International Development Association’s Sustainable Development Finance Policy - Proposed Adjustment of the Set-Aside Mechanism

Jul 19, 2026

Upload by Rowan

Proposed revisions to the International Development Association’s Sustainable Development Finance Policy (SDFP) adjust how the set-aside and discount mechanism works while IDA20 advances by one year. The note explains the rationale amid an unprecedented crisis, emphasizing debt transparency, creditor coordination, and reforms to strengthen fiscal policy and debt management. It presents a replenishment cycle-neutral design that allows recovery of set-asides after improved Policy and Performance Actions implementation, while setting rules for permanent discounts after two consecutive unsatisfactory years.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages8

Reading Time20 min

Introduction

Proposed revisions to the PPA set-aside mechanism

Summary and discussion issues

Public Disclosure Authorized Public Disclosure Authorized March 23, 2021 Official Use Only INTERNATIONAL DEVELOPMENT ASSOCIATION’S SUSTAINABLE DEVELOPMENT FINANCE POLICY: PROPOSED ADJUSTMENT OF THE SET-ASIDE MECHANISM I. INTRODUCTION 1. Approved by IDA’s Executive Directors on June 9, 2020, the Sustainable Development Finance Policy (SDFP) became effective on July 1, 2020. The policy aims to incentivize countries to move towards transparent and sustainable financing, among others to make debt more transparent, and to further enhance coordination between IDA and other creditors in support of the countries’ reform efforts towards a sustainable development finance. This is especially important now, given the critical importance of addressing debt vulnerabilities in the many IDA countries that have seen a recent rise. The policy has two pillars: the (i) Debt Sustainability Enhancement Program (DSEP); and the (ii) Program of Creditor Outreach (PCO) . 2. The first year of the SDFP implementation is taking place during an unprecedented global crisis for IDA countries. As highlighted in the January 2021 Global Economic Prospects Report, the crisis has reversed the downward trend in global poverty in many low-income countries for the first time in a generation, putting key development goals even further out of reach. In many IDA countries, rising debt stock levels are adding challenges to existing debt vulnerabilities. Nonetheless, in times of crisis, debt transparency is more important than ever, as is creditor coordination. In this context, the SDFP is supporting countries’ reform efforts to strengthen debt transparency, sustainable fiscal policies, and debt management capacity. The SDFP also aims to help countries invest more efficiently and build their capacity to identify and manage fiscal risks from natural disasters and contingent liabilities stemming from different sources, including public credit operations and public-private partnerships (PPPs) on infrastructure development projects. These areas remain highly relevant in the context of the current crisis. 3. The SDFP was designed for a three-year IDA cycle agreement, which means it now needs to be amended to reflect the decision reached during the IDA Day meeting on February 8, 2021 to advance IDA20 by one year, and hence shorten the IDA19 cycle. The objective of this note is to propose revisions to the set-aside and discount mechanism in the current SDFP framework that can be implemented starting July 1, 2021 (i.e. , the final year of the IDA19 cycle) .1 The revisions focus on making the set-aside and discount mechanism replenishment cycle-neutral, while also maintaining the incentive structure of that underpin the implementation of the Policy and Performance Actions (PPAs) . The changes are intended to be applied in future replenishments. 4. The note consists of 2 Sections. Section II discusses proposed revisions to the SDFP setaside mechanism; and Section III summarizes conclusions and proposes issues for discussions by Participants. 1 An SDFP Progress Report will be prepared for Board review in Q1 ofFY22. In addition, a report on early lessons from SDFP Implementation will be prepared for Participants by October 2021. II. PROPOSED REVISIONS TO THE PPA SET-ASIDE MECHANISM 5. This section describes the proposed revisions to the SDFP to ensure its effective implementation as IDA20 is advanced by a year. As discussed in the Financing Options for IDA Countries paper (January 23, 2021),2 the revisions aim at maintaining incentives, continuity, and neutrality of the PPA implementation and assessment cycle. Revisions will focus only on the setaside and discount mechanisms, and no other changes to the SDFP are envisioned at this time. 6. With the proposed revisions, the SDFP set-aside mechanism will be made replenishment cycle-neutral, running continuously across cycles rather than coming to a hard stop at the end of each cycle. A replenishment cycle-neut

FAQs

What is the Sustainable Development Finance Policy and why is it proposed for adjustment?

The SDFP incentivizes countries to pursue transparent and sustainable financing, enhance debt transparency, and improve coordination between IDA and other creditors. The adjustment is proposed to align the mechanism with the decision to advance IDA20 by one year and shorten the IDA19 cycle.

How does the proposed replenishment cycle-neutral set-aside mechanism work?

The mechanism would run continuously across cycles rather than stopping at the end of each cycle. If a country does not satisfactorily implement PPAs in the second year under the new framework, recovery of the set-aside becomes possible through satisfactory implementation in the following fiscal year.

When does a set-aside become a permanent discount?

If PPA implementation remains unsatisfactory for two consecutive fiscal years, irrespective of timing within a replenishment cycle, the set-aside is lost as a discount. The note illustrates this transition from IDA19 to IDA20 with examples for FY21–FY23.

Jul 19, 2026

Upload by Rowan