[China Co-Financing Fund] IDB administers $37.6 million loan from CHC for Program to Strengthen Fiscal Management in Federative Entities and Municipios

On August 24, 2017, the Inter-American Development Bank (IDB) signed signed two loan contracts with the Government of Mexico to finance the Program to Strengthen Fiscal Management in Federative Entities and Municipios: a $612.4 million loan that IDB issued from its ordinary capital (Loan 4072/OC-ME), and a $37.6 million loan from the People's Bank of China (Loan 4071/CH-ME) via the China Co-Financing Fund for Latin America and the Caribbean (CHC). The $650 million of loan financing authorized by IDB was designed to cover the total program cost. The IDB approval date for the loan financing was June 6, 2017, and it refers to this project as ‘ME-L1253 : Program to Strengthen Fiscal Management in Federative Entities and Municipios’. The CHC loan carries the following borrowing terms: a 12.5-year maturity, a 12.5-year grace period, a 0.75% commitment (credit) fee, no management fee, and an annual interest rate of 3-month LIBOR plus a 0.1% funding margin (also known as the ‘Bank’s Cost of Funding’) and a 0.85% IDB lending spread. The full amount of the loan was scheduled for repayment on the loan’s final maturity date (February 15, 2030) as a ‘bullet payment.’ The program's overall purpose was to strengthen the fiscal regulation, policy, transparency, responsibility, and long-term sustainability of subnational, including state and municipal, governments in Mexico. This was accomplished through policy reforms and structural changes in the management of public finances for these governments. These included, for example, the establishment of the Financial Discipline Law of Federative Entities and Municipalities (Ley de Disciplina Financiera de las Entidades Federativas y los Municipios) to create updated fiscal management rules, and the creation of registries to publish, for the public to view, information on local governments' debt obligations and finances. It also included training programs for government officials about the reforms. Many of these reforms also had the goal of increasing macroeconomic stability. 11 states and 105 municipalities had sufficient levels of indebtedness, over a certain baseline, to be of interest to the program. By the end of 2019, 5 states and 33 municipalities had levels of indebtedness above this baseline, exceeding the goal for states but missing the goal for municipalities. The final disbursement, for the total of both the IDB and China Co-Financing Fund loans, was made on August 24, 2018. Project execution ended during the first half of 2019. The Secretariat of Finance and Public Credit (Secretaría de Hacienda y Crédito Público - SHCP) was responsible for project execution, including its International Finance Affairs Unit (Unidad de Asuntos Internacionales de Hacienda, UAIH), which helped design the program, and its Federal Entities Coordination Unit (Unidad de Coordinación con Entidades Federativas, UCEF). The UCEF helped carry out technical work prior to, and helped facilitate evaluation and program monitoring during, project execution.

Additional details

1. The CHC loan agreement can be accessed in its entirety via https://www.dropbox.com/s/21gtnonj8kbg84b/CONTRATO%20DE%20PR%C3%89STAMO%20No.%204071%3ACH-ME.pdf?dl=0. 2. The second part of the Program to Strengthen Fiscal Management in Federative Entities and Municipios was wholly funded by the IDB's ordinary capital with a $600 million loan. 3. AidData has estimated the all-in interest rate (2.25%) by adding average 3-month LIBOR in the third quarter of 2017 (1.3%) to the funding margin during the third quarter of 2017 (0.10%) and the IDB lending spread during the third quarter of 2017 (0.85%). 4. According to the CHC loan contract, the ‘Bank's Cost of Funding’ means a cost margin calculated quarterly relative to a three (3)-month LIBOR Dollar Interest Rate, using the weighted average cost of funding instruments applicable to the Flexible Financing Facility, expressed in terms of an annual percentage, as determined by the Bank. AidData identified this cost margin via https://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=EZSHARE-1436601171-376. 5. The China Co-Financing Fund for Latin America and the Caribbean was established on January 14, 2013 with a contribution of $2 billion by the People's Bank of China. It is administered by the IDB. For more information, see umbrella Project ID#86526.

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