments, differentiation in IDA’s lending terms has been introduced to recognize the variation in economic development of broad categories of IDA recipients. Since 1987, the legal agreements of regular, blend and hard-term loans include an accelerated repayment clause to double the principal repayments of the loan if the borrower’s GNI per capita exceeds a specific threshold and the borrower is eligible for IBRD financing. Implementation is subject to negotiation with the borrower and approval by IDA’s Board after considering a borrower’s economic development. The borrower can further negotiate either to (a) shorten the loan’s maturity (principal option), (b) pay interest at a rate that would result in the same net present value (interest option), or a combination of the two options. As of June 30, 2021, the acceleration clause was implemented for the qualifying loans of 18 borrowers that have graduated from IDA since the introduction of the accelerated repayment clause. Of these 18 borrowers, 11 borrowers selected the principal option, 6 borrowers selected the interest option, and one borrower selected a combination of the two options. The accelerated repayment clauses in all of these legal agreements also allow a borrower to subsequently request pausing of those accelerated terms if economic conditions in the borrower’s country have deteriorated, in which case, the terms of repayment can revert to the original terms of the financing agreements. Given the challenging economic situation as a result of the COVID-19 outbreak, for ten graduate countries whose accelerated repayments were approved by the Board for implementation in IDA17 and IDA19, management approved a one-year pause of the accelerated payment terms to conform to the schedule originally provided in their financing agreements which became effective July 1, 2020. Subsequently, this was extended for an additional year for five graduate countries. As of June 30, 2021, $1.7 billion of loans outstanding were under the original accelerated repayment terms. As these repayment accelerations and decelerations are contemplated in the original terms of the instruments, they do not constitute loan modifications. Loans, Grants and Guarantee Activity Commitments FY21 net loan commitments were $23.9 billion, an increase of $1.6 billion (7%) over FY20 ($22.3 billion). There were no guarantee commitments in FY21, a decrease of $25 million over FY20. (See Table 17). Also, see Section VI: Other Development Activities and Programs. FY21 Net commitments of grants were $12.1 billion, an increase of $4.1 billion (52%) over FY20 ($8.0 billion). (See Table 18). Table 17: Net Commitments of Loans and Guarantees by Region In millions of U.S. dollars For the fiscal year ended June 30, 2021 % of total 2020 % of total Variance Eastern and Southern Africa $ 7,105 30 $ 5,751 26 $ 1,354 Western and Central Africa 7,900 33 7,187 32 $ 713 East Asia and Pacific 1,003 4 2,248 10 (1,245) Europe and Central Asia 966 4 1,084 5 (118) Latin America and the Caribbean 622 3 748 3 (126) Middle East and North Africa 20 * 146 1 (126) South Asia 6,291 26 5,210 23 1,081 Total $ 23,907 100 $ 22,374 100 $ 1,533 of which Guarantees $ - $ 25 $ (25) * indicates percentage less than 0.5%. Management’s Discussion and Analysis Section V: Development Activities, Products and Programs IDA Management’s Discussion and Analysis: June 30, 2021 25 Table 18: Net Commitments of Grants by Region In millions of U.S. dollars For the fiscal year ended June 30, 2021 % of total 2020 % of total Variance Eastern and Southern Africa $ 6,984 58 $ 3,830 48 $ 3,154 Western and Central Africa 3,055 25 2,327 29 728 East Asia and Pacific 112 1 252 3 (140) Europe and Central Asia 349 3 413 5 (64) Latin America and the Caribbean 147 1 230 3 (83) Middle East and North Africa 638 5 57 1 581 South Asia 836 7 882 11 (46) Total $ 12,121 100 $ 7,991 100 $ 4,130 Management’s Discussion and Analysis Section VI: Other Development Activities and Programs 28 IDA Management’s Discussion and Analysis: June 30, 2021 IDA-Executed Trust Funds (BETFs): IDA, alone or jointly with one or more of its affiliated organizations, manages the funds and implements the activities financed. These trust funds support IDA’s work program. IDA, as an executing agency, disbursed $553 million in FY21 ($586 million in FY20) of trust fund program funds. Recipient-Executed Trust Funds (RETFs): Funds are provided to a third party, normally in the form of project grant financing, and are supervised by IDA. Financial Intermediary Funds (FIFs): IDA, as a trustee, administrator, or treasury manager, offers specific administrative or financial services with a limited operational role. Arrangements include the administration of debt service trust funds, fiscal agency funds and other more specialized limited fund management roles. IDA earned revenue from Trust Fund administration activity of $38 million in FY21 ($41 million in FY20). For additional information, see Notes to the Financial Statements for the year ended June 30, 2021, Note H-Trust Funds Administration. As noted in the discussion of Trust Fund activities above, IDA, alone or jointly with one or more of its affiliated organizations, administers on donors’ behalf funds restricted for specific uses. Such administration is governed by agreements with donors, who include members, their agencies, and other entities. These funds are held in trust and are not included on IDA’s Balance Sheet, except for $749 million of undisbursed third-party contributions made to IDA-executed trust funds, which are recognized on the Balance Sheet. These amounts are included in Other assets and the corresponding liabilities are included in Accounts payable and miscellaneous liabilities on the Balance Sheet. The cash and investment assets held in trust by IDA as administrator and trustee as of June 30, 2021 and June 30, 2020 are summarized in Table 21. Table 21: Cash and Investment Assets Held in Trust by IDA In millions of U.S. dollars Total Fiduciary Assets As of June 30, 2021 2020 IDA-executed $ 44 $ 49 Jointly executed with affiliated organization 1,025 944 Recipient-executed 2,365 1,964 Financial intermediary funds 286 281 Execution not yet assigned a 5,365 4,643 Total $ 9,085 $ 7,881 a. These represent assets held in trust for which the determination as to the type of execution is yet to be finalized. Reimbursable Advisory Services (RAS) While most of IDA’s advisory and analytical work is financed by its own budget or donor contributions (e.g., Trust Funds), clients may also pay for services. IDA offers technical assistance and other advisory services to its member countries, in connection with, and independent of, lending operations. Available services include, for example, assigning qualified professionals to survey developmental opportunities in member countries; analyzing member countries fiscal, economic, and developmental environments; helping members devise coordinated development programs; and improving their asset and liability management techniques. In FY21, income relating to reimbursable advisory services was $46 million (FY20 - $65 million). Externally Financed Outputs (EFOs) IDA offers donors the ability to contribute to specific projects and programs. EFO contributions are recorded as restricted revenue when received because they are for contractually specified purposes. Restrictions are released once the funds are used for the purposes specified by donors. In FY21, IDA had $21 million of revenue, compared with $23 million in FY20. Management’s Discussion and Analysis Section VII: Investment Activities IDA Management’s Discussion and Analysis: June 30, 2021 29 Section VII: Investment Activities As of June 30, 2021, IDA’s net investment portfolio totaled $37.9 billion (Figure 7). See the Notes to the Financial Statements for the year ended June 30, 2021, Note C – Investments. Figure 7: Net Investment Portfolio In billions of U.S. dollars Liquid Asset Portfolio The primary objective of IDA’s liquid asset portfolio strategy continues to be preservation of capital within institutional constraints. Consistent with this primary objective, IDA invests in high quality instruments. IDA aims to earn reasonable investment returns, while ensuring timely availability of funds for future cash flow requirements, including disbursements for loans, grants, debt service, and administrative expenses. For IDA19, as part of IDA’s evolving ALM needs, to ensure that the overall liquidity level is maintained prudently and to address the new business circumstances of COVID-19 crisis response, the following refinements to the investment strategy were implemented from July 1, 2020. As a result, the average duration of the liquid asset portfolio shortened to four months in FY21 compared to fifteen months in FY20. • Aligned the stable sub-portfolio investment benchmark with the funding benchmark, as the stable sub-portfolio is expected to be increasingly funded by debt during IDA19 and beyond. • Merged Tranche 1 assets into stable or discretionary sub-portfolio, as applicable. Table 22: Liquid Asset Portfolio Composition In millions of U.S. dollars As of June 30, 2021, $28.0 billion (approximately 74% of total volume) was due to mature within six months, of which $11.6 billion was expected to mature within one month. IDA’s return on its liquid asset portfolio for FY21 (excluding unrealized mark-to-market gains / losses on PEBP assets) was 0.25%, compared to 1.73% in FY20, primarily due to unrealized mark-to-market losses on investments – trading in FY21 compared to unrealized mark-to-market gains in FY20, reflecting the increase in yield curves during the year. Table 23 provides a breakdown of the average balances and returns of IDA’s liquid asset portfolio. For details on returns of the total portfolio, refer to Section IV: Financial Results. 31.7 35.0 37.4 0.7 0.6 0.5 0 10 20 30 40 Jun 19 Jun 20 Jun 21 Trading Portfolio Non-trading Portfolio As of June 30, 2021 2020 Liquid Asset Portfolio Operational $ 12,836 $ 9,276 Stable 24,598 15,624 Discretionary - 87 Tranche 1 - 9,959 Total $ 37,434 $ 34,946 Management’s Discussion and Analysis Section VII: Investment Activities 30 IDA Management’s Discussion and Analysis: June 30, 2021 Table 23: Average Balances and Returns by Sub-Portfolio In millions of U.S. dollars, except rates in percentages FY21 FY20 Sub Portfolios Average Balance Return Average Balance Return Operational $ 9,557 0.23% $ 8,600 0.46% Stable 25,708 0.23% 15,420 1.87% Discretionary * 87 0.26% 129 1.72% Tranche 1 - 0.00% 9,814 2.74% Total $ 35,309 0.25% $ 33,963 1.73% * Discretionary sub-portfolio was terminated in December 2020. IDA’s liquid assets are held mainly in the following types of highly rated, fixed-income instruments. See Table 29 for eligibility criteria for IDA’s investments. • Government and Agency Obligations. • Time deposits, and other unconditional obligations of banks and financial institutions. • Asset-backed securities (including mortgage-backed securities). • Currency and interest rate derivatives (including currency forward contracts). • Exchange-traded options and futures. IDA’s prudential minimum liquidity policy ensures that it holds sufficient liquidity. The prudential minimum liquidity level is set at 80% of 24 months of projected net outflows. For FY21, the prudential minimum was $21.2 billion. The prudential minimum for FY22 has been set at $19.3 billion. See Section IX: Risk Management for details on how IDA manages liquidity risk. Investments - Non-Trading Portfolio During FY15, with the proceeds of a concessional loan from a member, IDA purchased a debt security issued by the IFC. IDA elected to measure the security at fair value, so that the measurement method could be consistently applied to all its investments. The changes in fair value for this security are reflected in the Statement of Income. As of June 30, 2021, the investment non-trading portfolio had a fair value of $487 million ($625 million in FY20). See Notes to the Financial Statements for the year ended June 30, 2021, Note C – Investments. Management’s Discussion and Analysis Section IX: Risk Management IDA Management’s Discussion and Analysis: June 30, 2021 33 Section IX: Risk Management Risk Governance IDA’s risk management processes and practices continually evolve to reflect changes in activities in response to market, credit, product, operational, and other developments. The Board, particularly Audit Committee members, periodically review trends in IDA’s risk profiles and performance, and any major developments in risk management policies and controls. Management believes that effective risk management is critical for IDA’s overall operations. Accordingly, the risk management governance structure is designed to manage the principal risks IDA assumes in its activities, and supports management in its oversight function, particularly in coordinating different aspects of risk management and in connection with risks that are common across functional areas. IDA’s financial and operational risk governance structure is built on the “three lines model” where: • Business units are responsible for directly managing risks in their respective functional areas, • The Vice President and WBG Chief Risk Officer (CRO) provides direction, challenge, and oversight over financial and operational risk activities, and • Internal Audit provides independent oversight. IDA’s risk management process comprises risk identification, assessment, response, and risk monitoring and reporting. IDA has policies and procedures under which risk owners and corporate functions are responsible for identifying, assessing, responding to, monitoring, and reporting risks. Figure 10: Financial and Operational Risk Management Structure Risk Oversight and Coverage Financial and Operational Risk Management The CRO oversees both financial and operational risks. These risks include (i) country credit risks in the core sovereign lending business, (ii) market and counterparty risks including liquidity risk, and (iii) operational risks relating to people, processes, and systems. In addition, the CRO works closely with IBRD, IFC, and MIGA’s management to review, measure, aggregate, and report on risks and share best practices across the WBG. The CRO also helps enhance cooperation between the entities and facilitates knowledge sharing in the risk management function. The risk of IDA’s operations not meeting the expected development outcomes (development outcome risks) in IDA’s lending activities is monitored at the corporate level by Operations Policy and Country Services (OPCS). Where fraud and corruption risks may impact IDA-financed projects, OPCS, the Regions and Practice Groups, and the Integrity Vice Presidency jointly address such issues. CRO Financial Risk Operational Risk Business Units Monitor and Report Respond Assess Internal Audit 1 st Line 2 nd Line 3 rd Line Identify Risk Process Risk Coverage Risk Oversight Risk Owners Management’s Discussion and Analysis Section IX: Risk Management 34 IDA Management’s Discussion and Analysis: June 30, 2021 The following three departments report directly to the CRO: Credit Risk Department • Identifies, measures, monitors, and manages country credit risk faced by IDA. • Assesses loan portfolio risk and capital requirements, determines the adequacy of provisions for losses on loans and other exposures, and monitors borrowers that are vulnerable to crises in the near term. The Department assesses the consistency of country lending programs as determined in IDA’s PBA allocation framework with overall capital adequacy. • Whenever a new financial product is being considered for introduction, this department reviews any implications for country credit risk. Market and Counterparty Risk Department • Responsible for market, liquidity, and counterparty credit risk oversight, assessment, and reporting. It does these in coordination with IDA’s financial managers who are responsible for the day-to-day execution of trades for the liquid asset and derivative portfolios within applicable policy and guideline limits. • Responsible for ensuring effective oversight, which includes: i) maintaining sound credit assessments, ii) addressing transaction and product risk issues, iii) providing an independent review function, iv) monitoring market and counterparty risk in the investment, borrowing and client operation portfolios, and v) implementing the model risk governance framework. It also provides reports to the Audit Committee and the Board on the extent and nature of risks, risk management, and oversight. Operational Risk Department • Provides direction and oversight for operational risk activities by business function. • Key operational risk management responsibilities include: (i) administering the Operational Risk Committee (ORC) for IDA, (ii) implementing the operational risk management framework which is aligned with Basel principles and providing direction to business unit partners to ensure consistent application, (iii) assisting and guiding business unit partners in identifying and prioritizing significant operational risks and enabling monitoring and reporting of risks through suitable metrics (or risk indicators), (iv) helping identify emerging risks and trends through monitoring of internal and external risk events, (v) supporting risk response and mitigating activities, and preparing a corporate Operational Risk Report for review and discussion by the ORC. • The department is also responsible for business continuity management, and enterprise risk management functions. Risk Committees Figure 11: Management Risk Committee Structure for Financial and Operational Risks Operational Risk Financial Risk FRC Finance and Risk Committee Chair: MDCFO NBC New Business Committee ERC Enterprise Risk Committee Chair: MDCAO ORC Operational Risk Committee ALCO Asset and Liability Management Committee Chair: MDCFO Management’s Discussion and Analysis Section IX: Risk Management IDA Management’s Discussion and Analysis: June 30, 2021 35 Financial Risk Committees: The Finance and Risk Committee (FRC), a Vice President level committee, provides a high-level governance structure for decisions that may have financial risks. The FRC is chaired by the Managing Director and WBG Chief Financial Officer (MDCFO) and approves, clears, or discusses: (a) risk policy and procedure documents related to financial integrity, income sustainability and balance sheet strength, and (b) issues and new business initiatives with policy implications related to IDA’s risks in the areas of finance, which include country credit, market, counterparty, liquidity, model risks, and operational risks related to the finance business functions. The FRC helps to integrate individual components of finance and risk management activities by building on mechanisms and processes already in place and provides a forum for discussing and communicating significant risk related issues. The FRC meets regularly to discuss the financial performance, new products and services, and risk management of IDA. The New Business Committee (NBC) is a standing subcommittee of the FRC. The NBC provides advice, guidance, and recommendations to the FRC, by performing due diligence over new financial products or services to ensure that management has a full understanding of the rationale, costs, risks and rewards of the product or service being considered. Asset Liability Management Committee (ALCO), a Vice President level committee chaired by the MDCFO provides a high-level forum to ensure prudent balance sheet management of IDA by: a) monitoring its financial positions and ALM activities for compliance with its respective guidelines, policies and procedures, including borrowing and investment activities; b) identifying and providing recommendations on emerging ALM issues for IDA, as well as those related to capital, balance-sheet planning, and financial sustainability; and c) serving as reviewing and recommending body for ongoing decisions as part of implementing the ALM policies and procedures of IDA, including those that impact lending rates and net income. Operational Risk Committees: The Enterprise Risk Committee (ERC) is a corporate committee that has oversight over operational and non- financial risks across IDA. Chaired by IDA’s Managing Director and Chief Administrative Officer (MDCAO), it consists of Vice President level committee members to review and discuss enterprise risk matters. Specifically, the Committee has a governance role over risk matters relating to corporate security, business continuity and IT security. Operational Risk Committee (ORC) is the main governance committee for operational risk and provides a mechanism for an integrated review and response across IDA units on operational risks associated with people, processes, and systems including business continuity, and recognizing that business units remain responsible for managing operational risks. The Committee’s key responsibilities include monitoring significant operational risk matters and events on a quarterly basis to ensure that appropriate risk-response measures are taken and reviewing and concluding on IDA’s overall operational risk profile. The ORC is chaired by the CRO and escalates significant risks/decisions to the FRC and ERC. Management of IDA’s Risks IDA assumes financial risks in order to achieve its development and strategic objectives. IDA’s financial risk management framework is designed to enable and support the institution in achieving its goals in a financially sustainable manner. IDA manages credit, market, and operational risks for its financial activities which include lending, borrowing, and investing (Table 26). The primary financial risk to IDA is the country credit risk inherent in its loan and guarantee portfolio. IDA is also exposed to risks in its liquid asset and derivative portfolios, where the major risks are interest rate, exchange rate, commercial counterparty, and liquidity risks. IDA’s operational risk management framework is based on a structured and uniform approach to identify, assess, and monitor key operational risks across business units. Management’s Discussion and Analysis Section IX: Risk Management 38 IDA Management’s Discussion and Analysis: June 30, 2021 Credit Risk IDA faces two types of credit risk: country credit risk and counterparty credit risk. Country credit risk is the risk of loss due to a country not meeting its contractual obligations, and counterparty credit risk is the risk of loss attributable to a counterparty not honoring its contractual obligations. IDA is exposed to commercial as well as noncommercial counterparty credit risk. Country Credit Risk IDA’s lending management framework encompasses the long-standing PBA mechanism and allocation framework agreed at each replenishment, complemented by additional considerations required when accessing debt markets to ensure adherence to risk management (capital adequacy) requirements. While the PBA framework was not originally intended as a credit quality metric, it incorporates factors related to country credit risk. The PBA determines the volume of concessional IDA resources allocated to each country, based on performance in implementing policies that promote economic growth and poverty reduction, as assessed under the Country Policy and Institutional Assessment (CPIA). The CPIA includes economic management criteria, such as fiscal policy and debt policy and management. In addition to these considerations in the PBA, IDA assesses the country credit risk of all its borrowers. IDA produces credit risk ratings for all its borrowing countries, which reflect country economic, financial, and political circumstances, and also considers environmental, social and governance (ESG) risk factors. Based on these risk ratings, to manage overall portfolio risk, the allocation outcomes of the PBA and other mechanisms are reviewed to ensure that they are compatible with the Deployable Strategic Capital Framework and Single Borrower Limit. Single Borrower Limit Portfolio concentration risk, which arises when a small group of borrowing countries account for a large share of loans outstanding, is a key consideration for IDA. Concentration risk is managed through the SBL, which caps exposure to any single borrowing country at 25 percent of equity, in line with the Basel-based maximum exposure limit. For FY22, the SBL has been set at $45 billion (25 percent of $180.9 billion of equity as of June 30, 2021), marginally higher than FY21. Currently, the maximum country exposure levels compatible with IDA’s overall capital adequacy target are lower than the SBL for all IDA-borrowing countries. As a consequence, the SBL is not currently a constraining factor. As of June 30, 2021, the ten countries with the highest exposures accounted for 66% of IDA’s total exposure (Figure 12). IDA’s largest exposure to a single borrowing country, India, was $22 billion as of June 30, 2021. Monitoring these exposures relative to the SBL, requires consideration of the repayment profiles of existing loans, as well as disbursement profiles and projected new loans and guarantees. Figure 12: Country Exposures as of June 30, 2021 In billions of U.S. dollars Debt Relief IDA has participated in two comprehensive debt relief initiatives, HIPC and MDRI, adopted by the global development community to reduce the debt burdens of developing countries. In each case, IDA agreed to provide debt relief in return for future compensation from members for forgone reflows, ensuring that IDA’s financial capacity would not be reduced. For a borrower to be eligible for debt relief on its loans with IDA, it is required to maintain macroeconomic stability, carry out key structural and social reforms, and maintain all loans in accrual status. 4.4 5.6 8.3 10.2 11.2 11.7 14.1 16.4 18.1 22.0 0 2 4 6 8 10 12 14 16 18 20 22 Uganda Ghana Tanzania Kenya Ethiopia Nigeria Vietnam Pakistan Bangladesh India Top Ten Country Exposures Management’s Discussion and Analysis Section IX: Risk Management IDA Management’s Discussion and Analysis: June 30, 2021 39 Expected Losses, Overdue Payments and Non-Performing Loans When a borrower fails to make payments on any principal, interest, or other charges due to IDA, IDA may suspend disbursements immediately on all loans and grants to that borrower. IDA’s current practice is to exercise this option using a gradual approach (Table 28). These practices also apply to member countries eligible to borrow from both IDA and IBRD, and whose payments on IBRD loans may become overdue. It is IDA’s practice not to reschedule service charges, interest or principal payments on its loans or participate in debt rescheduling agreements with respect to its loans. As of June 30, 2021, none of the IDA borrowing countries in the accrual portfolio had overdue payments beyond 45 days. Table 28: Treatment of Overdue Payments Overdue by 30 days Where the borrower is the member country, no new loans or grants to the member country, or to any other borrower in the country, will be presented to the Board for approval nor will any previously approved loans or grants be signed, until payments for all amounts 30 days overdue or longer have been received. Where the borrower is not the member country, no new loans or grants to that borrower will be signed or approved. Overdue by 45 days In addition to the provisions cited above for payments overdue by 30 days, to avoid proceeding further on the notification process leading to suspension of disbursements, the country as borrower or guarantor and all borrowers in the country must pay not only all payments overdue by 30 days or more, but also all payments due regardless of the number of days since they have fallen due. Where the borrower is not the member country, no new loans, or grants to, or guaranteed by, the member country, will be signed or approved. Overdue by 60 days In addition to the suspension of approval for new loans or grants and signing of previously approved loans or grants, disbursements on all grants or loans to or guaranteed by the member country are suspended until all overdue amounts are paid. This policy applies even when the borrower is not the member country. Under exceptional circumstances, disbursements can be made to a member country upon the Board’s approval. Overdue by more than six months All loans made to or guaranteed by a member of IDA are placed in nonaccrual status, unless IDA determines that the overdue amount will be collected in the immediate future. Unpaid service charges and other charges not yet paid on loans outstanding are deducted from the income for the current period. To the extent that these payments are received, they are included in income. At the time of arrears clearance, if collectability risk is considered to be particularly high, the member’s exposures may not automatically emerge from nonaccrual status. In such instances, a decision is made on the restoration of accrual status on a case-by- case basis and in certain cases, this decision may be deferred until after a suitable period of payment performance has passed. As an exception to the practices set forth in Table 28, IDA has provided financing to countries with overdue payments, in very specific situations: • IDA has provided grants from its Crisis Response Window to third party agencies for use in Somalia and Zimbabwe in response to major crises, during FY17 and FY19 respectively, and; • IDA has financed a few regional projects, for the benefit of countries with overdue payments to IDA, through its Regional Program Window. In the past, on an exceptional basis, IDA financed through concessional loans and grants the following regional projects, where participation of a country with overdue payments was crucial to the success of the regional project. • In April 2017, the Kenya Displacement project ($103 million) through Intergovernmental Authority on Development (IGAD) that included financing for Somalia. • In December 2014, Kariba Dam Rehabilitation Project ($75 million) that included benefits for Zimbabwe. • In September 2003, West Africa HIV/AIDS project for the Abidjan-Lagos Transport Corridor ($17 million) that included benefits for Togo, a country with overdue payments at that time. In the above cases, financing was not made directly to the country with overdue payments. Implementation arrangements were such that a regional bank or another participating country took on the obligation of the regional project on behalf of the country with overdue payments to IDA. In addition, IDA may engage with countries with overdue payments when a very narrow and well-defined set of criteria are met, including a clear path to arrears clearance. For more details on exceptional financing, see Section III: IDA’s Financial Resources. Arrears Clearance On March 25, 2021, Sudan paid all of the overdue principal and charges due to IDA of $849 million and $244 million, respectively. The outstanding loans remaining to Sudan were restored to accrual status on that date, in accordance Management’s Discussion and Analysis Section IX: Risk Management 40 IDA Management’s Discussion and Analysis: June 30, 2021 with IDA’s policy. For more details, see Notes to the Financial Statements for the year ended June 30, 2021, Note D – Loans and Other Exposures. Accumulated Provision for Losses on Loans and other Exposures Beginning July 1, 2020, IDA records a provision to reflect the expected losses inherent in its loan and other exposures. Prior to July 1, 2020, the provision was determined based on an incurred loss model. On July 1, 2020, IDA recorded a transition adjustment of $802 million, increasing the beginning balance of accumulated deficit. This adjustment represented the difference between the previous method and CECL. For more details, see Notes to the Financial Statements for the year ended June 30, 2021, Note A – Summary of Significant Accounting and Related Policies. A key determinant in the provision for losses on loans and other exposures is IDA’s borrowing country credit risk ratings. These ratings are IDA’s own assessment of borrowers’ ability and willingness to repay IDA on time and in full. As of June 30, 2021, IDA had $181.5 billion of loans outstanding, of which loans in nonaccrual status represent 0.5%. IDA’s total provision for losses on loans and other exposures was $4.9 billion, which represents a provisioning rate of 2.0% of the underlying exposures ($4.5 billion as of June 30, 2020, 2.7% of the underlying exposures). For a summary of countries with loans or guarantees in nonaccrual status as of June 30, 2021, see Notes to the Financial Statements for the year ended June 30, 2021, Note D–Loans and Other Exposures. Commercial Counterparty Credit Risk Commercial counterparty credit risk is the risk that counterparties fail to meet their payment obligations under the terms of the contract or other financial instruments. Effective management of counterparty credit risk is vital to the success of IDA’s funding, investment, and asset/liability management activities. The monitoring and management of these risks is continuous as the market environment evolves. IDA mitigates the counterparty credit risk from its investment and derivative holdings through the credit approval process, the use of collateral agreements and risk limits, and other monitoring procedures. The credit approval process involves evaluating counterparty and product specific creditworthiness, assigning internal credit ratings and limits, and determining the risk profile of specific transactions. Credit limits are set and monitored throughout the year. Counterparty exposure is updated daily, taking into account current market values of assets held, estimates of potential future movements of exposure for derivative instruments, and related counterparty collateral agreements. Collateral posting requirements are based on thresholds driven by public credit ratings. Collateral held includes cash and highly rated liquid investment securities. Commercial credit risk management includes ESG related assessments in the approval and monitoring of higher exposure counterparts for the liquid asset portfolio and for derivative counterparts. In addition, third-party ESG scores of the liquid asset portfolio and derivative exposures are monitored. IDA’s liquid asset portfolio consists mostly of sovereign government bonds, debt instruments issued by sovereign government agencies, and time deposits with banks. More than half of these investments are with issuers and counterparties rated triple-A or double-A (Table 30). Derivative Instruments In the normal course of its business, IDA enters into various derivative instruments to manage foreign exchange and interest rate risks. These instruments are also used to help borrowers to manage their financial risks. Derivative transactions are conducted with other financial institutions and, by their nature, entail commercial counterparty credit risk. While the volume of derivative activity can be measured by the contracted notional value of derivatives, notional value is not an accurate measure of credit or market risk. IDA uses the estimated replacement cost of the derivative instruments, or potential future exposure (PFE), to measure credit risk with counterparties. Under IDA’s mark-to-market collateral arrangements, IDA receives collateral when mark-to-market exposure is greater than the ratings-based collateral threshold. As of June 30, 2021, IDA did not receive any cash collateral for its derivative transactions (June 30, 2020 – $2 million). IDA is not required to post collateral under its derivative agreements as long as it maintains a triple-A credit rating. (For the contractual value, notional amounts, related credit risk exposure amounts, and the amount IDA would be required to post in the event of a downgrade, see Notes to the Financial Statements for the year ended June 30, 2021, Note F–Derivative Instruments). Management’s Discussion and Analysis Section IX: Risk Management IDA Management’s Discussion and Analysis: June 30, 2021 43 As of June 30, 2021, IDA’s investment-trading portfolio (liquid asset portfolio) had a duration of four months. Low and negative fixed interest rates present a challenge for the investment of the liquid asset portfolio. During FY21, this portfolio experienced unrealized mark-to-market losses of $40 million, excluding positive returns from IDA’s share of PEBP earnings, as a result of the increase in yield curves ($187 million of unrealized mark-to-market gains in FY20). Under its integrated financing model, IDA employs the following strategies to continue to enhance its management of interest rate risk: • The capital adequacy policies factor in the sensitivity to interest rates. • Matching interest rates between assets and related funding to minimize open interest rate positions. • The funding risk related to the mismatch between the maturity profile of the debt funding and the related assets is monitored through duration measurements and adjustments to capital requirements to cover this risk. Alternative Reference Rate In July 2017, the Financial Conduct Authority (FCA), the regulator of the London Interbank Offered Rate (LIBOR), announced that it would no longer compel panel banks to submit rates required to calculate LIBOR after December 31, 2021. Therefore, market participants, including IDA and its borrowers, need to move to alternative reference rates because the availability of LIBOR after this date is not a certainty. In March 2021, the FCA confirmed that all LIBOR settings will either cease to be provided by any administrator or will no longer be representative, as follows: • All sterling, euro, Swiss franc and Japanese yen LIBOR settings, and the 1-week and 2-month U.S. dollar LIBOR settings, will cease immediately following publication on December 31, 2021. • All remaining U.S. dollar LIBOR settings, including the 6-month U.S. dollar LIBOR used as the reference rate for IDA loans, will cease immediately following its publication on June 30, 2023. Despite the extension of the publication of certain U.S. dollar LIBOR rates to June 30, 2023, the regulators’ guidance remains that LIBOR should not be used for new contracts after 2021. In consideration of the regulatory guidance and in preparations for the global markets’ transition away from LIBOR, IDA has taken important steps to facilitate a smooth and orderly transition of its financial instruments effected by alternative reference rates. IDA previously completed an initial impact assessment of its exposure, both quantitatively and qualitatively, to LIBOR and developed an implementation roadmap for the LIBOR transition. IDA is actively working through this transition and is analyzing the impact from multiple perspectives: lending, funding, accounting, operations, information technology, liquidity investing, risk and legal, considering the portfolio of existing loans and other instruments that use LIBOR as a benchmark. Although most of IDA’s loans are on fixed rate concessional terms, for IDA’s LIBOR based non-concessional and hard-term loans, in FY20, IDA’s Executive Directors endorsed an omnibus amendment process with borrowers for loan agreements, where relevant, to address the replacement of LIBOR, allowing IDA to maintain the principles of fairness and equivalence for any replacement reference rate. The contract amendments will enable similar treatment to all loans by bringing the fallback provisions related to changes in the reference rate in the General Conditions into conformity with the revised General Conditions of December 2018. The new language permits IDA to transition the interest rate to alternative reference rates when a suitable alternative is available, and it is appropriate to do so. To date, IDA has made significant progress in securing counter-signature of the omnibus amendments from the borrowing countries. IDA is also using pre-existing provisions in loan agreements to implement these changes. In addition, as the market undergoes fundamental changes due to the transition to alternative reference rates, as a part of its interest rate risk management, on January 26, 2021, IDA suspended the offering of non-concessional loans on fixed spread terms as well as the suspension of a related conversion feature from the variable spread terms to fixed spread terms, effective from April 1, 2021. An existing feature to permit fixing of the reference rate in loans with variable spread terms remains available. While IDA’s primary product is fixed rate loans that is not dependent on a reference rate (see Section V: Development Activities, Products and Programs), IDA does offer certain borrowers non-concessional terms based on the lending rate of IBRD loan products (See Table 16). In July 2021, the Board approved offering new loans with new alternative reference rates and ceasing to offer LIBOR based loans effective January 1, 2022 for all variable spread loans. Careful consideration was given to the regulatory guidance, relevant provisions in IDA’s General Conditions and loan Management’s Discussion and Analysis Section IX: Risk Management 44 IDA Management’s Discussion and Analysis: June 30, 2021 agreements, ALM needs, as well as borrower implications. As a result of the different characteristics of the new market reference rates and LIBOR and the implications of a staggered LIBOR cessation timetable, there will be changes to the current loan processes for non-concessional loans, including billing and cost-pass through methodologies used for IBRD lending rates. However, the impact of these changes will be limited as IDA’s non-concessional loans portfolio represented 3% of the total loans outstanding as of June 30, 2021. IDA will continue to work with key stakeholders, including internal subject matter experts, senior management, borrowers, industry groups and other market participants, to mitigate potential financial and operational risks to which IDA is exposed and to ensure an orderly transition to alternative reference rates. IDA is managing the transition prudently and in a cost-effective manner. Exchange Rate Risk IDA faces foreign exchange rate risk exposure as a result of the currency mismatch between its commitments for loans and grants, which are mainly denominated in SDRs; equity contributions from members, which are typically denominated in national currencies; and the portion of IDA’s internal resources and expenditures that are denominated in U.S. dollars. Changes in exchange rates affect the capital adequacy of IDA when the currency of the equity supporting the loan portfolio and other assets is different from that of the risk exposure. Accordingly, the primary objective of IDA’s currency risk management is to protect IDA’s financial capacity, as measured by the capital adequacy framework, from exchange rate movements. To achieve this, IDA’s balance sheet is managed in multiple currencies: SDR and the currencies comprising the SDR basket. The exchange rate risk management methodology includes the hedging of: (i) currency risk arising from settlement of loan disbursements, loan repayments and donor contributions; (ii) debt funding; (iii) IDA loans; (iv) donor contributions; and (v) administrative budget. The reported levels of its assets, liabilities, income, and expenses in the financial statements are affected by exchange rate movements in all the currencies in which IDA transacts, relative to its reporting currency, the U.S. dollar. These movements are shown as currency translation adjustments. Translation adjustments relating to the revaluation of assets and liabilities denominated in SDR and SDR component currencies, (IDA’s functional currencies), are reflected in Accumulated Other Comprehensive Income (Loss), in equity. Translation adjustments relating to non-functional currencies are reported in IDA’s Statement of Income (see Notes to the Financial Statements for the year ended June 30, 2021, Note A – Summary of Significant Accounting and Related Policies). IDA uses currency forward contracts to convert future inflows from members’ receivables provided in national currencies into the five currencies of the SDR basket, thereby aligning the currency composition of member contributions with the net cash outflows relating to loans and grants, which are primarily denominated in SDR. Liquidity Risk Liquidity risk arises in the general funding of IDA’s activities and in managing its financial position. It includes the risk of IDA being unable to fund its portfolio of assets at appropriate maturities and rates, and the risk of being unable to liquidate a position in a timely manner at a reasonable price. IDA’s aggregate liquid asset holdings are kept above a specified prudential minimum to safeguard against cash flow interruptions. The Prudential Minimum is equal to 80% of 24 months of projected net outflows. For FY21, the prudential minimum was $21.2 billion. For FY22, the prudential minimum has been set at $19.3 billion. As of June 30, 2021, IDA’s liquid assets were 177% of the prudential minimum. IDA will hold liquidity above the prudential minimum to ensure sufficient liquidity under a wide range of shock scenarios as well as to give it flexibility in timing its borrowing transactions and to meet working capital needs. Operational Risk Operational risk is defined as the risk of financial loss, or damage to IDA’s reputation resulting from inadequate or failed internal processes, people, and systems, or from external events. IDA recognizes the importance of operational risk management activities, which are embedded in its financial operations. As part of its business activities, IDA is exposed to a range of operational risks including physical security and staff health and safety, data and cyber security, business continuity, and external vendor risks. IDA’s approach to identifying and managing operational risk includes a dedicated program for these risks and a robust process that Management’s Discussion and Analysis Section IX: Risk Management IDA Management’s Discussion and Analysis: June 30, 2021 45 includes identifying, assessing and prioritizing operational risks, monitoring and reporting relevant key risk indicators, aggregating and analyzing internal and external events, and identifying emerging risks that may affect business units and developing risk response and mitigating actions. Cybersecurity Risk Management IDA’s operations rely on the secure processing, storage, and transmission of confidential and other information in computer systems and networks. As is the case for financial institutions generally, cybersecurity risk continues to be significant for IDA due to the evolving sophistication and complexity of the cyber threat landscape. These risks are unavoidable, and IDA seeks to manage them on a cost-effective basis consistent with its risk appetite. To protect the security of its computer systems, software, networks and other technology assets, IDA has developed its cybersecurity risk management program, consisting of cybersecurity policies, procedures, compliance, and awareness programs. IDA deploys a multi-layered approach for cybersecurity risk management to help prevent and detect malicious activity, both from within the organization and from external sources. In managing emerging cyber threats such as malware including ransomware, denial of service and phishing attacks, IDA strives to adapt its technical and process-level controls and raise the level of user awareness to mitigate the risk. IDA periodically assesses the maturity and effectiveness of its cyber defenses, through risk mitigation techniques, including but not limited to, targeted testing, internal and external audits, incident response desktop exercises and industry benchmarking. Management’s Discussion and Analysis Section XI: Governance and Internal Controls 48 IDA Management’s Discussion and Analysis: June 30, 2021 Section XI: Governance and Internal Controls Figure 14: Governance Structure Business Conduct The WBG promotes a positive work environment in which staff members understand their ethical obligations to the institution. In support of this commitment, the institution has in place a Code of Conduct. The WBG has both an Ethics Helpline and a Fraud and Corruption hotline. A third-party service offers many methods of worldwide communication. Reporting channels include telephone, mail, email, or confidential submission through a website. IDA has in place procedures for receiving, retaining, and handling recommendations and concerns relating to business conduct identified during the accounting, internal control, and auditing processes. WBG staff rules clarify and codify the staff’s obligations in reporting suspected fraud, corruption, or other misconduct that may threaten the operations or governance of the WBG. These rules also offer protection from retaliation. General Governance IDA’s decision-making structure consists of the Board of Governors, the Executive Directors, the President, management, and staff. The Board of Governors is the highest decision-making authority. Governors are appointed by their member governments for a five-year term, which is renewable. The Board of Governors may delegate authority to the Executive Directors (referred to as the Board in this document) to exercise any of its powers, except for certain powers enumerated in the IDA Articles. IDA has its own policies and frameworks that are carried out by staff that share responsibilities for both IDA and IBRD. Executive Directors In accordance with the Articles, Executive Directors are appointed or elected every two years by their member governments. The Board currently has 25 Executive Directors who represent all 173-member countries. Executive Directors are neither officers nor staff of IDA. The President is the only member of the Board from management, and he serves as a non-voting member and as Chairman of the Board. The Board is required to consider proposals made by the President on IDA loans, grants, and guarantees and on other policies that affect its general operations. The Board is also responsible for presenting to the Board of Governors, at the Annual Meetings, audited accounts, an administrative budget, and an annual report on operations and policies and other matters. The Board and its committees are in sessions as business requires. Each committee's terms of reference establish its respective roles and responsibilities. In light of the COVID-19 situation, currently, the committee meetings are held in a virtual format. As committees do not vote on issues, their role is primarily to serve the Board in discharging its responsibilities. The committees are made up of eight members and function under their respective terms of reference. These committees are as follows: Executive Directors Board of Governors President Audit Committee Budget Committee Human Resources Committee Committee on Governance and Executive Directors’ Administrative Matters Committee on Development Effectiveness Management’s Discussion and Analysis Section XI: Governance and Internal Controls IDA Management’s Discussion and Analysis: June 30, 2021 49 • Audit Committee - assists the Boards in overseeing IDA’s finances, accounting, risk management and internal controls (See further explanation below). • Budget Committee - assists the Boards in approving the World Bank’s budget and in overseeing the preparation and execution of IDA’s business plans. The committee provides guidance to management on strategic directions of IDA. • Committee on Development Effectiveness - supports the Boards in assessing IDA’s development effectiveness, providing guidance on strategic directions of IDA, monitoring the quality and results of operations. • Committee on Governance and Executive Directors’ Administrative Matters - assists the Boards in issues related to the governance of IDA, the Boards’ own effectiveness, and the administrative policy applicable to Executive Directors’ offices. • Human Resources Committee - strengthens the efficiency and effectiveness of the Board in discharging its oversight responsibility on the World Bank’s human resources strategy, policies and practices, and their alignment with the business needs of the organization. Audit Committee Membership The Audit Committee consists of eight Executive Directors. Membership in the Audit Committee is determined by the Board, based on nominations by the Chairman of the Board, following informal consultation with Executive Directors. Key Responsibilities The Audit Committee is appointed by the Board for the primary purpose of assisting the Board in overseeing IDA’s finances, accounting, risk management, internal controls, and institutional integrity. Specific responsibilities include: • Oversight of the integrity of IDA’s financial statements. • Appointment, qualifications, independence, and performance of the External Auditor. • Performance of the Group Internal Audit Vice Presidency. • Adequacy and effectiveness of financial and accounting policies and internal controls and the mechanisms to deter, prevent and penalize fraud and corruption in IDA operations and corporate procurement. • Effective management of financial, fiduciary and compliance risks in IDA. • Oversight of the institutional arrangements and processes for risk management across IDA. In carrying out its role, the Audit Committee discusses financial issues and policies that affect IDA’s financial position and capital adequacy, with management, external auditors, and internal auditors. It also recommends the annual audited financial statements for approval to the Board. The Audit Committee monitors and reviews developments in corporate governance and its own role on an ongoing basis. Executive Sessions Under the Audit Committee's terms of reference, it may convene an executive session at any time, without management’s presence. The Audit Committee meets separately in executive session with the external and internal auditors. Access to Resources and to Management Throughout the year, the Audit Committee receives a large volume of information to enable it to carry out its duties and meets both formally and informally throughout the year to discuss relevant matters. It has complete access to management, and reviews and discusses with management topics considered in its terms of reference. The Audit Committee has the authority to seek advice and assistance from outside legal, accounting, or other advisors as it deems necessary. Management’s Discussion and Analysis Section XI: Governance and Internal Controls 50 IDA Management’s Discussion and Analysis: June 30, 2021 Auditor Independence The appointment of the external auditor for IDA is governed by a set of Board-approved principles. These include: • Limits on the external auditor’s provision of non-audit-related services; • Requiring all audit-related services to be pre-approved on a case-by-case basis by the Board, upon recommendation of the Audit Committee; and • Renewal of the external audit contract every five years, with a limit of two consecutive terms and mandatory rotation thereafter. The external auditor may provide non-prohibited, non-audit related services subject to monetary limits. Broadly, the list of prohibited non-audit services includes those that would put the external auditor in the roles typically performed by management and in a position of auditing their own work, such as accounting services, internal audit services, and provision of investment advice. The total non-audit services fees over the term of the relevant external audit contract shall not exceed 70 percent of the audit fees over the same period. Communication between the external auditor and the Audit Committee is ongoing and carried out as often as deemed necessary by either party. The Audit Committee meets periodically with the external auditor and individual committee members have independent access to the external auditor. IDA’s external auditors also follow the communication requirements with the Audit Committee set out under generally accepted auditing standards in the United States. External Auditors The external auditor is appointed to a five-year term, with a limit of two consecutive terms, and is subject to annual reappointment based on the recommendation of the Audit Committee and approval of a resolution by the Board. Following a mandatory rebidding of the external audit contract, IDA’s Executive Directors approved the selection of Deloitte & Touche LLP as IDA’s external auditor for a five-year term commencing FY19, subject to annual reappointment. Senior Management Changes There were no senior management changes during the year. Internal Controls Internal Control over Financial Reporting Each fiscal year, management evaluates the internal control over financial reporting to determine whether any changes made in these controls during the fiscal year materially affect, or would be reasonably likely to materially affect, IDA’s internal control over financial reporting. The internal control framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), “Internal Control - Integrated Framework (2013)” provides guidance for designing, implementing, and conducting internal control and assessing its effectiveness. IDA uses the 2013 COSO framework to assess the effectiveness of the internal control over financial reporting. As of June 30, 2021, management maintained effective internal control over financial reporting. See “Management’s report regarding effectiveness of Internal Control over Financial Reporting” on page 54. IDA’s internal control over financial reporting was audited by Deloitte & Touche LLP, and their report expresses an unqualified opinion on the effectiveness of IDA’s internal control over financial reporting as of June 30, 2021. See Independent Auditor’s Report on page 56. Disclosure Controls and Procedures Disclosure controls and procedures are designed to ensure that information required to be disclosed is gathered and communicated to management as appropriate, to allow timely decisions regarding required disclosure by IDA. Management conducted an evaluation of the effectiveness of such controls and procedures and the President and the MDCFO have concluded that these controls and procedures were effective as of June 30, 2021. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 53 INTERNATIO NAL DEVELO PMENT ASSO CIATION ( IDA) FI NANCI AL STATEM ENTS AND I NTERNAL CO NTROL REPO RTS JUNE 30, 2021 Management’s Report Regarding Effectiveness of Internal Control Over Financial Reporting 54 Independent Auditors’ Report on Effectiveness of Internal Control Over Financial Reporting 56 Independent Auditors’ Report 58 Balance Sheet 60 Statement of Income 62 Statement of Comprehensive Income 63 Statement of Changes in Accumulated Deficit 63 Statement of Cash Flows 64 Supplementary Information Summary Statement of Loans 66 Statement of Voting Power and Subscriptions and Contributions 69 Notes to Financial Statements 73 54 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 MANAGEM ENT ’S REPO RT REG ARDI NG EFFECTIVENESS OF INTERNAL CO NTROL OVER EXTERNAL F I NANCIAL REPO RTING Management’s Report Regarding Effectiveness of Internal Control over Financial Reporting August 6, 2021 The management of the International Development Association (IDA) is responsible for the preparation, integrity, and fair presentation of its published financial statements. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on informed judgments and estimates made by management. The financial statements have been audited by an independent audit firm, which was given unrestricted access to all financial records and related data, including minutes of all meetings of the Executive Directors and their Committees. Management believes that all representations made to the independent auditors during their audit of IDA’s financial statements and audit of its internal control over financial reporting were valid and appropriate. The independent auditors’ reports accompany the audited financial statements. Management is responsible for establishing and maintaining effective internal control over financial reporting for financial statement presentations in conformity with accounting principles generally accepted in the United States of America. Management maintains a comprehensive system of controls intended to ensure that transactions are executed in accordance with management’s authorization, assets are safeguarded, and financial records are reliable. The system of internal control contains monitoring mechanisms, and actions are taken to correct deficiencies identified. Management believes that internal control over financial reporting supports the integrity and reliability of the external financial statements. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time. IDA assessed its internal control over financial reporting for financial statement presentation in conformity with accounting principles generally accepted in the United States of America as of June 30, 2021. This assessment was based on the criteria for effective internal control over financial reporting described in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment, management believes that IDA maintained effective internal control over financial reporting presented in conformity with accounting principles generally accepted in the United States of America as of June 30, 2021. The independent audit firm that audited the financial statements has issued an Independent Auditors Report which expresses an opinion on IDA’s internal control over financial reporting. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 55 The Executive Directors of IDA have appointed an Audit Committee responsible for monitoring the accounting practices and internal controls of IDA. The Audit Committee is comprised entirely of Executive Directors who are independent of IDA’s management. The Audit Committee is responsible for recommending to the Executive Directors the selection of independent auditors. It meets periodically with management, the independent auditors, and the internal auditors to ensure that they are carrying out their responsibilities. The Audit Committee is responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of IDA in addition to reviewing IDA’s financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of internal control over financial reporting and any other matters which they believe should be brought to the attention of the Audit Committee. ________________________ David Malpass President _______________________ Anshula Kant Managing Director and World Bank Group Chief Financial Officer ________________________ Jorge Familiar Calderon Vice President and World Bank Group Controller 58 INDEPENDENT AUDITO RS ’ REPORT INDEPENDENT AUDITORS’ REPORT President and Board of Executive Directors International Development Association: We have audited the accompanying financial statements of the International Development Association ("IDA"), which comprise the balance sheets as of June 30, 2021 and 2020, and the related statements of income, comprehensive income, changes in accumulated deficit, and cash flows for each of the three years in the period ended June 30, 2021, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to IDA’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IDA as of June 30, 2021 and 2020, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2021 in accordance with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP 7900 Tysons One Place Suite 800 McLean, VA 22102 USA Tel.: +1 703 251 1000 Fax: +1 703 251 3400 www.deloitte.com 59 Change in Accounting Principle As described in Note A to the financial statements, IDA changed its method of accounting for the accumulated provision for loan losses and other exposures on July 1, 2020, due to the adoption of Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Report on Supplementary Information Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The summary statement of loans and the statement of voting power and subscriptions and contributions as of June 30, 2021 ("supplementary information") listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the financial statements. This supplementary information is the responsibility of IDA's management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in our audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, such information is fairly stated in all material respects in relation to the financial statements as a whole. Report on Internal Control over Financial Reporting We have also audited, in accordance with auditing standards generally accepted in the United States of America, IDA's internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 6, 2021 expressed an unmodified opinion on IDA's internal control over financial reporting. August 6, 2021 60 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 BALANCE SHEET June 30, 2021 and June 30, 2020 Expressed in millions of U.S. dollars 2021 2020 Assets Due from banks—Notes C and K Unrestricted cash $ 470 $ 650 Restricted cash 26 24 496 674 Investments (including securities transferred under repurchase or securities lending agreements of Nil - June 30, 2021; $108 million - June 30, 2020) —Notes C, G and K 37,376 34,670 Derivative assets, net—Notes C, F and K 249 136 Receivable from affiliated organization—Note G 865 858 Other receivables Receivable from investment securities traded—Note C 7 636 Accrued interest and commitment charges 511 440 518 1,076 Loans outstanding (Summary statement of loans, Notes D, G and K) Total loans approved 251,676 227,291 Less: Undisbursed balance (including signed loan commitments of $60,775 million—June 30, 2021; $49,580 million— June 30, 2020) (70,172) (61,911) Loans outstanding 181,504 165,380 Less: Accumulated provision for loan losses (3,718) (4,420) Add: Deferred loans origination costs (7) 1 Net loans outstanding 177,779 160,961 Other assets—Note H 2,041 1,097 Total assets $ 219,324 $ 199,472 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 63 STATEMENT OF COMPREHENSIVE INCOME For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Net loss $ (433) $ (1,114) $ (6,650) Other Comprehensive income (loss)—Note J Currency translation adjustments on functional currencies 5,647 (1,526) (1,735) Net Change in Debit Valuation Adjustment (DVA) on Fair Value option elected liabilities (64) 7 2 Comprehensive income (loss) $ 5,150 $ (2,633) $ (8,383) STATEMENT OF CHANGES IN ACCUMULATED DEFICIT For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Accumulated Deficit at beginning of the fiscal year $ (58,321) $ (57,207) $ (50,557) Cumulative effect of a change in accounting principle—Notes A and D (802) - - Adjusted Accumulated Deficit at beginning of the fiscal year $ (59,123) $ (57,207) $ (50,557) Net loss (433) (1,114) (6,650) Accumulated Deficit at end of the fiscal year $ (59,556) $ (58,321) $ (57,207) The Notes to Financial Statements are an integral part of these Statements. 64 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 STATEMENT OF CASH FLOWS For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Cash flows from investing activities Loans Disbursements $ (16,681) $ (16,449) $ (13,562) Principal repayments 6,457 6,016 5,277 Principal prepayments - 51 51 Non-trading securities—Investments Repayments 125 124 122 Net cash used in investing activities (10,099) (10,258) (8,112) Cash flows from financing activities Members' subscriptions and contributions 8,355 7,823 7,421 Medium and long-term borrowings New issues 9,405 5,725 872 Retirements (96) (43) - Short-term borrowings (original maturities greater than 90 days) New issues 8,219 12,018 1,724 Retirements (9,561) (8,178) - Net short-term borrowings (original maturities less than 90 days) 120 16 140 Net derivatives-borrowings 29 (20) (2) Net cash provided by financing activities 16,471 17,341 10,155 Cash flows from operating activities Net loss (433) (1,114) (6,650) Adjustments to reconcile net loss to net cash used in operating activities Provision for losses on loans and other exposures (release) charge (539) (170) 316 Non-functional currency translation adjustment losses (gains), net 372 (95) (105) Unrealized mark-to-market (gains) losses on non-trading portfolios, net (1,102) 688 (386) Other non-interest (income) expenses, net (20) 40 (12) Amortization of discount on borrowings 96 133 88 Changes in: Investments—Trading (2,090) (2,323) 2,956 Net investment securities traded/purchased 603 (155) (643) Net derivatives—Investments 160 (89) (14) Net derivatives—Asset-liability management 19 533 127 Net securities purchased/sold under resale/repurchase agreements and payable for cash collateral received (109) (601) (1,811) Net receivable from affiliated organizations 45 14 (26) Payable for development grants (2,652) (3,070) 3,697 Accrued interest and commitment charges (57) (43) (13) Other assets (1,367) (1,279) 379 Accounts payable and miscellaneous liabilities 471 992 (332) Net cash used in operating activities (6,603) (6,539) (2,429) Effect of exchange rate changes on unrestricted and restricted cash 53 (8) 1 Net (decrease) increase in unrestricted and restricted cash (178) 536 (385) Unrestricted cash and restricted cash at beginning of the fiscal year 674 138 523 Unrestricted and restricted cash at end of the fiscal year $ 496 $ 674 $ 138 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 65 STATEMENT OF CASH FLOWS For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Supplemental disclosure Increase (Decrease) in ending balances resulting from exchange rate fluctuations: Loans outstanding $ 5,909 $ (1,543) $ (1,696) Investment portfolio 1,180 (449) (334) Derivatives—Asset-liability management (880) 321 293 Borrowings 627 (149) 12 Principal repayments written off under Heavily Indebted Poor Countries (HIPC) Debt Initiative 9 10 10 Loans prepaid—carrying value - 54 54 Interest paid on borrowing portfolio 118 161 88 The Notes to Financial Statements are an integral part of these Statements. 68 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 SUMMARY STATEMENT OF LOANS June 30, 2021 Amounts expressed in millions of U.S. dollars Undisbursed balance Borrower or guarantor Total loans Loans approved but not yet signed Signed loan commitments Loans outstanding Percentage of total loans outstanding a African Trade Insurance Agency $ 423 $ - $ 388 $ 35 0.02 % Bank of the States of Central Africa 60 - 18 42 0.02 Caribbean Development Bank 10 - - 10 0.01 West African Development Bank 389 - 122 267 0.15 Subtotal—Regional development banks $ 882 $ - $ 528 $ 354 0.20 % Private Sector Window (PSW) Loans 287 166 111 10 0.01 Total—June 30, 2021 a $ 251,676 $ 9,397 $ 60,775 $ 181,504 100.00 % Total—June 30, 2020 $ 227,291 $ 12,331 $ 49,580 $ 165,380 * Indicates amount less than $0.5 million or 0.005 percent a. May differ from the calculated amounts or sum of individual figures shown due to rounding. The Notes to Financial Statements are an integral part of these Statements. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 69 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2021 Amounts expressed in millions of U.S. dollars Member a Number of votes Percentage of total votes Subscriptions and contributions committed b Part I Members Australia 365,955 1.25 % $ 5,531.34 Austria 272,150 0.93 4,183.42 Belgium 320,639 1.09 5,453.06 Canada 782,320 2.66 13,483.05 Denmark 275,568 0.94 4,339.45 Estonia 54,427 0.19 21.85 Finland 185,339 0.63 2,271.86 France 1,118,918 3.81 20,625.63 Germany 1,569,980 5.35 29,272.77 Greece 57,465 0.20 214.16 Iceland 65,779 0.22 103.96 Ireland 110,230 0.38 938.89 Italy 667,995 2.28 11,349.98 Japan 2,454,693 8.36 50,118.26 Kuwait 122,208 0.42 1,121.38 Latvia 60,916 0.21 20.73 Lithuania 54,278 0.18 19.83 Luxembourg 83,584 0.28 471.47 Netherlands 590,188 2.01 10,731.10 New Zealand 81,955 0.28 421.18 Norway 308,671 1.05 4,686.94 Portugal 74,308 0.25 332.75 Russian Federation 90,647 0.31 750.72 Slovenia 60,445 0.21 46.49 South Africa 76,902 0.26 249.43 Spain 315,111 1.07 5,006.44 Sweden 608,339 2.07 10,095.48 Switzerland 389,326 1.33 6,575.63 United Arab Emirates 1,367 - 5.58 United Kingdom 1,984,072 6.76 36,991.70 United States 2,925,790 9.96 56,214.92 Subtotal—Part I Members b 16,129,565 54.94 % $ 281,649.45 Part II Members Afghanistan 59,204 0.20 1.50 Albania 61,859 0.21 0.37 Algeria 122,959 0.42 30.57 Angola 153,438 0.52 8.27 Argentina 412,256 1.40 156.21 Armenia 65,146 0.22 0.69 Azerbaijan 72,636 0.25 6.14 Bahamas, The 59,906 0.20 8.54 Bangladesh 156,110 0.53 8.16 Barbados 62,860 0.21 2.36 Belize 19,834 0.07 0.27 Benin 60,820 0.21 0.78 Bhutan 58,732 0.20 0.08 Bolivia, Plurinational State of 75,994 0.26 1.65 Bosnia and Herzegovina 55,440 0.19 2.50 70 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2021 Amounts expressed in millions of U.S. dollars Member a Number of votes Percentage of total votes Subscriptions and contributions committed b Botswana 53,728 0.18 % $ 3.63 Brazil 477,996 1.63 834.89 Burkina Faso 66,310 0.23 0.81 Burundi 55,801 0.19 1.09 Cabo Verde, Republic of 43,840 0.15 0.13 Cambodia 71,089 0.24 1.60 Cameroon 60,782 0.21 1.61 Central African Republic 48,910 0.17 0.77 Chad 52,210 0.18 0.78 Chile 58,505 0.20 39.12 China 660,966 2.25 1,135.53 Colombia 133,321 0.45 25.21 Comoros 47,140 0.16 0.13 Congo, Democratic Republic of 82,699 0.28 4.60 Congo, Republic of 52,210 0.18 0.75 Costa Rica 28,362 0.10 0.28 Côte d’Ivoire 67,377 0.23 1.57 Croatia 91,994 0.31 5.98 Cyprus 75,021 0.26 32.18 Czech Republic 131,906 0.45 157.38 Djibouti 48,116 0.16 0.26 Dominica 58,892 0.20 0.14 Dominican Republic 27,780 0.09 0.58 Ecuador 50,151 0.17 0.94 Egypt, Arab Republic of 134,452 0.46 18.66 El Salvador 46,516 0.16 0.49 Equatorial Guinea 6,167 0.02 0.41 Eritrea 46,536 0.16 0.14 Eswatini 22,322 0.08 0.42 Ethiopia 51,732 0.18 0.69 Fiji 19,809 0.07 0.76 Gabon 2,093 0.01 0.63 Gambia, The 55,208 0.19 0.42 Georgia 65,717 0.22 0.97 Ghana 86,677 0.30 3.14 Grenada 28,927 0.10 0.14 Guatemala 40,696 0.14 0.56 Guinea 37,287 0.13 1.33 Guinea-Bissau 44,500 0.15 0.22 Guyana 74,343 0.25 1.27 Haiti 54,538 0.19 1.11 Honduras 59,206 0.20 0.44 Hungary 205,105 0.70 173.10 India 851,128 2.90 628.42 Indonesia 259,846 0.88 140.09 Iran, Islamic Republic of 115,867 0.39 24.18 Iraq 72,712 0.25 1.11 Israel 90,204 0.31 152.76 Jordan 24,865 0.08 0.41 Kazakhstan 23,297 0.08 8.50 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 73 NOTES TO FINANCIAL STATEMENTS PURPOSE AND AFFILIATED ORGANIZATIONS The International Development Association (IDA) is an international organization established in 1960. IDA’s main goal is reducing poverty through promoting sustainable economic development in the less developed countries of the world that are members of IDA, by extending concessionary and non-concessionary financing in the form of grants, loans and guarantees, and by providing related technical assistance. The activities of IDA are complemented by those of three affiliated organizations, the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). Each of these organizations is legally and financially independent from IDA, with separate assets and liabilities, and IDA is not liable for their respective obligations. Transactions with these affiliates are disclosed in the notes that follow. IDA is immune from taxation pursuant to Article VIII, Section 9, Immunities from Taxation, of IDA’s Articles of Agreement. NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES IDA’s financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Due to the inherent uncertainty involved in making those estimates, actual results could differ from these estimates. Significant judgment has been used in the valuation of certain financial instruments and the determination of the adequacy of the accumulated provisions for debt relief and losses on loans and other exposures (signed loan commitments, including deferred drawdown options that are effective and irrevocable commitments, guarantees and repaying project preparation facilities). On August 6, 2021, the Executive Directors approved these financial statements for issue, which was also the date through which IDA’s management evaluated subsequent events. Certain reclassifications to the prior year’s information have been made to conform with the current year’s presentation. Translation of Currencies IDA’s financial statements are expressed in U.S. dollars for the purpose of summarizing its financial position and the results of its operations for the convenience of its members and other users. IDA conducts its operations in Special Drawing Rights (SDR) and its component currencies of U.S. dollar, euro, Japanese yen, pound sterling and Chinese renminbi. These constitute the functional currencies of IDA. Assets and liabilities are translated at market exchange rates in effect at the end of the accounting period. Revenue and expenses are translated at either the market exchange rates in effect on the dates of revenue and expense recognition, or at an average of the market exchange rates in effect during each month. Translation adjustments relating to the revaluation of all assets and liabilities denominated in either SDR or the component currencies of SDR, are reflected in Accumulated Other Comprehensive Income. Translation adjustments relating to non- functional currencies are reported in the Statement of Income. Members’ Subscriptions and Contributions Recognition Members’ subscriptions and contributions committed for each IDA replenishment are initially recorded both as subscriptions and contributions committed and, correspondingly, as subscriptions and contributions receivable. Prior to effectiveness, only a portion of the value of Instruments of Commitment (IoCs) received as specified in the replenishment resolution is recorded as subscriptions and contributions committed. Upon effectiveness, the remainder of the value of IoCs received is subsequently recorded as subscriptions and contributions committed. 74 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 IoCs can contain unqualified or qualified commitments. Under an unqualified commitment, a contributing member agrees to pay a specified amount of its subscription and contribution without requiring appropriation legislation. A qualified commitment is subject to the contributing member obtaining the necessary appropriation legislation. Subscriptions and contributions made under IoCs become available for commitment for loans, grants and guarantees by IDA for a particular replenishment in accordance with the IDA replenishment envelope as approved by the Executive Directors. A replenishment becomes effective when IDA receives IoCs from members whose subscriptions and contributions aggregate to a specified portion of the full replenishment. Amounts not yet paid in at the date of effectiveness, are recorded as subscriptions and contributions receivable and shown as a reduction of subscriptions and contributions committed. These receivables become due throughout the replenishment period, generally three years, in accordance with an agreed payment schedule. The actual payment of receivables when they become due may be subject to the budgetary appropriation processes for certain members. The subscriptions and contributions receivable are settled through payment of cash or deposit of nonnegotiable, non- interest bearing demand notes. The notes are encashed by IDA on an approximately pro rata basis either as provided in the relevant replenishment resolution over the disbursement period of the loans and grants committed under the replenishment, or as needed. In certain replenishments, donors receive discounts (a reduced obligation) when they pay a contribution amount before the relevant due date, and acceleration credits when they pay their full contribution amount before the due date. IDA retains any related revenue earned on these early payments, with subscriptions and contributions committed being recorded at contribution amounts received, grossed up for discounts and acceleration credits. The discounts and acceleration credits are deducted in arriving at the subscriptions and contributions paid-in. Under the Seventeenth Replenishment of IDA’s Resources (IDA17), which became effective beginning fiscal year ended June 30, 2015, IDA’s Executive Directors approved the use of a limited amount of concessional debt funding, referred to as concessional partner loans, which continued in the subsequent Replenishments of IDA’s Resources. The borrowing terms of this concessional debt funding aim to match the concessional features of IDA’s loans. Proceeds received under this arrangement have two separate components: (1) a borrowing component and (2) a grant component, for which voting rights are allocated to providers of the concessional partner loans. The borrowing component of the concessional partner loans is recognized and reported at amortized cost (see borrowings section for more details). The grant component is calculated as a function of the terms of the loan and the discount rate agreed upon during the replenishment discussions. This grant component is recorded as equity equivalent to the cash received. For the purposes of determining its subscriptions and contributions, the membership of IDA is divided into two categories: (1) Part I members, which make payments of subscriptions and contributions provided to IDA in convertible currencies that may be freely used or exchanged by IDA in its operations and (2) Part II members, which make payments of ten percent of their initial subscriptions in freely convertible currencies, and the remaining 90 percent of their initial subscriptions, and all additional subscriptions and contributions in their own currencies or in freely convertible currencies. Certain Part II members provide a portion of their subscriptions and contributions in the same manner as mentioned in (1) above. IDA’s Articles of Agreement and subsequent replenishment resolutions provide that the currency of any Part II member paid in by it may not be used by IDA for projects financed by IDA and located outside the territory of the member except by agreement between the member and IDA. The national currency portion of subscriptions of Part II members is recorded as restricted under Members’ subscriptions and contributions unless released under an agreement between the member and IDA, or used for administrative expenses. The cash paid and notes deposited in nonconvertible local currencies for the subscriptions of Part II members are recorded either as Restricted cash under Due from Banks, or as restricted notes included under Nonnegotiable, Noninterest-bearing Demand Obligations on Account of Members’ subscriptions and contributions. Following adoption by the Board of Governors on April 21, 2006 of a resolution authorizing additions to IDA’s resources to finance the MDRI (Multilateral Debt Relief Initiative), pledges received in the form of IoCs for financing the MDRI are recorded and accounted for in their entirety. Therefore, the full value of all IoCs received is recorded as Subscriptions and contributions committed. Correspondingly, the IoCs are recorded as Subscriptions and contributions receivable and deducted from equity. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 75 Withdrawal of Membership Under IDA’s Articles of Agreement, a member may withdraw from membership in IDA at any time. When a government ceases to be a member, it remains liable for all financial obligations undertaken by it to IDA, whether as a member, borrower, guarantor or otherwise. The Articles provide that upon withdrawal, IDA and the government shall proceed to a settlement of accounts. If agreement is not reached within six months, standard arrangements are provided. Under these arrangements, IDA would pay to the government the lower of the member’s total paid-in subscriptions and contributions or the member’s proportionate share of IDA’s net assets. These funds would be paid as a proportionate share of all principal repayments received by IDA on loans made during the period of the government’s membership. Valuation of Subscriptions and Contributions The subscriptions and contributions provided through the Third Replenishment are expressed in terms of “U.S. dollars of the weight and fineness in effect on January 1, 1960” (1960 dollars). Following the abolition of gold as a common denominator of the monetary system and the repeal of the provision of the U.S. law defining the par value of the U.S. dollar in terms of gold, the pre-existing basis for translating 1960 dollars into current dollars or any other currency disappeared. The Executive Directors of IDA decided, that until such time as the relevant provisions of the Articles of Agreement are amended, the words “U.S. dollars of the weight and fineness in effect on January 1, 1960” in Article II, Section 2(b) of the Articles of Agreement of IDA are interpreted to mean the SDR introduced by the International Monetary Fund as the SDR was valued in terms of U.S. dollars immediately before the introduction of the basket method of valuing the SDR on July 1, 1974, such value being equal to $1.20635 for one SDR (the 1974 SDR). The Executive Directors also decided to apply the same standard of value to amounts expressed in 1960 dollars in the relevant resolutions of the Board of Governors. The subscriptions and contributions provided through the Third Replenishment are expressed on the basis of the 1974 SDR. Prior to the decision of the Executive Directors, IDA had valued these subscriptions and contributions on the basis of the SDR at the current market value of the SDR. The subscriptions and contributions provided under the Fourth Replenishment and thereafter are expressed in members’ currencies or SDRs and are payable in members’ currencies. Subscriptions and contributions made available for disbursement in cash to IDA are translated at market exchange rates in effect on the dates they were made available. Subscriptions and contributions not yet available for disbursements are translated at market exchange rates in effect at the end of the accounting period. Maintenance of Value Article IV, Section 2(a) and (b) of IDA’s Articles of Agreement provides for maintenance of value payments on account of the local currency portion of the initial subscription whenever the par value of the member’s currency or its foreign exchange value has depreciated or appreciated to a significant extent, so long as, and to the extent that, such currency shall not have been initially disbursed or exchanged for the currency of another member. The provisions of Article IV, Section 2(a) and (b) have by agreement been extended to cover additional subscriptions and contributions of IDA through the Third Replenishment, but are not applicable to those of the Fourth and subsequent replenishments. The Executive Directors decided on June 30, 1987 that settlements of maintenance of value, which would result from the resolution of the valuation issue on the basis of the 1974 SDR, would be deferred until the Executive Directors decide to resume such settlements. These amounts are shown as Deferred Amounts to Maintain Value of Currency Holdings and deducted from equity; any changes relate solely to translation adjustments. Nonnegotiable, Noninterest-bearing Demand Obligations on Account of Members’ Subscriptions and Contributions Payments on these instruments are due to IDA upon demand and these instruments are held in bank accounts in IDA’s name. These instruments are carried and reported at face value as a reduction to equity on the Balance Sheet. Loans and Other Exposures In fulfilling its mission, IDA makes concessional and non-concessional loans to the poorest countries. These loans and other exposures (collectively “exposures”) are made to, or guaranteed by, member governments or to the government of a territory of a member (except for loans which have been made to regional development institutions for the benefit of members or territories of members of IDA). In order to qualify for lending on IDA terms, a 78 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 Accumulated Provision for Losses on Loans and Other Exposures Management determines the appropriate level of accumulated provisions for losses on loan exposures, which reflects the expected losses inherent in IDA’s exposures. The accumulated provision for losses on loans and other exposures includes the accumulated provision for HIPC Debt Initiative and MDRI. HIPC Debt Initiative and MDRI The adequacy of the accumulated provision for the HIPC Debt Initiative and MDRI is based on both quantitative and qualitative analyses of various factors, including estimates of the Decision and the Completion point dates. IDA periodically reviews these factors and reassesses the adequacy of the accumulated provision for the HIPC Debt Initiative and MDRI. Upon approval by the Executive Directors of a country as potentially eligible for IDA debt relief under the Enhanced HIPC Initiative, the principal component of the estimated debt relief costs is recorded within the accumulated provision for loan losses on the Balance Sheet, and as a provision expense in the Statement of Income. This estimate is subject to periodic revision. Adjustments to the accumulated provision are recorded as a charge to or release of provision in the Statement of Income. The accumulated provision for HIPC Debt Initiative is reduced as debt relief is provided. The accumulated provision for HIPC Debt Initiative is reduced by the amount of the eligible loans written off when the country reaches Completion Point and becomes eligible for MDRI debt relief. Following the Executive Directors' approval of IDA's participation in the MDRI in June 2006, IDA fully provided for the estimated write-off of the principal component of debt relief to be delivered under the MDRI for the HIPC eligible countries confirmed by the Executive Directors as eligible for relief at that time. Loans Loan exposures are disaggregated into two groups: exposures in accrual status and exposures in nonaccrual status. In each group, a credit risk rating is then assigned to the exposures for each borrower (defined as the nominal amount of loans outstanding less the accumulated provision for loss under the HIPC Debt Relief Initiative, and MDRI). The total exposure for provisioning is the current exposure and the estimated exposure taking into account expected disbursements and repayments over the life of the instruments. The expected credit losses related to loans and other exposures are calculated over the life of the instruments based on the expected exposures, the expected default frequency (probability of default to IDA) and the estimated loss given default. The provision for expected losses is the sum of the expected annual losses over the life of the instruments. For countries in accrual status, these exposures are grouped in pools of borrowers with a similar risk rating. The determination of a borrower’s rating is based on various factors (see Note D—Loans and other exposures). Each risk rating is mapped to an expected default frequency using IDA’s credit migration matrix, based on historical observations of credit ratings at the beginning and at the end of each year. Expected losses on loan exposures comprise estimates of potential losses arising from default and nonpayment of principal and interest amounts due, and any economic loss due to delays in receiving payments. The estimated loss given default is determined at each balance sheet date, based on IDA’s historical experience as well as parameters adjusted for current conditions during the reasonable and supportable forecast period of IDA. The loss given default is based on the borrower’s eligibility, namely: IDA, Blend (IBRD and IDA) and IBRD, with the highest loss given default associated with IDA eligibility. The borrower’s eligibility is assessed at least annually. The main factors used to determine the loss given default are the estimated length of delays in receiving loan payments and the effective interest rate of the exposures. IDA’s loan portfolio comprises mostly fixed interest rate loans, therefore, the measurement of loss severity is not sensitive to market interest rate movements. For the calculation of expected credit losses, IDA applies a three-year reasonable and supportable forecast period representing the most reliable and available economic data during this period. IDA also applies a ten-year straight- line reversion to the mean to reflect the historical pattern of rating migration to the mean of its loan portfolio. This methodology is also applied to countries with exposures in nonaccrual status, although the expected default frequency is equal to one. At times, to reflect certain distinguishing circumstances of a particular nonaccrual situation, different input assumptions may be used for a specific country. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 79 All exposures for countries in nonaccrual status are individually assessed. Except for debt relief provided under the HIPC Debt Initiative and MDRI, it is IDA’s practice not to write off its loans. To date, no loans have been written off, other than under the HIPC Debt Initiative, MDRI and buy-down of loans. Management reassesses the adequacy of the accumulated provision on a quarterly basis and adjustments to the accumulated provision are recorded as a charge to or release of provision in the Statement of Income. In addition, reasonableness of the inputs used is reassessed at least annually. When a member country prepays its outstanding loans, it may receive a discount equivalent to the difference between the outstanding carrying amount and the present value of the remaining cash flows. In such instances, IDA records a provision for losses on loans equivalent to the discount provided, at the time when the prepayment terms are agreed between IDA and the member country. Loan Commitments IDA records the expected credit losses on loan commitments based on the projected disbursements of signed loan commitments (adjusted by cancellations based on historical experience), the probability of default and loss given default. The provision is included in Other liabilities - Accounts payable and miscellaneous liabilities on the Balance Sheet. Guarantees IDA records a contingent liability for the expected losses related to guarantees over the projected life of the instruments, which is determined based on the estimated exposure at default multiplied by the corresponding loss given default and expected default probability for the projected life of the guarantee. This provision, as well as the unamortized balance of the deferred guarantee fees, and the unamortized balance of the obligation to stand ready, are included in Other liabilities - Accounts payable and miscellaneous liabilities on the Balance Sheet. Statement of Cash Flows: For the purpose of IDA's Statement of Cash Flows, cash is defined as the amount of both Unrestricted cash and Restricted cash presented under the Due from banks line on the Balance Sheet. Restricted Cash: This mainly includes amounts which have been received from members as part of their subscriptions, which are restricted for specified purposes. Investments Investment securities are classified based on management’s intention on the date of purchase, their nature, and IDA’s policies governing the level and use of such investments. All investment securities are held in the trading portfolio except for a security purchased from IFC in 2015 which is classified as non-trading. While IDA does not plan to sell the IFC security, IDA elected to measure it at fair value, so that all of its investment securities are measured on the same basis. All investment securities and related financial instruments held by IDA are carried and reported at fair value, or at face value which approximates fair value. Where available, quoted market prices are used to determine the fair value of trading securities. Examples include most government and agency securities, asset-backed securities (ABS), mortgage-backed securities (MBS), to-be-announced securities (TBA securities) and futures contracts. For instruments for which market quotations are not available, fair values are determined using model-based valuation techniques, whether internally generated or vendor-supplied, that include the standard discounted cash flow method using observable market inputs such as yield curves, credit spreads, and constant prepayment rates. Where applicable, unobservable inputs such as constant prepayment rates, probability of default and loss severity are used. Unless quoted prices are available, time deposits are reported at face value, which approximates fair value, as they are short term in nature. The first-in first-out method is used to determine the cost of securities sold in computing the realized gains and losses on these instruments. Interest revenue is included in the Investments, net line in the Statement of Income. Unrealized mark-to-market gains and losses for investment securities and related financial instruments held in the investment portfolio are included in the Statement of Income. Realized gains and losses on trading securities are recognized in the Statement of Income when securities are sold. IDA may require collateral in the form of cash or approved liquid securities from individual counterparties under legal agreements that provide for collateralization, in order to mitigate its credit exposure to these counterparties. For collateral received in the form of cash from counterparties, IDA invests the amounts received and records the investment and a corresponding obligation to return the cash. Collateral received in the form of liquid securities is 80 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 only recorded on IDA’s Balance Sheet to the extent that it has been transferred under securities lending agreements in return for cash. Securities Purchased Under Resale Agreements, Securities Sold Under Repurchase Agreements, Securities Lent Under Securities Lending Agreements and Payable for Cash Collateral Received Securities purchased under resale agreements, securities sold under repurchase agreements, securities lent under securities lending agreements and payable for cash collateral received are recorded at face value, which approximates fair value, as they are short term in nature. IDA receives securities purchased under resale agreements, monitors the fair value of the securities and, if necessary, closes out transactions and enters into new repriced transactions. The securities transferred to counterparties under the repurchase and security lending arrangements and the securities transferred to IDA under the resale agreements have not met the accounting criteria for treatment as a sale. Therefore, securities transferred under repurchase agreements and security lending arrangements are retained as assets on the Balance Sheet, and securities received under resale agreements are not recorded on the Balance Sheet. Securities lent under securities lending agreements and sold under securities repurchase agreements as well as securities purchased under resale agreements are presented on a gross basis, which is consistent with the manner in which these instruments are settled. The interest earned with respect to securities purchased under resale agreements is included in Investments, net, line in the Statement of Income. The interest expense pertaining to the securities sold under repurchase agreements and security lending arrangements is included in the Borrowing expenses, net line in the Statement of Income. Borrowings IDA introduced long term borrowings through concessional partner loans for the first time in the fiscal year commencing July 1, 2014. The borrowing terms of the concessional partner loans aim to match the features of IDA’s concessional loans. As of June 30, 2021, these borrowings are unsecured and unsubordinated fixed rate debt in SDR component currencies. IDA may prepay some or the entire outstanding amounts without penalty. These borrowings are carried and reported at amortized cost. IDA has also issued debt instruments in the capital markets. IDA has elected the fair value option for all market debt issued, as of June 30, 2021. For debt carried at fair value, changes in fair value are recognized in the related Unrealized mark-to-market gains and losses on non-trading portfolios, net, line in the Statement of Income, except for changes in the fair value that relate to IDA’s own credit risk, which are reported in Other Comprehensive Income (OCI) as a Debit Valuation Adjustment (DVA). The DVA on fair value option elected liabilities is measured by revaluing each liability to determine the changes in fair value of that liability arising from changes in IDA’s cost of funding relative to the London Inter-Bank Offered Rate (LIBOR). Plain vanilla bonds and discount notes, if any, are valued using the standard discounted cash flow method which relies on observable market inputs such as yield curves, foreign exchange rates, basis spreads and funding spreads. Where available, quoted market prices are used to determine the fair value of short-term notes. For the purpose of the Statement of Cash Flows, new issuances and retirements pertaining to short term borrowings, if any, with an original maturity of less than 90 days, are presented on a net basis. In contrast, short term borrowings with an original maturity greater than 90 days and less than one year are presented on a gross basis. Interest expense relating to all debt instruments in IDA’s borrowing portfolio is measured on an effective yield basis and is reported as part of the Borrowing expenses, net line in the Statement of Income. For presentation purposes, amortization of discounts and premiums is also included in the Borrowing expenses, net line in the Statement of Income. Accounting for Derivatives IDA has elected not to designate any hedging relationships for accounting purposes. Rather, all derivative instruments are marked to fair value on the Balance Sheet, with changes in fair value accounted for through the Statement of Income. The presentation of derivative instruments on IDA’s Balance Sheet reflects the netting of derivative asset and liability positions and the related cash collateral received from the counterparty when a legally enforceable master netting agreement exists, and the other conditions set out in ASC Topic 210-20, Balance Sheet—Offsetting, are met. In addition, in the Notes to the financial statements, unless stated differently, derivatives are presented on a net basis by instrument. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 83 Accounting and Reporting Developments Evaluated Accounting Standards: In January 2021, the FASB issued ASU 2021-01 - Reference Rate Reform (Topic 848): Scope. The ASU permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts affected by changes in the interest rates used in computations affected by reference rate reform activities. IDA adopted the standard prospectively effective March 31, 2021, as permitted by the ASU, and the adoption did not have a material impact on the financial statements. In March 2020, the FASB issued ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden of the expected market transition from LIBOR and other interbank offered rates. To be eligible for the optional expedients, modifications of contractual terms that change (or have the potential to change) the amount or timing of contractual cash flows must be related only to replacement of a reference rate. The relief is temporary and is only available through December 31, 2022. IDA will apply the standard consistently to contractual amendments made to all applicable floating rate instruments indexed to IBOR (inter-bank offered rate) rates. IDA adopted the standard effective June 30, 2020 and the adoption did not have a material impact on the financial statements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which amends the disclosure requirements of ASC 820. The guidance became effective for IDA from the quarter ending September 30, 2020. The adoption of this ASU had no material impact on IDA’s financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL ASU). The ASU and its subsequent amendments introduce a new model for the accounting of credit losses of loans and other financial assets measured at amortized cost. The current expected credit loss (CECL) model, requires an entity to estimate the credit losses expected over the life of an exposure, considering historical information, current information, and reasonable and supportable forecasts. Additionally, the ASUs require enhanced disclosures about credit quality and significant estimates and judgments used in estimating credit losses. For IDA, the ASUs became effective on July 1, 2020.  The transition adjustment increased the Accumulated Deficit by $802 million, which reflects the increase in the credit losses relating to loans and other exposures under CECL compared to the previous “incurred loss” model. The impact is mainly driven by the requirement to provision over the full life of IDA’s long maturity profile credit exposures as well as the inclusion of signed loan commitments in the determination of the provision. See the table below for details of the CECL transition adjustment as of July 1, 2020. The transition adjustment had no impact to the Statement of Income. See Note D — Loans and Other Exposures, for additional details. In millions of U.S. dollars Accumulated provision related to Location on the Balance Sheet June 30, 2020 As reported Impact of the adoption of the CECL ASU July 1, 2020 Adjusted Loans outstanding Accumulated provision for loan losses $ 2,829 $ (59) $ 2,770 Debt Relief under HIPC/MDRI Accumulated provision for loan losses 1,591 - 1,591 Signed loan commitments Other liabilities - 859 859 Other exposures Other liabilities 72 2 74 Total accumulated provision $ 4,492 $ 802 $ 5,294 Accumulated Deficit $ (58,321) $ (802) $ (59,123) 84 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 NOTE B—MEMBERS’ SUBSCRIPTIONS AND CONTRIBUTIONS, AND MEMBERSHIP The movement in subscriptions and contributions paid-in is summarized below: Table B1: Subscriptions and contributions paid-in In millions of U.S. dollars June 30, 2021 June 30, 2020 Beginning of the fiscal year $ 241,343 $ 234,078 Cash contributions received a 3,442 3,336 Demand obligations received 4,901 4,233 Translation adjustment 766 (304) End of the fiscal year $ 250,452 $ 241,343 a. Includes any restricted cash subscriptions. During the fiscal year ended June 30, 2021, IDA encashed demand obligations totaling $4,913 million ($4,487 million—fiscal year ended June 30, 2020). NOTE C—INVESTMENTS The investment securities held by IDA are designated as either trading or non-trading. All securities are carried and reported at fair value, or at face value which approximates fair value. As of June 30, 2021, IDA’s Investments were mainly comprised of government and agency obligations (68%), with all the instruments being classified as either Level 1 or Level 2 within the fair value hierarchy. As of June 30, 2021, the largest holding of Investments-Trading with a single counterparty was Japanese Government instruments (14%). A summary of IDA’s investments composition is as follows: Table C1: Investments-composition In millions of U.S. dollars June 30, 2021 June 30, 2020 Trading Government and agency obligations $ 25,277 $ 24,198 Time deposits 11,460 8,398 Asset-backed securities 152 1,449 $ 36,889 $ 34,045 Non-trading (at fair value) Debt securities 487 625 Total $ 37,376 $ 34,670 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 85 IDA manages its investments on a net portfolio basis. The following table summarizes IDA’s net portfolio position; the presentation of derivative instruments is on a net instrument basis: Table C2: Net investment portfolio position In millions of U.S. dollars June 30, 2021 June 30, 2020 Investments Trading $ 36,889 $ 34,045 Non-trading 487 625 Total 37,376 34,670 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received a - (109) Derivative Assets Currency swaps and currency forward contracts 167 19 Interest rate swaps - 1 Other b - 3 Total 167 23 Derivative Liabilities Currency swaps and currency forward contracts (65) (143) Interest rate swaps (17) (6) Other b - (1) Total (82) (150) Cash held in investment portfolio c 426 602 Receivable from investment securities traded and other assets d 107 636 Payable for investment securities purchased e (73) (101) Net Investment Portfolio $ 37,921 $ 35,571 a. As of June 30, 2021 there was no cash collateral received from counterparties under derivative agreements ($2 million - June 30, 2020, including $1 million excess collateral). b. These relate to TBA securities, swaptions, exchange traded options and futures contracts. c. This amount is included in Unrestricted cash under Due from Banks on the Balance Sheet. d. This amount is included in Other receivables and in Other assets, respectively, on the Balance Sheet. e. As of June 30, 2021 there were no short sales (less than $0.5 million—June 30, 2020) IDA uses derivative instruments to manage currency and interest rate risk in the investment portfolio. For details regarding these instruments, see Note F—Derivative Instruments. The maturity structure of IDA’s non-trading investment portfolio (principal amount due) is provided in the table below: Table C3: Maturity structure of non-trading investment portfolio In millions of U.S. dollars Period June 30, 2021 June 30, 2020 Less than 1 year $ 113 $ 125 Between 1 - 2 years 96 113 2 - 3 years 77 96 3 - 4 years 62 77 4 - 5 years 34 62 Thereafter 90 124 $ 472 $ 597 Commercial Credit Risk For the purpose of risk management, IDA is party to a variety of financial transactions, certain of which involve elements of credit risk. Credit risk exposure represents the maximum potential loss due to possible nonperformance 88 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 IDA’s borrower country risk ratings are key determinants in the provision for loan losses. Country risk ratings are grouped in pools of borrowers with similar credit ratings for the purpose of the calculation of the expected credit losses. Country risk ratings are determined in review meetings that take place several times a year. All countries are reviewed at least once a year, or more frequently if circumstances warrant, to determine the appropriate ratings. An assessment was also performed to determine whether a qualitative adjustment was needed on the loan loss provision as of June 30, 2021, particularly in consideration of the COVID-19 pandemic. Management concluded that a qualitative adjustment beyond the regular application of IDA’s loan loss provision framework was not warranted. IDA considers loans to be past due when a borrower fails to make payment on any principal, interest or other charges due to IDA on the dates provided in the contractual loan agreement. The following tables provide an aging analysis of loans outstanding: Table D3: Loans-Aging structure In millions of U.S. dollars June 30, 2021 Days past due Up to 45 46-60 61-90 91-180 Over 180 Total Past Due Current Total Risk Class Low $ - $ - $ - $ - $ - $ - $ 659 $ 659 Medium - - - - - - 23,092 23,092 High 7 - - - - 7 156,814 a 156,821 Loans in accrual status 7 - - - - 7 180,565 180,572 Loans in nonaccrual status 7 1 3 9 399 419 513 932 Total $ 14 $ 1 $ 3 $ 9 $ 399 $ 426 $ 181,078 $ 181,504 Table D3.1 In millions of U.S. dollars June 30, 2020 Days past due Up to 45 46-60 61-90 91-180 Over 180 Total Past Due Current Total Risk Class Low $ * $ - $ - $ - $ - $ * $ 985 $ 985 Medium - - - - - - 23,100 23,100 High 3 * * - - 3 139,195 a 139,198 Loans in accrual status 3 * * - - 3 163,280 163,283 Loans in nonaccrual status 10 1 3 20 1,131 1,165 932 2,097 Total $ 13 $ 1 $ 3 $ 20 $ 1,131 $ 1,168 $ 164,212 $ 165,380 a. Includes PSW-related loans of $10 million ($5 million-June 30, 2020) * Indicates amount less than $0.5 million. IDA considers the signature date of a loan as the best indicator of the decision point in the origination process, rather than the disbursement date. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 89 The table below discloses the outstanding balances of IDA’s loan portfolio as of June 30, 2021 classified by the year the loan agreement was signed. Table D4: Loan portfolio vintage disclosure In millions of U.S. dollars June 30, 2021 Fiscal Year of origination CAT DDOs disbursed and revolving CAT DDOs Converted to Term Loans Loans Outstanding as of June 30, 2021 Risk Class 2021 2020 2019 2018 2017 Prior Years Low $ - $ - $ - $ - $ - $ 659 $ - $ - $ 659 Medium 401 564 255 64 488 21,320 - - 23,092 High 4,803 6,260 8,266 8,861 8,927 119,316 388 - 156,821 Loans in accrual status 5,204 6,824 8,521 8,925 9,415 141,295 388 - 180,572 Loans in nonaccrual status - - - - - 932 - - 932 Total $ 5,204 $ 6,824 $ 8,521 $ 8,925 $ 9,415 $ 142,227 $ 388 $ - $ 181,504 There were no Catastrophe Deferred Drawdown Option (CAT DDO) outstanding and revolving converted to term loans during the fiscal year ended June 30, 2021. Accumulated Provision for Losses on Loans and Other Exposures Management determines the appropriate level of accumulated provisions for losses, which reflects the expected losses inherent in IDA’s exposures. The provision for HIPC Debt Initiative and MDRI is based on quantitative and qualitative analyses of various factors, including estimates of Decision Point and Completion Point dates. These factors are reviewed periodically as part of the reassessment of the adequacy of the accumulated provision for loan losses. Provisions are released as qualifying debt service becomes due and is forgiven under the HIPC Debt Initiative and are reduced by the amount of the eligible loans written off when the country reaches Completion Point and becomes eligible for MDRI debt relief. The accumulated provision as of July 1, 2020 was increased by an $802 million transition adjustment recorded upon adoption of CECL. The transition adjustment corresponds to the difference between the accumulated provision calculated under the previous “incurred loss” model and the CECL model. Changes to the accumulated provision for losses on loans and other exposures are summarized below. 90 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 Table D5: Accumulated provisions In millions of U.S. dollars June 30, 2021 Loans outstanding Loan commitments Debt relief under HIPC/MDRI Other Total Accumulated provision, beginning of the fiscal year $ 2,829 $ - $ 1,591 $ 72 $ 4,492 CECL Transition adjustment (59) 859 - 2 802 Adjusted accumulated provision at the beginning of the fiscal year 2,770 859 1,591 74 5,294 Provision, net - charge (release) 77 166 (828) b 46 (539) Loans written off under: HIPC/MDRI - - (9) d - (9) Translation adjustment 99 29 18 - 146 Accumulated provision, end of the fiscal year $ 2,946 $ 1,054 $ 772 $ 120 $ 4,892 Including accumulated provision for losses on: Loans in accrual status $ 2,692 $ 485 $ 3,177 Loans in nonaccrual status 254 287 541 Total $ 2,946 $ 772 $ 3,718 Loans: Loans in accrual status $ 180,572 Loans in nonaccrual status 932 Total $ 181,504 Table D5.1: In millions of U.S. dollars June 30, 2020 Loans outstanding Loan commitments Debt relief under HIPC/MDRI Other Total Accumulated provision, beginning of the fiscal year $ 2,826 $ - $ 1,812 $ 70 $ 4,708 Provision, net - charge (release) a 33 - (206) c 3 (170) Loans written off under: Prepayments (3) - - - (3) HIPC/MDRI - - (10) d - (10) Translation adjustment (27) - (5) (1) (33) Accumulated provision, end of the fiscal year $ 2,829 $ - $ 1,591 $ 72 $ 4,492 Including accumulated provision for losses on: Loans in accrual status $ 2,556 $ 201 $ 2,757 Loans in nonaccrual status 273 1,390 1,663 Total $ 2,829 $ 1,591 $ 4,420 Loans: Loans in accrual status $ 163,283 Loans in nonaccrual status 2,097 Total $ 165,380 a. For the fiscal year ended June 30, 2020, the provision includes $3 million of discount on prepayment of loans b. Includes $819 million release of Sudan HIPC provision due to arrears clearance c. Includes $280 million release of Somalia HIPC provision due to arrears clearance d. Represents debt service reduction under HIPC IDA FINANCIAL STATEMENTS: JUNE 30, 2021 93 NOTE E—BORROWINGS IDA’s borrowings comprise both concessional partner loans from IDA’s members and market borrowings. Concessional partner loans are unsecured and unsubordinated fixed rate debt in SDR component currencies. IDA may prepay some or the entire outstanding amounts without penalty. These borrowings are reported at amortized cost, and have original maturities of 25 and 40 years, with the final maturity in 2060. This does not include the proceeds received under the grant component of the concessional partner loan agreements, included in equity for which voting rights have been attributed. Table E1: Borrowings-concessional partner loans outstanding In millions of U.S dollars Concessional Partner Loans outstanding Principal at face value Net unamortized premium (discount) Total June 30, 2021 $ 9,495 $ (1,736) $ 7,759 June 30, 2020 $ 9,360 $ (1,725) $ 7,635 Market borrowings are unsecured and unsubordinated fixed debt in a variety of currencies. Some of these instruments are callable. IDA has elected the fair value option for these instruments, which have original maturities that range from 34 days to 15 years, with the final maturity in 2036. IDA uses derivative contracts to manage the currency risk as well as the interest rate risk in the market borrowings portfolio. For example, as part of IDA’s asset-liability management strategy, IDA may also enter into derivative transactions to convert fixed rate bonds into floating rate instruments. For details regarding the derivatives used in the borrowing portfolio, see Note F—Derivative Instruments. Table E2: Market borrowings after derivatives, at fair value In millions of U.S. dollars June 30, 2021 June 30, 2020 Market borrowings $ 20,555 $ 12,131 Currency swaps, net (97) 40 Interest rate swaps, net 118 (153) Total $ 20,576 $ 12,018 As of June 30, 2021, all of the instruments in IDA’s borrowing portfolio were classified as Level 2, within the fair value hierarchy. The following table provides a summary of the interest rate characteristics of IDA’s borrowings: Table E3: Borrowings-Interest rate composition In millions of U.S. dollars June 30, 2021 WAC a June 30, 2020 WAC a Fixed $ 28,404 0.99 % $ 19,610 1.14 % Variable - - - - Borrowings b $ 28,404 0.99 % $ 19,610 1.14 % Fair Value Adjustment (90) 156 Total Borrowings $ 28,314 $ 19,766 a. WAC refers to weighted average cost. b. At amortized cost. 94 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 The currency composition of debt in IDA’s borrowing portfolio before derivatives was as follows: Table E4: Borrowings-Currency composition before derivatives June 30, 2021 June 30, 2020 Euro 18 % 18 % Japanese yen 14 20 Pound sterling 17 17 U.S. dollar 49 43 Others 2 2 100 % 100 % The maturity structure of IDA’s borrowings outstanding was as follows: Table E5: Borrowings-Maturity structure In millions of U.S. dollars Period June 30, 2021 June 30, 2020 Less than 1 year $ 4,724 $ 5,840 1 - 2 years 1,713 120 2 - 3 years 146 1,740 3 - 4 years 2,837 137 4 - 5 years 4,154 2,564 Thereafter 16,476 11,090 Total a $ 30,050 $ 21,491 a. For June 30, 2021, total includes net unamortized discount of $1,736 million ($1,725 million—June 30, 2020) for Concessional Partner Loans. The following table provides information on the unrealized mark-to-market gains or losses on market borrowings included in the Statement of Income: Table E6: Unrealized mark-to-market gains or losses relating to market borrowings In millions of U.S. dollars Reported as 2021 2020 2019 Unrealized mark-to-market gains (losses) on non-trading portfolios, net $ 318 $ (106) $ (63) IDA FINANCIAL STATEMENTS: JUNE 30, 2021 95 NOTE F—DERIVATIVE INSTRUMENTS IDA uses derivative instruments in its investment, loan and borrowing portfolios, for asset/liability management purposes, and to assist clients in managing risks. The following table summarizes IDA’s use of derivatives in its various financial portfolios. Table F1: Use of derivatives in various financial portfolios Portfolio Derivative instruments used Purpose/Risk being managed Risk management purposes: Investments-Trading Interest rate swaps, currency forward contracts, currency swaps, options, swaptions, futures contracts and TBA securities Manage currency and interest rate risk in the portfolio. Other assets/liabilities Currency forward contracts, currency swaps and interest rate swaps Manage currency and interest rate risks. Loans Interest rate swaps Manage interest rate risk in the portfolio. Borrowings Interest rate swaps and currency swaps Manage currency and interest rate risk in the portfolio. Other purposes: Client operations Structured swaps Assist clients in managing risks. The derivatives in the related tables of Note F are presented on a net basis by instrument. A reconciliation to the Balance Sheet presentation is shown in table F2. Offsetting assets and liabilities IDA enters into International Swaps and Derivatives Association, Inc. (ISDA) master netting agreements with substantially all of its derivative counterparties. These legally enforceable master netting agreements give IDA the right to liquidate securities held as collateral and to offset receivables and payables with the same counterparty, in the event of a default by the counterparty. The following tables summarize the gross and net derivative positions by instrument type. Instruments that are in a net asset position are included in the Derivative Assets columns and instruments that are in a net liability position are included in the Derivative Liabilities columns. The gross columns represent the fair value of the instrument leg that is in an asset or liability position that are then netted with the other leg of the instrument in the gross offset columns. The effects of the master netting agreements are applied on a aggregate basis to the total derivative asset and liability positions and are presented net of any cash collateral received on the Balance Sheet in accordance with ASC 815 – Derivatives and Hedging. The net derivative asset positions in the tables below have been further reduced by any securities received as collateral to disclose IDA’s net exposure on its derivative asset positions.