Brics funding to low-income countries is risk-weighted: IMF paper

Fund study shows degree of loans concessionality to low-income countries is negatively correlated with risk profile
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An International Monetary Fund paper published on Friday finds the terms and size of loans issued by Bric nations [Brazil, Russia, India and China] to low-income countries increases as the level of risks associated with lending falls.

Nkunde Mwase, the paper's author, uses a panel vector auto-regression model to investigate the determinants of financing flows and loan commitments from Bric countries to low-income countries and the degree of concessionality. Concessionality refers to the extent to which soft loans – loans issued at below market rates – reduce a lender's returns in comparison with a loan of the same amount and duration as the soft loan advanced at full market rates.

The author finds that Brics lend more to low-income countries with weaker institutions and that land-locked, resource-scarce low-income countries receive significantly less financing than other resource-rich low-income countries. The degree of concessionality is negatively correlated with the amount of loans and positively correlated with better institutional indicators, suggesting the higher the risks, the higher the required returns Brics expect, the author says.

Click here to read the paper.

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