TWN Info Service on Climate Change (Apr15/01)
1 April 2015
Third World Network

GCF Board decides on terms of concessional loans to developing countries

Geneva, 1 April (Meena Raman) – The Board of the Green Climate Fund at its ninth meeting, decided that the Fund will use differentiated terms for concessional loans to be given to the public sector in developing countries.

The Board decision was taken early morning of Friday, 27 March, following intense discussions in an open-ended small group along the side-lines of the meeting in Songdo, South Korea, in an effort to bridge differences among members.

The Board meeting was scheduled for 24 – 26 March but concluded in the early hours of the 27th due to the complexity of the discussions.

The Board agreed that for the public sector, highly concessional terms include a maturity period of 40 years for the loan repayment, with a 10-year grace period and with no interest rate charged. For the lower concessional terms, the maturity period is 20 years, with a 5-year grace period and an interest charge of 0.75%.    

The main sticky point was over which developing countries would be eligible for highly concessional loan terms and which would be eligible for the lesser concessional terms.

The Secretariat, in proposing a decision for the Board’s consideration, suggested that highly concessional terms will be offered to “vulnerable countries” as defined in an annex to the proposed draft decision, while less concessional terms will be offered to “other countries”.

In the annex, the Secretariat proposed the “classification of a country as a vulnerable country… if it falls into the vulnerable countries category by at least one of the reference criteria contained in ... a table …” The table provided references to the United Nations Framework Convention on Climate Change (UNFCCC) and classified the ‘vulnerable countries’ as “LDCs (least developed countries) and SIDs (small island developing states) and ‘other recipient countries’ as “Non-Annex 1 countries not included in LDCs and SIDs”.

It also referred to the Organisation for Economic Cooperation (OECD) and classified ‘vulnerable countries’ as “LDCs, other low-income countries, lower middle-income countries and territories” and ‘other recipient countries’ as “upper middle-income countries and territories”; the World Bank Group reference to ‘vulnerable countries’ as “low-income economies” and ‘other recipient countries’ as “lower middle-income economies and upper middle-income economies”; and to the International Development Association (IDA) reference to ‘vulnerable countries’ as “IDA countries” and ‘other recipient countries as “IDA blend countries”.

During the discussions in the open-ended small group, a “consolidated list of LDCs, SIDs and low-income countries” was produced based on the recommendation of the Risk Management Committee (which is comprised of 4 Board members) for the high concessionality loans, which drew strong disagreement from other developing country Board members.     

Several developing country Board members firmly challenged the basis for country classification of who are ‘vulnerable countries’. Given the strong disagreement in this regard, the Board did not propose which countries would be eligible for the highly concessional terms and decided to “consider at the tenth Board meeting a proposal regarding the cases which the high level concessional terms and the low level concessional terms … for the public sector … will apply”.

Highlights of some interventions

Jorge Ferrer Rodriguez (Cuba) objected to the differentiation among developing countries, saying that this would prejudge negotiations which are currently on-going (under the UNFCCC), including the ‘Financing for Development’ process in New York (at the UN headquarters). He said that no developing country should be excluded from receiving highly concessional terms.

Angel Valverde (Ecuador) said that the (Secretariat’s) document is defining the group of particularly vulnerable countries and undermines the Governing Instrument that determines that particularly vulnerable countries include, but are not limited to LDCs, SIDs and African States. He added further that the UNFCCC determines in Article 4.8 characteristics that affect vulnerability in developing countries, and some countries like Ecuador comply with all of these situations. He stressed that “it is situations of vulnerability that the Framework Convention refers to and not to country groupings. This is a focus we need to translate to our work in these instruments.”

Valverde said further that “from a practical point of view, we recognize that variability should exist but the idea of differentiating at the level of the country may not be correct. The variability should be according to the project type and type of entity etc. so that it is fit for its purpose.”

Ayman Shasly (Saudi Arabia) also objected to the country classification as presented in the document. He said further that “we recognise SIDs and LDCs in the Convention, which also has its own classification (of who are vulnerable).” Differentiation has to be on the basis of the Convention and not on the basis of the World Bank and others, he added.  

Yang Yingming (China) said that in defining ‘vulnerable countries’, reference should be made to the language in paragraph 52 of the Governing Instrument (which refers to the Board taking into account “the needs of developing countries that are particularly vulnerable to the adverse effects of climate change, including LDCs, SIDs and African States”). He added that since this is a new concept, and that one should never borrow concepts from the OECD, World Bank or IDA as “they may not reflect the climate change situation”. He stressed further that according to scientific evidence and many findings, the Asian continent is most vulnerable to climate change in terms of frequency and scale. Yang said further that it would be better to follow the language from the UNFCCC since the GCF serves the Convention.

Patrick McKaskie (Barbados) emphasised that SIDs are vulnerable countries.

Nojibur Rahman (Bangladesh) echoed the concerns of the other developing country Board members and also referred to the Governing Instrument of the Fund and the need to also link to the Convention. He highlighted the need to give special importance to LDCs for grants and highly concessional loans.

Zaheer Fakir (South Africa) said that the financial terms to be provided need to take into account the climate resilience of countries and he said support is needed for those particularly vulnerable, who can be identified later.

Tosi Mpanu-Mpanu (Democratic Republic of Congo) (who is a member of the Risk Management Committee) said that the Committee did not want to categorise countries but some countries do have less capacity, adding that LDCs, SIDs and African states have been given special status (in the Governing Instrument).

George Zedginidze (Georgia) agreed with the Cuban Board member and said that it was not wise to discuss the categorisation of developing countries.  

Stefan Schwager (Switzerland) said that as regards the differentiation of countries, he preferred a “dynamic approach” with categories of countries that can be adjusted or changed, as in IDA.

Henrick Harboe (Norway), who is Co-chair of the Board, said that that the “world is changing” and that the (non-Annex I) list in the UNFCCC is based on the situation in 1992. He said that IDA is flexible and there is need for some differentiation. He added that a decision was needed or there “will not be any financing of proposals in October”.

Leonardo Martinez (the United States) said that fairness is important and countries who are most vulnerable and who need the most should deserve the best terms. On how to capture this, he said a “middle road” should be found, adding that the IDA scale captures dynamism but does not capture the vulnerability component of the SIDs. He also recalled that at a previous Board meeting in Paris, the Board recognised the need to take into account the “level of indebtedness” of a country. He said that the Board should provide just enough concessionality that could attract financing from the private sector.

Jan Cedergen (Sweden) wanted a clearer definition of who are poorer countries and did not like the concept of ‘vulnerable countries’. He supported the use of the IDA definition of countries.