Annual Report 2019 The International Bank for Reconstruction and Development (IBRD) and The International Development Association (IDA) Management's Discussion & Analysis and Financial Statements (Fiscal 2019) June 30, 2019 International Bank for Reconstruction and Development Management’s Discussion & Analysis and Financial Statements June 30, 2019 Management’s Discussion and Analysis Section I: Executive Summary Contents Section I: Executive Summary Financial Results and Portfolio Performance 3 Key Performance Indicators 5 Section II: Overview Introduction 6 Presentation 6 Financial Business Model 6 Basis of Reporting 8 Section III: Financial Results Summary of Financial Results 10 Net Income 11 Net Income Allocation 16 Section IV: Lending Activities Lending Commitments and Disbursements 19 Lending Categories 20 Currently Available Lending Products 21 Discontinued Lending Products 23 Waivers 23 Section V: Other Development Activities Guarantees 25 Grants 27 Externally-Funded Activities 27 Section VI: Investment Activities Liquid Asset Portfolio 29 Other Investments 30 Section VII: Borrowing Activities Medium- and Long-Term Borrowings 33 Section VIII: Capital Activities Capital Structure 34 Usable Equity 35 Section IX: Risk Management Risk Governance 37 Risk Oversight and Coverage 37 Management of IBRD’s Specific Risks 40 Capital Adequacy 40 Market Risk 47 Operational Risk 50 Section X: Fair Value Analysis Effect of Interest Rates 52 Effect of Credit 52 Changes in Accumulated Other Comprehensive Income 53 Section XI: Contractual Obligations Contractual Obligations 56 Section XII: Pension and Other Post-Retirement Benefits Governance 57 Funding and Investment Policies 57 Environmental, Social and Governance (ESG) Policies 58 Projected Benefit Obligation 58 Section XIII: Critical Accounting Policies and The Use of Provision for Losses on Loans and Other Exposures 59 Estimates Fair Value of Financial Instruments 59 Pension and Other Post-Retirement Benefits 60 Section XIV: Governance and Controls General Governance 61 Executive Directors 61 Audit Committee 62 Business Conduct 62 Auditor Independence 62 External Auditors 63 Senior Management Changes 63 Internal Control 63 Appendix Glossary of Terms 64 Abbreviations and Acronyms 65 Eligible Borrowing Member Countries by Region 66 List of Tables, Figures and Boxes 66 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 1 Management’s Discussion and Analysis Section I: Executive Summary This Management’s Discussion and Analysis (MD&A) discusses the financial results of the International Bank for Reconstruction and Development (IBRD) for the fiscal year ended June 30, 2019. For information relating to IBRD’s development operations’ results and corporate performance, refer to the World Bank Corporate Scorecard and Sustainability Review. Box 1: Selected Financial Data In millions of U.S. dollars, except ratios which are in percentages As of and for the fiscal years ended June 30 2019 2018 2017 2016 2015 Lending Highlights (See Section IV) Commitments a $ 23,191 $ 23,002 $ 22,611 $ 29,729 $ 23,528 Gross disbursements b 20,182 17,389 17,861 22,532 19,012 Net disbursements b 10,091 5,638 8,731 13,197 9,999 Reported Basis Income Statement (See Section III) Board of Governors-approved and other $ (338) $ (178) $ (497) $ (705) $ (715) transfers Net Income/(loss) 505 698 (237) 495 (786) Balance Sheet Total assets c $ 283,031 $ 263,800 $ 258,648 $ 231,408 $ 212,931 Net investment portfolio (See Section VI) 81,127 73,492 71,667 51,760 45,105 Net loans outstanding (See Section IV) 192,752 183,588 177,422 167,643 155,040 Borrowing portfolio (See Section VII) 228,763 213,652 207,144 178,231 158,853 Allocable Income (See Section III) Allocable income $ 1,190 $ 1,161 $ 795 $ 593 $ 686 Allocated as follows: General Reserve d 831 913 672 96 36 International Development Association 259 248 123 497 650 Surplus 100 - - - - Usable Equity e f (See Section VIII) $ 45,360 $ 43,518 $ 41,720 $ 39,424 $ 40,195 Capital Adequacy (See Section IX) Equity-to-loans ratio g 22.8% 22.9% 22.8% 22.7% 25.1% a. Commitments include guarantee commitments and guarantee facilities that have been approved by the Executive Directors. b. Amounts include transactions with the International Finance Corporation (IFC) and loan origination fees. c. Effective June 30, 2019, derivatives are presented net by counterparty, after cash collateral received, and the presentation of the prior periods has been aligned for comparability. (For further details, see Note A: Summary of Significant Accounting and Related Policies in the Notes to the Financial Statements for the fiscal year ended June 30, 2019). d. The June 30, 2019 amount represents the proposed transfer to the General Reserve from FY19 net income, which was approved on August 8, 2019 by the Board. e. Excludes amounts associated with unrealized mark-to-market gains/losses on non-trading portfolios, net and related cumulative translation adjustments. f. As defined in Table 27: Usable Equity. Usable equity includes the proposed transfer to the General Reserve. g. As defined in Table 28: Equity-to-Loans Ratio. 2 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section I: Executive Summary Section I: Executive Summary With its many years of experience and its depth of billion of paid-in capital and $52.6 billion of callable knowledge in the international development arena, capital, over the next five years. IBRD plays a key role in achieving the World Bank To meet its development goals, the World Bank Group Group’s (WBG 1 ) goal of helping countries achieve is increasing its focus on country programs in order to better development outcomes. IBRD contributes to improve growth and development outcomes. We are both the WBG’s twin goals of ending extreme poverty expanding support for countries at lower levels of and promoting shared prosperity by providing income and fragile and conflict-affected states. The countries with investments, advisory services and aim is to effectively address issues central to the WBG analytical support. IBRD and its affiliated mission, while taking into account the global organizations seek to help countries achieve slowdown in growth and the surge in debt that is not improvements in growth, job creation, poverty bringing true benefits. Support to countries from reduction, governance, the environment, climate IBRD rose to $23.2 billion in FY19, up from $23 adaptation and resilience, human capital, billion in the previous fiscal year. infrastructure and debt transparency. On October 1, 2018, the Board of Governors (the Governors) approved a General Capital Increase Financial Results and Portfolio (GCI) and a Selective Capital Increase (SCI). The GCI Performance and SCI are part of an agreed-upon capital package The financial performance of IBRD reflects the impact that includes institutional and financial reforms of the measures put in place in previous years to designed to ensure IBRD’s long-term financial increase its financial capacity and ensure its long-term sustainability. The package provides support for financial sustainability. At the end of the fiscal year priorities such as crisis preparedness, prevention and ended June 30, 2019, the Executive Directors (referred management; situations of fragility, conflict and to as “the Board” in this document), approved the violence (FCV); climate change; gender equality; retention of $831 million in the General Reserve out knowledge and convening; and regional integration. of the allocable income for the fiscal year ended June The capital increases will result in additional 30, 2019 (FY19). subscribed capital of up to $60.1 billion, with $7.5 1 The other WBG institutions are the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 3 Management’s Discussion and Analysis Section I: Executive Summary Net Income and Allocable Income IBRD’s net income on a reported basis was $505 million for the fiscal year ended June 30, 2019, compared with $698 million for the fiscal year ended June 30, 2018. $505 million Net Income In both fiscal years, the results were affected by net unrealized mark-to-market losses on IBRD’s non-trading portfolios. Given IBRD’s intention to maintain its non-trading portfolio positions, unrealized mark-to-market losses and gains are not included in IBRD’s allocable income. Allocable income is the income measure IBRD uses for making net income allocation decisions. For the fiscal year ended June 30, 2019, allocable income was $1,190 million, compared with $1,161 million for the fiscal year ended June 30, 2018. The higher allocable income was primarily driven by: increase in loan spread revenue; and increase in equity contribution; largely offset by a loan loss $1,190 million provisioning charge of $54 million in FY19, compared with a release of $28 Allocable Income million in FY18. Loans IBRD’s lending operations during the fiscal year ended June 30, 2019, resulted in $23.2 billion of loan commitments and $10.1 billion of net loan disbursements. The latter was the key driver in the increase in net loans outstanding, from $184 $193 billion Net Loans Outstanding billion at the end of the fiscal year ended June 30, 2018, to $193 billion at the end of the fiscal year ended June 30, 2019. Investments IBRD’s investment portfolio increased by $7 billion, from $74 billion as of June 30, 2018 to $81 billion as of June 30, 2019. The investments remain concentrated in the upper end of the credit spectrum, with 67% rated AA or above, reflecting $81 billion Net Investment Portfolio IBRD’s objective of principal protection and its resulting preference for high- quality investments. Borrowings IBRD raised medium and long-term debt of $54 billion during FY19, resulting in a $15 billion increase in the portfolio during the year, from $214 billion as of June 30, 2018, to $229 billion as of June 30, 2019. The funds raised financed $229 billion Borrowing Portfolio development lending operations and satisfied the increase in liquidity requirements. The debt issuances were highly diversified in terms of investor types and location, with an average maturity of 4.1 years. Usable Equity IBRD’s usable equity increased by $1.9 billion, to $45 billion as of June 30, 2019, from $43 billion as of June 30, 2018. As of June 30, 2019, IBRD had received $605 million of paid-in capital under the General and Selective Capital Increases. $45 billion Usable Equity 4 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section I: Executive Summary Key Performance Indicators Lending - In FY19, IBRD committed $23.2 billion through 100 operations to help developing countries find solutions to global and local development challenges. Lending commitments (including guarantees of $1.1 billion) in FY19 were in line with a year earlier (see Table 8). As of June 30, 2019, IBRD’s net loans outstanding amounted to $193 billion (see Table 2), 5% above a year earlier. In billions of U.S dollars Commitments Disbursements Net Loans outstanding 35 35 250 30 30 200 25 25 Gross 20 150 20 15 100 15 Net 10 10 50 5 5 0 0 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 0 Jun 15Jun 16Jun 17Jun 18Jun 19 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 Capital Adequacy and Liquidity – The Equity-to-Loans ratio declined marginally from 22.9% as of June 30, 2018 to 22.8% as of June 30, 2019. The decline in the ratio reflected the combined impact of several factors. These include the increase in loan and other exposures, partially offset by the increase in paid-in capital from the GCI/SCI subscriptions; the FY19 allocation to the General Reserve; and the change in the measure used for incorporating the pension funded status (see Section VIII). The net investment portfolio’s growth was due to pre-funding activities and liquidity for anticipated loan disbursements for the coming fiscal year, and enhanced IBRD’s ability to meet its financial commitments, even under potential scenarios of severe market disruption. In billions of U.S dollars (except for ratio) Equity to Loans ratio Net Investment Portfolio Borrowing Portfolio 40% 250 250 200 200 30% 150 150 20% 100 100 policy minimum 10% 50 50 0% 0 0 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 Financial Results – On a reported basis, IBRD’s net income for FY19 was $505 million. This primarily reflects strong net interest revenue results and contained net administrative expenses, partially offset by Board of Governor- approved transfers and net unrealized mark-to-market losses on the non-trading portfolios (see Table 6). After the standard adjustments to arrive at allocable income (see Table 7), IBRD had allocable income of $1,190 million for FY19, $29 million higher than FY18 (see Section III). In millions of U.S dollars Net Income/Loss Allocable Income 1,500 Unrealized gains/losses 1,500 1,000 1,250 1,000 500 750 0 500 -500 250 -1,000 0 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 5 Management’s Discussion and Analysis Section II: Overview Section II: Overview Introduction Financial Business Model IBRD, an international organization owned by its 189 IBRD’s objective is not to maximize profits, but to member countries, is one of the five institutions of the earn adequate income to ensure that it has the long- WBG. Each institution is legally and financially term financial capacity necessary to support its independent, with separate assets and liabilities. IBRD development activities. IBRD seeks to generate is not liable for the obligations of the other institutions. sufficient revenue to finance its operations as well as to be able to set aside funds in reserves to strengthen IBRD is one of the largest Multilateral Development its financial position. It also seeks to provide support Banks (MDB) in the world and combines knowledge to IDA and trust funds via income transfers for other services and financing with global reach. IBRD’s developmental purposes. value derives from its ability to help eligible borrowing members address their development IBRD’s financial strength rests on the support it challenges and meet their rising demand for innovative receives from its shareholders, and on its array of products. IBRD provides loans, guarantees, and other financial policies and practices. Shareholder support financial products for development-focused projects for IBRD is reflected in the capital backing it and programs to creditworthy middle-income and low- continues to receive from its members and in the income countries to support sustainable development. record of its borrowing member countries in meeting By operating across a full range of country clients, their debt service obligations to IBRD. Sound IBRD maintains a depth of development knowledge, financial and risk management policies and practices uses its convening power to promote development and have enabled IBRD to maintain its capital adequacy, advance the global public goods agenda, and diversify its funding sources, hold a portfolio of liquid coordinates responses to regional and global investments to meet its financial commitments, and challenges. limit its risks, including credit and market risks. Member countries use IBRD’s technical advice, IBRD offers its borrowers, in middle income and analysis and convening power to develop or creditworthy low-income countries, long-term loans implement better policies, programs, and reforms that with maturities of up to 35 years. Borrowers may help sustain development over the long term. The customize their repayment terms to meet their debt products delivered range from development data, to management or project needs, and loans are offered on reports on key social economic and social issues at the fixed and variable terms in multiple currencies. local, country, regional and global levels. Other However, borrowers have generally preferred loans products also include knowledge-sharing workshops denominated in U.S dollars and euros. IBRD also focused on local issues, to flagship events and fora to supports its borrowers by providing access to risk address the most pressing global development management tools such as derivative instruments, challenges. including currency and interest rate swaps and interest rate caps and collars. Presentation To meet its development goals, it is important for This document provides Management’s Discussion IBRD to intermediate funds for lending from the and Analysis (MD&A) of the financial condition and international capital markets. IBRD’s loans are results of operations for IBRD for the fiscal year- financed through its equity, and from borrowings ended June 30, 2019. At the end of this document there raised in the capital markets. IBRD is rated triple-A by is a Glossary of Terms and a list of Abbreviations and the major rating agencies and its bonds are viewed as Acronyms. high-quality securities by investors. IBRD’s funding IBRD undertakes no obligation to update any forward- strategy is aimed at achieving the best long-term value looking statements. Certain reclassifications of prior on a sustainable basis for its borrowing members. This years’ information have been made to conform to the strategy has enabled IBRD to borrow at favorable current year’s presentation. For further details, see market terms and pass the savings on to its borrowing Note A: Summary of Significant Accounting and members. IBRD’s annual funding volumes vary from Related Policies in the Notes to the Financial year to year, and funds raised are used to finance Statements for the year-ended June 30, 2019. IBRD’s development projects and programs in member countries. Funds not deployed for lending are maintained in IBRD’s investment portfolio to supply liquidity for its operations. Figure 1 below illustrates IBRD’s financial business model. 6 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section II: Overview Figure 1: IBRD’s Financial Business Model IBRD uses derivatives to manage its exposure to Such external funds include trust funds, reimbursable various market risks from the above activities. These funds and revenues from fee-based services (to are used to align the interest and currency compositions member countries), which are primarily Reimbursable of its assets (loan and investment trading portfolios) Advisory Services (RAS), Externally Financed with those of its liabilities (borrowing portfolio), and to Outputs (EFO), and the Reserves Advisory stabilize earnings on the portion of the loan portfolio Management Program (RAMP). Non-interest revenue funded by equity. See Section IX: Risk Management from externally funded activities provides additional for additional details on how IBRD uses derivatives. capacity to support the development needs of client countries. Management continues to strengthen and Management believes that these risk management align this revenue source with the overall WBG strategies, taken together, effectively manage market strategy and priorities. See Section V for a detailed risk in IBRD’s operations from an economic discussion on externally funded activities. perspective. These strategies entail the use of derivatives, which introduce volatility through The financial results for FY19 reflect the impact of the unrealized mark-to-market gains and losses on the measures implemented in prior years to enhance reported basis income statement (particularly given the IBRD’s financial sustainability. These measures are long-term nature of some of IBRD’s assets and intended to increase IBRD’s equity, its lending liabilities). Accordingly, Management makes decisions capacity, and its ability to fund priorities that meet on income allocation without reference to unrealized shareholder goals while also ensuring its long-term mark-to-market gains and losses on risk management financial sustainability. instruments in the non-trading portfolios – see Basis of At IBRD’s Spring Meetings in April 2018, the Reporting – Allocable Income. Governors endorsed a capital package consisting of a Financial Performance series of policy and financial measures, and a capital increase designed to enhance IBRD’s financial IBRD’s primary sources of revenue are from loans and capacity on a sustainable basis. That package included: investments (both net of funding costs), and equity contribution. These revenues cover, administrative 1) a General and Selective Capital increase, which expenses, provisions for losses on loans and other the Governors approved on October 1, 2018, exposures 2 (LLP), as well as transfers to Reserves, that will provide up to $7.5 billion in additional Surplus, and for other development purposes including transfers to IDA. paid-in capital; In addition to the revenue generated from the activities 2) new loan pricing measures, which were shown in Figure 1, other development activities approved by the Board in June 2018 and became generate non-interest revenue that is externally-funded. effective from July 1, 2018. IBRD retained in its 2 Other exposures include deferred drawdown options (DDO), irrevocable commitments, exposures to member countries’ derivatives and guarantees. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 7 Management’s Discussion and Analysis Section II: Overview reserves, all the additional revenue from these this framework, starting from FY20, pricing measures earned in FY19; management provides an update of the sustainable annual lending limit and the Board 3) an increase in the Single Borrower Limit (SBL) approves a crisis buffer, which enables IBRD to with differentiation based on per capita income, respond to crises. The crisis buffer-adjusted which the Board approved on June 28, 2018, sustainable annual lending limit (SALL-Adj) with a subsequent increase for below-GDI serves as the upper bound for regular lending in countries approved on July 31, 2019 for FY20; the next year. On June 25, 2019, the Board 4) continued efficiency measures and approved a crisis buffer of $10 billion, resulting administrative simplification; and in a SALL-Adj of $28.1 billion for FY20. 5) a financial sustainability framework, which the Board approved on December 11, 2018. Under Figure 1: Sources and Uses of Revenue Sources Uses Simplified Revenue Funding Net Interest Balance Sheet Revenue Liquid Return on Cost of Investment Inv. Investments debt Revenue, net Admin D Expenses e b t LLP Cost of Loan Interest L Loan revenue Margin debt o a Reserves n s Allocable IDA, Other Income Equity Equity transfers & Contribution Surplus Basis of Reporting Presentation of Derivatives Audited Financial Statements Starting from June 30, 2019, IBRD changed the presentation of derivative instruments on its Balance IBRD’s financial statements conform with accounting Sheet to align with the preferred accounting treatment, principles generally accepted in the United States of which is also the prevailing market practice. This America (U.S. GAAP), referred to in this document as practice nets derivative asset and liability positions, the “reported basis”. All instruments in the investment and the related cash collateral received, by and borrowing portfolios and all other derivatives are counterparty under specific conditions when a legally reported at fair value, with changes in fair value enforceable master netting agreement exists between reported in the Statement of Income. IBRD’s loans are IBRD and its counterparties. This is a change from the reported at amortized cost, except for loans with previous presentation, where interest rate swaps were embedded derivatives, if any, which are reported at presented on the Balance Sheet on a net basis by fair value. Management uses the reported net income instrument, and currency swaps were presented on a as the basis for deriving allocable income, as discussed gross basis, reflecting the manner in which these below. instruments were settled. 8 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section II: Overview The change is made in the current period, and the year. These adjustments primarily relate to unrealized presentation of prior period information has been mark-to-market gains and losses associated with its aligned for comparability. non-trading portfolios, as well as the expenses for Board of Governors-approved and other transfers, Change of Functional Currency which primarily relate to the allocation of the prior Starting from the fourth quarter of the fiscal year year’s net income. ended June 30, 2019, IBRD changed its functional See Financial Results Section (Section III) and Table currencies from all the currencies of its members, to 7 for details of the adjustments to reported net income U. S. dollars and euro. As a result, while translation required to calculate allocable income. gains/losses relating to euro-denominated balances continue to be reflected in equity, translation The volatility in IBRD’s reported net income is gains/losses on non-euro (non-functional currencies) primarily driven by the unrealized mark-to-market balances, are reflected in reported net income (see gains and losses on the derivative instruments in Notes to the Financial Statements, Note A: Summary IBRD’s non-trading portfolios (loans, borrowings, and of Significant Accounting and Related Policies for Equity Management Framework). IBRD’s risk more details). management strategy entails the use of derivatives to manage market risk. Derivatives are primarily used to Fair Value Results align the interest rate and currency bases of its assets IBRD reflects all financial instruments at fair value in and liabilities. IBRD has elected not to designate any Section X of this document. The fair value of these hedging relationships for accounting purposes. Rather, instruments is affected by changes in market variables all derivative instruments are marked to fair value on such as interest rates, exchange rates, and credit risk. the Balance Sheet, with changes in fair values Management uses fair value to assess the performance accounted for through the Statement of Income. of the investment-trading portfolio; and to manage In line with its financial risk management policies, various market risks, including interest rate risk and IBRD maintains non-trading portfolios (loans, commercial counterparty credit risk. borrowings, and derivative instruments in the Equity Allocable Income Management Framework). As a result, for non-trading portfolios, allocable income only includes amounts IBRD’s Articles of Agreement (the Articles) require that have been realized. that the Governors determine the allocation of income at the end of every fiscal year. Allocable income, For trading portfolios (investment portfolio), allocable which is a non-GAAP financial measure, is an internal income includes both realized and unrealized mark-to- management measure that reflects income available market gains and losses. for allocation. IBRD defines allocable income as net income on a reported basis after certain adjustments that are approved by the Board at the end of each fiscal IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 9 Management’s Discussion and Analysis Section III: Financial Results Section III: Financial Results The following section is a discussion of IBRD’s Results of Operations on a Reported and Allocable Income basis, for the fiscal year-ended June 30, 2019 compared with the fiscal year-ended June 30, 2018, as well as changes in its financial position between June 30, 2019 and June 30, 2018. Summary of Financial Results Table 1: Condensed Statement of Income In millions of U.S. dollars For the fiscal year ended June 30, 2019 2018 2017 FY19 vs FY18 FY18 vs FY17 Interest Revenue, net of Funding Costs Loan interest margin $ 1,323 $ 1,184 $ 1,022 $ 139 $ 162 Equity contribution, (including EMF) 827 746 719 81 27 Investments, net 117 231 170 (114) 61 Net Interest Revenue $ 2,267 $ 2,161 $ 1,911 $ 106 $ 250 Provision for losses on loans and other exposures, net - (54) 28 (14) (82) 42 (charge) / releasea Net non-interest expenses (Table 4) (1,167) (1,185) (1,347) 18 162 Net other revenue (Table 3) 105 138 129 (33) 9 Board of Governors-approved and other transfers (338) (178) (497) (160) 319 Non-functional currency translation adjustments losses, netb (30) - - (30) - Unrealized mark-to-market losses on non - trading (278) (266) (419) (12) 153 portfolios, netc Net Income (Loss) $ 505 $ 698 $ (237) $ (193) $ 935 Adjustments to Reconcile Net Income to Allocable Income Pension and other adjustments 39 19 116 20 (97) Board of Governors-approved and other transfers 338 178 497 160 (319) Non-functional currency translation adjustments losses, netb 30 - - 30 - Unrealized mark-to-market losses on non - trading 278 266 419 12 (153) portfolios, netc Allocable Income $ 1,190 $ 1,161 $ 795 $ 29 $ 366 a. Includes a $4 million reduction (expense) in the recoverable asset for FY19. For FY18 and FY 17 amount includes $3 million, each, reduction (expense) in the recoverable asset. These amounts relate to the change in the value of the risk coverage received (recoverable assets) associated with the MDB EEA transactions and are included in other non-interest revenue on IBRD’s statement of income. b. Translation adjustments relating to assets and liabilities in non-functional currencies. c. Adjusted to exclude amounts reclassified to realized gains (losses). See Table 36 IBRD’s principal assets are its loans to member countries. These are financed by IBRD’s equity and proceeds from the capital markets. Table 2: Condensed Balance Sheet In millions of U.S. dollars As of June 30, 2019 2018 Variance Investments and due from banks $ 82,310 $ 73,188 $ 9,122 Net loans outstanding 192,752 183,588 9,164 Derivative assets, net 2,840 2,460 380 Other assets 5,129 4,564 565 Total Assets $ 283,031 $ 263,800 $ 19,231 Borrowings 230,180 208,009 22,171 Derivative liabilities, net 3,053 7,932 (4,879) Other liabilities 7,683 6,015 1,668 Equity 42,115 41,844 271 Total Liabilities and Equity $ 283,031 $ 263,800 $ 19,231 10 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section III: Financial Results Total Assets Loan Portfolio As of June 30, 2019, total assets grew by 7% compared The 2018 capital package, as well as the increase in with June 30, 2018. The growth was primarily due to amounts retained in reserves, will provide additional the increase in net loans outstanding resulting from capacity for lending and enhance IBRD’s capacity to positive net disbursements during the fiscal year, and respond to crises. As of June 30, 2019, IBRD’s net the increase in investments and due from banks, as a loans outstanding totaled $193 billion, 5% above a result of pre-funding activities. year earlier (see Figure 3). The increase was mainly attributable to $10 billion of net loan disbursements in The following is a discussion of the key drivers of FY19, partially offset by currency translation losses of IBRD’s financial performance, including a $0.9 billion, primarily due to the 2.2% depreciation of reconciliation between IBRD’s reported net income the euro against the U.S. dollar during the year. and allocable income. Gross disbursements in FY19 were $20.2 billion, 16% Net Income higher than FY18, which were primarily due to higher activity in fast-disbursing operations - Development On a reported basis, IBRD had net income of $505 Policy Financing, and Program for Results - during the million for FY19. This net income primarily reflects year (see Section IV). higher net interest revenue, offset by higher loan loss Figure 3: Loan Interest Margin provisioning and higher Board of Governors-approved Net Loans Outstanding Loan Interest Margin transfers. After adjustments, IBRD had allocable 193 income of $1,190 million for FY19, higher by $29 200 177 184 1,400 million as compared to FY18 (see Table 1). The higher 1,200 allocable income in FY19 was primarily due to the 150 1,000 increase in IBRD’s loan spread revenue (loan interest (In $ bllions ) (In $ millions ) 800 margin, commitment and guarantee fees) and an 100 600 increase in equity contribution. 50 400 Figure 2: Net Income and Unrealized gains / (losses) 200 Net Income/Loss 0 0 1,000 Unrealized gains/losses FY17 FY18 FY19 500 In $ millions 0 Figure 4: Derived Spread 350 Basis Points -500 291 300 Loan - Weighted Average Return -1,000 250 before funding costs (after swaps) FY15 FY16 FY17 FY18 FY19 222 200 Results from Lending activities Weighted 150 Average Funding Loan Interest Margin 100 Cost (after swaps) 69 Loan interest margin is comprised of the contractual 50 Derived Spread spread on loans funded by borrowings and IBRD’s 0 equity (that is, loan interest revenue, less associated Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 funding costs, less equity savings). It is largely unaffected by changes in short-term interest rates due to the cost-pass-through nature of IBRD’s loans (see Results from Investing activities Figure 4). IBRD’s FY19 loan interest margin was $1,323 million, an increase of $139 million compared Net Investment Revenue with FY18. The increase was driven by the impact of During FY19, interest revenue from investments, net the pricing measures previously adopted, as well as the of funding costs, amounted to $117 million, compared increase in lending volume during the year. with $231 million during FY18. The FY18 net investment revenue was higher than usual given the additional cross-currency arbitrage opportunities which were available during that time. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 11 Management’s Discussion and Analysis Section III: Financial Results Investment Portfolio Equity Contribution IBRD’s investment portfolio consists mainly of the Equity contribution is primarily the sum of: liquid asset portfolio. As of June 30, 2019, the net 1) equity savings, defined as the revenue earned from investment portfolio totaled $81 billion, with $79 the portion of loans funded by equity rather than debt billion representing the liquid asset portfolio. This (excluding the contractual spread); and compares with $74 billion a year earlier, of which $72 billion represented the liquid asset portfolio (see Note 2) interest revenue earned from the interest rate swap C: Investments in the Notes to the Financial positions held for the EMF. Statements). The growth in the liquid asset portfolio Figure 7: Equity Contribution reflects the higher projected debt service and loan In millions of U.S. dollars disbursements for the coming fiscal year (see Section 1,000 IX). Interest Revenue Equity Savings 800 Figure 5: Net Investment Portfolio In billions of U.S. dollars 600 336 529 884 100 400 81 74 200 383 80 72 217 0 60 (57) -200 FY17 FY18 FY19 40 20 For FY19, equity contribution was $827 million, $81 million higher compared with $746 million in FY18, 0 as a result of higher equity savings. This was partially FY17 FY18 FY19 offset by the reduction in net interest revenue from the EMF swap positions, consistent with the increase in interest rates during the year (see Table 1). Results from Borrowing activities A discussion on the EMF strategy and how IBRD Borrowing Portfolio manages its exposure to short-term interest rates is included in the Risk Management Section (Section As of June 30, 2019, the borrowing portfolio totaled IX). $229 billion, $15 billion above June 30, 2018 (see Note E: Borrowings in the Notes to the Financial Net Other Revenue Statements). Net other revenue represents non-interest sources of In FY19, to fund its operations, IBRD raised medium- revenue. Table 3 provides details on the composition and long-term debt of $54 billion in 27 different of net other revenue, which was lower by $33 million currencies, $18 billion above FY18 (see Table 23). or 24% relative to FY18. The decrease was mainly due The increase in medium- and long-term debt issuances to expenses for transactions associated with the Pilot in FY19 is primarily a result of the increase in net loan Auction Facility for Methane and Climate Change disbursements, as well as higher debt servicing and Mitigation (PAF), and the Pandemic Emergency refinancing requirements for the coming year. Financing Facility (PEF). This was partially offset by an increase in loan commitment fees compared with Figure 6: Borrowing Portfolio In billions of U.S. dollars FY18, as a result of the higher proportion of undisbursed loan balances subject to the 25 basis-point 250 229 commitment fee charge (see Table 11). Revenues from 207 214 200 PAF and PEF are fully offset by fair value changes in market trades (facing counterparties), which are 150 included in Unrealized mark-to market gains/(losses) 100 on non-trading portfolios, net (Table 1). 50 0 FY17 FY18 FY19 12 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section III: Financial Results Table 3: Net Other Revenue In millions of U.S. dollars FY19 vs FY18 vs For the fiscal year ended June 30, 2019 2018 2017 FY18 FY17 Loan commitment fees $ 107 $ 87 $ 70 $ 20 $ 17 Guarantee fees 18 14 8 4 6 Net Earnings from PEBP and PCRF 34 34 47 - (13) Pilot Auction Facility (PAF) and Pandemic Emergency Facility (PEF) a (56) 1 8 (57) (7) Others 2 2 (4) - 6 Net other revenue (Table 1) $ 105 $ 138 $ 129 $ (33) $ 9 a. Amount is fully offset by fair value changes in trades (facing counterparties) related to PEF and PAF, which are included in Unrealized mark-to market gains/(losses) on non-trading portfolios, net (Table 1). Expenses improvement reflects the increase in IBRD’s loan spread revenue during the year, sustained expenditure Net Non-Interest Expenses restraint, and the lower allocation of administrative As shown in Table 4, IBRD’s net non-interest expenses to IBRD under the agreed cost-sharing expenses primarily comprise administrative expenses, methodology (see Table 5 for details of the Budget net of revenue from externally funded activities. Anchor components). IBRD/IDA's administrative budget is a single resource Figure 8: Net Non-Interest Expenses envelope that funds the combined work programs of In millions of U.S. dollars IBRD and IDA. The allocation of administrative expenses and revenue between IBRD and IDA is 1,400 based on an agreed cost- and revenue-sharing 1,300 methodology, approved by their Boards, which is 1,200 primarily driven by the relative level of lending, 1,100 knowledge services, and other services between these 1,000 two institutions. The administrative expenses shown 900 in the table below include costs related to IBRD- 800 FY15 FY16 FY17 FY18 FY19 executed trust funds and other externally funded activities. Figure 9: Budget Anchor The decrease in net non-interest expenses relative to In millions of U.S. dollars FY18 was primarily due to the impact of the lower 1600 107% 79% allocation of administrative expenses to IBRD, driven 88% by IDA’s increased activities in lower income 1400 countries and fragile states in FY19. Also contributing 1200 to the decrease were lower pension and post- 1000 retirement benefit costs, reflecting lower amortization 800 of unrecognized net actuarial losses and service costs 600 during FY19. Higher revenue from externally funded 400 activities also contributed to the lower net non-interest 200 expenses. 0 FY17 FY18 FY19 IBRD monitors its net administrative expenses as a Net administrative expenses percentage of its loan spread revenue, using a measure Net loan spread revenue referred to as the Budget Anchor. In FY19, IBRD’s Budget anchor Budget Anchor was 79%, an improvement of nine percentage points compared with 88% in FY18. The IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 13 Management’s Discussion and Analysis Section III: Financial Results Table 4: Net Non-Interest Expenses In millions of U.S. dollars FY19 vs FY18 vs For the fiscal year ended June 30, 2019 2018 2017 FY18 FY17 Administrative expenses Staff costs $ 980 $ 951 $ 904 $ 29 $ 47 Travel 181 181 175 - 6 Consultant fees and contractual services 450 437 454 13 (17) Pension and other post-retirement benefitsa 246 272 394 (26) (122) Communications and technology 53 54 55 (1) (1) Equipment and buildings 126 128 130 (2) (2) Other expenses 21 26 33 (5) (7) Total administrative expenses $ 2,057 $ 2,049 $ 2,145 $ 8 $ (96) Grant Making Facilities (See Section V) 18 18 22 - (4) Revenue from externally funded activities (See Section V) Reimbursable revenue – IBRD-executed trust funds (603) (595) (542) (8) (53) Reimbursable advisory services (56) (52) (47) (4) (5) Revenue - Trust fund administration (44) (48) (47) 4 (1) Restricted revenue (primarily EFO) (33) (22) (24) (11) 2 Revenue - Asset management services (15) (15) (14) - (1) Other revenue (157) (150) (146) (7) (4) Total Revenue from externally funded activities (908) (882) (820) (26) (62) Total Net Non-Interest Expenses (Table 1) $ 1,167 $ 1,185 $ 1,347 $ (18) $ (162) a. Includes all components of pension costs. See Notes to Financial Statements, Note J: Pension and Other Post-Retirement Benefits. Table 5: Budget Anchor Ratio In millions of U.S. dollars FY19 vs FY18 vs For the fiscal year ended June 30, 2019 2018 2017 FY18 FY17 Total Net non-interest expenses (Table 4) $ 1,167 $ 1,185 $ 1,347 $ (18) $ (162) Pension adjustment (Table 7) a (28) (56) (175) 28 119 EFO adjustment a 11 2 4 9 (2) Net administrative expenses $ 1,150 $ 1,131 $ 1,176 $ 19 $ (45) Loan interest margin (Table 1) 1,323 1,184 1,022 139 162 Loan commitment fees (Table 3) 107 87 70 20 17 Guarantee fees (Table 3) 18 14 8 4 6 Total loan spread revenue $ 1,448 $ 1,285 $ 1,100 $ 163 $ 185 Budget Anchor 79% 88% 107% a. These adjustments are made to arrive at net administrative expenses used for allocable income purposes. For more information see Allocable Income and Income Allocation section. 14 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section III: Financial Results Provision for losses on loans and other Statements, Note G: Retained Earnings, Allocations exposures and Transfers). This compares with $178 million recorded in FY18. The main reason for the increase is In FY19, IBRD recorded a provision of $54 million for the introduction in FY17 of a formula-based approach losses on loans and other exposures, compared with a for determining IBRD’s transfers to IDA, which links $28 million release during the same period in FY18. these transfers with IBRD’s allocable income level. The main driver of the increase in the provisioning requirement was the increase in IBRD’s lending Unrealized mark-to-market gains/losses on exposures from $191 billion as of June 30, 2018 to non-trading portfolios $200 billion as of June 30, 2019. The accumulated provision for losses on loans and other exposures of These mainly relate to unrealized mark-to-market $1,688 million as of June 30, 2019 was less than 1% gains and losses on the loan, borrowing, and EMF of total exposures, largely unchanged compared with portfolios. Since these are non-trading portfolios, any the prior year ($1,645 million as of June 30, 2018 and unrealized mark-to-market gains and losses associated less than 1% of total exposures). See Notes to with these positions, are excluded from reported net Financial Statements, Note D: Loans and Other income to arrive at allocable income. As a result, from Exposures. a long-term financial sustainability perspective, income allocations are based on amounts that have been realized (except for the Investments-Trading Board of Governors-approved and other portfolio, as previously discussed). For FY19, $278 transfers million of net unrealized mark-to-market losses ($266 For FY19, IBRD recorded expenses of $338 million million net unrealized mark-to-market losses in FY18) for Board of Governors-approved and other transfers, were excluded from reported net income to arrive at which primarily relate to the transfer to IDA from allocable income (see Table 1). FY18 allocable income (see Notes to the Financial Table 6: Unrealized Mark-to-Market gains/losses, net In millions of U.S. dollars For the fiscal year ended June 30, 2019 Unrealized gains Realized gains Total (losses)a (losses) Borrowing portfolio b $ 109 $ 11 $ 120 Loan portfolio c (1,486) 1 (1,485) EMF 1,084 - 1,084 Asset-liability management portfolio - - - Client operations portfolio 15 - 15 Total $ (278) $ 12 $ (266) For the fiscal year ended June 30, 2018 Unrealized gains Realized gains Total (losses)a (losses) Borrowing portfolio b $ (381) $ * $ (381) Loan portfolio c 916 - 916 EMF (799) - (799) Asset-liability management portfolio (2) - (2) Client operations portfolio (*) - (*) Total $ (266) $ * $ (266) a. Excludes amounts reclassified to realized mark-to-market gains (losses). b. Includes related derivatives. c. Comprises derivatives on loans. * Indicates amount less than $0.5 million. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 15 Management’s Discussion and Analysis Section III: Financial Results Loan Portfolio related to Board of Governors-approved and other transfers. On a reported basis, all loans are reported at amortized cost, whereas the derivatives which convert loans to Board of Governors-approved and other transfers variable-rate instruments are reported at fair value. As Board of Governors-approved and other transfers refer a result, while from an economic perspective, IBRD’s to the allocations recommended by the Board and loans after the effect of derivatives carry variable approved by the Governors, as part of the prior year’s interest rates, and therefore have a low sensitivity to net income allocation process and subsequent interest rates, this is not evident in the reported net decisions on uses of surplus, as well as on payments income. To show the economic effect of its risk from restricted retained earnings. management policies, IBRD reflects its loans at fair value in the MD&A. See Section X for more details. Since these amounts primarily relate to allocations out of IBRD’s FY18 allocable income, Surplus, or Borrowing Portfolio restricted retained earnings, they are deducted from On a reported basis, all IBRD’s borrowings and the FY19 reported net income in calculating FY19 related derivatives are at fair value, and therefore, allocable income. unrealized mark-to-market gains and losses on the Non-functional currency translation adjustment borrowing related derivatives are correspondingly gains/losses offset by unrealized mark-to-market gains and losses on the underlying borrowings, except for changes in With this year’s change in IBRD’s functional IBRD’s own credit. currency, translation gains and losses relating to non- functional currencies on asset/liability positions are Effective July 1, 2018, as required by an accounting now reflected in reported net income. Since these are change, the movement in IBRD’s own credit is unrealized gains/losses related to asset/liability reflected as a Debit Valuation Adjustment (DVA) on positions still held by IBRD, they are excluded from Fair Value Option Elected Liabilities in Other reported net income to arrive at allocable income. Comprehensive Income (OCI). These amounts were previously recognized in IBRD’s unrealized mark-to- Unrealized mark-to-market gains/losses on non- market gains/losses on non-trading portfolios in net trading portfolios income. See Section X for more details. These mainly comprise unrealized mark-to-market EMF gains and losses on the loan, borrowing, and EMF portfolios as discussed previously. For the portion of loans funded by equity, the EMF uses derivatives to convert variable rate cash flows to Pension, PEBP and PCRF adjustments fixed rate cash flows. These derivatives are at fair The Pension adjustment reflects the difference value on a reported basis. See Sections IX and X for between the sum of IBRD’s cash contributions - to the more details on the activity and the underlying pension plans, the Post-Employment Benefit Plan strategy. (PEBP), and the Post-Retirement Contribution Reserve Fund (PCRF), versus the accounting expense. Net Income Allocation It also includes investment revenue earned on the pension plan, PEBP, and PCRF assets. The PCRF was Net income allocation decisions are based on allocable established by the Board to stabilize contributions to income. Management recommends to the Board, the pension and post-retirement benefits plans. allocations out of net income at the end of each fiscal Management bases the allocation decision on IBRD’s year to augment reserves and support developmental cash contributions rather than on pension expenses. In activities. As illustrated in Table 7, the key differences addition, Management has designated the income from between allocable income and reported net income these assets to meet the needs of the pension plans. As relate to unrealized mark-to-market gains and losses a result, PEBP and PCRF investment revenues are on IBRD’s non-trading portfolios, and expenses excluded from allocable income. 16 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section III: Financial Results Table 7: Allocable Income In millions of U.S. dollars For the fiscal years ended June 30, 2019 2018 Net Income (Loss) $ 505 $ 698 Adjustments to Reconcile Net Income to Allocable Income: Board of Governors-approved and other transfers 338 178 Non-functional currency translation adjustments losses, net a 30 - Unrealized mark-to-market losses on non-trading portfolios, net b 278 266 Pension 28 56 PEBP and PCRF income (34) (34) Other 45 (3) Allocable Income $ 1,190 $ 1,161 Recommended Allocations General Reserve 831 913 Surplus 100 - Transfer to IDA 259 248 Total Allocations $ 1,190 $ 1,161 a. Translation adjustments relating to assets and liabilities in non-functional currencies. b. Adjusted to exclude amounts reclassified to realized gains (losses). See Table 36. Other Adjustments FY19, $54 million of expense was recognized in reported net income.  Under certain arrangements (such as Externally Financed Outputs), IBRD enters into  The income recognized for the right to receive agreements with donors under which it receives reimbursement from the Financial Intermediary grants to finance specified IBRD outputs or Fund (FIF) for the Pilot Auction Facility (PAF) services. These funds may be utilized only for for Methane and Climate Change Mitigation 4 the purposes specified in the agreements and is excluded, as this is required for the payout for are, therefore, considered restricted until IBRD the changes in market value on put options has fulfilled those purposes. Management under the PAF. Therefore, it is not available for excludes from allocable income amounts other uses. In FY19, $2 million of expense was arising from these arrangements, because IBRD recognized in reported net income, and thus has no discretion over the use of the related excluded to arrive at the FY19 allocable funds. In line with this, the income is income. The change in the market value of the transferred to restricted retained earnings. In put option is also excluded from reported net FY19, the net balance of these restricted funds income to arrive at allocable income, as part of increased by $11 million. the unrealized mark-to market gains/(losses) on non-trading portfolios.  The revenue (expense) associated with the right to receive reimbursement from the Financial Intermediary Fund for the Pandemic Income Allocation Emergency Financing Facility 3 (PEF) is In FY17, the Board approved a formula-based excluded, as this is required for payment approach for determining IBRD’s transfers to IDA. obligations relating to the pandemic catastrophe The approach links transfers to IBRD’s allocable bonds, and the pandemic catastrophe insurance. income for the year, ensuring that most allocable Therefore, it is not available for other uses. In income is retained to grow IBRD’s reserves. In 3 The PEF was launched with the aim of establishing a fast-disbursing mechanism that can provide funding for response efforts that help prevent low-frequency, high-severity outbreaks from becoming pandemics. The PEF has been established as a Financial Intermediary Fund (FIF). 4 In FY16, IBRD issued put options for methane and climate change mitigation. The PAF is a climate finance model developed by IBRD to stimulate investment in projects that reduce greenhouse gas emissions in developing countries. The PAF is a pay-for- performance mechanism which uses auctions to allocate public funds and attract private sector investment to projects that reduce methane emissions by providing a medium-term guaranteed floor price on emission rights. IBRD did not issue any put options under the PAF in FY19 or FY18. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 17 Management’s Discussion and Analysis Section III: Financial Results addition, as part of the commitment made under the allocation process in accordance with IBRD’s 2018 capital package, incremental revenue from the Articles. In making their decisions, the Governors price increases implemented in July 2018 was continue to take the overall financial standing of IBRD excluded from the formula used to calculate transfers into consideration. to IDA out of FY19 allocable income and was retained Allocable income in FY19 was $1,190 million and of in IBRD’s reserves. this, the Board approved the allocation of $831 million IBRD’s strong support of IDA is reflected in the $15 to the General Reserve on August 8, 2019. Based on billion of cumulative income transfers it has made the new methodology, the Board recommended to since IDA’s first replenishment. IBRD’s Governors a transfer of $259 million to IDA and $100 million to Surplus. Annual IDA transfer recommendations are still subject to approval by the Governors as part of the net income Figure 10: FY19 Allocable Income and Income Allocation In millions of U.S. dollars Revenue Interest Margin Equity Contribution Investment 1,448 827 Income 117 Uses Administrative Expenses, Allocable Income 1,190 LLP net of Other Revenue 54 1,148 Surplus 100 IDA Transfers 259 General Reserves 831 0 500 1,000 1,500 2,000 2,500 3,000 18 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section IV: Lending Activities Section IV: Lending Activities IBRD provides financing instruments and knowledge (e.g., natural disasters) and in crises (e.g., food, fuel, services to middle-income and creditworthy low- and global economic crises). income countries to reduce poverty and promote Loan disbursements must meet the requirements set shared prosperity, while ensuring that social, out in loan agreements. During implementation of environmental, and governance considerations are IBRD-supported operations, IBRD’s staff review taken into account. Country teams with an progress, monitor compliance with IBRD policies, and understanding of each country’s circumstances work help resolve any problems that may arise. The with clients to tailor the mix of instruments, products, Independent Evaluation Group, an IBRD unit whose and services. director general reports to the Board, evaluates the Engagements with borrowing members are extent to which operations have met their development increasingly aligned with IBRD’s strategic priorities, objectives. including engagements that support global public All IBRD loans, are made to, or guaranteed by, goods such as climate, fragility and gender. member countries. IBRD may also make loans to IFC Over the past decades, considerable advancements in without any guarantee. In most cases, IBRD’s Board poverty reduction have been made globally. The approves each loan and guarantee after appraisal of a World Bank estimates suggest that, for the first time in project by staff. However, under the Multiphase history, the number of people living in extreme Programmatic Approach, the Board may approve an poverty has fallen below 10 percent of the global overall program framework, its financing envelope population. Despite this achievement, hundreds of and the first appraised phase, and then authorize millions of people still live on less than $1.90 a day, Management to appraise and commit financing for the current benchmark for extreme poverty. A later program phases. continuation of these advancements offers an For FY20, eligible countries with 2018 per capita opportunity to end extreme poverty. Gross National Income (GNI) of more than $1,175 are Projects and programs supported by IBRD are eligible to borrow from IBRD. Since 1946, IBRD has designed to achieve a positive social impact and extended, net of cumulative cancellations, about undergo a rigorous review and internal approval $658.5 billion in loans. IBRD does not currently sell process, aimed at safeguarding equitable and its loans. sustainable economic growth, that includes early screening to identify environmental and social impacts Lending Commitments and and designing mitigation actions. Disbursements Identifying and appraising a project, and approving In FY19, IBRD had new loan commitments, through and disbursing a loan, can often take several years. 100 operations, totaling $23 billion, which were However, IBRD has shortened the preparation and marginally higher as compared to FY18, driven by the approval cycle for countries in emergency situations increase in Development Policy Financing operations (see Figure 12). Figure 11: Commitments and Disbursements Trend In billions of U.S. dollars 50 40 30 20 10 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Commitments Gross Disbursements IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 19 Management’s Discussion and Analysis Section IV: Lending Activities Table 8: Commitments by Region In millions of U.S. dollars For the fiscal year ended June 30, 2019 % of total 2018 % of total Variance Africa $ 820 4% $ 1,120 5% $ (300) East Asia and Pacific 4,030 17 3,981 17 49 Europe and Central Asia 3,749 16 3,550 15 199 Latin America and the Caribbean 5,709 25 3,898 17 1,811 Middle East and North Africa 4,872 21 5,945 26 (1,073) South Asia 4,011 17 4,508 20 (497) Total $ 23,191 100% $ 23,002 100% $ 189 Table 9: Gross Disbursements by Region In millions of U.S. dollars For the fiscal year ended June 30, 2019 % of total 2018 % of total Variance Africa $ 690 3% $ 734 4% $ (44) East Asia and Pacific 5,048 25 3,476 20 1,572 Europe and Central Asia 2,209 11 4,134 24 (1,925) Latin America and the Caribbean 4,847 24 4,066 23 781 Middle East and North Africa 4,790 24 3,281 19 1,509 South Asia 2,598 13 1,698 10 900 Total $ 20,182 100% $ 17,389 100% $ 2,793 Lending Categories Development Policy Financing (DPF) IBRD’s lending is classified in three categories: DPF supports borrowers in achieving sustainable investment project financing, development policy development through programs of policy and financing, and program-for-results (see Figure 12). institutional actions. Examples of DPF operations include strengthening public financial management, Investment Project Financing (IPF) improving the investment climate, addressing IPF provides financing for a wide range of activities bottlenecks to improve service delivery, and aimed at creating the physical and social infrastructure diversifying the economy. DPF supports reforms necessary to reduce poverty and create sustainable through non-earmarked general budget financing. development. IPF is usually disbursed over the long- DPF provides fast-disbursing financing (roughly 1 to term (roughly a 5 to 10-year horizon). FY19 3 years) to help borrowers address actual or commitments under this lending category amounted to anticipated financing requirements. FY19 $11.6 billion, compared with $14.4 billion in FY18. commitments under this lending category totaled $9 billion, compared with $5 billion in FY18. Figure 12: Share of Financing Categories for Annual Commitments Percent FY19 50% 39% 11% FY18 63% 22% 15% FY17 57% 34% 9% FY16 38% 45% 17% FY15 66% 30% 4% 0% 25% 50% 75% 100% Investment Project Development Policy Program-for-Results 20 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section IV: Lending Activities Program-for-Results (PforR) chosen by the borrower if IBRD can efficiently intermediate in that currency. Using currency PforR helps countries improve the design and conversions, some borrowing member countries have implementation of their development programs and converted their IBRD loans into domestic currencies achieve specific results by strengthening institutions to reduce their foreign currency exposure for projects and building capacity. PforR disburses when agreed or programs that do not generate foreign currency results are achieved and verified. Results are identified revenue. These local currency loans may carry fixed and agreed upon during the loan preparation stage. or variable-spread terms. The balance of such loans FY19 commitments under this lending category outstanding was $3.6 billion as of June 30, 2019 and totaled $2.6 billion compared with $3.5 billion in $3.5 billion as of June 30, 2018. respectively. Box 2 FY18. below shows the components of the spread on IBRD’s IFLs and how these are determined. Currently Available Lending Products Box 2: Determination of Spreads for IFLs As of June 30, 2019, 85 member countries were Contractual lending spread Subject to the Board’s eligible to borrow from IBRD. See Appendix for a list periodic review of eligible countries. Maturity Premium Market Risk Premium Set by Management IBRD Flexible Loans (IFLs) Funding Cost Margin IFLs allow borrowers to customize their repayment terms (i.e., grace period, repayment period, and For fixed-spread IFLs, Management ensures that the amortization profile) to meet their debt management funding cost margin and the market risk premium or project needs. The IFL offers two types of loan reflect the underlying market conditions, which are terms: variable-spread terms and fixed-spread terms. constantly evolving. These are communicated to the As of June 30, 2019, 73% of IBRD’s loans outstanding Board at least quarterly. carried variable-spread terms and 27% had fixed- spread terms. See Table 11 for details of loan terms for The ability to offer long-term financing distinguishes IFL loans. development banks from other sources of funding for IFLs include options to manage the currency and/or member countries. Since IBRD introduced maturity- interest rate risk over the life of the loan. The based pricing in 2010, most countries continue to outstanding balance of loans, for which currency or choose loans with the longest maturities despite a interest rate conversions have been exercised was $25 higher maturity premium, highlighting the value of billion as of June 30, 2019 and June 30, 2018. IFLs longer maturities to member countries (See Table 10). may be denominated in the currency or currencies Table 10: Commitments by Maturity In millions of U.S. dollars For the fiscal year ended June 30, 2019 For the fiscal year ended June 30, 2018 Variable Variable Maturity Fixed Spread Total Fixed Spread Total Spread Spread < 8 years $ 407 $ 267 $ 674 $ 442 $ 514 $ 956 8-10 years 2,254 1,456 3,710 133 2,476 2,609 10-12 years - 1,123 1,123 7 2,387 2,394 12-15 years 1,952 2,326 4,278 2,016 3,172 5,188 15-18 years 1,236 2,225 3,461 915 3,218 4,133 >18 years 3,287 5,517 8,804 2,617 4,677 7,294 Guarantee Commitments - - 1,141 - - 428 Total Commitments $ 9,136 $ 12,914 $ 23,191 $ 6,130 $ 16,444 $ 23,002 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 21 Management’s Discussion and Analysis Section IV: Lending Activities Other Lending Products Currently Available In addition to IFLs, IBRD offers loans with a deferred drawdown option, Special Development Policy Loans (SDPLs), loan-related derivatives, and loans to IFC (See Box 3). Box 3: Other Lending Products Currently Available Lending Product Description The Development Policy Loan Deferred Drawdown Option (DPL DDO) gives borrowers the flexibility to rapidly obtain the financing they require. For example, such funds could be needed owing to a shortfall in resources caused by unfavorable economic events, such as declines in growth or unfavorable shifts Loans with a in commodity prices or terms of trade. The Catastrophe Risk DDO (CAT DDO) enables borrowers to Deferred Drawdown access immediate funding to respond rapidly in the wake of a natural disaster. Under the DPL DDO, Option borrowers may defer disbursement for up to three years, renewable for an additional three years. The CAT DDO has a revolving feature and the three-year drawdown period may be renewed up to four times, for a total maximum drawdown period of 15 years (Table 11). As of June 30, 2019, the amount of DDOs disbursed and outstanding was $6.7 billion (compared to $6.1 billion on June 30, 2018), and the undisbursed amount of effective DDOs totaled $3.2 billion, compared to $3.7 billion a year earlier. Special SDPLs support structural and social reforms by creditworthy borrowers that face a possible global Development Policy financial crisis or are already in a crisis and have extraordinary and urgent external financing needs. As Loans (SDPLs) of June 30, 2019, the outstanding balance of such loans was $68 million (compared to $163 million a year earlier). IBRD made no new SDPL commitments in either FY19 or FY18. IBRD assists its borrowers with access to better risk management tools by offering derivative instruments, including currency and interest rate swaps, and interest rate caps and collars, associated Loan-Related with their loans. These instruments may be executed either under a master derivatives agreement, which Derivatives substantially conforms to industry standards, or under individually negotiated agreements. Under these arrangements, IBRD passes through the market cost of these instruments to its borrowers. The balance of loans outstanding for which borrowers had entered into currency or interest rate derivative transactions under a master derivatives agreement with IBRD was $11 billion as of June 30, 2019 and June 30, 2018. IBRD provides loans to IFC in connection with the release of a member's National Currency Paid-In Loans with IFC Capital (NCPIC) to IBRD. (See Section VIII for explanation of NCPIC). As of June 30, 2019, there were no loans outstanding with the IFC. Lending Terms Applicable to IBRD Products exemptions, discounts or surcharges applicable to each pricing group (See Table 12 below). Until the end of FY18, loans for all eligible members were subject to the same pricing. However, as part of The new pricing measures became effective on July 1, the 2018 capital package, IBRD implemented a new 2018, with limited grandfathering for projects under pricing structure that classifies member countries into preparation at that time and approved by the Board on four pricing groups, based on income and other or before September 30, 2018. factors, and relates the maturity premium to the 22 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section IV: Lending Activities Table 11: Loan Terms Available Through June 30, 2019 Basis points, unless otherwise noted IBRD Flexible Loan (IFL)a Special Development Fixed-spread Terms Variable-spread Terms Policy Loans (SDPL) Final maturity 35 years 35 years 5 to 10 years Maximum weighted average maturity 20 years 20 years 7.5 years Six-month variable rate Six-month variable rate Six-month variable rate Reference market rate index index index Spread Contractual lending spread 50 50 200 Maturity premium 0-115b 0-115b – Market risk premium 10-15c – – Actual funding spread to Projected funding variable rate index of Funding cost margin spread to six-month IBRD borrowings in the – variable rate indexd previous six-month period Charges Front-end fee 25 25 100 Late service charge on principal payments received after 30 days of due datee 50 50 – Commitment fee 25 25 25 Development Policy Loan Catastrophe Risk Deferred Drawdown Option Deferred Drawdown Option Reference market rate Six-month variable rate index Six-month variable rate index Contractual lending spread IFL variable or fixed-spread in effect at the time of withdrawal Front-end fee 25 50 Renewal fee – 25 Stand-by fee 50 – a. There is an implicit floor of zero on the overall interest rate in IBRD’s loans. b. Based on the weighted average maturity of the loan and on country pricing group. c. Based on the weighted average maturity of the loan. d. Projected funding spread to variable rate index (e.g., London Interbank Offered Rate (LIBOR)) is based on the weighted average maturity of the loan. e. See Box 7 in Section IX for a discussion of overdue payments Table 12: Country Pricing Group and Maturity Premium (in basis points) Maturity Country pricing group Description Premium a A Blendsb, small states, countries in fragile and conflict-affected situations (FCS) and 0-50c recent IDA graduates. These countries are exempt from the maturity premium increase regardless of their income levels. B Countries below GDI which do not qualify for an exemption listed in Group A. 0-70 Countries above GDI, but below high-income status and which do not qualify for an C exemption listed in Group A. 0-90 Countries with high-income status and which do not qualify for an exemption listed in D 5-115 Group A. a. Based on the weighted average maturity of the loan b. Countries eligible for IDA and IBRD loans c. Applicable to loans on pre-FY18 terms. Discontinued Lending Products charges on eligible loans. Waivers are approved annually by the Board. For FY20, the Board has IBRD’s loan portfolio includes lending products approved the same waiver rates as in FY19 for all whose terms are no longer available for new eligible borrowers with eligible loans. The foregone commitments. These products include currency pool income in FY19 due to previously approved waivers loans and fixed-rate single-currency loans. As of June was $49 million (FY18: $65 million). Figure 13 30, 2019, loans outstanding of $512 million (0.26% of illustrates a breakdown of IBRD’s loans outstanding the portfolio) carried terms no longer offered. and undisbursed balances by loan terms, as well as Waivers loans outstanding by currency composition. The loans outstanding after the use of derivatives for risk Loan terms offered prior to September 28, 2007, management purposes is discussed under Market Risk included a partial waiver of interest and commitment in Section IX. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 23 Management’s Discussion and Analysis Section IV: Lending Activities Figure 13: Loan Portfolio In millions of U.S. dollars Figure 13a. Loans Outstanding by Loan Terms In millions of U.S. dollars, except for ratios June 30, 2019 June 30, 2018 Fixed Spread Fixed terms Spread 27% terms, 27% $194,787 $185,589 Variable Variable Spread Spread terms terms, 73% 73% Figure 13b. Undisbursed Balances by Loan Terms In millions of U.S. dollars, except for ratios June 30, 2019 June 30, 2018 Fixed Spread Fixed Spread terms, 25% terms, 21% $67,825 $68,422 Variable Spread Variable terms, 75% Spread terms, 79% Figure 13c. Loans Outstanding by Currency In millions of U.S. dollars, except for ratios June 30, 2019 June 30, 2018 Other, 2% Other, 3% Euro, 19% Euro, 20% U.S. Dollars, U.S. Dollars, 78% 78% 24 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section V: Other Development Activities Section V: Other Development Activities IBRD continues to deliver value to its client countries June 30, 2018 (see Table 13). Exposure is measured through its knowledge services, convening power, and by discounting each guaranteed amount from its next capacity to implement solutions that address global call date. issues where coordinated action is critical. IBRD offers project-based and policy-based IBRD also assists clients with designing financial guarantees for priority projects and programs in products and structuring transactions to help mobilize member countries. Project-based guarantees are resources for development projects and mitigate the provided to mobilize private financing for projects; financial effects of market volatility and disasters. they are also used to mitigate projects’ payment- and performance-related risks. Policy-based guarantees Other financial products and services provided to are provided to mobilize private financing for borrowing member countries, and to affiliated and sovereigns or sub- sovereigns. IBRD’s guarantees are non-affiliated organizations, include financial partial and are intended to provide only the coverage guarantees, grants, externally-funded activities necessary to obtain the required private financing, (described below), and advisory services and considering country, market and, if appropriate, analytics. project circumstances. All guarantees require a Guarantees sovereign counter-guarantee and indemnity, comparable to the requirement of a sovereign IBRD’s exposure on its guarantees was $7.4 billion guarantee for IBRD lending to sub-sovereign and non- as of June 30, 2019 compared with $6.3 billion as of sovereign borrowers (see Box 4). Table 13: Guarantees Exposure In million U.S. dollars As of June 30, 2019 2018 Guarantees (project, policy and enclave) $ 3,739 $ 2,540 Advance Market Commitment 30 114 Exposure Exchange Agreements 3,661 3,671 Total $ 7,430 $ 6,325 Box 4: Types of Guarantees Provided by IBRD Guarantee Description Two types of project-based guarantees are offered: 1. Loan guarantees: these cover loan-related debt service defaults caused by the government’s failure to meet specific payment and/or performance obligations arising from contract, law or regulation, in relation to a project. Loan guarantees include coverage for debt service defaults on: Project-based (i) commercial debt, normally for a private sector project where the cause of debt service default guarantees is specifically covered by IBRD’s guarantee; and, (ii) a specific portion of commercial debt irrespective of the cause of such default, normally for a public-sector project. 2. Payment guarantees: these cover payment default on non-loan related government payment obligations to private entities and foreign public entities arising from contract, law or regulation. These cover debt service default, irrespective of the cause of such default, on a specific portion of Policy-based commercial debt owed by national or sub-national governments and associated with the supported guarantees government’s program of policy and institutional actions. IBRD extends guarantees for projects in IDA-only member countries that (i) are expected to generate large economic benefits with significant developmental impact in the member country; and (ii) cannot Guarantees for be fully financed out of the country’s own resources, IDA resources, or other concessional financing. enclave operations Those projects are known as enclave operations. The provision of IBRD support to enclave operations is subject to credit enhancement features that adequately mitigate IBRD’s credit risk. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 25 Management’s Discussion and Analysis Section V: Other Development Activities Table 14: Pricing for IBRD Project-Based and Policy-Based Guarantees Basis Points Charges Pre-FY19 d FY19 Front-end fee 25 25 Processing fee 50a 50a Initiation fee 15b 15b Standby fees 25 25 Guarantee fee 50-100c 50-165c a. The processing fee is determined on a case-by-case basis. b. The initiation fee is 15 basis points of the guaranteed amount or $100,000, whichever is greater. c. Based on the weighted average maturity of the guarantee and country pricing group. d. Pre-FY19 pricing applies to guarantees approved by the Board on or before September 30, 2018 (see Section IV). In addition, IBRD has entered into the following and interest exposure of MIGA under its Non- arrangements, which are treated as financial Honoring of Sovereign Financial Obligation guarantees under U.S. GAAP: agreement.  Advance Market Commitment (AMC): AMC is a  In December 2015, IBRD signed, together with multilateral initiative to accelerate the creation of the African Development Bank (AfDB) and a market and sustainable production capacity for Inter-American Development Bank (IADB), an pneumococcal vaccines for developing MDB EEA. Under the EEA, each MDB countries. IBRD provides a financial platform exchanged credit risk exposure of a reference for AMC by holding donor-pledged assets as an portfolio supported by underlying loans to intermediary agent and passing them on to the borrowing member countries. For each MDB, Global Alliance for Vaccines and Immunization EEAs through diversification benefits, help (GAVI) when appropriate conditions are met. reduce credit risk at the portfolio level; improve Moreover, should a donor fail to pay, or delay the risk-weighted capital ratios especially by paying any amounts due, IBRD has committed addressing exposure concentration concerns; to pay from its own funds any amounts due and and create lending headroom for individual payable by the donor, to the extent there is a borrowing countries where MDBs may be shortfall in total donor funds received. The constrained. The EEA involved the receipt of a amount of the exposure is discussed under the guarantee and the provision of a guarantee guarantee program (see Notes to Financial against nonpayment in the reference portfolio by Statements, Note I: Management of External each MDB to the other. The guarantee received Funds and Other Services). and the guarantee provided are two separate transactions: (a) a receipt of an asset for the right  Exposure Exchange Agreements (EEA): IBRD to be indemnified, and receive risk coverage has an exposure exchange agreement (recoverable asset) and (b) the provision of a outstanding with MIGA under which IBRD and financial guarantee, respectively (see Notes to MIGA exchanged selected exposures, with each the Financial Statements, Note D: Loans and divesting itself of exposure in countries where Other Exposures). their lending capacities are limited, in return for exposure in countries where they had excess  Other guarantee arrangements: As of June 30, lending capacity. Under the agreement, IBRD 2019, IBRD had received guarantees totaling and MIGA each exchanged $120 million of $1,544 million ($1,094 million for FY18). These notional exposure as follows: MIGA assumed guarantees serve as a credit enhancement to IBRD's loan principal and interest exposure in increase IBRD’s lending capacity in certain exchange for IBRD's assumption of the principal countries. Table 15: Exposure Exchange Agreements In millions of U.S. dollars As of June 30, 2019 2018 Guarantee Guarantee Guarantee Guarantee Received Provided Received Provided Exposure Exchange Agreement MIGA $ 53 $ 52 $ 63 $ 62 IADB 2,021 2,021 2,021 2,021 AfDB 1,588 1,588 1,588 1,588 Total notional $ 3,662 $ 3,661 $ 3,672 $ 3,671 26 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section V: Other Development Activities Grants in FY18) of trust fund program funds. Grant-Making Facilities (GMFs) are complementary  Recipient-Executed Trust Funds (RETFs): to IBRD’s work. IBRD deployed $18 million under Funds are provided to a third party, normally in this program in FY19 and a similar amount in FY18. the form of project grant financing, and are These amounts are reflected in contributions to special supervised by IBRD. programs on IBRD’s Statement of Income.  Financial Intermediary Funds (FIFs): IBRD, as trustee, administrator, or treasury manager, Externally-Funded Activities offers an agreed set of financial and administrative services, including managing These funds have become an integral part of IBRD’s donor contributions. activities, and primarily include Trust Funds. IBRD uses a cost recovery framework for Trust Funds. Additional external funds include reimbursable funds Key features of the framework include: and revenues from fee-based services to member countries, which are related to Reimbursable Advisory  Ensuring IBRD increases the recovery of costs Services (RAS), Externally Financed Outputs (EFO), incurred for trust fund activities. and the Reserves Advisory Management Program  Simplifying and standardizing the fee structure (RAMP). for all types of trust funds. Reimbursable Advisory Services Table 16 below shows IBRD’s share of revenue in FY19 from trust fund administration, (see Notes to While most of IBRD’s advisory and analytical work is Financial Statements, Note I: Management of External financed by its own budget or donor contributions Funds and Other Services). (e.g., Trust Funds), clients may also pay for services. IBRD offers technical assistance and other advisory Table 16: Revenue Earned from Trust Fund Activities In millions of U.S. dollars services to its member countries, in connection with, As of June 30, 2019 2018 and independent of, lending operations. Available Revenue / Fees from Trust services include, for example, assigning qualified Fund Administration $ 44 $ 48 professionals to survey developmental opportunities in member countries; analyzing member countries’ fiscal, economic, and developmental environments; Externally Financed Outputs helping members devise coordinated development IBRD offers donors the ability to contribute to specific programs; and improving their asset and liability projects and programs. EFO contributions are management techniques. In FY19, IBRD earned recorded as restricted revenue when received because revenue of $56 million ($52 million in FY18) from they are for contractually specified purposes. RAS. Restrictions are released once the funds are used for Trust Fund Activity the purposes specified by donors. In FY19, IBRD earned $23 million of revenue, compared with $22 Trust Funds are an integral part of IBRD’s resource million in FY18. envelope, affording IBRD with the resources and added flexibility to provide development solutions that Other Financial Products and Services serve member recipients and donors alike. Trust IBRD plays an active role in designing financial Funded-partnerships often serve as a platform for products and structuring transactions to help clients IBRD and its partners to access WBG’s diverse mobilize resources for development projects and technical and financial resources, and achieve mitigate the financial effects of market volatility and development goals whose complexity, scale, and disasters. scope exceed any individual partner’s capabilities. IBRD’s roles and responsibilities in managing trust Risk Management Instruments funds depend on the type of fund, outlined as follows: IBRD helps member countries build resilience to  IBRD-Executed Trust Funds (BETFs): IBRD, shocks by facilitating access to risk management alone or jointly with one or more of its affiliated solutions to mitigate the financial effects of currency, organizations, manages the funds and interest rate, and commodity price volatility; disasters; implements or supervises the activities and of extreme weather events. Box 5 below illustrates financed. These trust funds support IBRD’s the financial solutions and disaster risk financing work program. IBRD, as an executing agency, options IBRD offers: disbursed $603 million in FY19 ($595 million IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 27 Management’s Discussion and Analysis Section V: Other Development Activities Box 5: Disaster Risk Financing Options sector assets. Clients include central banks, sovereign Hedging Transactions Disaster Risk Financing wealth funds, national pension funds, and Interest Rate Catastrophe Derivatives and supranational organizations. RAMP helps clients to Bonds upgrade their asset management capabilities, Currency Insurance and Reinsurance including portfolio and risk management, operational Commodity Price Regional Pooling Facilities infrastructure, and human resources capacity. Under most of these arrangements, IBRD is responsible for In FY17 IBRD launched the Pandemic Emergency managing a portion of the institution’s assets and, in Financing Facility (PEF) with the aim of establishing return, receives a fee based on the average value of the a fast-disbursing mechanism to provide funding for portfolio managed (see Table 17). The fees earned are response efforts that help prevent low-frequency, used to provide training and capacity-building high-severity outbreaks from becoming pandemics. services. In addition to RAMP, IBRD invests and IBRD also intermediates the following risk manages investments on behalf of IDA, MIGA, and management transactions for clients: trust funds; those investments are not included in IBRD’s assets.  Affiliated Organization: To assist IDA with its Table 17: RAMP – Assets and Revenues asset/liability management IBRD executes In millions of U.S. dollars currency forward contracts on its behalf. As of June 30, 2019 2018 During FY19, IBRD did not execute any Assets managed under contracts on behalf of IDA. $ 24,795 $ 22,091 RAMP  Unaffiliated Organization: To assist the Revenue from RAMP $ 13 $ 13 International Finance Facility for Immunization (IFFIm) with its asset/liability management strategy, IBRD executes currency and interest As noted in the discussion of Trust Fund Activities rate swaps on its behalf. In addition, IBRD, as above, IBRD, alone or jointly with one or more of its Treasury Manager, is IFFIm’s sole affiliated organizations, administers on donors’ behalf counterparty and enters into offsetting swaps funds restricted for specific uses. Such administration with market counterparties. During FY19, is governed by agreements with donors, who include IBRD did not execute any interest rate members, their agencies and other entities. These derivatives under this agreement. funds are held in trust and, except for undisbursed (See Risk Management, Section IX, for a detailed third-party contributions made to IBRD-executed trust discussion of IBRD’s risk mitigation of these funds, are not included on IBRD’s Balance Sheet. The derivative transactions). cash and investment assets held in trust by IBRD as administrator and trustee totaled $27 billion in FY19, Asset Management of which $60 million (compared to $68 million in FY18) relates to IBRD contributions to these trust The Reserves Advisory and Management Program funds (Table 18). (RAMP) provides services that build clients’ capacity to support the sound management of their official Table 18: Cash and Investment Assets Held in Trust In millions of U.S dollars As of June 30, 2019 2018 IBRD-executed $ 273 $ 292 Jointly executed with affiliated organizations 862 810 Recipient-executed 2,730 2,796 Financial intermediary funds 17,828 19,497 Execution not yet assigned a 5,466 4,318 Total fiduciary assets $ 27,159 $ 27,713 a. These represent assets held in trust for which the determination as to the type of execution is yet to be finalized. 28 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section VI: Investment Activities Section VI: Investment Activities IBRD’s investment portfolio consists mainly of the obligations of banks and financial liquid asset portfolio. As of June 30, 2019, the net institutions investment portfolio totaled $81.1 billion with $78.9  Asset Backed Securities (including Agency billion representing the liquid asset portfolio. This Mortgage Backed Securities) compares with $73.5 billion a year earlier, of which $71.6 billion represented the liquid asset portfolio (see  Currency and interest rate derivatives Note C: Investments in the Notes to the Financial  Exchange-traded options and futures Statements). The increased level of liquidity reflects IBRD keeps liquidity volumes above a Prudential the higher projected debt service and loan Minimum which is defined as 80% of the twelve- disbursements for the coming fiscal year. month Target Liquidity Level. The twelve- month Target Liquidity Level is calculated before the end of Liquid Asset Portfolio each fiscal year based on Management’s estimates of Funds raised through IBRD’s borrowing activity that projected net loan disbursements approved at the time have not yet been deployed for lending, are held in the of projection, and twelve months of debt-service for liquid asset portfolio to provide liquidity for IBRD’s the upcoming fiscal year. This twelve-month estimate operations. The portfolio is managed with the goal of becomes the target for the upcoming fiscal year and ensuring sufficient cash flow to meet all IBRD’s the Prudential Minimum is 80% of this target (see financial commitments. While it seeks a reasonable Section IX for details of how IBRD manages liquidity return on this portfolio, IBRD restricts its liquid assets risk). to high-quality investments, consistent with its The liquid asset portfolio is composed largely of assets investment objective of prioritizing principal denominated in, or swapped into, U.S. dollars, with net protection over yield. Liquid assets are managed exposure to short-term interest rates after derivatives. conservatively and are primarily held against The portfolio has an average duration of less than three disruptions in IBRD’s access to capital markets. months, and the debt funding these liquid assets has a IBRD’s liquid assets, are held mainly in highly rated, similar currency and duration profile. This is a direct fixed-income instruments (see Box 8: Eligibility result of IBRD’s exchange rate and interest rate risk Criteria for IBRD's Investments) and include the management policies (see Section IX), combined with following: appropriate investment guidelines (see Box 8).  Government and agency obligations  Time deposits and other unconditional Figure 14: Liquid Asset Portfolio by Asset Class In millions of U.S. dollars, except for ratios June 30, 2019 June 30, 2018 Asset-backed Asset-backed Securities Securities 7% Government 6% and agency Government obligations 41% $78,900 and agency obligations $71,579 Time 46% Deposits 48% Time Deposits 52% IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 29 Management’s Discussion and Analysis Section VI: Investment Activities Table 19: Liquid Asset Portfolio Composition In millions of U.S. dollars, except ratios which are in percentages As of June 30, 2019 % 2018 % Liquid asset portfolio: Stable $ 49,285 63% $ 28,481 40% Operational 15,236 19 14,451 20 Discretionary 14,379 18 28,647 40 $ 78,900 100% $ 71,579 100% The maturity profile of IBRD’s liquid asset portfolio larger average portfolio size and higher interest rates reflects a high degree of liquidity. As of June 30, 2019, during the year. $61 billion (approximately 78% of total volume) was In addition to monitoring gross investment returns due to mature within six months, of which $30 billion relative to their benchmarks, IBRD also monitors was expected to mature within one month. overall earnings from the investment portfolio, net of The liquid asset portfolio is held in three sub- funding costs. In FY19, IBRD earned $117 million of portfolios: Stable, Operational, and Discretionary. investment revenue, net of funding costs, as discussed Each may have different risk profiles and performance in Section III. guidelines (see Table 19).  Stable portfolio is mainly an investment Other Investments portfolio holding all or a portion of the In addition to the liquid asset portfolio, the investment Prudential Minimum level of liquidity, set at the portfolio also includes holdings related to AMC, start of each fiscal year. PCRF and PEBP. Table 20 summarizes the net  Operational portfolio is used to meet IBRD’s carrying value of other investments (see Notes to day-to-day cash flow requirements. Financial Statements, Note I: Management of External Funds and Other Services for additional details on  Discretionary portfolio gives IBRD the AMC): flexibility to execute its borrowing program and can be used to tap attractive market Table 20: Net Carrying Value of Other Investments opportunities. Additional portions of the In millions of U.S. dollars Prudential Minimum may also be held in this As of June 30, 2019 2018 portfolio. AMC $ 252 $ 250 PEBP 1,605 1,393 During FY19, IBRD earned a return of 2.63% on its PCRF 370 270 liquid asset portfolio, compared to 1.83% last year. Total Other Investments $ 2,227 $ 1,913 The higher dollar return in FY19 primarily reflects the Table 21: Liquid Asset Portfolio - Average Balances and Returns In millions of U.S. dollars, except rates which are in percentages Average Balances Financial Returns % 2019 2018 2019 2018 Liquid asset portfolio Stable $ 30,094 $ 28,201 2.72% 1.98% Operational 15,368 21,191 2.38 1.59 Discretionary 27,830 23,485 2.67 1.89 $ 73,292 $ 72,877 2.63% 1.83% 30 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section VII: Borrowing Activities Section VII: Borrowing Activities IBRD has been issuing bonds in the international purposes. New medium- and long-term funding is capital markets since 1947. The proceeds of these swapped into variable-rate U.S. dollar instruments, bonds support IBRD’s lending operations which are with conversion to other currencies carried out aimed at promoting sustainable development for subsequently. This in accordance with loan funding IBRD’s borrowing member countries. requirements, and so that IBRD can minimize interest rate and currency risk. IBRD also uses derivatives to IBRD borrows at attractive rates underpinned by its manage the re-pricing risks between loans and strong financial profile and shareholder support that borrowings. A further discussion on how IBRD together are the basis for its triple-A credit rating. As manages this risk is included in the Risk Management a result of its financial strength and triple-A credit Section, Section IX. rating, IBRD is recognized as a premier borrower and its bonds and notes are viewed as a high credit quality In FY19, IBRD raised a total of $54 billion of medium investment in the global capital markets. and long-term debt (Table 23). IBRD issues short-term debt (maturing in one year or less), and medium- and IBRD uses the proceeds to finance development long-term debt (with a maturity greater than one year). activities in creditworthy middle-income and low- From time to time, IBRD exercises the call option in income countries eligible to borrow from IBRD at its callable bond issues; it may also repurchase its debt market-based rates. Funding raised in any given year to meet other operational or strategic needs such as is used for IBRD’s operations, including loan providing liquidity to its investors (Table 23). disbursements, replacement of maturing debt, and prefunding for lending activities. IBRD determines its As of June 30, 2019, the borrowing portfolio totaled funding requirements based on a three-year rolling $229 billion, $15 billion above June 30, 2018 (see horizon and funds about one-third of the projected Note E: Borrowings in the Notes to the Financial amount in the current fiscal year. Statements). This increase was mainly due to net new borrowing issuances of $15.7 billion during the year. As discussed in Section II, IBRD uses currency and interest rate derivatives in connection with its borrowings for asset and liability management Figure 15: Effect of Derivatives on Currency Composition of the Borrowing Portfolio–June 30, 2019 Borrowings excluding derivatives Borrowings Including derivatives Others Euro 18% 13% Australian Others * Dollars 5% US Dollar 69% Euro US Dollar 8% 87% * Denotes percentage less than 0.5%. As of June 30, 2019, IBRD’s total borrowing portfolio, Short-Term Borrowings after the effects of derivatives, carried variable rates, with a weighted average cost of 2.2% (1.8% as of June Table 22 summarizes IBRD’s short-term borrowings, 30, 2018). The increase in the weighted average cost which include discount notes, securities lent or sold from the prior year reflects the increase in short-term under securities lending and repurchase agreements, interest rates during the year. The latter also resulted and other short-term borrowings. in an increase in IBRD’s weighted average loan rates, which are also based on short-term interest rates. Discount Notes IBRD’s lending spread was therefore not impacted IBRD’s short-term borrowings consist mainly of negatively by the increase in short-term interest rates. discount notes issued in U.S. dollars. These IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 31 Management’s Discussion and Analysis Section VII: Borrowing Activities borrowings have a weighted average maturity of including government-issued debt, and have an approximately 124 days. As of June 30, 2019, the average maturity of less than 30 days. outstanding balance of discount notes was $10.2 billion, relatively unchanged as compared with the Other Short-Term Borrowings year earlier. Other short-term borrowings have maturities of one year or less. The outstanding balance as of June 30, Securities Lent or Sold under Repurchase 2019 was $200 million, largely unchanged compared Agreements to last year ($223 million in FY18). These short-term borrowings are secured mainly by highly-rated collateral in the form of securities, Table 22: Short-Term Borrowings In millions of U.S. dollars, except rates which are in percentages As of June 30, 2019 2018 2017 Discount notes a Balance at year-end $ 10,204 $ 10,376 $ 10,599 Average daily balance during the fiscal year $ 10,556 $ 10,231 $ 5,265 Maximum month-end balance $ 12,189 $ 13,845 $ 11,758 Weighted-average rate at the end of fiscal year 2.44% 2.02% 1.02% Weighted-average rate during the fiscal year 2.37% 1.40% 0.63% Securities lent or sold under repurchase agreements b Balance at year-end $ - $ - $ - Average monthly balance during the fiscal year $ - $ 164 $ 17 Maximum month-end balance $ - $ 797 $ 204 Weighted-average rate at the end of fiscal year 0.00%  - - Weighted-average rate during the fiscal year 0.00% 1.65% 0.07% Other short-term borrowings a c Balance at year-end $ 200 $ 223 $ 269 Average daily balance during the fiscal year $ 210 $ 254 $ 280 Maximum month-end balance $ 273 $ 372 $ 377 Weighted-average rate at the end of the fiscal year 2.34% 2.16% 1.00% Weighted-average rate during the fiscal year 2.32% 1.50% 0.62% a. After swaps. b. Excludes securities related to PEBP. c. At amortized cost. 32 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section VII: Borrowing Activities Medium- and Long-Term Borrowings In FY19, medium- and long-term debt raised directly by IBRD in the capital markets amounted to $54 billion with an average maturity to first call of 4.1 years (Table 23). The increase in medium-and-long-term debt issuances in FY19 is primarily due to the increase in net loan disbursements, as well as higher debt servicing and refinancing requirements. Table 23: Funding Operations Indicators In millions of U.S. dollars, except maturities which are in years For the fiscal year ended June 30, 2019 2018 Issuances a Medium- and long-term funding raised $ 54,157 $ 36,006 Average maturity to first call date 4.1 4.6 Average maturity to contractual final maturity 5.3 5.7 Maturities Medium- and long-term funding matured $ 35,088 $ 28,704 Average maturity of debt matured 4.4 3.7 Called/Repurchased Medium- and long-term funding called/repurchased $ 2,960 $ 1,489 a. Expected life of IBRD’s bonds is generally between first call date and the contractual final maturity. Table 24: Maturity Profile of Medium and Long-Term Debt In millions of U.S. dollars As of June 30, 2019 Less than 1 to 2 2 to 3 3 to 4 4 to 5 Due After 5 Total 1 year years years years years years Medium and Long-Term Debt $ 39,807 $ 42,557 $ 38,361 $ 21,461 $ 25,742 $ 51,846 $ 219,774 As shown below, 64% of IBRD’s medium- and long-term borrowings issued during the year are in U.S. dollars: Figure 16: Medium- and Long-Term Borrowings Issued by Currency, Excluding Derivatives June 30, 2019 June 30, 2018 Pound Others Sterling 16% Others 11% 22% Pound Sterling 9% Euro US Dollar 9% US Dollar Euro 64% 64% 5% IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 33 Management’s Discussion and Analysis Section VIII: Capital Activities Section VIII: Capital Activities Capital Structure the largest share of IBRD’s uncalled capital, $43,521 million, or 16.55% of total uncalled capital. Principal Shareholders and Voting Power Subscribed Capital As of June 30, 2019, IBRD had 189 member countries, Total subscribed capital is comprised of paid-in capital with the top six accounting for 39% of the total voting and uncalled subscribed capital. See Statement of power (see Figure 17). The percentage of votes held Subscriptions to Capital Stock and Voting Power in by members rated AA and above by at least two major IBRD’s Financial Statements for balances by country. rating agencies was 41% (see Figure 18). The United States is IBRD’s largest shareholder, with 15.68% of total voting power. Accordingly, it also has Figure 17: Voting Power of Top Six Members as of June 30, 2019 Figure 18: Percentage of Votes held by Member Countries, as of June 30, 2019 United States 15.68% Japan 7.88% China 4.37% Germany 3.96% France 3.71% AA & Below AA Above United Kingdom 3.71% 41% 59% 0% 5% 10% 15% 20% 25% Table 25: Breakdown of IBRD Subscribed Capital In millions of U.S. dollars, except ratios which are in percentages As of June 30, % 2019 2018 Variance Subscribed capital Uncalled subscribed capital 94% $ 262,892 $ 258,274 $ 4,618 Paid-in capital 6 17,061 16,456 605 Total subscribed capital 100% $ 279,953 $ 274,730 $ 5,223 Uncalled Subscribed Capital amount received on a call is insufficient to meet the obligations of IBRD for which the call is made, IBRD As of June 30, 2019, the total uncalled portion of has the right to make further calls until the amounts subscriptions was $262,892 million. The amount may received are sufficient to meet such obligations. On be called only when required to meet IBRD’s any such call or calls, however, no member is required obligations for funds borrowed or loans guaranteed to pay more than the unpaid balance of its capital and is, thus, not available for use by IBRD in making subscription. loans. Of this amount, $38,930 million was restricted pursuant to resolutions of the Governors (though such Under the Bretton Woods Agreements Act and other conditions are not required by IBRD’s Articles). U.S. legislation, the Secretary of the U.S. Treasury is While these resolutions are not legally binding on permitted to pay approximately $7,663 million of the future Governors, they do record an understanding uncalled portion of the subscription of the United among members that this amount will not be called for States, if called for use by IBRD, without need for use by IBRD in its lending activities or for further congressional action. administrative purposes. The balance of the uncalled portion of the U.S. No call has ever been made on IBRD’s capital. Any subscription, $35,858 million, has been authorized but such calls are required to be uniform, but the not appropriated by the U.S. Congress. Further action obligations of IBRD’s members to make payment on by the U.S. Congress is required to enable the such calls are independent of one another. If the Secretary of the Treasury to pay any portion of this 34 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section VIII: Capital Activities balance. The General Counsel of the U.S. Treasury has Paid-In Capital rendered an opinion that the entire uncalled portion of the U.S. subscription is an obligation backed by the Paid-in capital has two components: full faith and credit of the U.S., notwithstanding that  The U.S. dollar portion, which is freely congressional appropriations have not been obtained available for use by IBRD. with respect to certain portions of the subscription.  National Currency Paid-In Capital (NCPIC) portion, usage of which is subject to certain Capital Increases restrictions under IBRD’s Articles and to The subscription period for the GCI and SCI agreed by Maintenance-Of-Value (MOV) requirements. shareholders in 2010 ended on March 16, 2018 and For additional details see the Notes to the March 16, 2017, respectively. Financial Statements, Note A: Summary of Significant Accounting and Related Policies. On October 1, 2018, the Governors approved a new GCI and SCI. The new GCI and SCI are part of a Usable Paid-in Capital capital package endorsed by the Governors in April Usable paid-in capital represents the portion of paid-in 2018 that includes institutional and financial reforms capital that is available to support IBRD’s risk bearing designed to ensure long-term financial sustainability. capacity and includes all U.S. dollar paid-in capital, as The capital increases will result in additional well as NCPIC for which use restrictions have been subscribed capital of up to $60.1 billion, with $7.5 lifted (referred to as released NCPIC). The billion of paid-in capital and $52.6 billion of callable adjustments made to paid-in capital to arrive at usable capital, over the next five years. paid-in capital are provided in Table 26. The $614 million increase in usable paid-in capital between FY19 and FY18 was primarily due to the receipt of $417 million for GCI and $188 million for SCI during FY19. Table 26: Usable Paid-In Capital In millions of U.S dollars As of June 30, 2019 2018 Variance Paid-in Capital $ 17,061 $ 16,456 $ 605 Adjustments for deferred MOV on released NCPIC Net deferred MOV (receivable) payable a 24 27 (3) Adjustments for unreleased NCPIC : Restricted cash (70) (83) 13 Demand notes (382) (361) (21) MOV receivable (292) (313) 21 MOV payable 5 6 (1) Total Adjustments for unreleased NCPIC (739) (751) 12 Usable paid-in capital $ 16,346 $ 15,732 $ 614 a. The MOV on released NCPIC is considered to be deferred. Usable Equity Usable equity consists of usable paid-in capital, and elements of retained earnings and reserves (see Table Usable equity represents the amount of equity that is 27). The components of retained earnings and reserves available to support IBRD’s lending operations. included in usable equity are as follows: Usable equity is central to the three frameworks IBRD uses to manage its capital adequacy, credit risk, and Special Reserve: amount set aside pursuant to IBRD’s equity earnings. These frameworks, described in Articles, held in liquid form and to be used only for Section IX, are: meeting IBRD’s liabilities on its borrowings and guarantees;  Strategic Capital Adequacy Framework General Reserve: consists of earnings from prior fiscal  Credit Risk and Loan Loss Provisioning years which the Board has approved for retention in Framework IBRD’s equity. On August 8, 2019, the Board  Equity Management Framework approved the transfer of $831 million to the General IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 35 Management’s Discussion and Analysis Section VIII: Capital Activities Reserve from FY19 net income; 2019, usable equity includes the measure of the funded status of the pension plans, which is based on the Cumulative Translation Adjustments: comprise funding methodology used by the Pension Finance translation adjustments that arise upon revaluing Committee to determine sustainable funding levels for currency balances to U.S. dollars for reporting the pension plans. This methodology more closely purposes. As a result of changes in IBRD’s business aligns with the long-term nature of the capital operations, effective from the fourth quarter of FY19, adequacy framework. The funded status previously IBRD changed its functional currencies to the U.S. used was based on U. S. GAAP, which reflects a point- dollar and euro. Changes in cumulative translation in-time measurement of the funded status, versus a adjustments will now only relate to translation long-term position. The Board approved this change, adjustments on euro-denominated balances. under a framework in which the Board approves both Translation adjustments associated with non- the equity-to-loans ratio and any material changes to functional currencies are reflected in the Other the definition or measurement of its component parts. adjustments line in Table 27. Usable equity excludes cumulative translation adjustments associated with The increase in usable equity in FY19, primarily unrealized mark-to-market gains/losses on non- reflects the impact of the reserve retention out of FY19 trading portfolios; allocable income, the increase in usable paid-in capital, and the reduction in the underfunded status of Underfunded Status of Pension Plans and Other pension plans due to the change in methodology, as Adjustments: these adjustments relate to the net discussed above. underfunded status of IBRD’s pension plans (see Table 38), and income earned on PEBP assets before FY11. Starting from the fiscal year ended June 30, Table 27: Usable Equity In millions of U.S. dollars Variance Due to Due to Translation Activities As of June 30, 2019 2018 Total Adjustment Usable paid-in capital $ 16,346 $ 15,732 $ 614 $ 710 $ (96) Special reserve 293 293 - - - General reserve a 29,437 28,606 831 831 - Cumulative translation adjustment (629) (465) (164) - (164) Other adjustments (87) (648) b 561 600 (39) Equity (usable equity) $ 45,360 $ 43,518 $ 1,842 $ 2,141 $ (299) a. Includes proposed transfer to the General Reserve, which for FY19 (FY18) was subsequently approved by IBRD's Board on August 8, 2019 (August 9, 2018). b. Other adjustments for FY18 primarily relate to the net underfunded status of IBRD’s pension plans. 36 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section IX: Risk Management Section IX: Risk Management Risk Governance IBRD’s financial and operational risk governance structure is built on the “three lines of defense” IBRD’s risk management processes and practices principle where: continually evolve to reflect changes in activities in response to market, credit, product, operational, and (i) business units are responsible for directly other developments. The Board, particularly Audit managing risks in their respective functional Committee (AC) members, periodically review trends areas; in IBRD’s risk profiles and performance, and any (ii) the Vice President and WBG Chief Risk Officer major developments in risk management policies and (CRO) provides direction, challenge, and controls. oversight over financial and operational risk activities; and Management believes that effective risk management is critical for its overall operations. Accordingly, the (iii) Internal Audit provides independent oversight. risk management governance structure is designed to IBRD’s risk management process comprises: risk manage the principal risks IBRD assumes in its identification, assessment, response and risk activities, and supports Management in its oversight monitoring and reporting. IBRD has policies and function, particularly in coordinating different aspects procedures under which risk owners and corporate of risk management and in connection with risks that functions are responsible for identifying, assessing, are common across functional areas. responding to, monitoring and reporting risks. Figure 19: Financial and Operational Risk Management Structure Risk Oversight and Coverage and systems. In addition, the CRO works closely with IFC, MIGA, and IDA’s Management, to review, Financial and Operational Risk Management measure, aggregate, and report on risks, and share best The CRO has an overview of both financial and practices across the WBG. The CRO also helps operational risks. These risks include (i) country credit enhance cooperation between the entities and risks in the core sovereign lending business, (ii) facilitates knowledge sharing in the risk management market and counterparty risks, including liquidity risk, function. and (iii) operational risks relating to people, processes IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 37 Management’s Discussion and Analysis Section IX: Risk Management The following three departments report directly to the CRO: Credit Risk Department  Identifies, measures, monitors, and manages country credit risk faced by (CROCR) IBRD. By agreement with the Board, the individual country credit risk ratings are not shared with the Board and are not made public.  Assesses loan portfolio risk, determines the adequacy of provisions for losses on loans and other exposures, and monitors borrowers that are vulnerable to crises in the near term. These reviews are taken into account in determining the overall country programs and lending operations, and they are included in the assessment of IBRD’s 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  Responsible for market, liquidity, and counterparty credit risk oversight, Department (CROMC) assessment, and reporting. It does these in coordination with IBRD’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.  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 (CROOR) function.  The department’s key operational risk management responsibilities include (i) administering the Operational Risk Committee (ORC) for IBRD, (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 actions, 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. The risk to the development outcomes of IBRD’s operations not meeting their development outcomes (development outcome risk) in IBRD’s lending activities is monitored at the corporate level by Operations Policy and Country Services (OPCS). Where fraud and corruption risks may impact IBRD-financed projects, OPCS, the regions and practice groups, and the Integrity Vice Presidency jointly address such issues. 38 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section IX: Risk Management Risk Committees Figure 20 depicts IBRD ’s management risk committee structure for financial and operational risks. Figure 20: Risk Committee Structure for Financial and Operational Risks Financial Risk Committees: as a standing committee of the FRC under the authority of the MDCFO to ensure a consistent, The Finance and Risk Committee (FRC), a Vice transparent and effective managerial and President-level committee, provides a high-level reporting process for monitoring the governance structure for decisions that may have performance of the EMF portfolio and the financial risks. The FRC, chaired by the Managing implementation of possible strategic changes. Director and WBG Chief Financial Officer (MDCFO), approves, clears, or discusses: (a) risk policy and Operational Risk Committees: procedure documents related to financial integrity, The Enterprise Risk Committee (ERC) is a income sustainability and balance sheet strength, and corporate committee that has oversight over (b) issues and new business initiatives with policy operational and non-financial risks across IBRD. implications related to IBRD’s financial risks, Chaired by the Managing Director and Chief including country credit, market, counterparty, Administrative Officer (MDCAO), it consists of a liquidity and model risks; and operational risks related Vice President-level committee to review and discuss to the finance business functions. The FRC helps to enterprise risk matters. Specifically, the Committee integrate individual components of finance and risk has a governance role in risk matters relating to management activities by building on mechanisms and corporate security, business continuity and IT security. processes already in place and provides a forum for The ERC also sponsors the further development of the discussing and communicating significant risk related enterprise risk management framework, including an issues. The FRC meets regularly to discuss the annual high-level survey of emerging top risks for financial performance, new products and services, and IBRD. risk management of IBRD. In addition to the FRC, two other committees work  Operational Risk Committee (ORC) is the main under the authority of the MDCFO and the CRO, governance committee for operational risk and which provide technical expertise and guidance on provides a mechanism for an integrated review new initiatives, and equity management framework and response across IBRD units on operational surveillance issues: risks associated with people, processes, and systems, including business continuity, and  New Business Committee (NBC) is a standing recognizing that business units remain committee of the FRC under the authority of the responsible for managing operational risks. The MDCFO. The NBC provides advice, guidance Committee’s key responsibilities include and recommendations to the FRC, by monitoring significant operational risk matters performing due diligence over new financial and events on a quarterly basis to ensure that products or services to ensure that Management appropriate risk-response measures are taken has a full understanding of the rationale, costs, and reviewing and concluding on IBRD’s risks and rewards of the product or service overall operational risk profile. The ORC is being considered. chaired by the CRO and escalates significant  Equity Management Framework Surveillance risks/decisions to the FRC and ERC. Committee (EMFSC) was established in FY18 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 39 Management’s Discussion and Analysis Section IX: Risk Management Box 6: Summary of IBRD's Specific Risk Categories Types of Risk How the Risk is Managed Credit Risk Country Credit Risk IBRD’s credit-risk-bearing capacity and individual country exposure limits Counterparty Credit Risk Counterparty credit limits and collateral Market Risk Interest Rate Risk Interest rate derivatives to match the sensitivity of assets and liabilities Exchange Rate Risk Currency derivatives to match the currency composition of assets and liabilities Liquidity Risk Prudential minimum liquidity level Operational Risk Risk assessment and monitoring of key risk indicators and events Management of IBRD’s Specific Risks capital adequacy. The framework seeks to ensure that IBRD’s capital is aligned with the financial risk IBRD assumes financial risks to achieve its associated with its loan portfolio as well as other development and strategic objectives. IBRD’s exposures over a medium-term capital-planning financial risk management framework is designed to horizon. Under this framework, IBRD evaluates its enable and support the institution in achieving its goals capital adequacy as measured by stress tests and an in a financially sustainable manner. IBRD manages appropriate minimum level for the long-term equity- credit, market and operational risks for its financial to-loans ratio. For FY19, the outcome of the stress activities which include lending, borrowing and tests was satisfactory. investing (Box 6). The primary financial risk to IBRD is the country credit risk inherent in its loan portfolio. At the beginning of the global financial crisis, the IBRD is also exposed to risks in its liquid asset and equity-to-loans ratio stood at 38% as of June 30, 2008, derivative portfolios, where the major risks are interest significantly exceeding the then minimum of 23% rate, exchange rate, commercial counterparty, and equity-to-loans ratio. This allowed IBRD to respond liquidity risks. IBRD’s operational risk management effectively to the borrowing needs of its member framework is based upon a structured and uniform countries, resulting in the higher leveraging of its approach to identify, assess and monitor key equity and a corresponding decline in the ratio. The operational risks across business units. capital adequacy framework was reviewed in FY14 and the minimum equity-to-loans ratio was reduced to Capital Adequacy 20% to reflect the significant long-term improvement in IBRD’s loan portfolio credit quality. The lowering IBRD holds capital to cover the credit, market and of the minimum equity-to-loans ratio has allowed operational risks inherent in its operating activities and IBRD to use its equity more effectively to support a financial assets. Country credit risk is the most larger volume of development lending and thus substantive risk covered by IBRD’s equity. enhance IBRD’s commitment capacity, including for The Board monitors IBRD’s capital adequacy within a responding to potential crises (Figure 21). This is part Strategic Capital Adequacy Framework, using the of the strategy to maximize the use of capital for equity-to-loans ratio as a key indicator of IBRD’s lending operations. Figure 21: Equity-to-Loans Ratio 38% 35% 32% 29% 26% 23% policy minimum 20% 17% Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 40 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section IX: Risk Management Table 28: Equity-to-Loans Ratio In millions of U.S. dollars Variance Due to Due to Translation Activities As of June 30, 2019 2018 Total Adjustment Usable paid-in capital $ 16,346 $ 15,732 $ 614 $ 710 $ (96) Special reserve 293 293 - - - General reserve a 29,437 28,606 831 831 - Cumulative translation adjustment b (629) (465) (164) - (164) Other adjustments (87) (648)c 561 600 (39) Equity (usable equity) $ 45,360 $ 43,518 $ 1,842 $ 2,141 $ (299) Loans exposure $ 194,787 $ 185,589 $ 9,198 $ 10,091 $ (893) Present value of guarantees 3,739 2,540 1,199 1,249 (50) Effective but undisbursed DDOs 3,198 4,548 (1,350) (1,360) 10 Relevant accumulated provisions (1,655) (1,607) (48) (55) 7 Deferred loan income (461) (448) (13) (14) 1 Other exposures (907) (692) (215) (215) - Loans (total exposure) $ 198,701 $ 189,930 $ 8,771 $ 9,696 $ (925) Equity-to-Loans Ratio 22.8% 22.9% a. Includes proposed transfer to the General Reserve, which for FY19 (FY18) was subsequently approved by IBRD's Board on August 8, 2019 (August 9, 2018). b. Excluding cumulative translation amounts associated with the unrealized mark-to-market gains/losses on non-trading portfolios, net. c. Other adjustments primarily relate to the net underfunded status of IBRD’s pension plans. IBRD’s equity-to-loans ratio was 22.8% as of June 30, loss attributable to a counterparty not honoring its 2019, largely unchanged compared to 22.9% as of contractual obligations. IBRD is exposed to June 30, 2018, and remained above the 20% minimum commercial as well as non-commercial counterparty threshold level (Table 28). It reflected the impact of credit risk. four main factors: (1) increase of $8.8 billion in loans exposure, offset by; (2) change in the methodology Country Credit Risk used for incorporating the pension funded status, IBRD’s mandate is to take only sovereign credit risk effective June 30, 2019 (increase of $0.6 billion); (3) in its lending activities. Within country credit risk, receipt of capital subscription payments ($0.6 billion) three distinct types of risks can be identified: and; (4) the retention of $0.8 billion in the general idiosyncratic risk, correlation risk, and concentration reserve. risk. Idiosyncratic risk is the risk of an individual Under IBRD’s currency management policy, to borrowing country’s exposure falling into nonaccrual minimize exchange rate risk in a multicurrency status for country-specific reasons (such as policy environment, IBRD matches its borrowing obligations slippage or political instability). Correlation risk is the in any one currency (after derivatives activities) with risk that exposure to two or more borrowing countries assets in the same currency. In addition, IBRD’s will fall into non-accrual in response to common policy is to minimize the exchange rate sensitivity of global or regional economic, political, or financial its capital adequacy as measured by the equity-to- developments. Concentration risk is the risk resulting loans ratio. It implements this policy by periodically from having a large portion of exposure outstanding undertaking currency conversions to align the which, if the exposure fell into non-accrual, would currency composition of its equity with that of its result in IBRD’s financial health being excessively outstanding loans, across major currencies. impaired. Concentration risk needs to be evaluated both on a stand-alone basis (exposure of one Credit Risk borrowing country) and when taking into account correlation when more than one borrowing country is IBRD faces two types of credit risk: country credit risk affected by a common event, such that when and counterparty credit risk. Country credit risk is the combined, IBRD’s exposure to a common risk is risk of loss due to a country not meeting its contractual elevated. obligations, and counterparty credit risk is the risk of IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 41 Management’s Discussion and Analysis Section IX: Risk Management To estimate idiosyncratic risk and stand-alone dual-SBL system, that differentiates between concentration risk, the Credit Risk Department looks countries below the Graduation Discussion Income at IBRD’s exposure to each borrowing country and (GDI) threshold and those above it. GDI is the level of each borrowing country’s expected default to IBRD as GNI per capita of a member country above which captured in its credit rating. For correlation risk, the graduation from IBRD starts being discussed. The Credit Risk Department models the potential common GDI threshold was $6,795 as of July 1, 2018. Under factors that could impact borrowing countries the new system, the SBL for FY19 was $21 billion for simultaneously. The existence of correlation increases highly creditworthy countries below the GDI and the likelihood of large non-accrual events, as most of $19.5 billion for highly creditworthy countries above these nonaccrual events involve the joint default of the GDI. In the event that a borrowing country eligible two or more obligors in the portfolio. for one of the limits set under the new SBL framework is downgraded to the high-risk category, management IBRD manages country credit risk by using individual may determine that the borrowing country continue to country exposure limits and takes into account factors be eligible for borrowing at the currently applicable such as population size and the economic situation of limit, but the borrowing country would not be eligible the country. In addition, IBRD conducts stress tests of for any future increases in the SBL approved by the the effects of changes in market variables and of Board. During FY19, there were two countries below potential geopolitical events on its portfolio to GDI and two countries above GDI with exposure complement its capital adequacy framework. limits set at the applicable SBLs. For all other Portfolio Concentration Risk countries, the individual country exposure limits were set below the relevant SBL. The GDI threshold was Portfolio concentration risk, which arises when a small $6,975 as of July 1, 2019. For FY20, the SBL is $21.5 group of borrowing countries account for a large share billion for highly creditworthy countries below the of loans outstanding, is a key concern for IBRD. It is GDI and $19.5 billion for highly creditworthy carefully managed for each borrowing country, in part, countries above the GDI. through an exposure limit for the aggregate balance of loans outstanding, the present value of guarantees, and As of June 30, 2019, the ten countries with the highest the undisbursed portion of DDOs that have become exposures accounted for about 62% of IBRD’s total effective, among other potential exposures. Under exposure (see Figure 22). IBRD’s largest exposure to current guidelines, IBRD’s exposure to a single a single borrowing country was $17.3 billion on June borrowing country is restricted to the lower of an 30, 2019. Monitoring these exposures relative to the Equitable Access Limit (EAL) or the Single Borrower limit, however, requires consideration of the Limit (SBL). repayment profiles of existing loans, as well as disbursement profiles and projected new loans and Equitable Access Limit guarantees. The EAL is equal to 10% of IBRD’s Statutory Lending Sustainable Annual Lending Limit (SALL) Limit (SLL). Under IBRD’s Articles, as applied, total IBRD loans outstanding, including participation in The capital package endorsed at the 2018 Spring loans and callable guarantees, may not exceed the sum Meetings includes the adoption of a “Financial of unimpaired subscribed capital, reserves and surplus, Sustainability Framework” (FSF) that requires IBRD referred to as the SLL. The SLL seeks to ensure that to align its lending to its long-term sustainable sufficient resources are available to meet IBRD's capacity, while retaining flexibility to respond to obligations to bondholders in the highly unlikely event crises by maintaining a crisis buffer. In December of substantial and historically unprecedented losses on 2018, the Board approved the implementation IBRD's loans. At June 30, 2019, the SLL totaled $309 approach for the FSF that takes effect from FY20. billion, of which the outstanding loans and callable The SALL is the maximum annual commitment level guarantees totaled $198.5 billion, or 64.2% of the sustainable, in real terms, for 10 years in line with SLL. The EAL was $30.9 billion, as of June 30, 2019. IBRD’s capital adequacy framework and the Statutory Single Borrower Limit Lending Limit set out in IBRD’s Articles. The crisis- buffer-adjusted lending limit (SALL-Adj) serves as The SBL is established, in part, by assessing its impact the upper bound for regular lending in the next year. on overall portfolio risk relative to equity. The SBL On June 25, 2019, the Board approved a crisis buffer caps the maximum exposure to IBRD’s most of $10 billion, resulting in a SALL-Adj of $28.1 creditworthy and largest borrowing countries in terms billion. of population and economic size. The Board approved a new SBL framework on June 28, 2018, which was effective July 1, 2018. The new framework reflects a 42 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section IX: Risk Management Figure 22: Country Exposures as of June 30, 2019 In billions of U.S. dollars Top Ten Country Exposures Indonesia 17.3 Brazil 16.1 China 14.6 Mexico 14.5 India 14.1 Turkey 11.1 Colombia 10.7 Egypt 10.5 Argentina 7.6 Poland 7.6 0 2 4 6 8 10 12 14 16 18 20 Credit-Risk-Bearing Capacity The shock estimated by this risk model is used in IBRD’s capital adequacy testing to determine the Management uses risk models to estimate the size of a impact of potential non-accrual events on equity and potential non-accrual shock that IBRD could face over income earning capacity. the next three years at a given confidence level. The model-estimated non-accrual shock is a single Probable Losses, Overdue Payments, and Non- measure of the credit quality of the portfolio that Performing Loans combines the following: The loan-loss provision is calculated by taking into  IBRD’s country-credit-risk ratings and their account IBRD’s exposure, the expected default associated expected risk of default; frequency (EDF), or probability of default, and the  covariance risks; assumed loss in the event of default. Probable losses inherent in the loan portfolio attributable to country  the loan portfolio’s distribution across risk credit risk are covered by the accumulated provision rating categories; and for losses on loans and other exposures, while  the exposure concentration. unexpected losses owing to country credit risk are covered by equity. Box 7: Treatment of Overdue Payments Where the borrower is the member country, no new loans 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 loan 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 to that borrower will be signed or approved. In either case, the borrower will lose its eligibility for any waiver Overdue by of interest charges in effect at that time for loans signed before May 16, 2007, and those loans signed between May 30 days 16, 2007, and September 27, 2007, if the borrowers elected not to convert the terms of their loans to the pricing terms effective September 27, 2007. For loans with the pricing terms applicable from May 16, 2007, an overdue interest penalty will be charged at a rate of 50 basis points on the overdue principal. In addition, if an overdue amount remains unpaid for a period of 30 days, then the borrower will pay a higher interest rate (LIBOR + fixed spread) plus 50 basis points on the overdue principal amount until the overdue amount is fully paid. 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 Overdue by in the country must pay not only all payments overdue by 30 days or more, but also all payments due regardless of 45 days the number of days since they have fallen due. Where the borrower is not the member country, no new loans to, or guaranteed by, the member country, will be signed or approved. Additionally, all borrowers in the country will lose eligibility for any waivers of interest in effect at the time. In addition to the suspension of approval for new loans and signing of previously approved loans, disbursements on Overdue by all loans to, or guaranteed by, the member country are suspended until all overdue amounts are paid. This policy 60 days 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. All loans made to, or guaranteed by, a member of IBRD are placed in nonaccrual status, unless IBRD determines that the overdue amount will be collected in the immediate future. Unpaid interest and other charges not yet paid on Overdue by loans outstanding are deducted from the income for the current period. To the extent that these payments are more than received, they are included in income. At the time of arrears clearance, a decision is made on the restoration of six months accrual status on a case-by-case basis; in certain cases, this decision may be deferred until after a suitable period of payment performance has passed. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 43 Management’s Discussion and Analysis Section IX: Risk Management When a borrower fails to make payments due to IBRD IBRD’s liquid asset investment portfolio consists on any principal, interest, or other charges, IBRD may mostly of sovereign government bonds, debt suspend disbursements immediately on all loans to instruments issued by sovereign government agencies, that borrower. IBRD’s current practice is to exercise and bank time deposits. More than half of these this option using a graduated approach (Box 7). These investments are with issuers and counterparties rated practices also apply to member countries eligible to triple-A and AA (Table 29). borrow from both IBRD and IDA, and whose payments on IDA loans may become overdue. It is Derivative Instruments IBRD’s practice not to reschedule interest or principal In the normal course of its business, IBRD enters into payments on its loans or participate in debt various derivative instruments to manage foreign rescheduling agreements with respect to its loans. As exchange and interest risks. These derivatives are of June 30, 2019, one borrower in the accrual portfolio used mainly to meet the financial needs of IBRD had overdue payments beyond 90 days however, borrowers and to manage the institution’s exposure to payments were subsequently received. fluctuations in interest and exchange rates. These As of June 30, 2019, 0.2% of IBRD’s loans were in transactions are conducted with other financial nonaccrual status and all related to Zimbabwe. The institutions and, by their nature, entail commercial value of exposures to Zimbabwe was $434 million as counterparty credit risk. of June 30, 2019, compared with $435 million as of While the volume of derivative activity can be June 30, 2018. IBRD received a payment of $1.5 measured by the contracted notional value of million, including interest, from Zimbabwe in FY19 derivatives, notional value is not an accurate measure (FY18: Nil). IDA has agreed to provide grants from its of credit or market risk. IBRD uses the estimated Crisis Response Window to third party UN agencies replacement cost of the derivative instrument, or for use in Zimbabwe in response to major losses potential future exposure to measure counterparty caused by Cyclone Idai. credit risk with these trading partners. Counterparty Credit Risk Under IBRD’s mark-to-market collateral arrangements, IBRD receives collateral when mark- IBRD is exposed to commercial and non-commercial to-market exposure is greater than the ratings-based counterparty credit risk. collateral threshold. As of June 30, 2019, IBRD had Commercial Counterparty Credit Risk received collateral of cash and securities totaling $1.3 billion. This is the normal risk that counterparties fail to meet their payment obligations under the terms of the IBRD is not required to post collateral under its contract or other financial instruments. Effective derivative agreements as long as it maintains a triple- management of counterparty credit risk is vital to the A credit rating. (For the contractual value, notional success of IBRD’s funding, investment, and amounts, related credit risk exposure amounts, and the asset/liability management activities. The monitoring amount IBRD would be required to post in the event and management of these risks is continuous as the of a downgrade, see Notes to Financial Statements, market environment evolves. Note F: Derivative Instruments). IBRD mitigates the counterparty credit risk from its Investment Securities investment and derivative holdings through the credit The Board-approved General Investment approval process, the use of collateral agreements and Authorization provides the basic authority for IBRD to risk limits, and other monitoring procedures. The invest its liquid assets. Furthermore, all investment credit approval process involves evaluating activities are conducted in accordance with a more counterparty and product-specific creditworthiness, detailed set of Investment Guidelines. The Investment assigning internal credit ratings and limits, and Guidelines are approved by the MDCFO and determining the risk profile of specific transactions. implemented by the Treasurer. These Investment Credit limits are set and monitored throughout the Guidelines set out detailed trading and operational year. Counterparty exposure is updated daily, rules, including which instruments are eligible for considering the current market values of assets held, investment, and establish risk parameters relative to estimates of potential future movements of exposure benchmarks. These include an overall consultative for derivative instruments, and related counterparty loss limit and duration deviation, specifying collateral agreements, where collateral posting concentration limits on counterparties and instrument requirements are based on thresholds driven by public classes, as well as clear lines of responsibility for risk credit ratings. Collateral held includes cash and highly monitoring and compliance. Credit risk is controlled rated liquid investment securities. by applying eligibility criteria (Box 8). 44 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section IX: Risk Management The overall market risk of the investment portfolio is commercial counterparty credit risk is concentrated in subject to a consultative loss limit to reflect a level of the investment portfolio, in instruments issued by tolerance for the risk of underperforming the sovereign governments and non-sovereign holdings benchmark in any fiscal year. IBRD has procedures in (including Agencies, Asset Backed Securities) (Table place to monitor performance against this limit and 29). potential risks, and it takes appropriate actions if the IBRD’s overall commercial counterparty credit limit is reached. All investments are subject to exposure, net of collateral held, was $81 billion as of additional conditions specified by the Chief Risk June 30, 2019. As shown on Table 29, the credit Officer department, as deemed necessary. quality of IBRD’s portfolio remains concentrated in IBRD’s exposure to futures and options and resale the upper end of the credit spectrum, with 67% of the agreements is marginal. For futures and options, IBRD portfolio rated AA or above and the remaining generally closes out open positions prior to expiration. portfolio primarily rated A. The A-rated Futures are settled on a daily basis. In addition, IBRD counterparties primarily consisted of sovereigns and monitors the fair value of resale securities received financial institutions (limited to short-term deposits and, if necessary, closes out transactions and enters and swaps). into new repriced transactions. Non-Commercial Counterparty Credit Risk Management has broadened its universe of investment assets in an effort to achieve greater diversification in In addition to the derivative transactions with the portfolio and better risk-adjusted investment commercial counterparties, IBRD also offers performance. This exposure is monitored by the derivative-intermediation services to borrowing Market and Counterparty Risk Department. member countries, as well as to affiliated and non- affiliated organizations, to help meet their Commercial Counterparty Credit Risk Exposure development needs or to carry out their development mandates. As a result of IBRD’s use of mark-to-market collateral arrangements for swap transactions, its residual Box 8: Eligibility Criteria for IBRD's Investmentsa Instrument Securities Description IBRD may only invest in obligations issued or unconditionally guaranteed by governments Sovereigns of member countries with a minimum credit rating of AA-. However, no rating is required if government obligations are denominated in the national currency of the issuer. IBRD may invest only in obligations issued by an agency or instrumentality of a government Agencies of a member country, a multilateral organization, or any other official entity (other than the government of a member country), with a minimum credit rating of AA-. Corporates and asset-backed IBRD may only invest in securities with a triple-A credit rating. securities IBRD may only invest in time deposits issued or guaranteed by financial institutions, whose Time deposits b senior debt securities are rated at least A-. IBRD may only invest in short-term borrowings (less than 190 days) from commercial banks, Commercial Paper corporates, and financial institutions with at least 2 Prime-1 ratings. Securities lending, and borrowing, IBRD may engage in securities lending against adequate collateral, repurchases and repurchases, resales, and reverse reverse repurchases, against adequate margin protection, of the securities described under repurchases the sovereigns, agencies, and corporates and asset-backed security categories. IBRD may engage in collateralized forward transactions, such as swap, repurchase, resale, securities lending, or equivalent transactions that involve certain underlying assets not Collateral Assets independently eligible for investment. In each case, adequate margin protection needs to be received. a. All investments are subject to approval by the Chief Risk Officer department and must appear on the “Approved List” created by the department. b. Time deposits include certificates of deposit, bankers’ acceptances, and other obligations issued or unconditionally guaranteed by banks or other financial institutions. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 45 Management’s Discussion and Analysis Section IX: Risk Management Table 29: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating In millions of U.S. dollars As of June 30, 2019 Investments Net Swap Total % of Counterparty Rating a Sovereigns Non-Sovereigns Exposure Exposure Total AAA $ 12,130 $ 11,548 $ - $ 23,678 29% AA 858 29,468 122 30,448 38 A 18,590 7,818 277 26,685 33 BBB 4 32 - 36 * BB or lower/unrated - 8 2 10 * Total $ 31,582 $ 48,874 $ 401 $ 80,857 100% As of June 30, 2018 Investments Net Swap Total % of Counterparty Rating a Sovereigns Non-Sovereigns Exposure Exposure Total AAA $ 5,127 $ 13,319 $ - $ 18,446 26% AA 3,388 28,208 177 31,773 44 A 13,045 8,365 66 21,476 30 BBB 118 33 11 162 * BB or lower/unrated - 9 - 9 * Total $ 21,678 $ 49,934 $ 254 $ 71,866 100% a. Average rating is calculated using available ratings from the three major rating agencies. However, if ratings are not available from each of the three rating agencies, IBRD uses the average of the ratings available from any of such rating agencies or a single rating to the extent that an instrument or issuer (as applicable) is rated by only one rating agency. * Indicates amount less than $0.5 million or percentage less than 0.5%.  Borrowing Member Countries: Currency and amounts and net fair value exposures under this interest rate swap transactions are executed agreement were $2.2 billion and $0.5 billion, between IBRD and its borrowers under master respectively. IBRD has the right to call for derivative agreements. As of June 30, 2019, the collateral above an agreed specified threshold. notional amounts and net fair value exposures As of June 30, 2019, IBRD had not exercised under these agreements were $12.2 billion and this right, but it reserves the right under the $1.1 billion, respectively. Probable losses existing terms of the agreement. Rather than inherent in these exposures due to country calling for collateral, IBRD and IFFIm have credit risk are incorporated in the fair value of agreed to manage IBRD’s exposure by applying these instruments. a risk management buffer to the gearing ratio  Affiliated Organizations: Derivative contracts limit. The gearing ratio limit represents the are executed between IBRD and IDA, under an maximum amount of net financial obligations agreement allowing IBRD to intermediate of IFFIm less cash and liquid assets, as a derivative contracts on behalf of IDA. As of percent of the net present value of IFFIm's June 30, 2019, the notional amount under this financial assets. agreement was $4.6 billion. As of June 30, Credit and Debit Valuation Adjustments 2019, IBRD had no exposure to IDA. Under its Most outstanding derivative positions are transacted derivative agreement with IBRD, IDA is not over-the-counter and therefore valued using internally required to post collateral as long as it maintains developed valuation models. For commercial and non- liquidity holdings at pre-determined levels. As commercial counterparties where IBRD has a net of June 30, 2019, IDA was not required to post exposure (net receivable position), IBRD calculates a any collateral with IBRD. Credit Valuation Adjustment (CVA) to reflect credit  Non-Affiliated Organizations: IBRD has a risk. (IBRD’s non-commercial counterparty exposure master derivatives agreement with IFFIm, mainly arises from derivative-intermediation activities under which several transactions have been on behalf of IFFIm, as discussed earlier). For net executed. As of June 30, 2019, the notional derivative positions with commercial and non- 46 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section IX: Risk Management commercial counterparties where IBRD is in a net Interest Rate Risk payable position, IBRD calculates a Debit Valuation Adjustment (DVA) to reflect its own credit risk. Under its current interest rate risk management strategy, IBRD seeks to match the interest rate The CVA is calculated using the fair value of the sensitivity of its assets (loan and investment trading derivative contracts, net of collateral received under portfolios) with those of its liabilities (borrowing credit support agreements, and the probability of portfolio) by using derivatives, such as interest rate counterparty default based on the Credit Default swaps. These derivatives effectively convert IBRD’s Swaps (CDS) spread and, where applicable, proxy financial assets and liabilities into variable-rate CDS spreads. IBRD does not currently hedge this instruments. After considering the effects of these exposure. The DVA calculation is generally consistent derivatives, virtually the entire loan and borrowing with the CVA methodology and incorporates IBRD’s portfolios are carried at variable interest rates (see own credit spread as observed through the CDS Figures 23 and 24). market. As of June 30, 2019, IBRD recorded a CVA adjustment on its Balance Sheet of $18 million, and a IBRD faces three main sources of interest rate risk: the DVA of $22 million. interest rate sensitivity of the income earned in a low interest rate environment, fixed-spread loans Market Risk refinancing risk, and interest rate risk on the liquid asset portfolio. The discontinuance of LIBOR and the IBRD is exposed to changes in interest and exchange transition to alternative reference rates also present a rates, and it uses various strategies to minimize its significant risk to IBRD’s activities, which is exposure to market risk. discussed later in this section. Figure 23: Effect of Derivatives on Interest Rate Structure of the Borrowing Portfolio - June 30, 2019 In millions of U.S. dollars, except for ratios Borrowing Portfolio excluding Derivativesa Borrowing Portfolio Including Derivativesa Variable Fixed 21% * Fixed 79% Variable 100% a. Excludes discount notes. * Denotes percentage less than 0.5%. Figure 24: Effect of Derivatives on Interest Rate Structure of the Loan Portfolio - June 30, 2019 In millions of U.S. dollars, except for ratios Loans Excluding Derivatives Loans Including Derivatives Fixed Fixed * 10% Variable Variable 90% 100% * Denotes percentage less than 0.5%. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 47 Management’s Discussion and Analysis Section IX: Risk Management Alignment of Assets and Liabilities – IBRD borrows in Figure 26: Use of Derivatives for Investments multiple currency and interest rate bases worldwide and lends the proceeds of those borrowings to eligible member countries. IBRD offers its borrowers the option of converting the currency and interest rate bases on their loans where there is a liquid swap market, thereby enabling them to select loan terms that are best suited to their circumstances. Such options meet borrowers’ preferences and help mitigate their currency and interest rate risk. In the absence of active risk management, IBRD would be exposed to substantial market risk and asset-liability management imbalances. To address such imbalances, IBRD uses Equity Management – For the portion of loans that are derivatives to swap its payment obligations on bonds funded by equity5, loan interest revenue reflects short- to currency and interest rate basis aligned with its loan term variable rates. If left unmanaged, the revenue portfolio. Likewise, when a borrower exercises a from these loans would be highly sensitive to conversion option on a loan to change its currency or fluctuations in short-term interest rates. To manage interest rate basis, IBRD uses derivatives to convert its this exposure, Management has put in place an Equity exposure back to a currency and interest rate basis Management Framework (EMF) with the primary goal aligned with its loan portfolio. Thus, IBRD’s payment of providing income stability for IBRD. Under this obligations on its borrowings are aligned with its loans framework, IBRD uses derivatives to convert the funded by such borrowings – generally, after the effect variable rate cash flows on loans funded by equity of derivatives, IBRD primarily pays U.S. dollar, short- back to fixed rate cash flows, thereby stabilizing loan term variable rates on its borrowings, and receives interest income over time by increasing the duration of U.S. dollar, short-term variable rates on its loans. IBRD’s equity. See Figure 27 below. Figure 25 below illustrates the use of derivatives in the As measured by duration, the interest rate sensitivity loan and borrowing portfolios. of IBRD’s equity was 2.6 years as of June 30, 2019 Figure 25: Use of Derivatives for Loans and Borrowings (2.9 years as of June 30, 2018). IBRD has the flexibility of managing the duration of its equity (difference between the duration of IBRD’s assets and liabilities), within a range of zero to five years under this framework. Figure 27: Use of Derivatives for EMF Derivatives are also used to manage market risk in the liquidity portfolio. In line with its development mandate, IBRD maintains a large liquidity balance to Low Interest Rate Environment ensure that it can make payments on its borrowing Loans to borrowing countries: obligations and loan disbursements, even in the event of severe market disruptions. Pending disbursement, Under IBRD’s loan agreements, interest is required to the liquidity portfolio is invested on a global basis in be paid by borrowers to IBRD, and not vice versa; if multiple currencies and interest rates. Derivatives are an interest rate formula yields a negative rate, the also used to align the currency and duration of interest rate is fixed at zero. investments with the debt funding the liquidity portfolio. Figure 26 below illustrates the use of derivatives in the liquidity portfolio. 5 The equity-to-loans ratio of 22.8% indicates the portion of loans funded by equity. 48 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section IX: Risk Management Liquid Asset Portfolio: Alternative Reference Rate IBRD’s existing guidelines allow for the investment in In July 2017, the U.K. Financial Conduct Authority a wide variety of credit products in both developed and (FCA), regulator of LIBOR, announced that banks emerging market economies (see investment would not be required to submit rates for calculating eligibility criteria in (Box 8). Low and negative fixed LIBOR after 2021. The announcement created interest rates present a challenge for the investment of uncertainty about LIBOR’s future and its implications the liquid asset portfolio. However, even markets with for other rates and indices used as benchmarks. negative rates can provide positive spread returns once the investment is swapped back into a U.S. dollar IBRD’s investment, loan and borrowing portfolios all floating basis. In FY19, despite the low interest rate have instruments that use LIBOR as a reference rate, environment, IBRD was able to generate a positive as well as derivative transactions that support these return, net of funding costs on its liquid asset portfolio portfolios. The planned replacement of LIBOR (see Table 1). presents risks to the financial instruments IBRD holds or originates. The risks related to the transition might Fixed Spread Loan Refinancing Risk include valuation issues that may arise from the Refinancing risk for funding fixed-spread loans relates unavailability of suitable alternative reference rates, to the potential impact of any future deterioration in possible asset-liability mismatches, operational risk, IBRD's funding spread. IBRD does not match the and potential impacts on financial results. maturity of its funding with that of its fixed spread Given the uncertainty about the availability of suitable loans as this would result in significantly higher alternative reference rates, IBRD is actively financing costs for all loans. Instead, IBRD targets a participating in industry working groups and shorter average funding maturity and manages the collaborating with stakeholders to prepare for the refinancing risk through two technical components of change. IBRD has an ongoing program to identify, the fixed-spread loan pricing, both of which can be evaluate and mitigate the risks involved with the changed at Management’s discretion (see Table 11): transition of its transactions and products to alternative  Projected funding cost: Management’s best reference rates. estimate of average funding costs over the life Exchange Rate Risk of the loan  Risk premium: a charge for the risk that actual IBRD holds its assets and liabilities mainly in U.S. funding costs are higher than projected Liquid dollars and euro. However, the reported levels of its Asset Portfolio Spread Exposure assets, liabilities, income, and expenses in the financial statements are affected by exchange rate The interest rate risk on IBRD’s liquid asset portfolio, movements in all the currencies in which IBRD including the risk that the value of assets in the transacts, relative to its reporting currency, the U.S. portfolio will fluctuate in response to changes in dollar. From Q4 FY19, IBRD changed its functional market interest rates, is managed within specified currencies to the U.S. dollar and euro. As a result, duration-mismatch limits. The liquid asset portfolio while currency translation adjustments relating to has spread exposure because IBRD holds instruments euro-denominated balances are still reflected in other other than the short-term bank deposits represented by comprehensive income, in equity, currency translation the portfolios’ London Interbank Bid Rate (LIBID) adjustments relating to non-euro denominated benchmark. These investments generally yield balances (non-functional currencies) are shown in the positive returns over the benchmark but can generate Statement of Income (see Notes to Financial mark-to-market losses if their spreads relative to Statements - Note A: Summary of Significant LIBOR widen. Accounting and Related Policies in the Notes to the Other Interest Rate Risks Financial Statements). While IBRD’s equity could be affected by exchange rate movements, IBRD’s risk Interest rate risk also arises from other variables, management policies work to minimize the exchange including differences in timing between the rate risk in its capital adequacy, by immunizing the contractual maturities or re-pricing of IBRD’s assets, equity-to-loans ratio against exchange rate liabilities, and derivative instruments. On variable-rate movements. assets and liabilities, IBRD is exposed to timing mismatches between the re-set dates on its variable- To minimize exchange risk, IBRD matches its rate receivables and payables. IBRD monitors these borrowing obligations in any one currency (after exposures and may execute overlay interest rates derivative activities) with assets in the same currency swaps to reduce sizable timing mismatches. (see Figure 28). In addition, IBRD undertakes periodic currency conversions to align the currency IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 49 Management’s Discussion and Analysis Section IX: Risk Management composition of its equity with that of its outstanding portfolio of assets at appropriate maturities and rates, loans across major currencies. Together, these polices and the risk of being unable to liquidate a position in a are designed to minimize the impact of exchange rate timely manner at a reasonable price. fluctuations on the equity-to-loans ratio; thereby Under IBRD’s liquidity management guidelines, preserving IBRD’s ability to better absorb unexpected aggregate liquid asset holdings are kept at or above a losses from arrears on loan repayments, regardless of specified Prudential Minimum to safeguard against exchange movements. As a result, exchange rate cash flow interruptions. movements during the year generally do not have an impact on the overall equity-to-loans ratio. The Target Liquidity Level represents twelve-months’ coverage as calculated at the start of every fiscal year. Liquidity Risk The new Prudential Minimum is defined as 80% of the Liquidity risk arises in the general funding of IBRD’s Target Liquidity Level. The 150% maximum activities and in managing its financial position. It guideline (150% of Target Liquidity Level) applies to includes the risk of IBRD being unable to fund its the portfolio and it continues to function as a guideline rather than a hard ceiling (see Table 30). Figure 28: Currency Composition of Loan and Borrowing Portfolios as of June 30, 2019 Loans outstanding (including Derivatives) Borrowings funding loans (including Derivatives) Others Euro Euro Others * 1% 19% 19% U.S. U.S. Dollars Dollars 81% 80% * Denotes percentage less than 0.5%. As of June 30, 2019, the liquid asset portfolio was Operational Risk 141% of the Target Liquidity Level. The increased level of liquidity reflects the higher Prudential Operational risk is defined as the risk of financial loss Minimum, as well as higher projected debt service and or damage to IBRD’s reputation resulting from loan disbursements for the coming fiscal year. The inadequate or failed internal processes, people and FY20 Target Liquidity Level is set at $66 billion. systems, or from external events. Table 30: Liquidity Levels IBRD recognizes the importance of operational risk In billions % of Target management activities, which are embedded in its of U.S. Liquidity financial operations. As part of its business activities, Effective for FY19 dollars Level IBRD is exposed to a range of operational risks Target Liquidity Level 56 including physical security and staff health and safety, Guideline Maximum Liquidity Level 84 150% cyber security, business continuity, and external vendor risks. IBRD’s approach to managing Prudential Minimum Liquidity Level 44.8 80% operational risk includes a dedicated program for these Liquid Asset Portfolio as of 78.9 141% risks and a robust process that includes assessing and June 30, 2019 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. 50 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section X: Fair Value Analysis Section X: Fair Value Analysis An important element in achieving IBRD’s financial Fair value adjustments are recorded on IBRD’s fair goals is its ability to minimize the cost of borrowing value income statement and reflect the sensitivity of from capital markets for lending to member countries each portfolio to the effect of interest rates and credit by using financial instruments, including derivatives. movements (Table 31). The fair value of these financial instruments is affected Borrowing Portfolio: For FY19, IBRD experienced by changes in the market environment such as interest $673 million of unrealized mark-to-market gains, rates, exchange rates and credit risk. Fair value is used which was mainly driven by the unrealized mark-to- mainly to assess the performance of the investment market gains due to the widening of IBRD’s credit trading portfolio, and to manage certain market risks, spread relative to LIBOR. including interest rate and commercial credit risk for derivative counterparties. Loan Portfolio: For FY19, IBRD experienced a $75 million increase in the fair value of its loans, mainly driven by the decrease in interest rates. Table 31: Summary of Fair Value Adjustments on Non-Trading Portfolios a In millions of U.S. dollars For the fiscal year ended June 30, 2019 2018 Borrowing portfolio $ 673 $ (375) Loan portfolio 75 247 EMF 1,084 (799) Asset Liability Management portfolio - (2) Client Operations portfolio 15 (*) Total $ 1,847 $ (929) a. See Table 35 for reconciliation to the fair value comprehensive basis net income. Table 32: Effect of Interest Rates and Credit on IBRD’s Fair Value Income In millions of U.S. dollars Interest rate Effect Credit Effect As of June 30, 2019 on Fair Value Income on Fair Value Income Sensitivity a c Sensitivity b c Borrowing portfolio $ 6 $ 69 Loan portfolio (15) (34) EMF (10) * Investment portfolio (1) (4) Total (loss)/gains $ (20) $ 31 a. After the effects of derivatives b. Excludes CVA/DVA adjustment on swaps. c. Amount represents dollar change in fair value corresponding to a one basis-point parallel upward shift in interest rates/ credit spreads. * Sensitivity is marginal. Figure 29: Sensitivity to Interest Rates Dollar change in fair value corresponding to a one-basis-point upward parallel shift in interest rates In millions of U.S. dollars Borrowing Portfolio Loan Portfolio EMF Investment Portfolio Swaps Investments Swaps 0 Bonds Loans Swaps -63 69 -33 18 FY19 -10 FY19 -0.7 FY19 FY19 -58 63 FY18 -30 17 FY18 -11 FY18 -0.9 FY18 -70 -50 -30 -10 10 30 50 70 -70 -50 -30 -10 10 30 50 70 -70 -50 -30 -10 10 30 50 70 -70 -50 -30 -10 10 30 50 70 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 51 Management’s Discussion and Analysis Section X: Fair Value Analysis Effect of Interest Rates assets would have an estimated impact of about $4 million on the market value of the portfolio. On a fair value basis, if interest rates increase by one basis point, IBRD would experience an unrealized  Borrowings: For FY19, IBRD’s unrealized mark-to-market loss of approximately $20 million as mark-to-market gains on the borrowing of June 30, 2019 (see Table 32). portfolio totaled $673 million, of which $120  Investment Trading Portfolio: After the effects million was reflected on the Statement of of derivatives, the duration of the investment Income, and $551 million in OCI. The $120 trading portfolio is less than three months. As a million of net unrealized mark-to-market gains result, the portfolio has a low sensitivity to are mainly due to the impact on borrowing- changes in interest rates, resulting in small fair related derivatives from the decrease in interest value adjustments to income. rates during the year. The $551 million of unrealized mark-to-market gains, represents the  Loan and Borrowing Portfolios: In line with changes in IBRD’s own credit relative to IBRD’s financial risk management strategies, LIBOR in FY19. As shown in Table 32, the the sensitivity of IBRD’s loan and borrowing dollar value change corresponding to a one portfolios to changes in interest rates is basis-point upward parallel shift in interest relatively small (see Figure 29). As noted rates on IBRD’s own credit relative to LIBOR earlier, IBRD intends to maintain its positions is about $69 million of unrealized mark-to- for these portfolios and thus manages these market gains. instruments on a cash flow basis. The resulting net unrealized mark-to-market gains and losses  Loans: IBRD’s fair value model represents a on these portfolios, associated with the small hypothetical exit price of the loan portfolio. It sensitivity to interest rates, are therefore not incorporates CDS spreads as an indicator of the expected to be realized. credit risk for each borrower, after adjusting  EMF: At the end of FY19, a one basis-point recovery levels to incorporate IBRD’s increase in interest rates would result in institutional experience and assumptions. These unrealized mark-to-market losses of $10 assumptions are reviewed annually. The dollar million on the EMF (unrealized mark-to-market value change corresponding to a one-basis- losses of $11 million at the end FY18). point parallel rise in CDS rates on the loan portfolio is about $34 million of unrealized Figure 29 provides a further breakdown of how the use mark-to-market losses. IBRD does not hedge its of derivatives affects the overall sensitivity of the sovereign credit exposure but Management borrowing, loan, EMF and investment portfolios. For assesses its credit risk through a proprietary example, for the borrowing portfolio, a one basis point loan-loss provisioning model. Loan-loss increase in interest rates would result in net unrealized provision represents the probable losses mark-to-market gains of $69 million on the bonds. inherent in its accrual and nonaccrual These would be significantly offset by the $63 million portfolios. As discussed earlier, IBRD’s of net unrealized mark-to-market losses on the related country credit risk is managed by using swaps, resulting in net unrealized mark-to-market individual country exposure limits and by gains of $6 million for the portfolio. monitoring its credit-risk-bearing capacity. Effect of Credit  Derivatives: IBRD uses derivatives to manage exposures to currency and interest rate risks in  Investments: IBRD purchases investment- its investment, loan, and borrowing portfolios, grade securities for its liquid asset portfolio. and EMF. It is therefore exposed to commercial Credit risk is controlled through appropriate counterparty credit risk on these instruments. eligibility criteria (see Box 8). The overall risk This risk is managed through: of the investment portfolio is also constrained o Stringent selection of commercial by a consultative loss limit. In line with these derivative counterparties, risk management strategies, the potential effect o Daily marking-to-market of derivative of default risk on IBRD’s investment portfolio positions, and is therefore small. The effect of credit changes on the market value of the investment portfolio o Use of collateral and collateral thresholds is also relatively limited; a one-basis-point for all commercial counterparties. change in the credit spreads of the investment The fair value of IBRD’s commercial counterparty credit risk is reflected in the CVA and IBRD’s own 52 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section X: Fair Value Analysis credit is reflected in the DVA. The net effect of the Liabilities driven by lower corporate AA bond CVA and DVA adjustments to IBRD’s Balance Sheet rates. Given its long-term planning horizon for was a decrease in liability of $709 million as of June pension plans, Management is focused mainly 30, 2019. See Section IX for further discussion on on ensuring that contributions to pension plans effect of credit on IBRD’s borrowings. appropriately reflect long-term assumptions about asset returns and discount rates. See Changes in Accumulated Other Section XII for further discussion on the Comprehensive Income pension plans. In addition to fair value adjustments on the loan,  Valuation adjustments on fair value option borrowing, and asset/liability management portfolios, elected liabilities represent the portion of the IBRD’s fair value adjustment on the income statement total change in fair value caused by changes in also reflects changes in Accumulated Other IBRD’s own credit risk (DVA on fair value Comprehensive Income (AOCI): option elected liabilities). Starting in FY19, in accordance with new accounting  Currency Translation Adjustments mainly pronouncements, these amounts are presented represent the translation adjustment on the loan separately in other comprehensive income; and borrowing portfolios. The net negative previously they were recognized in net income. currency translation adjustment in FY19 is For liabilities under the fair value option that mainly due to the 2.2% depreciation of the euro mature or are bought back, the cumulative against the U.S. dollar in FY19, compared to amount of DVA will be reclassified from AOCI the 2.1% appreciation of the euro last year to net income. On July 1, 2018, a cumulative (Table 33). From Q4 FY19, the translation effect adjustment of $155 million was adjustments included in AOCI relate only to reclassified from retained earnings to AOCI. assets and liabilities denominated in euro. For more details, see Notes to the Financial  Unrecognized Pension Adjustments largely Statements, Note K: Comprehensive Income. represent the unrecognized net actuarial gains and losses on benefit plans. Actuarial gains and As non-financial assets and liabilities are not reflected losses occur when actual results differ from at fair value, IBRD’s equity is not intended to reflect expected results in determining the funded fair value. Under the fair value basis, in addition to the status of the pension plans. Since the pension instruments in the investment and borrowing plans are long term, changes in asset returns and portfolios, and all other derivatives, loans are reported discount rates cause volatility in fair value at fair value and all changes in AOCI are also included income. There was an increase in the in fair value net income. underfunded status of the pension plans from Tables 33-35 provide a reconciliation from the $1.3 billion as of June 30, 2018 to $2.6 billion reported basis to the fair value basis for both the as of June 30, 2019, net of PEBP assets, balance sheet and income statement; Table 36 primarily reflecting the increase in the Plan provides a reconciliation of all fair value adjustments. Table 33: Summary of Changes to AOCI (Fair Value Basis) In millions U.S. dollars For the fiscal year ended June 30, 2019 2018 Variance Net actuarial gains (losses) on benefit plans, net $ (1,255) $ 834 $ (2,089) Prior service credit on benefit plans, net 24 24 - Derivatives and hedging transition adjustment 3 6 (3) Net Change in Debit Valuation Adjustment (DVA) on Fair Value option 550 - 550 Currency translation adjustments (165) 98 (263) Total $ (843) $ 962 $ (1,805) IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 53 Management’s Discussion and Analysis Section X: Fair Value Analysis Table 34: Condensed Balance Sheet on a Fair Value Basis In millions of U.S. dollars As of June 30, 2019 As of June 30, 2018 Reported Adjustments Fair Value Basis Reported Adjustments Fair Value Basis Basis Basis Due from banks $ 895 $ - $ 895 $ 619 $ - $ 619 Investments 81,415 - 81,415 72,569 - 72,569 Net loans outstanding 192,752 4,615 197,367 183,588 3,062 186,650 Derivative Assets, net 2,840 - 2,840 2,460 - 2,460 Other assets 5,129 - 5,129 4,564 - 4,564 Total assets $ 283,031 $ 4,615 $ 287,646 $ 263,800 $ 3,062 $ 266,862 Borrowings $ 230,180 $ 8 $ 230,188 $ 208,009 $ 10 $ 208,019 Derivative Liabilities, net 3,053 - 3,053 7,932 - 7,932 Other liabilities 7,683 - 7,683 6,015 - 6,015 Total liabilities 240,916 8 240,924 221,956 10 221,966 Paid-in capital stock 17,061 - 17,061 16,456 - 16,456 Retained earnings and other equity 25,054 4,607 29,661 25,388 3,052 28,440 Total equity 42,115 4,607 46,722 41,844 3,052 44,896 Total liabilities and equity $ 283,031 $ 4,615 $ 287,646 $ 263,800 $ 3,062 $ 266,862 Table 35: Reconciliation from Net Income to Income on a Fair Value Comprehensive Basis In millions U.S. dollars For the fiscal year ended June 30, 2019 2018 Variance Net income (loss) from Table 1 $ 505 $ 698 $ (193) Fair value adjustment on loans a 1,561 (669) 2,230 Changes to AOCI Currency translation adjustments (165) 98 (263) Others (1,228) 864 (2,092) Net Change in DVA on Fair Value option elected liabilities 550 - 550 Net Income on fair value comprehensive basis $ 1,223 $ 991 $ 232 a. Amount has been adjusted to exclude the provision for losses on loans and other exposures: $54 million charge – June 30, 2019, and $28 million release on June 30, 2018. 54 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section X: Fair Value Analysis Table 36: Fair Value Adjustments, net In millions of U.S. dollars For the fiscal year ended June 30, 2019 Unrealized Fair Value Realized Other Total from Table gains Adjustment from gains Adjustments 31 (losses) a Table 35 Borrowing portfolio b $ 109 $ 11 $ - $ 553 d $ 673 Loan portfolio c (1,486) 1 1,561 - 75 EMF 1,084 - - - 1,084 Asset-liability management portfolio - - - - - Client operations portfolio 15 - - - 15 Total $ (278) $ 12 $ 1,561 $ 553 $ 1,847 For the fiscal year ended June 30, 2018 Unrealized Fair Value Realized Other Total from Table gains Adjustment from gains Adjustments 31 (losses) a Table 35 Borrowing portfolio b $ (381) $ * $ - $ 6 $ (375) Loan portfolio c 916 - (669) - 247 EMF (799) - - - (799) Asset-liability management portfolio (2) - - - (2) Client operations portfolio (*) - - - (*) Total $ (266) $ * $ (669) $ 6 $ (929) a. Excludes amounts reclassified to realized mark-to-market gains (losses). b. Includes related derivatives. c. Comprises derivatives on loans. d. Amount primarily represents change in fair value due to the change in IBRD’s own credit risk for financial liabilities measured under the fair value option, included in the Statement of Other Comprehensive Income. * Indicates amount less than $0.5 million. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 55 Management’s Discussion and Analysis Section XI: Contractual Obligations Section XI: Contractual Obligations In conducting its business, IBRD takes on contractual mainly for its capital expenditure and utilities. obligations that may require future payments. These These commitments are designed to ensure include borrowings, operating leases, contractual sources of supply, are not expected to exceed purchases, capital expenditures, and other long-term normal requirements, and are in line with liabilities. Table 37 shows IBRD’s contractual IBRD's budget. obligations for the next five years and thereafter; it  Other Long-Term Liabilities: IBRD provides a excludes the following obligations reflected on variety of benefits to its employees. As some of IBRD’s balance sheet: undisbursed loans, amounts these benefits are of a long-term nature, IBRD payable for currency and interest rate swaps, amounts records the associated liability on its balance payable for investment securities purchased, sheet. The obligations payable represents guarantees, and cash received under agency expected benefit payments as well as arrangements. contributions to the pension plans. These  Borrowings: IBRD issues debt in the form of include future service and pay accruals for securities to retail and institutional investors. current staff and new staff projections for the next 10 years.  Operating Leases: IBRD leases real estate and equipment under lease agreements for varying Operating leases, contractual purchases and capital periods. Operating leases represent future cash expenditures, and other long-term obligations, include payments for real-estate-related obligations and obligations shared with IDA, IFC, and MIGA under equipment, based on contractual amounts. cost-sharing and service arrangements. These arrangements reflect the WBG strategy of maximizing  Contractual Purchases and Capital synergies (see Notes to Financial Statements, Note H Expenditures: IBRD is a party to various for Transactions with Affiliated Organizations). obligations to purchase products and services Table 37: Contractual Obligations In millions of U.S. dollars As of June 30, 2019 Due after 1 Due after 3 Due in 1 Due After Year through 3 Years through 5 Total year or Less 5 years Years Years Borrowings (at fair value) $ 50,213 $ 80,918 $ 47,203 $ 51,846 $ 230,180 Operating leases 74 97 60 1,189 1,420 Contractual purchases and 36 41 - - 77 Other long-term liabilities 603 131 87 173 994 Total $ 50,926 $ 81,187 $ 47,350 $ 53,208 $ 232,671 56 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section XII: Pension and Other Post-Retirement Benefits Section XII: Pension and Other Post-Retirement Benefits Governance assets, are the funding and investment policies. The objective of these policies is to ensure that the Plans IBRD participates, along with IFC and MIGA, in have sufficient assets to meet benefit payments over pension and post-retirement benefit plans. The Staff the long term. The funding policy, as approved by the Retirement Plan and Trust (SRP), Retired Staff Benefits PFC, establishes the rules that determine the WBG’s Plan and Trust (RSBP), and PEBP (collectively called contributions. The policy seeks to fund the Plans in a the “Plans”) are defined benefit plans and cover consistent and timely manner, while at the same time substantially all WBG employees, retirees and their avoiding excessive volatility in WBG contributions. beneficiaries. Costs, assets, and liabilities associated The funding policy determines how much the WBG with the Plans are allocated among IBRD, IFC, and must contribute annually to sustain and ensure the MIGA, based on their employees' respective accumulation of sufficient assets over time to meet the participation in the Plans. Costs allocated to IBRD are expected benefit payments. Under the Plan Document, subsequently shared with IDA, based on an agreed cost- the PFC determines the WBG contribution based on sharing ratio (see Notes to Financial Statements, Note actuarial valuations. IBRD is required to make the J: Pension and Other Post-Retirement Benefits). contribution determined by the PFC. In FY19, the The benefits of the Plans at retirement are determined WBG’s rate for contributions to the Plans was 28.43% pursuant to the Plan Documents adopted by the Board of net salaries. (Plan Document). IBRD has a contractual obligation to The Projected Benefit Obligation (PBO) is derived make benefit payments to the Plans’ beneficiaries. The from AA-rated corporate bonds, as required by U.S. governance mechanism of the Plans, including the GAAP. The selection of this rate as the basis for the funding and investment policies described here, are discount rate is to establish a liability equivalent to an designed to support this objective. amount that if invested in high-quality fixed income There are two committees that govern the Plans. From securities would match the benefit payment stream. a governance stand point, both committees are While this measure is based on an objective, observable independent of IBRD and the Board. market rate, it does not necessarily reflect the realized or expected returns of the Plan which depend on how  The Pension Finance Committee (PFC), the Plans are managed and invested. The PBO for which is responsible for the financial funding purposes is discounted using a 3.5% real management of the Plans and is supported by discount rate since the funding strategy for the Plans is the Pension Finance Administrator. based on a target of 3.5% real return on investments.  The Pension Benefits Administration This rate constitutes the long-term return objective for Committee (PBAC), which is responsible for the Plan’s assets, referred to as the Long-Term Real the administration of the benefits of the Return Objective (LTRRO), which Management has Plans. followed since the year ended June 30, 1999 and recently reaffirmed under the strategic asset allocation Contributions to the SRP and RSBP are irrevocable, review in April 2018. If the return on pension assets is with assets held in separate trusts, and the PEBP assets 3.5% in real terms and contributions are made at the are included in IBRD's investment portfolio. IBRD actuarially required rates (which reflect the long- term acts as trustee for the Plans and the assets are used for cost of the plan benefit), the Plan benefits will be the exclusive benefit of the participants and their funded over time. beneficiaries. The objective of the Plans is to accumulate sufficient assets to meet future pension The assets of the Plans are diversified across a variety benefit obligations. As of June 30, 2019, IBRD and of asset classes, with the objective of achieving returns IDA’s share of the assets amounted to $23.5 billion consistent with the LTRRO over the long term without (see Table 38). This represents the accumulated taking undue risks. The returns on investments for the contributions paid into the plans net of benefit Plans have met or exceeded the LTRRO on a consistent payments, together with the accumulated value of basis in the long term as well as in recent years. The investment earnings, net of related expenses. PFC periodically reviews the LTRRO for realism and appropriateness. See Notes to Financial Statements, Funding and Investment Policies Note J: Pension and Other Post-Retirement Benefits for asset allocation, expected return on Plan assets and The key policies underpinning the financial assumptions used to determine the PBO. management of the Plans, including the determination of WBG contributions and the investment of Plan IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 57 Management’s Discussion and Analysis Section XII: Pension and Other Post-Retirement Benefits Environmental, Social and under U.S. GAAP. It reflects the present value of all Governance (ESG) Policies retirement benefits earned by participants (adjusted for assumed inflation) as of a given date, including The Plan has a long-standing ESG policy that reflects projected salary increases to retirement. Therefore, the the latest developments in and understanding of PBO measure is an appropriate metric for assessing responsible investments and ESG integration. The the ability of the Plans to cover expected benefits as of ESG policy is based on a principled and pragmatic a certain date. The underlying actuarial assumptions approach in accordance with and subject to the used to determine the PBO, accumulated benefit fiduciary standard applicable to the administration and obligations, and funded status associated with the investment of Plan assets. The Plan’s ESG policy Plans are based on financial market interest rates, states that consideration of ESG factors, including but experience, and Management's best estimate of future not limited to environmental practices, worker safety benefit changes, economic conditions and earnings and health standards, and corporate governance, can from plan assets. add value to the investment process and affect assessment of the risk and return characteristics of The discount rate used to convert future obligations investments. In the last fiscal year, the Plans were able into today’s dollars is derived from high-grade, AA- to further consolidate all the core elements of the ESG rated corporate bond yields as required by U.S. GAAP. work program in line with best practice observed in The increase in the underfunded status of the pension the market and for a meaningful integration of relevant plans for IBRD and IDA from $1.3 billion as of June ESG issues in the Plans’ investment processes. 30, 2018 to $2.6 billion as of June 30, 2019, net of PEBP assets, primarily reflects the increase in the Plan Liabilities due to the impact of the decrease in AA Projected Benefit Obligation interest rates used to discount the Plan liability (real Given that pension plan liabilities can be defined and discount rate). As the Plans are managed with a long- measured in different ways, it is possible to have term horizon, results over shorter time periods may be different funded status measures for the same plans. impacted positively or negatively by market The most widely used and publicly disclosed measure fluctuations. of pension plan liabilities is the PBO measure required Table 38: Funded Status of the Plans In millions U.S. dollars As of June 30, 2019 SRP RSBP PEBP Total PBO $ (20,587) $ (3,401) $ (2,102) $ (26,090) Plan assets $ 19,180 $ 3,104 $ 1,177 $ 23,461 Net position $ (1,407) $ (297) $ (925) $ (2,629) IBRD's position $ (1,187) As of June 30, 2018 SRP RSBP PEBP Total PBO $ (18,429) $ (2,937) $ (1,778) $ (23,144) Plan assets $ 17,969 $ 2,837 $ 1,028 $ 21,834 Net position $ (460) $ (100) $ (750) $ (1,310) IBRD's position $ (600) 58 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section XIII: Critical Accounting Policies and The Use of Estimates Section XIII: Critical Accounting Policies and The Use of Estimates IBRD’s significant accounting policies, as well as country credit risk, in particular, reviewing the estimates made by Management, are integral to its provision for losses on loans and guarantees taking financial reporting. While all of these policies require into account, among other factors, any changes in a certain level of judgment and estimates, significant exposure, risk ratings of borrowing member countries, policies require Management to make highly difficult, or movements between the accrual and non-accrual complex, and subjective judgments as these relate to portfolios. matters inherently uncertain and susceptible to change. The accumulated provision for loan losses is reported Note A to the financial statements contains a summary separately in the balance sheet as a deduction from of IBRD’s significant accounting policies including a IBRD’s total loans outstanding. The accumulated discussion of recently issued accounting provision for losses on other exposures is included in pronouncements. accounts payable and miscellaneous liabilities. Provision for Losses on Loans and Increases or decreases in the accumulated provision Other Exposures for losses on loans and other exposures are reported in the Statement of Income as a provision for losses on IBRD’s accumulated provision for losses on loans and loans and other exposures (see Notes to Financial other exposures reflects probable losses inherent in its Statements: Note A: Summary of Significant accrual and nonaccrual portfolios. Determining the Accounting and Related Policies and Note D: Loans appropriate level of provision for each portfolio and Other Exposures). requires several steps: Fair Value of Financial Instruments  The loan portfolio is separated into the accrual and nonaccrual portfolios. In both portfolios, Under new guidance published by the Financial the loans and other exposures for each country Accounting Standards Board (FASB), effective July 1, are then assigned a credit-risk rating. Loans in 2018, fair value adjustments relating to changes in the accrual portfolio are grouped according to IBRD’s own credit are reported in OCI (see Notes to the assigned risk rating, while loans in the non- Financial Statements: Note A: Summary of Significant accrual portfolio are generally individually Accounting and Related Policies, and Note D: Loans assigned the highest risk rating. and Other Exposures).  Each risk rating is mapped to an expected The fair values of financial instruments are based on a default frequency using IBRD’s credit three-level hierarchy. For financial instruments migration matrix. classified as Level 1 or 2, less judgment is applied in  The required provision is calculated by arriving at fair value measures as the inputs are based multiplying the outstanding exposure by the on observable market data. For financial instruments expected default frequency (the probability of classified as Level 3, unobservable inputs are used. default to IBRD) and by the estimated severity These require Management to make important of the loss in the event of default. For loans assumptions and judgments in determining fair value carried at fair value, the credit risk assessment measures. Investments measured at net asset value per is a determinant of fair value. share (or its equivalent) are not classified in the fair value hierarchy. The determination of a borrower's risk rating is based on such variables as: political risk, external debt and Most of IBRD’s financial instruments which are liquidity, fiscal policy and the public debt burden, recorded at fair value are classified as Levels 1 and 2. balance of payments risks, economic structure and Table 39 presents the summary of the fair value of growth prospects, monetary and exchange rate policy, financial instruments recorded at fair value on a and financial sector risks and corporate sector debt and recurring basis, and the amounts measured using other vulnerabilities. significant Level 3 inputs. IBRD’s level 3 instruments are mainly structured bonds and related swaps held in IBRD periodically reviews such variables and the borrowing portfolio; they use market observable reassesses the adequacy of the accumulated provision inputs and such unobservable inputs as correlations accordingly. Actual losses may differ from expected and interest rate volatilities. There were no Level 3 losses owing to unforeseen changes in any of the instruments in IBRD’s investment or loan portfolios as variables affecting the creditworthiness of borrowers. of June 30, 2019. As of June 30, 2019, all IBRD’s The Credit Risk Committee monitors aspects of loans were carried at amortized cost. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 59 Management’s Discussion and Analysis Section XIII: Critical Accounting Policies and The Use of Estimates Table 39: Fair Value Level 3 Summary In millions U.S. dollars For the fiscal year ended June 30, 2019 2018 Total Total Level 3 Level 3 Balance Balance Total Assets at fair value $ 275 $ 94,826 $ 165 $ 83,987 As a percentage of total assets 0.29% 0.20% Total Liabilities at fair value $ 5,398 $ 243,487 $ 4,875 $ 224,883 As a percentage of total assets 2.22% 2.17% IBRD reviews the methodology, inputs, and In cases where Management relies on instrument assumptions on a quarterly basis to assess the valuations supplied by external pricing vendors, appropriateness of the fair value hierarchy procedures are in place to validate the appropriateness classification of each financial instrument. of the models used, as well as the inputs applied in determining those values. Some financial instruments are valued using pricing models. The Valuation Group, which is independent Pension and Other Post-Retirement of treasury and risk management functions, reviews all Benefits financial instrument models affecting financial reporting through fair value and assesses model The underlying actuarial assumptions used to appropriateness and consistency. The review looks at determine the PBO, accumulated benefit obligations, whether the models accurately reflect the and funded status associated with IBRD pension and characteristics of the transaction and its risks, the other post-retirement benefit plans are based on suitability and convergence properties of numerical financial market interest rates, experience, and algorithms, the reliability of data sources, the Management's best estimate of future benefit changes consistency of the treatment with models for similar and economic conditions. All costs, assets and products, and sensitivity to input parameters and liabilities associated with these plans are allocated assumptions that cannot be priced from the market. between IBRD, IFC, and MIGA based upon their employees’ respective participation in the plans. Costs Reviews are conducted of new and/or changed allocated to IBRD are then shared between IBRD and models, as well as previously validated models, to IDA based on an agreed cost-sharing ratio. IDA, IFC assess whether any changes in the product or market and MIGA reimburse IBRD for their proportionate may have affected the model’s continued validity and share of any contributions made to these plans by whether any theoretical or competitive developments IBRD. Contributions to the plans are calculated as a may require reassessment of the model’s adequacy. percentage of salary (see Notes to Financial The financial models used for input to IBRD’s Statements, Note J: Pension and Other Post- financial statements are subject to both internal and Retirement Benefits). periodic external verification and review by qualified personnel. 60 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section XIV: Governance and Controls Section XIV: Governance and Controls Figure 30: Governance Structure General Governance their role is primarily to serve the Board in discharging its responsibilities. IBRD’s decision-making structure consists of the Board of Governors, Executive Directors, the The committees are made up of eight members and President, Management, and staff. The Board of function under their respective stipulated terms of Governors is the highest decision-making authority. reference. These committees are as follows: Governors are appointed by their member governments for a five-year term, which is renewable. • Audit Committee - assists the Board in The Board of Governors may delegate authority to the overseeing IBRD’s finances, accounting, risk Executive Directors to exercise any of its powers, management and internal controls (see further except for certain powers enumerated in IBRD’s explanation below). Articles. IBRD has its own policies and frameworks • Budget Committee - assists the Board in that are carried out by staff that share responsibilities approving the World Bank’s budget and in over both IBRD and IDA. overseeing the preparation and execution of IBRD’s business plans. The committee Executive Directors provides guidance to management on strategic In accordance with IBRD’s Articles, Executive directions of IBRD. Directors are appointed or elected every two years by • Committee on Development Effectiveness - their member governments. The Board currently has supports the Board in assessing IBRD’s 25 Executive Directors, who represent all 189 member development effectiveness, providing guidance countries. Executive Directors are neither officers nor on strategic directions of IBRD, monitoring the staff of IBRD. The President is the only member of the quality and results of operations. Board from management, and he serves as a non- • Committee on Governance and Executive voting member and as Chairman of the Board. Directors’ Administrative Matters - assists the The Board is required to consider proposals made by Board on issues related to the governance of the President on IBRD loans, grants and guarantees IBRD, the Board’s own effectiveness, and the and on other policies that affect its general operations. administrative policy applicable to Executive The Board is also responsible for presenting to the Directors’ offices. Governors, at the Annual Meetings, audited accounts, • Human Resources Committee - strengthens the an administrative budget, and an annual report on efficiency and effectiveness of the Board in operations and policies and other matters. discharging its oversight responsibility on the World Bank’s human resources strategy, The Board and its committees are in continuous policies and practices, and their alignment with session at the main World Bank offices in Washington the business needs of the organization. DC, as business requires. Each committee's terms of reference establish its respective roles and responsibilities. As committees do not vote on issues, IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 61 Management’s Discussion and Analysis Section XIV: Governance and Controls Audit Committee The Audit Committee has the authority to seek advice and assistance from outside legal, accounting, or other Membership advisors as it deems necessary. The Audit Committee consists of eight Executive Business Conduct Directors. Membership in the Committee is determined by the Board, based on nominations by the The WBG promotes a positive work environment in Chairman of the Board, following informal which staff members understand their ethical consultation with Executive Directors. obligations to the institution. In support of this commitment, the institution has in place a Code of Key Responsibilities Conduct. The WBG has both an Ethics Help Line and The Audit Committee is appointed by the Board for a Fraud and Corruption hotline. A third-party service the primary purpose of assisting the Board in offers many methods of worldwide communication. overseeing IBRD’s finances, accounting, risk Reporting channels include telephone, mail, email, or management, internal controls and institutional confidential submission through a website. integrity. Specific responsibilities include: IBRD has in place procedures for receiving, retaining,  Oversight of the integrity of IBRD’s financial and handling recommendations and concerns relating statements. to business conduct identified during the accounting, internal control, and auditing processes.  Appointment, qualifications, independence and performance of the External Auditor. WBG staff rules clarify and codify the staff’s  Performance of the Internal Audit Department. obligations in reporting suspected fraud, corruption, or other misconduct that may threaten the operations or  Adequacy and effectiveness of financial and governance of the WBG. These rules also offer accounting policies and internal controls’ and protection from retaliation. the mechanisms to deter, prevent and penalize fraud and corruption in IBRD operations and Auditor Independence corporate procurement. The appointment of the external auditor for IBRD is  Effective management of financial, fiduciary governed by a set of Board-approved principles. These and compliance risks in IBRD. include:  Oversight of the institutional arrangements and  Limits on the external auditor’s provision of processes for risk management across IBRD. non-audit-relates services; In carrying out its role, the Audit Committee discusses  Requiring all audit-related services to be pre- financial issues and policies that affect IBRD’s approved on a case-by-case basis by the Board, financial position and capital adequacy with upon recommendation of the Audit Committee; Management, external auditors, and internal auditors. and It recommends the annual audited financial statements for approval to the Board. The Audit Committee  Renewal of the external audit contract every monitors and reviews developments in corporate five years, with a limit of two consecutive terms governance and its own role on an ongoing basis. and mandatory rotation thereafter. Executive Sessions In FY17, the Board approved amendments to the policy on the appointment of an external auditor which Under the Audit Committee's terms of reference, it came into effect for the FY19 audit period. The may convene in executive session at any time, without primary amendments now permit the external auditor Management’s presence. The Audit Committee meets to provide non-prohibited non-audit related services separately in executive session with the external and subject to monetary limits. Broadly, the list of internal auditors. prohibited non-audit services include those that would Access to Resources and to Management put the external auditor in the roles typically performed by management and in a position of Throughout the year, the Audit Committee receives a auditing their own work, such as accounting services, large volume of information to enable it to carry out internal audit services, and provision of investment its duties and meets both formally and informally advice. The total non-audit services fees over the term throughout the year to discuss relevant matters. It has of the relevant external audit contract shall not exceed complete access to Management, and reviews and 70 percent of the audit fees over the same period. discusses with Management topics considered in its terms of reference. 62 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Section XIV: Governance and Controls Communication between the external auditor and the President and World Bank Group Controller. Audit Committee is ongoing and carried out as often  Akihiko Nishio was appointed as Vice President, as deemed necessary by either party. The Audit Development Finance (DFi), succeeding Axel Van Committee meets periodically with the external Trotsenburg was appointed as the new Vice auditor and individual committee members have President for Latin America & Caribbean region. independent access to the external auditor. IBRD’s external auditors also follow the communication Internal Control requirements, with the Audit Committees set out under generally accepted auditing standards in the United Internal Control Over Financial Reporting States. Each fiscal year, Management evaluates the internal controls over financial reporting to determine whether External Auditors any changes made in these controls during the fiscal The external auditor is appointed to a five-year term, year materially affect, or would be reasonably likely to with a limit of two consecutive terms, and is subject to materially affect, IBRD’s internal control over annual reappointment based on the recommendation financial reporting. The internal control framework of the Audit Committee and approval of a resolution promulgated by the Committee of Sponsoring by the Board. Organizations of the Treadway Commission (COSO), “Internal Control - Integrated Framework (2013)” Following a mandatory rebidding of the external audit provides guidance for designing, implementing and contract, IBRD’s Board approved the appointment of conducting internal control and assessing its Deloitte & Touche, LLP as IBRD’s external auditor effectiveness. IBRD uses the 2013 COSO framework for a five-year term commencing FY19. to assess the effectiveness of the internal control over financial reporting. As of June 30, 2019, management Senior Management Changes maintained effective internal control over financial Effective February 1, 2019 Jim Yong Kim resigned as reporting. See “Management’s report regarding the President of the World Bank Group. David effectiveness of Internal Control over Financial Malpass was appointed as President of the World Reporting” on page 70. Bank Group effective April 9, 2019. IBRD’s internal control over financial reporting was Effective December 1, 2018 Arunma Oteh retired as audited by Deloitte & Touche, LLP, and their report Vice President and Treasurer of IBRD. Jingdong Hua expresses an unqualified opinion on the effectiveness was appointed as Vice President and Treasurer of of IBRD’s internal control over financial reporting as IBRD, effective January 1, 2019. of June 30, 2019. See Independent Auditor’s Report on page 72. Effective December 3, 2018, Joaquim Levy retired as Disclosure Controls and Procedures Managing Director and WBG Chief Financial Officer (MDCFO). On July 12, 2019, Anshula Kant was Disclosure controls and procedures are designed to appointed as the new MDCFO. Bernard Lauwers has ensure that information required to be disclosed is been the acting MDCFO and will continue in that gathered and communicated to Management as role until Ms. Kant assumes her position. appropriate, to allow timely decisions regarding required disclosure by IBRD. Management conducted Effective February 1, 2019: an evaluation of the effectiveness of such controls and  Bernard Lauwers accepted a special assignment procedures and the President and the MDCFO have with the office of the Chief Executive Officer, and concluded that these controls and procedures were Jorge Familiar was appointed as the new Vice effective as of June 30, 2019. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 63 Management’s Discussion and Analysis Appendix Appendix Glossary of Terms Articles: IBRD’s Articles of Agreement Below GDI Country: Country whose Gross National Income per capita is below the Graduation Discussion Income as published in the Per Capita Income Guidelines for Operational Purposes. Board: The Executive Directors as established by IBRD’s Articles of Agreement. Budget Anchor: Measure that IBRD uses to monitor the coverage of its net administrative expenses by its loan spread revenue. Capital Adequacy: A measure of IBRD’s ability to withstand unexpected shocks and is based on the amount of IBRD’s usable equity expressed as a percentage of its loans and other related exposures. Credit Default Swaps (CDS): A derivative contract that provides protection against deteriorating credit quality and allows one party to receive payment in the event of a default or specified credit event by a third party. Credit Valuation Adjustment (CVA): The CVA represents the counterparty credit risk exposure and is reflected in the fair value of derivative instruments. Debit Valuation Adjustment (DVA): Debit Valuation Adjustment on Fair Value Option Elected Liabilities that corresponds to the change in fair value of the liability presented under the FVO that relate to the instrument specific credit risk (“own-credit risk”). Duration: Provides an indication of the interest rate sensitivity of a fixed income security to changes in its underlying yield. Equity-to-Loans Ratio: The Board monitors IBRD’s capital adequacy within a Strategic Capital Adequacy Framework, using the equity-to-loans ratio as a key indicator of IBRD’s capital adequacy. For details on the ratio, see Table 28. Equity Savings: Interest cost saved by deploying equity instead of debt to fund loans. Loan Interest Margin: The spread between loan returns and associated debt cost. IDA18: The adequacy of IDA’s resources are periodically reviewed every three years. IDA is currently in its Eighteenth Replenishment of resources (IDA18), which is effective from July 1, 2017 until June 30, 2020. Lower-Middle-Income Countries: For FY19, income groups are classified according to 2017 gross national income (GNI) per capita. For lower-middle-income countries, the GNI range was $996–$3,895. Maintenance of Value (MOV): Under IBRD’s Articles, members are required to maintain the value of their subscriptions of national currency paid-in, which is subject to certain restrictions. MOV is determined by measuring the foreign exchange value of a member’s national currency against the standard of value of IBRD’s capital based on the 1974 SDR. Net Loan Disbursements: Loan disbursements net of repayments and prepayments. Prudential Minimum: The minimum amount of liquidity that IBRD is required to hold and is defined as 80% of the Target Liquidity Level. Sustainable Annual Lending Limit (SALL): The level of lending that can be sustained in real terms over 10 years. Strategic Capital Adequacy Framework: Evaluates IBRD’s capital adequacy as measured by stress tests and an appropriate minimum level for the long-term equity-to-loans ratio. The equity-to-loans ratio provides a background framework in the context of annual net income allocation decisions, as well as in the assessment of the initiatives for the use of capital. The framework has been approved by the Board. Single Borrower Limit (SBL): The maximum authorized exposure to IBRD’s most creditworthy and largest borrowing countries in terms of population and economic size. Statutory Lending Limit (SLL): Under IBRD’s Articles, as applied, the total amount outstanding of loans, participations in loans, and callable guarantees may not exceed the sum of unimpaired subscribed capital, reserves and surplus. Target Liquidity Level (TLL): The twelve- month Target Liquidity Level is calculated before the end of each fiscal year based on Management’s estimates of projected net loan disbursements approved at the time of projection and twelve months of debt- service for the upcoming fiscal year. This twelve-month estimate becomes the target for the upcoming fiscal year. U.S. GAAP: Accounting principles generally accepted in the United States of America. World Bank: The World Bank consists of IBRD and IDA. World Bank Group (WBG): The World Bank Group consists of IBRD, IDA, IFC, MIGA, and ICSID. 64 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Appendix Abbreviations and Acronyms AFDB: African Development Bank IFFIm: International Finance Facility for Immunization AMC: Advance Market Commitment for Vaccines against IFLs: IBRD Flexible Loans Pneumococcal Diseases IPF: Investment Project Financing AOCI: Accumulated Other Comprehensive Income LIBID: London Interbank Bid Rate BETF: IBRD-Executed Trust Funds LIBOR: London Interbank Offered Rate BOG: Board of Governors LLP: Loan Loss Provision COSO: Committee of Sponsoring Organizations of the Treadway Commission LTRRO: Long-Term Real Return Objective CCSAs: Cross-Cutting Solution Areas MDB: Multilateral Development Bank MDCAO: Managing Director and World Bank Group Chief CDS: Credit Default Swaps Administrative Officer CVA: Credit Value Adjustment MDCFO: Managing Director and World Bank Group CRO: Vice President and WBG Chief Risk Officer Chief Financial Officer DDO: Deferred Drawdown Option MDCOO: Managing Director and Chief Operating Officer DPF: Development Project Financing MIGA: Multilateral Investment Guarantee Agency DTCs: Developing and Transitional Countries MOV: Maintenance-Of-Value DVA: Debit Valuation Adjustment NBC: New Business Committee EAL: Equitable Access Limit NCPIC: National Currency Paid-in Capital EDF: Expected default frequency ORC: Operational Risk Committee EEA: Exposure Exchange Agreement PAF: Pilot Auction Facility for Methane and Climate Change Mitigation EFOs: Externally Financed Outputs PEF: Pandemic Emergency Financing Facility EMF: Equity Management Framework ESG: Environmental, Social and Governance PBAC: Pension Benefits Administration Committee FASB: Financial Accounting Standards Board PBO: Pension Benefit Obligation FIFs: Financial Intermediary Funds PCRF: Post Retirement Contribution Reserve Fund FRC: Finance and Risk Committee PEBP: Post-Employment Benefit Plan GAVI: Global Alliance for Vaccines and Immunization PFC: Pension Finance Committee GCI: General Capital Increase PforR: Program-for-Results GDI: Graduation Discussion Income RAS: Reimbursable Advisory Services GNI: Gross National Income RAMP: Reserves Advisory Management Program GMFs: Grant-Making Facilities RETF: Recipient-Executed Trust Funds GPs: Global Practices RSBP: Retired Staff Benefits Plan IADB: Inter-American Development Bank SALL: Sustainable Annual Lending Limit IBRD: International Bank for Reconstruction and SCI: Selective Capital Increase Development SDPL: Special Development Policy Loans ICSID: International Centre for Settlement of Investment Disputes SBL: Single Borrower Limit IFC: International Finance Corporation SLL: Statutory Lending Limit IDA: International Development Association SRP: Staff Retirement Plan IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 65 Management’s Discussion and Analysis Appendix Eligible Borrowing Member Countries by Region Region Countries Angola, Botswana, Cabo Verde, Cameroon, Republic of Congo, Equatorial Guinea, Eswatini, Africa Gabon, Kenya, Mauritius, Namibia, Nigeria, Seychelles, South Africa, Zimbabwe China, Fiji, Indonesia, Malaysia, Mongolia, Nauru, Palau, Papua New Guinea, Philippines, East Asia and Pacific Thailand, Timor-Leste, Vietnam Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Europe and Central Asia Kazakhstan, North Macedonia, Moldova, Montenegro, Poland, Romania, Russian Federation, Serbia, Turkey, Turkmenistan, Ukraine, Uzbekistan Argentina, Antigua and Barbuda, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Jamaica, Mexico, Panama, Latin America and Caribbean Paraguay, Peru, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago, Uruguay, Venezuela Algeria, Arab Republic of Egypt, Islamic Republic of Iran, Iraq, Jordan, Lebanon, Libya, Middle East and North Africa Morocco, Tunisia South Asia India, Pakistan, and Sri Lanka List of Tables, Figures and Boxes Tables Table 1: Condensed Statement of Income 10 Table 2: Condensed Balance Sheet 10 Table 3: Net Other Revenue 13 Table 4: Net Non-Interest Expenses 14 Table 5: Budget Anchor Ratio 14 Table 6: Unrealized Mark-to-Market gains/losses, net 15 Table 7: Allocable Income 17 Table 8: Commitments by Region 20 Table 9: Gross Disbursements by Region 20 Table 10: Commitments by Maturity 21 Table 11: Loan Terms Available Through June 30, 2019 23 Table 12: Country Pricing Group and Maturity Premium (in basis points) 23 Table 13: Guarantees Exposure 25 Table 14: Pricing for IBRD Project-Based and Policy-Based Guarantees 26 Table 15: Exposure Exchange Agreements 26 Table 16: Revenue Earned from Trust Fund Activities 27 Table 17: RAMP – Assets and Revenues 28 Table 18: Cash and Investment Assets Held in Trust 28 Table 19: Liquid Asset Portfolio Composition 30 Table 20: Net Carrying Value of Other Investments 30 Table 21: Liquid Asset Portfolio - Average Balances and Returns 30 Table 22: Short-Term Borrowings 32 Table 23: Funding Operations Indicators 33 Table 24: Maturity Profile of Medium and Long-Term Debt 33 Table 25: Breakdown of IBRD Subscribed Capital 34 Table 26: Usable Paid-In Capital 35 Table 27: Usable Equity 36 Table 28: Equity-to-Loans Ratio 41 Table 29: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating 46 Table 30: Liquidity Levels 50 Table 31: Summary of Fair Value Adjustments on Non-Trading Portfolios 51 Table 32: Effect of Interest Rates and Credit on IBRD’s Fair Value Income 51 Table 33: Summary of Changes to AOCI (Fair Value Basis) 53 Table 34: Condensed Balance Sheet on a Fair Value Basis 54 Table 35: Reconciliation from Net Income to Income on a Fair Value Comprehensive Basis 54 Table 36: Fair Value Adjustments, net 55 Table 37: Contractual Obligations 56 Table 38: Funded Status of the Plans 58 Table 39: Fair Value Level 3 Summary 60 66 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 Management’s Discussion and Analysis Appendix Figures Figure 1: Sources and Uses of Revenue 8 Figure 2: Net Income and Unrealized gains / (losses) 11 Figure 3: Loan Interest Margin 11 Figure 4: Derived Spread 11 Figure 5: Net Investment Portfolio 12 Figure 6: Borrowing Portfolio 12 Figure 7: Equity Contribution 12 Figure 8: Net Non-Interest Expenses 13 Figure 9: Budget Anchor 13 Figure 10: FY19 Allocable Income and Income Allocation 18 Figure 11: Commitments and Disbursements Trend 19 Figure 12: Share of Financing Categories for Annual Commitments 20 Figure 13: Loan Portfolio 24 Figure 14: Liquid Asset Portfolio by Asset Class 29 Figure 15: Effect of Derivatives on Currency Composition of the Borrowing Portfolio–June 30, 2019 31 Figure 16: Medium- and Long-Term Borrowings Raised by Currency, Excluding Derivatives 33 Figure 17: Voting Power of Top Six Members as of June 30, 2019 34 Figure 18: Percentage of Votes held by Member Countries, as of June 30, 2019 34 Figure 19: Financial and Operational Risk Management Structure 37 Figure 20: Risk Committee Structure for Financial and Operational Risks 39 Figure 21: Equity-to-Loans Ratio 40 Figure 22: Country Exposures as of June 30, 2019 43 Figure 23: Effect of Derivatives on Interest Rate Structure of the Borrowing Portfolio - June 30, 2019 47 Figure 24: Effect of Derivatives on Interest Rate Structure of the Loan Portfolio - June 30, 2019 47 Figure 25: Use of Derivatives for Loans and Borrowings 48 Figure 26: Use of Derivatives for Investments 48 Figure 27: Use of Derivatives for EMF 48 Figure 28: Currency Composition of Loan and Borrowing Portfolios as of June 30, 2019 50 Figure 29: Sensitivity to Interest Rates 51 Figure 30: Governance Structure 61 Boxes Box 1: Selected Financial Data 2 Box 2: Determination of Spreads for IFLs 21 Box 3: Other Lending Products Currently Available 22 Box 4: Types of Guarantees Provided by IBRD 25 Box 5: Disaster Risk Financing Options 28 Box 6: Summary of IBRD's Specific Risk Categories 40 Box 7: Treatment of Overdue Payments 43 Box 8: Eligibility Criteria for IBRD's Investments 45 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 67 Management’s Discussion and Analysis Appendix This page intentionally left blank 68 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2019 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT FINANCIAL STATEMENTS AND INTERNAL CONTROL REPORTS JUNE 30, 2019 Management’s Report Regarding Effectiveness of Internal Control Over Financial Reporting 70 Independent Auditors’ Report on Effectiveness of Internal Control Over Financial Reporting 72 Independent Auditors’ Report 74 Balance Sheet 76 Statement of Income 78 Statement of Comprehensive Income 79 Statement of Changes in Retained Earnings 79 Statement of Cash Flows 80 Supplemental Information Summary Statement of Loans 82 Statement of Subscriptions to Capital Stock and Voting Power 84 Notes to Financial Statements 88 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 69 MANAGEMENT’S REPORT REGARDING EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING 70 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 71 INDEPENDENT AUDITORS’ REPORT ON EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING 72 73 INDEPENDENT AUDITORS’ REPORT 74 75 BALANCE SHEET June 30, 2019 and June 30, 2018 Expressed in millions of U.S. dollars 2019 2018 Assets Due from banks—Notes C and L Unrestricted cash $ 777 $ 542 Restricted cash 118 77 895 619 Investments-Trading (including securities transferred under repurchase or securities lending agreements of $10 million—June 30, 2019; $29 million— June 30, 2018)—Notes C and L 81,247 72,352 Securities purchased under resale agreements—Notes C and L 168 217 Derivative assets, net—Notes A, C and F 2,840 2,460 Other receivables Receivable from investment securities traded—Note C 67 83 Accrued income on loans 1,823 1,539 1,890 1,622 Loans outstanding (Summary Statement of Loans, Notes D, H and L) Total loans 262,612 254,011 Less undisbursed balance (67,825) (68,422) Loans outstanding 194,787 185,589 Less: Accumulated provision for loan losses (1,574) (1,553) Deferred loan income (461) (448) Net loans outstanding 192,752 183,588 Other assets Premises and equipment, net 1,169 1,158 Miscellaneous—Notes E, H and I 2,070 1,784 3,239 2,942 Total assets $ 283,031 $ 263,800                       76 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019     2019 2018 Liabilities           Borrowings—Notes E and L $ 230,180   $ 208,009 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received—Notes C and L 10     30             Derivative liabilities, net—Notes A, C and F 3,053     7,932           Payable to maintain value of currency holdings on account of subscribed capital 5     6 Other liabilities         Payable for investment securities purchased—Note C 6     82 Liabilities under retirement benefits plans—Notes J and K 3,806     2,338 Accounts payable and miscellaneous liabilities—Notes D, H and I 3,856     3,559            7,668     5,979 Total liabilities 240,916 221,956           Equity Capital stock (Statement of Subscriptions to Capital Stock and Voting Power, Note B)         Authorized capital (2,783,873 shares—June 30, 2019, and 2,307,600 shares—June 30, 2018)         Subscribed capital (2,320,659 shares—June 30, 2019, and 2,277,364 shares—June 30, 2018) 279,953     274,730 Less uncalled portion of subscriptions (262,892) (258,274) Paid-in capital 17,061     16,456 Nonnegotiable, noninterest-bearing demand obligations on account of subscribed capital (382)     (361) Receivable amounts to maintain value of currency holdings—Note B (292)     (313) Deferred amounts to maintain value of currency holdings—Note B 24     27 Retained earnings (Statement of Changes in Retained Earnings; Note G) 28,807     28,457 Accumulated other comprehensive loss—Note K (3,103)     (2,422) Total equity 42,115 41,844 Total liabilities and equity $ 283,031 $ 263,800 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 77 STATEMENT OF INCOME For the fiscal years ended June 30, 2019, June 30, 2018 and June 30, 2017 Expressed in millions of U.S. dollars   2019 2018 2017 Interest revenue             Loans, net—Note D $ 5,170 $ 3,515 $ 2,579 Equity management, net (57)   217   383 Investments - Trading, net 1,478   878   545 Other, net (26)   25   5             Borrowings, net—Note E (4,778)   (2,919)   (1,845)                 Interest revenue, net of borrowing expenses 1,787 1,716 1,667                 Provision for losses on loans and other exposures, (charge) release—Note D (50)   31   (11)             Non interest revenue           Revenue from externally funded activities—Notes H and I 908   882   820 Commitment charges—Note D 107   87   70 Other, net—Note I 35   33   24 Total 1,050 1,002 914 Non interest expenses           Administrative—Notes H, I and J (2,119) (1,777) (1,751) Pension—Note A and J 62 (272) (394) Contributions to special programs (18)   (18)   (22) Other (23)   (22)   (21) Total (2,098) (2,089) (2,188)             Board of Governors-approved and other transfers—Note G (338)   (178)   (497)             Non-functional currency translation adjustment losses, net—Note A (30)   -   -             Unrealized mark-to-market gains on Investments-Trading portfolio, net—Notes F and L 450   482   291             Unrealized mark-to-market (losses) gains on non-trading portfolios, net           Loans, net—Notes D, F and L (1,485)   916   1,529 Equity management, net—Notes F and L 1,084   (799)   (1,701) Borrowings, net—Notes E, F and L 120   (381)   (248) Other, net—Note L 15   (2)   7 Total (266) (266) (413)       Net income (loss) $ 505 $ 698 $ (237) The Notes to Financial Statements are an integral part of these Statements. 78 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 STATEMENT OF COMPREHENSIVE INCOME For the fiscal years ended June 30, 2019, June 30, 2018 and June 30, 2017 Expressed in millions of U.S. dollars   2019 2018 2017                 Net income (loss) $ 505 $ 698 $ (237) Other comprehensive income—Note K         Reclassification to net income:         Derivatives and hedging transition adjustment 2   3   2 Net actuarial (losses) gains on benefit plans (1,255)   834   2,543 Prior service credit on benefit plans, net 24   24   24 Net Change in Debit Valuation Adjustment (DVA) on Fair Value option elected liabilities—Note E 550   -   - Currency translation adjustment—Note A (157)   93   181 Total other comprehensive (loss) income (836) 954 2,750 Comprehensive (loss) income $ (331) $ 1,652 $ 2,513               STATEMENT OF CHANGES IN RETAINED EARNINGS For the fiscal years ended June 30, 2019, June 30, 2018 and June 30, 2017 Expressed in millions of U.S. dollars   2019 2018 2017 Retained earnings at beginning of the fiscal year $ 28,457 $ 27,759 $ 27,996 Cumulative effect of change in accounting principle— Notes A, G and J (155) - - Net income (loss) for the fiscal year 505 698 (237) Retained earnings at end of the fiscal year $ 28,807 $ 28,457 $ 27,759 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 79 STATEMENT OF CASH FLOWS For the fiscal years ended June 30, 2019, June 30, 2018 and June 30, 2017 Expressed in millions of U.S. dollars   2019 2018 2017 Cash flows from investing activities                 Loans                 Disbursements $ (20,143)  $ (17,353)  $ (17,819) Principal repayments 9,688    10,411    9,130 Principal prepayments 403    1,340    - Loan origination fees received 16    13    11 Net derivatives-loans 53    41    35 Other investing activities, net (146)   (181)   (146) Net cash used in investing activities (10,129) (5,729) (8,789) Cash flows from financing activities              Medium and long-term borrowings              New issues 53,987    36,378    55,145 Retirements (36,110)    (29,587)    (34,605) Short-term borrowings (original maturities greater than 90 days)              New issues 16,293    10,287    6,002 Retirements (11,609)    (10,104)    (4,252) Net short-term borrowings (original maturities less than 90 days) (5,077)    (595)    5,150 Net derivatives-borrowings (2,071)    (1,158)    66 Capital subscriptions 605 347 304 Other capital transactions, net (1) (7) 5 Net cash provided by financing activities 16,017 5,561 27,815 Cash flows from operating activities              Net income (loss) 505    698    (237) Adjustments to reconcile net income (loss) to net cash used in operating activities:              Unrealized mark-to-market losses on non-trading portfolios, net 266    266    413 Non-functional currency translation adjustment losses, net 30    -    - Depreciation and amortization 897    803    660 Provision for losses on loans and other exposures, charge (release) 50    (31)    11 Changes in:              Investments-Trading, net (8,885)    579    (21,453) Net investment securities purchased/traded (49)    (186)    (393) Net derivatives-investments 1,199    (1,990)    883 Net securities purchased/sold under resale/repurchase agreements and payable for cash collateral received 267    (253)    153 Accrued income on loans (296)    (305)    (105) Miscellaneous assets 25    (11)    80 Accrued interest on borrowings (133)    226    (166) Accounts payable and miscellaneous liabilities 518   301   515 Net cash (used in) provided by operating activities (5,606) 97 (19,639) Effect of exchange rate changes on unrestricted and restricted cash (6) - 4 Net increase (decrease) in unrestricted and restricted cash—Note A 276    (71)    (609) Unrestricted and restricted cash at beginning of the fiscal year 619    613    1,222 Unrestricted and restricted cash at end of the fiscal year $ 895 $ 542 $ 613 80 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 Expressed in millions of U.S. dollars   2019 2018 2017 Supplemental disclosure                  (Decrease) increase in ending balances resulting from exchange rate fluctuations                  Loans outstanding $ (893)  $ 495   $ 1,070 Investment portfolio (18)    (34)     (126) Borrowing portfolio (632)    497     525 Capitalized loan origination fees included in total loans 39    36     42 Interest paid on borrowings portfolio 4,281    2,492     1,865 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 81 SUMMARY STATEMENT OF LOANS June 30, 2019 Expressed in millions of U.S. dollars Loans approved Undisbursed Percentage of but not yet balance of Loans total loans Borrower or guarantor Total loans c,d effective a effective loans b Outstanding outstanding e Albania d $ 1,033 $ 20 $ 326 $ 687 0.35 % Angola c 1,257 25 679 553 0.28 Antigua and Barbuda 4 2 - 2 * Argentina 10,089 441 2,687 6,961 3.57 Armenia d 963 15 211 737 0.38 Azerbaijan 2,225 - 174 2,051 1.05 Barbados 27 - - 27 0.01 Belarus 1,436 205 306 925 0.48 Belize 42 - 23 19 0.01 Bolivia,Plurinational State of c 818 - 676 142 0.07 Bosnia and Herzegovina d 777 31 163 583 0.30 Botswana c 417 - 243 174 0.09 Brazil d 18,672 827 1,648 16,197 8.32 Bulgaria 803 - 20 783 0.40 Cabo Verde, Republic of 46 5 - 41 0.02 Cameroon 724 - 469 255 0.13 Chile c 182 - 40 142 0.07 China d 22,324 1,136 6,493 14,695 7.54 Colombia c 11,759 930 750 10,079 5.18 Congo, Republic of 171 - 138 33 0.02 Costa Rica c 1,107 - 200 907 0.47 Cote d'Ivoire 186 - 163 23 0.01 Croatia 1,391 - 137 1,254 0.64 Dominican Republic c 1,387 180 289 918 0.47 Ecuador c 2,238 350 749 1,139 0.58 Egypt, Arab Republic of d 13,335 200 2,528 10,607 5.45 El Salvador 1,051 200 - 851 0.44 Eswatini 79 41 1 37 0.02 Fiji 121 - 47 74 0.04 Gabon c 837 - 266 571 0.29 Georgia d 1,359 173 282 904 0.46 Grenada 17 - 8 9 * Guatemala 1,981 300 - 1,681 0.86 India d 26,971 2,581 9,805 14,585 7.49 Indonesia d 21,828 750 2,796 18,282 9.39 Iran, Islamic Republic of 192 - - 192 0.10 Iraq d 4,825 200 1,419 3,206 1.65 Jamaica 969 - 89 880 0.45 Jordan d 3,875 141 862 2,872 1.47 Kazakhstan 4,954 - 1,079 3,875 1.99 Kenya 249 249 - - - Kosovo 161 - - 161 0.08 Latvia 68 - - 68 0.04 Lebanon 1843 688 662 493 0.25 Mauritius 216 - - 216 0.11 Mexico 16,027 900 631 14,496 7.44 Moldova 125 - 31 94 0.05 Montenegro d 309 - 99 210 0.11 Morocco 7,698 608 842 6,248 3.21 Nigeria c 500 - 126 374 0.19 North Macedonia d 570 30 168 372 0.19 Pakistan d 3,389 652 1,317 1,420 0.73 Panama c 1,479 - 255 1,224 0.63 Papua New Guinea 25 - - 25 0.01 Paraguay 849 115 112 622 0.32 Peru 4,326 85 3,004 1,237 0.64 Philippines 7,491 300 1,070 6,121 3.14 Poland 8,009 - 453 7,556 3.88     82 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 SUMMARY STATEMENT OF LOANS (continued) June 30, 2019 Expressed in millions of U.S. dollars Loans approved Undisbursed Percentage of but not yet balance of Loans total loans Borrower or guarantor Total loans c,d effective a effective loans b Outstanding outstanding e Romania d $ 5,722 $ 102 $ 1,034 $ 4,586 2.36 % Russian Federation 429 - 60 369 0.19 Serbia d 3,099 91 421 2,587 1.33 Seychelles 57 - 11 46 0.02 South Africa c 3,030 - 753 2,277 1.17 Sri Lanka 888 310 340 238 0.12 St. Kitts and Nevis * - - * * St. Lucia 4 - - 4 * St. Vincent and the Grenadines 1 - - 1 * Suriname 35 35 - - - Thailand 972 - - 972 0.50 Timor-Leste 15 - 5 10 0.01 Tunisia 4,562 329 726 3,507 1.80 Turkey d 14,160 874 1,667 11,619 5.97 Ukraine d 6,932 200 1,434 5,298 2.72 Uruguay 1,202 - 118 1,084 0.56 Uzbekistan 1,948 800 425 723 0.37 Vietnam 3,316 - 1,174 2,142 1.10 Zimbabwe 434 - - 434 0.22 Total-June 30, 2019 $ 262,612 $ 15,121 $ 52,704 $ 194,787 100 % Total-June 30, 2018 $ 254,011 $ 15,239 $ 53,183 $ 185,589 * Indicates amount less than $0.5 million or 0.005 percent Notes a. Loans totaling $13,302 million ($11,188 million—June 30, 2018) have been approved, but the related agreements have not been signed. Loan agreements totaling $1,819 million ($4,051 million—June 30, 2018) have been signed, but the loans are not effective and disbursements do not start until the borrowers and/or guarantors take certain actions and furnish documents. b. Of the undisbursed balance, IBRD has entered into irrevocable commitments to disburse $34 million ($60 million—June 30, 2018). c. Indicates a country for which a guarantee is provided under an Exposure Exchange Agreement (EEA) with a multilateral development organization (see Note D—Loans and Other Exposures). The effect of the guarantee is not included in the figures of the Statement above. d. Indicates a country for which a guarantee has been received, under an EEA with a multilateral development organization or from another guarantee provider (see Note D—Loans and Other Exposures). The amount of the guarantee is not included in the figures of the table above. e. May differ from the calculated figures or sum of individual figures shown due to rounding. . The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 83 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER June 30, 2019 Expressed in millions of U.S. dollars Subscriptions Voting Power Amounts Percentage Total Amounts subject to Number of Percentage Member Shares of total b amounts b paid in a,b call a, b votes of total b Afghanistan 506 0.02 % $ 61.0 $ 5.1 $ 55.9 1,228 0.05 % Albania 1,187 0.05 143.2 5.4 137.8 1,909 0.08 Algeria 11,724 0.51 1,414.3 85.0 1,329.3 12,446 0.51 Angola 3,708 0.16 447.3 23.1 424.2 4,430 0.18 Antigua and Barbuda 659 0.03 79.5 2.3 77.2 1,381 0.06 Argentina 26,387 1.14 3,183.2 191.6 2,991.5 27,109 1.10 Armenia 1,646 0.07 198.6 8.4 190.1 2,368 0.10 Australia c 31,592 1.36 3,811.1 233.4 3,577.7 32,314 1.32 Austria c 14,611 0.63 1,762.6 106.4 1,656.2 15,333 0.62 Azerbaijan 2,371 0.10 286.0 13.3 272.7 3,093 0.13 Bahamas, The 1,357 0.06 163.7 7.5 156.2 2,079 0.08 Bahrain 1,398 0.06 168.6 7.8 160.9 2,120 0.09 Bangladesh 6,468 0.28 780.3 43.8 736.5 7,190 0.29 Barbados 948 0.04 114.4 4.5 109.9 1,670 0.07 Belarus 4,211 0.18 508.0 28.8 479.2 4,933 0.20 Belgium c 37,413 1.61 4,513.3 276.8 4,236.5 38,135 1.55 Belize 586 0.03 70.7 1.8 68.9 1,308 0.05 Benin 1,260 0.05 152.0 5.8 146.2 1,982 0.08 Bhutan 680 0.03 82.0 2.0 80.0 1,402 0.06 Bolivia, Plurinational State of 2,565 0.11 309.4 14.7 294.7 3,287 0.13 Bosnia and Herzegovina 827 0.04 99.8 7.8 91.9 1,549 0.06 Botswana 916 0.04 110.5 5.4 105.1 1,638 0.07 Brazil 53,509 2.31 6,455.1 386.8 6,068.3 54,231 2.21 Brunei Darussalam 2,373 0.10 286.3 15.2 271.1 3,095 0.13 Bulgaria 6,608 0.28 797.2 46.6 750.5 7,330 0.30 Burkina Faso 1,260 0.05 152.0 5.8 146.2 1,982 0.08 Burundi 1,043 0.04 125.8 4.6 121.3 1,765 0.07 Cabo Verde, Republic of 729 0.03 87.9 2.3 85.7 1,451 0.06 Cambodia 493 0.02 59.5 4.6 54.9 1,215 0.05 Cameroon 2,202 0.09 265.6 12.4 253.3 2,924 0.12 Canada c 70,455 3.04 8,499.3 619.5 7,879.8 71,177 2.90 Central African Republic 975 0.04 117.6 3.9 113.8 1,697 0.07 Chad 975 0.04 117.6 3.9 113.8 1,697 0.07 Chile 10,013 0.43 1,207.9 71.9 1,136.0 10,735 0.44 China 106,594 4.59 12,859.0 774.8 12,084.1 107,316 4.37 Colombia 9,730 0.42 1,173.8 69.7 1,104.1 10,452 0.43 Comoros 369 0.02 44.5 1.0 43.5 1091 0.04 Congo, Democratic Republic of 3,416 0.15 412.1 31.0 381.1 4,138 0.17 Congo, Republic of 1,051 0.05 126.8 4.3 122.4 1,773 0.07 Costa Rica 1,123 0.05 135.5 8.4 127.1 1,845 0.08 Cote d'Ivoire 3,505 0.15 422.8 21.8 401.1 4,227 0.17 Croatia 2,906 0.13 350.6 21.7 328.8 3,628 0.15 Cyprus 1,851 0.08 223.3 11.2 212.1 2,573 0.10 Czech Republic c 7,993 0.34 964.2 58.1 906.1 8,715 0.35 Denmark c 17,796 0.77 2,146.8 129.2 2,017.6 18,518 0.75 Djibouti 801 0.03 96.6 2.8 93.8 1,523 0.06 Dominica 644 0.03 77.7 2.2 75.4 1,366 0.06 Dominican Republic 2,651 0.11 319.8 17.2 302.6 3,373 0.14 Ecuador 3,828 0.16 461.8 24.1 437.7 4,550 0.19 Egypt, Arab Republic of 10,682 0.46 1,288.6 76.8 1,211.8 11,404 0.46 84 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER (continued) June 30, 2019 Expressed in millions of U.S. dollars Subscriptions Voting Power Amounts Percentage Total Amounts subject to Number of Percentage Member Shares of total b amounts b paid in a,b call a, b votes of total b El Salvador 330 0.01 % $ 39.8 $ 3.1 $ 36.7 1052 0.04 % Equatorial Guinea 715 0.03 86.3 2.7 83.5 1,437 0.06 Eritrea 593 0.03 71.5 1.8 69.7 1,315 0.05 Estonia 1,170 0.05 141.1 6.1 135.1 1,892 0.08 Eswatini 499 0.02 60.2 2.0 58.2 1,221 0.05 Ethiopia 1,470 0.06 177.3 8.3 169.1 2,192 0.09 Fiji 1,251 0.05 150.9 6.7 144.2 1,973 0.08 Finland c 11,439 0.49 1,379.9 82.7 1,297.2 12,161 0.49 France c 90,404 3.90 10,905.9 672.4 10,233.5 91,126 3.71 Gabon 987 0.04 119.1 5.1 113.9 1,709 0.07 Gambia, The 777 0.03 93.7 2.7 91.0 1,499 0.06 Georgia 2,275 0.10 274.4 12.7 261.7 2,997 0.12 Germany c 96,574 4.16 11,650.2 717.9 10,932.3 97,296 3.96 Ghana 2,202 0.09 265.6 16.1 249.5 2,924 0.12 Greece c 3,405 0.15 410.8 26.5 384.2 4,127 0.17 Grenada 673 0.03 81.2 2.4 78.8 1,395 0.06 Guatemala 2,001 0.09 241.4 12.4 229.0 2,723 0.11 Guinea 1,864 0.08 224.9 9.9 214.9 2,586 0.11 Guinea-Bissau 613 0.03 73.9 1.4 72.5 1,335 0.05 Guyana 1,526 0.07 184.1 7.7 176.4 2,248 0.09 Haiti 1,550 0.07 187.0 7.8 179.2 2,272 0.09 Honduras 641 0.03 77.3 2.3 75.0 1,363 0.06 Hungary c 10,793 0.47 1,302.0 77.9 1,224.1 11,515 0.47 Iceland c 1,742 0.08 210.1 10.3 199.8 2,464 0.10 India 72,972 3.14 8,803.0 554.1 8,248.9 73,694 3.00 Indonesia 23,031 0.99 2,778.3 167.2 2,611.1 23,753 0.97 Iran, Islamic Republic of 34,963 1.51 4,217.8 254.3 3,963.4 35,685 1.45 Iraq 3,875 0.17 467.5 33.0 434.5 4,597 0.19 Ireland c 7,787 0.34 939.4 55.3 884.1 8,509 0.35 Israel 6,019 0.26 726.1 42.4 683.7 6,741 0.27 Italy c 63,372 2.73 7,644.9 469.3 7,175.6 64,094 2.61 Jamaica 3,267 0.14 394.1 21.8 372.3 3,989 0.16 Japan c 192,977 8.32 23,279.8 1,585.3 21,694.5 193,699 7.88 Jordan 2,009 0.09 242.4 10.9 231.5 2,731 0.11 Kazakhstan 4,573 0.20 551.7 31.3 520.4 5,295 0.22 Kenya 3,435 0.15 414.4 21.1 393.2 4,157 0.17 Kiribati 680 0.03 82.0 1.9 80.1 1,402 0.06 Korea, Republic of c 37,524 1.62 4,526.7 270.2 4,256.6 38,246 1.56 Kosovo, Republic of 1,262 0.05 152.2 7.3 144.9 1,984 0.08 Kuwait 19,432 0.84 2,344.2 141.0 2,203.2 20,154 0.82 Kyrgyz Republic 1,107 0.05 133.5 5.7 127.9 1,829 0.07 Lao People's Democratic Republic 272 0.01 32.8 2.2 30.6 994 0.04 Latvia 1,754 0.08 211.6 10.4 201.2 2,476 0.10 Lebanon 1,062 0.05 128.1 6.3 121.8 1,784 0.07 Lesotho 945 0.04 114.0 3.8 110.2 1,667 0.07 Liberia 606 0.03 73.1 3.6 69.5 1,328 0.05 Libya 9,935 0.43 1,198.5 72.1 1,126.4 10,657 0.43 Lithuania 1,910 0.08 230.4 11.6 218.8 2,632 0.11 Luxembourg c 2,289 0.10 276.1 14.4 261.7 3,011 0.12 Madagascar 2,057 0.09 248.1 11.2 236.9 2,779 0.11 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 85 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER (continued) June 30, 2019 Expressed in millions of U.S. dollars Subscriptions Voting Power Amounts Percentage Total Amounts subject to Number of Percentage Member Shares of total b amounts b paid in a,b call a, b votes of total b Malawi 1,574 0.07 % $ 189.9 $ 8.0 $ 181.9 2,296 0.09 % Malaysia 10,447 0.45 1,260.3 75.4 1,184.8 11,169 0.45 Maldives 469 0.02 56.6 0.9 55.7 1,191 0.05 Mali 1,670 0.07 201.5 8.7 192.8 2,392 0.10 Malta 1,361 0.06 164.2 7.5 156.7 2,083 0.08 Marshall Islands 469 0.02 56.6 0.9 55.7 1,191 0.05 Mauritania 1,308 0.06 157.8 6.1 151.7 2,030 0.08 Mauritius 1,574 0.07 189.9 9.1 180.8 2,296 0.09 Mexico 40,119 1.73 4,839.8 291.1 4,548.6 40,841 1.66 Micronesia,, Federated States of 479 0.02 57.8 1.0 56.8 1,201 0.05 Moldova 1,984 0.09 239.3 10.7 228.7 2,706 0.11 Mongolia 680 0.03 82.0 3.3 78.7 1,402 0.06 Montenegro 872 0.04 105.2 4.5 100.7 1,594 0.06 Morocco 7,024 0.30 847.3 51.0 796.3 7,746 0.32 Mozambique 1,332 0.06 160.7 6.8 153.9 2,054 0.08 Myanmar 3,465 0.15 418.0 21.4 396.6 4,187 0.17 Namibia 1,930 0.08 232.8 11.7 221.1 2,652 0.11 Nauru 586 0.03 70.7 2.4 68.3 1,308 0.05 Nepal 1,405 0.06 169.5 6.8 162.7 2,127 0.09 Netherlands c 45,829 1.97 5,528.6 339.5 5,189.0 46,551 1.89 New Zealand c 9,761 0.42 1,177.5 70.2 1,107.3 10,483 0.43 Nicaragua 873 0.04 105.3 3.4 101.9 1,595 0.06 Niger 1,233 0.05 148.7 5.6 143.1 1,955 0.08 Nigeria 16187 0.70 1,952.7 117.4 1,835.3 16,909 0.69 North Macedonia 541 0.02 65.3 4.0 61.2 1,263 0.05 Norway c 13,418 0.58 1,618.7 97.4 1,521.2 14,140 0.58 Oman 1,978 0.09 238.6 12.1 226.5 2,700 0.11 Pakistan 11,834 0.51 1,427.6 85.8 1,341.8 12,556 0.51 Palau 16 * 1.9 0.2 1.8 738 0.03 Panama 891 0.04 107.5 6.9 100.6 1,613 0.07 Papua New Guinea 1,864 0.08 224.9 9.9 214.9 2,586 0.11 Paraguay 1,766 0.08 213.0 9.3 203.7 2,488 0.10 Peru 7,691 0.33 927.8 54.6 873.2 8,413 0.34 Philippines 9,903 0.43 1,194.6 71.0 1,123.6 10,625 0.43 Poland c 17,129 0.74 2,066.4 124.1 1,942.2 17,851 0.73 Portugal c 7,511 0.32 906.1 53.3 852.7 8,233 0.34 Qatar 1,389 0.06 167.6 11.1 156.5 2,111 0.09 Romania 6,866 0.30 828.3 51.2 777.1 7,588 0.31 Russian Federation 66,505 2.87 8,022.8 483.5 7,539.3 67,227 2.74 Rwanda 1,502 0.06 181.2 7.5 173.7 2,224 0.09 St. Kitts and Nevis 275 0.01 33.2 0.3 32.9 997 0.04 St. Lucia 699 0.03 84.3 2.6 81.7 1,421 0.06 St. Vincent and the Grenadines 352 0.02 42.5 0.8 41.6 1074 0.04 Samoa 777 0.03 93.7 2.5 91.2 1,499 0.06 San Marino 595 0.03 71.8 2.5 69.3 1,317 0.05 Sao Tome and Principe 705 0.03 85.0 2.2 82.9 1,427 0.06 Saudi Arabia 66,505 2.87 8,022.8 484.6 7,538.2 67,227 2.74 Senegal 2,942 0.13 354.9 17.5 337.4 3,664 0.15 Serbia 3,606 0.16 435.0 27.0 408.1 4,328 0.18 Seychelles 263 0.01 31.7 0.2 31.6 985 0.04 86 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER (continued) June 30, 2019 Expressed in millions of U.S. dollars Subscriptions Voting Power Amounts Percentage Total Amounts subject to Number of Percentage Member Shares of total b amounts b paid in a,b call a, b votes of total b Sierra Leone 1,043 0.04 % $ 125.8 $ 4.6 $ 121.2 1,765 0.07 % Singapore 5,569 0.24 671.8 41.9 630.0 6,291 0.26 Slovak Republic c 4,075 0.18 491.6 29.2 462.4 4,797 0.20 Slovenia c 1,774 0.08 214.0 13.8 200.2 2,496 0.10 Solomon Islands 729 0.03 87.9 2.3 85.6 1,451 0.06 Somalia 632 0.03 76.2 3.3 72.9 1,354 0.06 South Africa 17,831 0.77 2,151.0 129.4 2,021.6 18,553 0.76 South Sudan 1,437 0.06 173.4 8.6 164.8 2,159 0.09 Spain c 44,159 1.90 5,327.1 323.8 5,003.3 44,881 1.83 Sri Lanka 5,154 0.22 621.8 34.0 587.8 5,876 0.24 Sudan 1,989 0.09 239.9 15.5 224.5 2,711 0.11 Suriname 412 0.02 49.7 2.0 47.7 1,134 0.05 Sweden c 19,833 0.85 2,392.6 145.4 2,247.2 20,555 0.84 Switzerland c 34,660 1.49 4,181.2 255.5 3,925.7 35,382 1.44 Syrian Arab Republic 2,452 0.11 295.8 14.0 281.8 3,174 0.13 Tajikistan 1,204 0.05 145.2 5.3 139.9 1,926 0.08 Tanzania 1,295 0.06 156.2 10.0 146.2 2,017 0.08 Thailand 11,108 0.48 1,340.0 79.6 1,260.4 11,830 0.48 Timor-Leste 753 0.03 90.8 3.1 87.8 1,475 0.06 Togo 1,598 0.07 192.8 8.1 184.7 2,320 0.09 Tonga 705 0.03 85.0 2.2 82.9 1,427 0.06 Trinidad and Tobago 3,376 0.15 407.3 22.8 384.5 4,098 0.17 Tunisia 1,693 0.07 204.2 12.7 191.5 2,415 0.10 Turkey 25,643 1.10 3,093.4 185.1 2,908.3 26,365 1.07 Turkmenistan 627 0.03 75.6 3.6 72.0 1,349 0.05 Tuvalu 461 0.02 55.6 1.5 54.1 1,183 0.05 Uganda 928 0.04 111.9 6.6 105.3 1,650 0.07 Ukraine 13,910 0.60 1,678.0 100.5 1,577.5 14,632 0.60 United Arab Emirates 5,342 0.23 644.4 44.0 600.4 6,064 0.25 United Kingdom c 90,404 3.90 10,905.9 691.6 10,214.3 91,126 3.71 United States c 384,502 16.57 46,384.4 2,863.6 43,520.8 385,224 15.68 Uruguay 3,563 0.15 429.8 24.0 405.8 4,285 0.17 Uzbekistan 3,476 0.15 419.3 21.4 397.9 4,198 0.17 Vanuatu 765 0.03 92.3 3.1 89.2 1,487 0.06 Venezuela, Republica Bolivariana de 20,361 0.88 2,456.2 150.8 2,305.5 21,083 0.86 Vietnam 4,173 0.18 503.4 31.3 472.1 4,895 0.20 Yemen, Republic of 2,212 0.10 266.8 14.0 252.8 2,934 0.12 Zambia 3,878 0.17 467.8 25.9 441.9 4,600 0.19 Zimbabwe 3,575 0.15 431.3 22.4 408.9 4,297 0.17 Total - June 30, 2019 2,320,659 100 % $ 279,953 $ 17,061 $ 262,892 2,457,117 100 % Total - June 30, 2018 2,277,364 100 % $ 274,730 $ 16,456 $ 258,274 2,411,176 * Indicates amounts less than 0.005 percent. NOTES a. See Notes to Financial Statements, Note B—Capital Stock, Maintenance of Value, and Membership. b. May differ from the calculated figures or sum of individual figures shown due to rounding. c. A member of the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD). The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 87 NOTES TO FINANCIAL STATEMENTS PURPOSE AND AFFILIATED ORGANIZATIONS The International Bank for Reconstruction and Development (IBRD) is an international organization which commenced operations in 1946. The principal purpose of IBRD is to promote sustainable economic development and reduce poverty in its member countries, primarily by providing loans, guarantees and related technical assistance for specific projects and for programs of economic reform in developing member countries. The activities of IBRD are complemented by those of three affiliated organizations, the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). Each of these organizations is legally and financially independent from IBRD, with separate assets and liabilities, and IBRD is not liable for their respective obligations. Transactions with these affiliated organizations are disclosed in the notes that follow. IDA’s main goal is to reduce poverty through promoting sustainable economic development in the less developed countries who are members of IDA, by extending grants, loans, guarantees and related technical assistance. IFC’s purpose is to encourage the growth of productive private enterprises in its member countries through loans and equity investments in such enterprises without a member’s guarantee. MIGA was established to encourage the flow of investments for productive purposes between member countries and, in particular, to developing member countries by providing guarantees against noncommercial risks for foreign investment in its developing member countries. IBRD is immune from taxation pursuant to Article VII, Section 9, Immunities from Taxation, of IBRD’s Articles of Agreement. NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES IBRD’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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Due to the inherent uncertainty involved in making these estimates, actual results could differ from these estimates. Significant judgment has been used in the valuation of certain financial instruments, the determination of the adequacy of the accumulated provisions for losses on loans and other exposures (irrevocable commitments, exposures to member countries’ derivatives, guarantees and deferred drawdown options-DDOs that are effective), the determination of net periodic cost from pension and other postretirement benefits plans, and the present value of projected benefit obligations. On August 8, 2019, the Executive Directors approved these financial statements for issue. Certain reclassifications of the prior year’s information have been made to conform with the current year’s presentation. Effective June 30, 2019, the presentation of derivative instruments on IBRD’s Balance Sheet was aligned with the preferable accounting treatment and the prevailing market practice of netting derivative asset and liability positions and the related cash collateral received by 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. This is a change from the historical presentation, where interest rate swaps were presented on the Balance Sheet on a net basis by instrument, and currency swaps were presented on a gross basis, which reflected the way in which swaps are routinely settled in on-going business. The change to a net presentation has been made in the current period and the presentation of the prior period has been aligned for comparability. See table below for details of the adjustments made to the June 30, 2018 Balance Sheet. There was no impact to total equity, operating activities in the Statement of Cash Flows or any line item within the Statement of Income, Statement of Comprehensive Income or Statement of Changes in Retained Earnings. See Note F —Derivative Instruments, for additional details on the accounting for derivative instruments.   88 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 In millions U.S. dollars June 30, 2018 June 30, 2018 Adjustments As reported Adjusted Derivative assets Investments $ 38,015 $ (38,015) $ - Loans 4,999 (4,999) - Client operations 17,042 (17,042) - Borrowings 80,518 (80,518) - Others 1,142 (1,142) - Net derivative assets at counterparty level after cash - 2,460 2,460 collateral received 141,716 (139,256) 2,460 Total assets $ 403,056 $ (139,256) $ 263,800 Securities sold under repurchase agreements, securities lent under securities lending $ 122 $ (92) $ 30 agreements, and payable for cash collateral received Derivative liabilities Investments 37,298 (37,298) - Loans 5,007 (5,007) - Client operations 17,069 (17,069) - Borrowings 86,161 (86,161) - Others 1,561 (1,561) - Net derivative liabilities at counterparty level after - 7,932 7,932 cash collateral received 147,096 (139,164) 7,932 Total liabilities $ 361,212 $ (139,256) $ 221,956 Total equity $ 41,844 $ - $ 41,844 Total liabilities and equity $ 403,056 $ (139,256) $ 263,800 Translation of Currencies: IBRD’s financial statements are expressed in terms of U.S. dollars for the purpose of summarizing IBRD’s financial position and the results of its operations. Until March 31, 2019, IBRD considered each of its members’ currencies to be a functional currency. Under this policy, assets and liabilities were translated at market exchange rates in effect at the end of the accounting period. Revenue and expenses were translated at either the market exchange rates in effect on the dates on which they were recognized or at an average of the market exchange rates in effect during each month. Translation adjustments were reflected in Accumulated Other Comprehensive Income. During the fiscal year ended June 30, 2019, IBRD’s Board of Governors approved General Capital Increase and Selective Capital Increase resolutions (2018 GCI/SCI). As a condition of subscrtiption, under these resolutions, IBRD’s members will be required to pay their capital subscriptions in U.S. dollars or freely convertible currencies and will no longer be able to pay in their national currencies if these currencies are not freely convertible. In addition, there has been a gradual change in IBRD’s business operations, including a shift in borrower preferences over the years. As of June 30, 2019, based on borrower demand, over 97% of IBRD’s loans were denominated in U.S dollars or Euro. In line with IBRD’s exchange rate management policies, IBRD’s borrowing portfolio and equity also had a similar currency composition. As a result of these changes in IBRD’s business operations, effective from the fourth quarter of the fiscal year ended June 30, 2019, IBRD changed its functional currencies to U.S. dollars and Euro. IBRD recorded translation adjustments relating to non-functional currencies in the Statement of Income from the last quarter of the fiscal year ended June 30, 2019. Translation adjustments of assets and liabilities denominated in Euro will continue to be reflected in Accumulated Other Comprehensive Income. As a result of this change in functional currency, IBRD recorded a $30 million currency translation adjustment loss in net income during the fourth quarter of the fiscal year ended June 30, 2019, relating to the non-functional currencies. This change does not affect IBRD’s policies for translating its assets, liabilities, revenues, and expenses. This change does not impact previously issued financial statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 89 Valuation of Capital Stock: In the Articles of Agreement, the capital stock of IBRD is expressed in terms of “U.S. dollars of the weight and fineness in effect on July 1, 1944” (1944 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 1944 dollars into current dollars or into any other currency was eliminated. The Executive Directors of IBRD have decided, until such time as the relevant provisions of the Articles of Agreement are amended, that the words “U.S. dollars of the weight and fineness in effect on July 1, 1944” in Article II, Section 2(a) of the Articles of Agreement of IBRD are interpreted to mean the Special Drawing Right (SDR) introduced by the International Monetary Fund, as 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 $1.20635 for one SDR (1974 SDR). Maintenance of Value: Article II, Section 9 of the Articles of Agreement provides for maintenance of value (MOV), at the time of subscription, of national currencies paid-in, which are subject to certain restrictions. MOV is determined by measuring the foreign exchange value of a member’s national currency against the standard of value of IBRD’s capital based on the 1974 SDR. MOV receivable relates to amounts due from members on account of movements in exchange rates from the date of initial subscription, resulting in the reduction in the value of their paid-in capital denominated in national currencies. Members are required to make payments to IBRD if their currencies depreciate significantly relative to the standard of value. These amounts may be settled either in cash or a non-negotiable, non-interest bearing note, which is due on demand. Certain notes are due on demand only after IBRD's callable subscribed capital has been entirely called pursuant to Article IV, Section 2 (a) of the Articles of Agreement. Furthermore, the Executive Directors have adopted a policy of reimbursing members whose national currencies appreciate significantly in terms of the standard of value. MOV is deferred when the restriction of national currencies paid-in is lifted and these currencies are being used in IBRD’s operations and/or are being invested, swapped, or loaned to members by IBRD or through IFC. Once these restricted currencies are no longer being used in operations, the related MOV is no longer deferred, but rather, becomes due on the same terms as other MOV obligations. All MOV receivable balances are shown as components of Equity, under Receivable amounts to maintain value of currency holdings. All MOV payable balances are included in Liabilities, under Payable to maintain value of currency holdings on account of subscribed capital. The net receivable or payable MOV amounts relating to national currencies used in IBRD's lending and investing operations are also included as a component of Equity under Deferred amounts to maintain value of currency holdings. Withdrawal of Membership: Under IBRD’s Articles of Agreement, in the event a member withdraws from IBRD, the withdrawing member is entitled to receive the value of its shares payable to the extent the member does not have any outstanding obligations to IBRD. IBRD’s Articles of Agreement also state that the former member has continuing obligations to IBRD after withdrawal. Specifically, the former member remains fully liable for its entire capital subscription, including both the previously paid-in portion and the callable portion, so long as any part of the loans or guarantees contracted before it ceased to be a member are outstanding. Transfers Approved by the Board of Governors: In accordance with IBRD’s Articles of Agreement, as interpreted by the Executive Directors, the Board of Governors may exercise its reserved power to approve transfers to other entities for development purposes. These transfers, which are included in Board of Governors-approved and other transfers on the Statement of Income, are reported as expenses when incurred, upon approval. The transfers are funded either from the immediately preceding fiscal year’s Net Income, Surplus, or Restricted Retained Earnings. Retained Earnings: Retained Earnings consist of allocated amounts (Special Reserve, General Reserve, Pension Reserve, Surplus, Cumulative Fair Value Adjustments, Restricted Retained Earnings) and Unallocated Net Income (Loss). The Special Reserve consists of loan commissions set aside pursuant to Article IV, Section 6 of the Articles of Agreement, which are to be held in liquid assets. These assets may be used only for the purpose of meeting liabilities of IBRD on its borrowings and guarantees in the event of defaults on loans made, participated in, or guaranteed by IBRD. The Special Reserve assets are included under Investments-Trading, and comprise obligations of the United States Government, its agencies, and other official entities. The allocation of such commissions to the Special Reserve was discontinued in 1964 with respect to subsequent loans and no further additions are being made to it. The General Reserve consists of earnings from prior fiscal years which, in the judgment of the Executive Directors, should be retained in IBRD’s operations. 90 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 The Pension Reserve consists of the difference between the cumulative actual funding of the Staff Retirement Plan and Trust (SRP) and other postretirement benefits plans, and the cumulative accounting income or expense for these plans, from prior fiscal years. This reserve is reduced when pension accounting expenses exceed the actual funding of these plans. In addition, the Pension Reserve also includes investment revenue earned on the Post-Employment Benefits Plan (PEBP) portfolio as well as Post Retirement Contribution Reserve Fund (PCRF), which is used to stabilize IBRD’s contributions to the pension plan. Surplus consists of earnings from prior fiscal years which are retained by IBRD until a further decision is made on their disposition or the conditions of transfer for specified uses have been met. Cumulative Fair Value Adjustments consist of the effects associated with the application of Financial Accounting Standards Board’s (FASB’s) fair value guidance relating to prior fiscal years. This amount includes the cumulative effect of the adoption of this guidance, the reclassification and amortization of the transition adjustments, and the unrealized gains or losses on non-trading portfolios. Restricted Retained Earnings consists of contributions or revenue from prior years which are restricted as to their purpose. Unallocated Net Income (Loss) consists of the current fiscal year’s net income (loss) adjusted for Board of Governors-approved and other transfers. Loans and Other Exposures: All of IBRD’s loans are made to or guaranteed by countries that are members of IBRD, except for those loans made to IFC. IBRD currently does not sell or intend to sell its loans. The majority of IBRD’s loans have repayment obligations based on specific currencies. IBRD also holds multicurrency loans which have repayment obligations in various currencies determined on the basis of a currency pooling system. Loans are carried at amortized cost. Commitment charges on the undisbursed balance of loans are recognized in revenue as earned. Any loan origination fees incorporated in the terms of a loan are deferred and recognized over the life of the loan as an adjustment of the yield. The unamortized balance of loan origination fees is included as a reduction of the Loans outstanding on the Balance Sheet, and the loan origination fee amortization is included in Interest revenue from Loans, net on the Statement of Income. It is IBRD’s practice not to reschedule interest or principal payments on its loans or participate in debt rescheduling agreements with respect to its loans. When modifications are made to the terms of existing loans, IBRD performs an evaluation to determine the required accounting treatment, including whether the modifications would result in the affected loans being accounted for as new loans, or as a continuation of the existing loans. It is the policy of IBRD to place into nonaccrual status all loans and other exposures (exposures) made to or guaranteed by a member of IBRD if principal, interest, or other charges with respect to any such exposures are overdue by more than six months, unless IBRD’s management determines that the overdue amount will be collected in the immediate future. IBRD considers all exposures in nonaccrual status to be impaired. In addition, if loans and other exposures made by IDA to a member government are placed in nonaccrual status, all loans and other exposures made to, or guaranteed by, that member government will also be placed in nonaccrual status by IBRD. On the date a member’s exposures are placed into nonaccrual status, unpaid interest and other charges accrued on exposures to the member are deducted from the revenue of the current period. Interest and other charges on nonaccruing exposures are included in revenue only to the extent that payments have been received by IBRD. If collectability risk is considered to be particularly high at the time of arrears clearance, the member’s exposures may not automatically emerge from nonaccrual status. In such instances, a decision on the restoration of accrual status is made on a case-by-case basis and in certain cases that decision may be deferred until a suitable period of payment performance has passed. Guarantees: Financial guarantees are commitments issued by IBRD to guarantee payment performance by a member country (the debtor) to a third party in the event that a member government (or a government-owned entity) fails to perform its contractual obligations to a third party. Guarantees are regarded as outstanding when the underlying financial obligation of the debtor is incurred, and called when a guaranteed party demands payment under the guarantee. IBRD would be required to perform under its guarantees if the payments guaranteed were not made by the debtor and the guaranteed party called the guarantee by demanding payment from IBRD in accordance with the terms of the guarantee. In the event that a guarantee of a member country is called, IBRD has the contractual right to require payment from the member country. IBRD records the fair value of the obligation to stand ready in Accounts payable and miscellaneous liabilities, and a corresponding fees receivable asset in the Accrued income on loans line on IBRD’s Balance Sheet. Upfront guarantee fees received are deferred and amortized over the life of the guarantee. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 91 IBRD records a contingent liability for the probable losses related to guarantees outstanding. 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 Accounts payable and miscellaneous liabilities on the Balance Sheet. Exposure Exchange Agreements (EEAs): IBRD executes EEAs with various organizations. While these agreements are not legally considered guarantees, in IBRD’s financial statements they are recognized as financial guarantees as they meet the accounting criteria for financial guarantees. Under an EEA, each party exchanges credit risk exposure of a portfolio supported by underlying loans to borrowers, by providing and receiving guarantees from each other, for the amounts specified. The guarantee provided and the guarantee received are two separate transactions; namely (a) the provision of a financial guarantee, and (b) the receipt of an asset, respectively. There is generally no exchange of cash between the organizations for these transactions. For a guarantee provided under an EEA, IBRD records a liability equivalent to the fair value of the obligation to stand ready. This liability is included in Other liabilities on the Balance Sheet and is amortized over the life of the EEA. IBRD also records a liability, and corresponding expense, in recognition of the risk coverage provided (provision). The value of this liability reflects the credit quality of the underlying loans in the portfolio and changes over the life of the EEA as the credit quality of these loans changes. For a guarantee received under an EEA, IBRD records an asset equivalent to the fair value of the right to be indemnified. This asset is included in Other assets on the Balance Sheet and is amortized over the life of the EEA. IBRD also records an asset, and corresponding income, in recognition of the risk coverage received (recoverable asset). The value of this asset reflects the credit quality of the underlying loans in the portfolio and changes over the life of the EEA contract as the credit quality of these loans changes. Accumulated Provision for Losses on Loans and Other Exposures: Management determines the appropriate level of accumulated provisions for losses on exposures, which reflects the probable losses inherent in IBRD’s exposures. Probable losses comprise estimates of potential losses arising from default and nonpayment of principal amounts due, as well as present value losses. There are several steps required to determine the appropriate level of provisions. First, the exposures are disaggregated into two groups: exposures in accrual status and exposures in nonaccrual status. In each group, exposures for each borrower are then assigned a credit risk rating of that borrower. With respect to countries with exposures in accrual status, these exposures are grouped according to the assigned borrower risk rating. The determination of borrower’s ratings is based on various factors (see Note D—Loans and other exposures). Second, each risk rating is mapped to an expected default frequency using IBRD's credit migration matrix. Finally, the provision required is calculated by multiplying the outstanding exposure, by the expected default frequency (probability of default to IBRD) and by the estimated severity of the loss given default. The severity of loss, which is assessed periodically and is based on historical experience of IBRD, is dependent on the borrower’s eligibility, namely: IBRD, Blend (IBRD and IDA) and IDA, with the highest severity of loss associated with IDA. The borrower’s eligibility is assessed at least annually. Management reassesses the adequacy of the accumulated provision and the reasonableness of the inputs used, on a periodic basis, at least annually, and adjustments to the accumulated provision are recorded as a charge or release of provision in the Statement of Income. This methodology is also applied to countries with exposures in nonaccrual status, however, at times, to reflect certain distinguishing circumstances of a particular nonaccrual situation, Management may use different input assumptions for a particular country. Generally, all exposures in nonaccrual status have the same risk rating. Delays in receiving loan payments result in present value losses to IBRD since it does not charge additional interest on any overdue interest or loan charges. These present value losses are equal to the difference between the present value of payments of interest and charges made according to the related loan's contractual terms and the present value of its expected future cash flows. It is IBRD’s practice not to write off its overdue loans. All contractual obligations associated with exposures in nonaccrual status have eventually been cleared, thereby allowing borrowers to eventually emerge from nonaccrual status. To date, no loans have been written off. When IBRD receives a third-party guarantee in the form of a credit enhancement that is embedded in the loan agreement with the borrower, it considers the benefit of the credit enhancement in the loan loss provisioning credit risk assessment. Statement of Cash Flows: For the purpose of IBRD's Statement of Cash Flows, cash is defined as the amount of Unrestricted cash and Restricted cash under the Due from banks line on the Balance Sheet. Restricted Cash: This includes amounts which have been received from members as part of their capital subscriptions, as well as from donors and other sources, which are restricted for specified purposes. For capital subscriptions, a portion of these subscriptions have been paid to IBRD in the national currencies of the members. 92 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 These amounts are usable by IBRD in its lending and investing operations, only with the consent of the respective members, and for administrative expenses incurred in national currencies. Investments: Investment securities are classified based on Management’s intention on the date of purchase, their nature, and IBRD’s policies governing the level and use of such investments. As of June 30, 2019, all of the financial instruments in IBRD’s investment portfolio were classified as trading. These securities are carried and reported at fair value, or at face value or net asset value per share (NAV), which approximate fair value. Where available, quoted market prices are used to determine the fair value of trading securities. These include most government and agency securities, futures contracts, exchange-traded equity securities, Asset-backed Securities (ABS) and Mortgage-backed Securities To-Be-Announced (TBA securities). 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 market observable 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. Derivative instruments used in liquidity management are not designated as hedging instruments. Interest revenue is included in the Investments-Trading, net line in the Statement of Income. Unrealized gains and losses for investment securities and related financial instruments held in the trading portfolio are included in the Unrealized mark-to-market gains (losses) on Investments-Trading portfolio, net line in the Statement of Income. Realized gains and losses on trading securities are recognized in the Statement of Income when securities are sold. IBRD may require collateral in the form of approved liquid securities from individual counterparties or cash, 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, IBRD 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 only recorded on IBRD'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 Lent Under Securities Lending Agreements and Securities Sold Under Repurchase Agreements and Payable for Cash Collateral Received: Securities purchased under resale agreements, securities lent under securities lending agreements, and securities sold under repurchase agreements are reported at face value which approximates fair value, as they are short term in nature. IBRD 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 repurchase and security lending arrangements and the securities transferred to IBRD under 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–Trading, net on the Statement of Income. The interest expense pertaining to the securities sold under repurchase agreements and security lending arrangements, is included in the Borrowings, net line in the Statement of Income. Nonnegotiable, Noninterest-bearing Demand Obligations on Account of Subscribed Capital: All demand obligations are held in bank accounts, which bear IBRD’s name and are carried and reported at face value as a reduction to equity. Payments on some of these instruments are due to IBRD upon demand. Others are due to IBRD on demand, but only after the Bank’s callable subscribed capital has been entirely called pursuant to Article IV, Section 2 (a) of the Articles of Agreement. Premises and Equipment: Premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. IBRD computes depreciation and amortization using the straight-line method over the estimated useful lives of the owned assets, which range between two and fifty years. For leasehold improvements, depreciation and amortization is computed over the lesser of the remaining term of the leased facility or the estimated economic life of the improvement. Maintenance and repairs are charged to expense as incurred, while major improvements are capitalized and amortized over the estimated useful life. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 93 Borrowings: To ensure funds are available for lending and liquidity purposes, IBRD borrows in the international capital markets, offering its securities (discount notes, vanilla and structured bonds) to private and governmental buyers. IBRD issues debt instruments of varying maturities denominated in various currencies with both fixed and variable interest rates. IBRD fair values all the financial instruments in the borrowing portfolio, and up until June 30, 2018, all changes in fair value were recognized in the related Unrealized mark-to-market gains and losses on non-trading portfolios, net, line in the Statement of Income. Since the fair value option has been elected for these instruments, starting July 1, 2018, changes in the fair value that relate to IBRD’s own credit risk, are reported in Other Comprehensive Income (OCI) as a 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 IBRD’s cost of funding relative to LIBOR. Discount notes and plain vanilla bonds are valued using the standard discounted cash flow method which relies on market observable 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. Structured bonds issued by IBRD have coupon or repayment terms linked to the level or the performance of interest rates, foreign exchange rates, equity indices, catastrophic events or commodities. The fair value of the structured bonds is generally derived using the discounted cash flow method based on estimated future pay-offs determined by applicable models and computation of embedded optionality such as caps, floors and calls. A wide range of industry standard models such as one factor Hull-White, Libor Market Model and Black-Scholes are used depending on the specific structure. These models incorporate market observable inputs, such as yield curves, foreign exchange rates, basis spreads, funding spreads, interest rate volatilities, equity index volatilities and equity indices. Where applicable, the models also incorporate significant unobservable inputs such as correlations and long-dated interest rate volatilities. Generally, the movements in correlations are considered to be independent of movements in long- dated interest rate volatilities. For the purpose of the Statement of Cash Flows, the short-term borrowings, if any, which have original maturities less than 90 days, are presented on a net basis. By contrast, short-term borrowings with original maturities greater than 90 days are presented on a gross basis. Interest expense relating to all debt instruments in IBRD’s borrowing portfolio is measured on an effective yield basis and is reported as part of Borrowings, net in the Statement of Income. For presentation purposes, amortization of discounts and premiums is included in Borrowings, net in the Statement of Income. Accounting for Derivatives: IBRD 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 values accounted for through the Statement of Income.   Through March 31, 2019, the presentation of derivative instruments on IBRD’s Balance Sheet was consistent with the manner in which these instruments are settled; interest rate swaps are settled on a net basis and were presented on a net basis and currency swaps are settled on a gross basis and were presented on a gross basis. Starting from June 30, 2019, the presentation of derivative instruments on IBRD’s Balance Sheet has been changed to align with the preferable accounting treatment and prevailing market practice of netting derivative asset and liability positions and the related cash collateral received by 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 now presented on a net basis by instrument. A master netting agreement is an industry standard agreement with a counterparty that permits multiple transactions governed by that agreement to be terminated or accelerated and settled through a single payment in a single currency in the event of a default (e.g., bankruptcy, failure to make a required payment or securities transfer or deliver collateral when due). Obligations under master netting agreements are often secured by collateral posted under an industry standard credit support annex to the master netting agreement. Upon default by the counterparty, the collateral agreement grants an entity the right to set-off any amounts payable by the counterparty against any posted collateral. IBRD uses derivative instruments in its investment trading portfolio to manage interest rate and currency risks. These derivatives are carried and reported at fair value. Interest revenue/expenses are reflected as part of Interest revenue, while unrealized mark-to-market gains and losses on these derivatives are reflected as part of the related Unrealized mark-to-market gains (losses) in Investments-Trading, net line in the Statement of Income. 94 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 IBRD also uses derivatives in its loan, borrowing and asset/liability management activities. In the loan and borrowing portfolios, derivatives are used to modify the interest rate and/or currency characteristics of these portfolios. The interest component of these derivatives is recognized as an adjustment to the related loan revenue and borrowing costs over the life of the derivative contracts and is included in the related Interest revenue/expenses lines on the Statement of Income. Changes in fair values of these derivatives are accounted for through the Statement of Income as Unrealized mark-to-market gains and losses in non-trading portfolios, net. For the purpose of the Statement of Cash Flows, IBRD has elected to report the cash flows associated with the derivative instruments that are used to economically hedge its loans, investments and borrowings, in a manner consistent with the presentation of the related loan, investment and borrowing cash flows. Derivative contracts include currency forward contracts, TBA securities, swaptions, exchange traded options and futures contracts, currency swaps and interest rate swaps. Currency swaps and interest rate swaps are either plain vanilla or structured. Currency forward contracts and plain vanilla currency and interest rate swaps are valued using the standard discounted cash flow methods using market observable inputs such as yield curves, foreign exchange rates, basis spreads and funding spreads. For structured currency and interest rate swaps, which primarily consist of callable swaps linked to interest rates, foreign exchange rates, and equity indices, valuation models and inputs similar to the ones applicable to structured bond valuations are used. Where applicable, the models also incorporate significant unobservable inputs such as correlations and long-dated interest rate volatilities. Most outstanding derivative positions are transacted over-the-counter and therefore valued using internally developed valuation models. For commercial and non-commercial counterparties where IBRD has a net exposure (net receivable position), IBRD calculates a Credit Valuation Adjustment (CVA) to reflect credit risk. For net derivative positions with commercial and non-commercial counterparties where IBRD is in a net payable position, IBRD calculates a DVA to reflect its own credit risk. The CVA is calculated using the fair value of the derivative contracts, net of collateral received under credit support agreements, and the probability of counterparty default based on the CDS spread and, where applicable, proxy CDS spreads. The DVA calculation is generally consistent with the CVA methodology and incorporates IBRD’s own credit spread as observed through the CDS market. Valuation of Financial Instruments: IBRD has an established and documented process for determining fair values. Fair value is based upon quoted market prices for the same or similar securities, where available. Financial instruments for which quoted market prices are not readily available are valued based on discounted cash flow models and other established valuation models. These models primarily use market-based or independently-sourced market parameters such as yield curves, interest rates, volatilities, foreign exchange rates and credit curves, and may incorporate unobservable inputs, some of which may be significant. Selection of these inputs may involve some judgment. In instances where Management relies on instrument valuations supplied by external pricing vendors, there are procedures in place to validate the appropriateness of the models used as well as inputs applied in determining those values. The fair value of certain instruments is calculated using NAV as a practical expedient. To ensure that the valuations are appropriate where internally-developed models are used, IBRD has various controls in place, which include both internal and periodic external verification and review. As of June 30, 2019 and June 30, 2018, IBRD had no financial assets or liabilities measured at fair value on a non-recurring basis. Fair Value Hierarchy: Financial instruments are categorized based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), the next highest priority to observable market-based inputs or inputs that are corroborated by market data (Level 2) and the lowest priority to unobservable inputs that are not corroborated by market data (Level 3). Financial assets and liabilities recorded at fair value on the Balance Sheet are categorized based on the inputs to the valuation techniques as follows: Level 1: Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: Financial assets and liabilities whose values are based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or pricing models for which all significant inputs are observable, either directly or indirectly for substantially the full term of the asset or liability. Level 3: Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 95 IBRD’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur. Investments measured at NAV (or its equivalent) are not classified in the fair value hierarchy. Accounting for Grant Expenses: IBRD recognizes an expense for grants, such as Contributions to Special Programs, and Board of Governors-approved and other transfers, when these have been incurred. Donor Receivables and Donor Contributions to Trust Funds: To the extent that IBRD acts as an intermediary agent for certain beneficiaries or for trust funds, assets held on behalf of specified beneficiaries are recorded on IBRD’s Balance Sheet, along with corresponding liabilities. Donor Receivables: Donors’ conditional promises to give are not recognized until the conditions to which they are subject are substantially met and the promise to give is considered unconditional. Donors’ unconditional promises to give are recognized as revenue when they are received, unless the donor specifies a third-party beneficiary. For the latter, IBRD is deemed to be acting as an intermediary agent, and assets held on behalf of the specified beneficiaries are recognized along with corresponding liabilities. If the contributions that IBRD receives can only be used for purposes specified by the donor, the proceeds are considered restricted until applied by IBRD for the donor- specified purposes. Donor promises to give, which are expected to be collected within one year, are recorded at face value, while promises expected to be collected over a period greater than one year are recorded initially at fair value based on the discounted cash flow method, with subsequent measurement on an amortized cost basis. Donor Contributions to Trust Funds: For those IBRD-executed trust funds where IBRD acts as an intermediary agent, undisbursed third-party donor contributions are recorded as assets held on behalf of the specified beneficiaries, with corresponding liabilities. Amounts disbursed from these trust funds are recorded as expenses with corresponding amounts recognized as revenues. For Recipient-executed trust funds, since IBRD acts as a trustee, no assets or liabilities relating to these activities are recorded on the Balance Sheet. In some trust funds, execution is split between Recipient-executed and IBRD-executed portions. Decisions on assignment of funding resources between the two types of execution may be made on an ongoing basis, therefore, the execution of a portion of these available resources may not yet be assigned. IBRD also acts as a financial intermediary to provide specific administrative or financial services with a limited fiduciary or operational role. These arrangements, referred to as Financial Intermediary Funds, include, for example, administration of debt service trust funds, financial intermediation and other more specialized limited fund management roles. For these arrangements, funds are held and disbursed in accordance with instructions from donors or, in some cases, an external governance structure or a body operating on behalf of donors. For Financial Intermediary Funds, since IBRD acts as a trustee, no assets or liabilities relating to these activities are recorded on the Balance Sheet. Accounting and Reporting Developments Evaluated accounting standards: In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU and its subsequent amendments provide a common framework for revenue recognition for U.S. GAAP, and supersede most of the existing revenue recognition guidance in US GAAP. For IBRD, the revenue streams within the scope largely relate to the provision of technical assistance and knowledge under Reimbursable Advisory Services (RAS), asset management, and trustee services to clients and donors. IBRD adopted the ASUs in the quarter ended September 30, 2018, using a modified retrospective approach under which all changes in revenue recognition are reflected in the period of adoption. The impact of adopting this standard was immaterial as less than 1% of IBRD’s revenue was affected by the new requirements. The adoption of the ASU also resulted in additional disclosures reflected in Note H—Transactions with Affiliated Organizations. In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU makes targeted amendments to existing guidance on recognition and measurement of financial instruments that primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The new guidance requires that changes in the fair value of financial liabilities measured under the fair value option that are attributable to instrument-specific credit risk are recognized in Other Comprehensive Income (OCI). For IBRD, the ASU became effective from the quarter ended September 30, 2018. Upon adoption, IBRD recorded a cumulative effect adjustment of $155 million attributable to changes in instrument-specific credit risk (DVA) for financial liabilities measured under the fair value option. The adjustment 96 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 was a reclassification from retained earnings to accumulated OCI. The adoption of the provisions of the ASU related to the instrument-specific credit risk required changes to the Statement of Comprehensive Income, the Statement of Changes in Retained Earnings, Note G—Retained Earnings, Allocations and Transfers and Note K—Accumulated Other Comprehensive Loss, which are related to DVA. Further amendments were made to Note D—Loans and other exposures, in line with the ASU’s disclosure requirements. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU and its subsequent amendments require that a lessee recognizes on the balance sheet the assets and liabilities that arise from all leases with a lease term of more than twelve months. The recognition, measurement, and presentation of expenses and cash flows by the lessee will primarily depend on the classification of the lease as finance or operating. The accounting applied by a lessor remains largely unchanged from the current guidance, with some targeted improvements. For IBRD, the ASUs are effective from the quarter ending September 30, 2019. IBRD has evaluated these ASUs and determined that the impact on the financial statements is not material. In June 2018, the FASB issued ASU 2018-8, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The ASU, which applies to all entities that receive or make contributions, clarifies and improves current guidance about whether a transfer of assets should be accounted for as a contribution or an exchange transaction, and provides additional guidance about how to determine whether a contribution is conditional. For contributions received, the ASU became effective from the quarter ended September 30, 2018. IBRD has evaluated the ASU and determined that the guidance on contributions received has no impact on its financial statements. IBRD has also evaluated the impact of the portion of the ASU applicable to contributions made, which will be effective from the quarter ending September 30, 2019 and determined that there will be no impact on its financial statements. Given the immateriality of the amounts subject to reclassification under the following ASUs, IBRD has applied the requirements prospectively upon effectiveness, from the quarter ended September 30, 2018: In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU provides classification guidance on eight specific cash flow classification issues for which US GAAP did not provide guidance. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The ASU requires that the amounts of restricted cash and cash equivalents are included in the total of cash and cash equivalents at the beginning and end of the period in the Statement of Cash Flows. In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires that an employer reports the service cost component of net benefit cost in the same line item as other compensation costs. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and are not eligible for capitalization. It also resulted in additional disclosures reflected in Note J – Pension and Other Postretirement Benefits. Accounting standards under evaluation: In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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. Current U.S. GAAP requires an “incurred loss” methodology for recognizing credit losses. The new model, referred to as 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 IBRD, the ASUs will be effective from the quarter ending September 30, 2020. IBRD is currently evaluating the impact of these ASUs on its financial statements. In August 2018, the FASB issued the following three ASUs. IBRD is currently evaluating the impact of these ASUs on its financial statements: ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which amends certain disclosure requirements of ASC 820. The guidance will be effective for IBRD from the quarter ending September 30, 2020, with early adoption permitted. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 97 ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 disclosure requirements related to defined benefit pension and other postretirement plans for annual periods. The guidance will be effective for IBRD from the fiscal year ending June 30, 2021, with early adoption permitted. ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance will be effective for IBRD from the quarter ending September 30, 2020, with early adoption permitted. NOTE B—CAPITAL STOCK, MAINTENANCE OF VALUE, AND MEMBERSHIP Capital Stock: The following table provides a summary of the changes in IBRD's authorized and subscribed shares due to the recent General Capital Increases (GCI) and Selective Capital Increases (SCI): Table B1: IBRD’s shares Authorized shares Subscribed shares As of June 30, 2017 2,307,600 2,229,344 General Capital Increase (GCI) - 48,020 As of June 30, 2018 2,307,600 2,277,364 General and Selective Capital Increase (GCI/SCI) 476,273 43,295 As of June 30, 2019 2,783,873 2,320,659 The subscription period for the GCI and SCI agreed by shareholders in 2010 ended on March 16, 2018 and March 16, 2017, respectively.   On October 1, 2018, IBRD’s Board of Governors approved two resolutions that increase IBRD’s authorized capital. The total increase in authorized capital was $57.5 billion, of which, $27.8 billion and $29.7 billion relate to the GCI and SCI, respectively. In addition, shares that were previously unallocated after the 2010 GCI and SCI are made available for subscription under the 2018 SCI. Under the terms of the 2018 GCI and SCI, paid-in capital is expected to increase by up to $7.5 billion over the next five years.  The following table provides a summary of the changes in subscribed capital, uncalled portion of subscriptions, and paid-in capital: Table B2: IBRD’s capital In millions of U.S. dollars Uncalled portion Subscribed capital of subscriptions Paid-in capital As of June 30, 2017 $ 268,937 $ (252,828) $ 16,109 GCI 5,793 (5,446) 347 As of June 30, 2018 274,730 (258,274) 16,456 GCI/SCI 5,223 (4,618) 605 As of June 30, 2019 $ 279,953 $ (262,892) $ 17,061 The uncalled portion of subscriptions is subject to call only when required to meet the obligations incurred by IBRD as a result of borrowings, or guaranteeing loans. 98 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 Amounts to Maintain the Value of Currency Holdings The following table summarizes the amounts to maintain the value of currency holdings (MOV) classified as components of equity: Table B3: MOV balances In millions of U.S. dollars June 30, 2019 June 30, 2018 MOV receivable $ (292) $ (313) Net Deferred MOV payable 154 157 Deferred demand obligations (130) (130) Deferred MOV payable $ 24 $ 27 NOTE C—INVESTMENTS As of June 30, 2019, IBRD’s investments include the liquid asset portfolio and holdings relating to the PEBP, Advanced Market Commitment for Pneumococcal Vaccines Initiative (AMC), and the PCRF. The composition of IBRD’s net investment portfolio was as follows: Table C1: Net investment portfolio composition In millions of U.S. dollars June 30, 2019 June 30, 2018 Net investment portfolio Liquid asset portfolio $ 78,900 $ 71,579 PEBP holdings 1,605 1,393 AMC holdings 252 250 PCRF holdings 370 270 Total $ 81,127 $ 73,492 Investments held by IBRD are designated as trading and are carried and reported at fair value, or at face value, which approximates fair value. As of June 30, 2019, the majority of Investments-Trading was comprised of time deposits and government and agency obligations (48% and 46%, respectively), with all the instruments being classified as Level 1 or Level 2 within the fair value hierarchy. As of June 30, 2019, exposure to one counterparty was in excess of 10% of total Investments-Trading. This related to Japanese instruments that represented the largest holding of a single counterparty, amounting to 21% of Investments-Trading. Over 99% of IBRD’s investments were rated A and above, as of June 30, 2019. The majority of instruments in Investments-Trading are denominated in U.S. dollars, Japanese yen and Euro (51%, 22% and 10%, respectively). IBRD uses derivative instruments to manage the associated currency and interest rate risk in the portfolio. After considering the effects of these derivatives, IBRD’s investment portfolio has an average repricing of 0.22 years, and is predominantly denominated in U.S. dollars (99%). A summary of IBRD’s Investments-Trading is as follows: Table C2: Investments-Trading composition In millions of U.S. dollars June 30, 2019 June 30, 2018 Alternative investments a $ 436 $ 345 ABS 3,730 3,962 Equity securities b 724 672 Government and agency obligations 37,279 29,610 Time deposits 39,078 37,763 Total $ 81,247 $ 72,352 a. Comprised of investments in hedge funds, private equity funds and real estate funds, related to PEBP holdings, at NAV. b. Includes $409 million of investments in commingled funds at NAV, related to PEBP holdings ($295 million—June 30, 2018).   IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 99 The following table summarizes the currency composition of IBRD’s Investments-Trading: Table C3: Investments-Trading currency composition In millions of U.S. dollars June 30, 2019 June 30, 2018 Average repricing Average repricing Currency Carrying Value (years) a Carrying Value (years) a Euro $ 8,000 0.14 $ 9,026 0.29 Japanese yen 17,531 0.19 11,902 0.16 U.S. dollar 41,233 0.37 34,775 0.22 Others 14,483 0.54 16,649 0.39 Total $ 81,247 0.34 $ 72,352 0.26 a. The average repricing represents the remaining period to the contractual repricing or maturity date, whichever is earlier. This indicates the average length of time for which interest rates are fixed. Equity securities are not subject to repricing. IBRD manages its investments on a net portfolio basis. The following table summarizes IBRD’s net portfolio position whereby the presentation of derivative instrument is on a net instrument basis: Table C4: Net investment portfolio position In millions of U.S. dollars       June 30, 2019         June 30, 2018     Investments - Trading $ 81,247 $ 72,352 Securities purchased under resale agreements   168 217 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received a   (341) (122) Derivative assets           Currency swaps and forward contracts   156 823 Interest rate swaps   43   60 Other   1   * Total 200 883 Derivative liabilities Currency swaps and forward contracts   (647) (120) Interest rate swaps   (72) (43) Other   (1) (3) Total (720) (166) Cash held in investment portfolio b   626 407 Receivable from investment securities traded c   67 83 Payable for investment securities purchased d   (120) (162) Net investment portfolio $ 81,127 $ 73,492 a. Includes $331 million of cash collateral received from counterparties under derivative agreements ($92 million—June 30, 2018). b. This amount is included in Unrestricted cash under Due from banks on the Balance Sheet. c. This amount is included in Other receivables on the Balance Sheet. d. This amount includes $114 million of liabilities related to PCRF payable, which is included in Accounts payable and miscellaneous liabilities on the Balance Sheet ($80 million—June 30, 2018). * Indicates amount less than $0.5 million. The following table summarizes the currency composition of IBRD’s net investment portfolio: Table C5: Net investment portfolio currency composition In millions of U.S. dollars June 30, 2019 June 30, 2018 Carrying Average repricing Carrying Average repricing Currency Value (years) a Value (years) a U.S. dollar $ 80,451 0.22 $ 72,664 0.16 Others 676 0.47 828 1.36 Total $ 81,127 0.22 $ 73,492 0.16 a. The average repricing represents the remaining period to the contractual repricing or maturity date, whichever is earlier. This indicates the average length of time for which interest rates are fixed. Equity securities are not subject to repricing. IBRD uses derivative instruments to manage currency and interest rate risk in the investment portfolio. For details regarding these instruments, see Note F—Derivative Instruments. 100 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 As of June 30, 2019, there were no short sales included in Payable for investment securities purchased on the Balance Sheet ($37 million—June 30, 2018). These are reported at fair value on a recurring basis. Fair Value Disclosures The following tables present IBRD’s fair value hierarchy for investment assets and liabilities measured at fair value on a recurring basis. Note that the fair value of alternative investments and certain equities is calculated using NAV. As a result, these amounts are included in the respective asset class totals and not in the fair value hierarchy, in accordance with the permitted practical expedient under U.S. GAAP. Table C6: Fair value hierarchy of investment assets and liabilities In millions of U.S. dollars Fair Value Measurements on a Recurring Basis June 30, 2019 Level 1 Level 2 Level 3 Total Assets:                             Investments – Trading                             Alternative investments a $ -   $ -   $ -   $ 436 ABS -     3,730     -     3,730 Equity securities 315     -     -     724b Government and agency obligations 24,022     13,257     -     37,279 Time deposits 2,079     36,999     -     39,078 Total Investments – Trading $ 26,416 $ 53,986 $ - $ 81,247    Securities purchased under resale agreements 10     158             168 Total $ 26,426 $ 54,144 $ - $ 81,415    Liabilities:                             Securities sold under repurchase agreements and securities lent under securities lending agreements c $ -   $ 10   $ -   $ 10 Total $ - $ 10 $ - $ 10    a. Investments at NAV related to PEBP holdings, not included in the fair value hierarchy. b. Includes $409 million of commingled funds at NAV, related to PEBP holdings and not included in the fair value hierarchy. c. Excludes $331 million relating to payable for cash collateral received.   IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 101 Table C6.1 In millions of U.S. dollars Fair Value Measurements on a Recurring Basis June 30, 2018 Level 1 Level 2 Level 3 Total Assets:                             Investments – Trading                             Alternative investments a $ -   $ -   $ -   $ 345 ABS -     3,962     -     3,962 Equity securities 377     -     -     672b Government and agency obligations 14,403     15,207     -     29,610 Time deposits 2,147     35,616     -     37,763 Total Investments – Trading $ 16,927 $ 54,785 $ - $ 72,352    Securities purchased under resale agreements 41     176     ‐        217 Total $ 16,968 $ 54,961 $ - $ 72,569    Liabilities:                             Securities sold under repurchase agreements and securities lent under securities lending agreements c $ -   $ 30   $ -   $ 30 Total $ - $ 30 $ - $ 30    a. Investments at NAV related to PEBP holdings, not included in the fair value hierarchy. b. Includes $295 million of commingled funds at NAV, related to PEBP holdings and not included in the fair value hierarchy. c. Excludes $92 million relating to payable for cash collateral received. During the fiscal years ended June 30, 2019, and June 30, 2018, there were no transfers between levels of the fair value hierarchy. Commercial Credit Risk For the purpose of risk management, IBRD 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 by obligors and counterparties under the terms of the contracts. For all securities, IBRD limits trading to a list of authorized dealers and counterparties. In addition, IBRD receives collateral in connection with resale agreements as well as swap agreements. This collateral serves to mitigate IBRD’s exposure to credit risk. Swap Agreements: Credit risk is mitigated through the application of eligibility criteria and volume limits for transactions with individual counterparties and through the use of mark-to-market collateral arrangements for swap transactions. IBRD may require collateral in the form of cash or other approved liquid securities from individual counterparties in order to mitigate its credit exposure. IBRD has entered into master derivative agreements, which contain legally enforceable close-out netting provisions. These agreements may further reduce the gross credit risk exposure related to the swaps. Credit risk with financial assets subject to a master derivatives arrangement is further reduced under these agreements to the extent that payments and receipts with the counterparty are netted at settlement. The reduction in exposure as a result of these netting provisions can vary due to the impact of changes in market conditions on existing and new transactions. The extent of the reduction in exposure may, therefore, change substantially within a short period of time following the balance sheet date. For more information on netting and offsetting provisions see note F—Derivative Instruments. 102 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 The following is a summary of the collateral received by IBRD in relation to swap transactions: Table C7: Collateral received In millions of U.S. dollars   June 30, 2019 June 30, 2018 Collateral received                 Cash $ 331   $ 92   Securities   985     1,365   Total collateral received $ 1,316 $ 1,457 Collateral permitted to be repledged $ 1,316   $ 1,457   Amount of collateral repledged   -     -   Amount of Cash Collateral invested $ 129   $ 31   Securities Lending: IBRD may engage in securities lending and repurchases against adequate collateral, as well as secured borrowing and reverse repurchases (resales) of government and agency obligations, corporate securities and ABS. These transactions have been conducted under legally enforceable master netting arrangements, which allow IBRD to reduce its gross credit exposure related to these transactions. For balance sheet presentation purposes, IBRD presents its securities lending and repurchases, as well as resales, on a gross basis. As of June 30, 2019, and June 30, 2018, there were no amounts which could potentially be offset as a result of legally enforceable master netting arrangements. Securities lending and repurchase agreements expose IBRD to several risks, including counterparty risk, reinvestment risk, and risk of a collateral gap (increase or decrease in the fair value of collateral pledged). IBRD has procedures in place to ensure that trading activity and balances under these agreements are below predefined counterparty and maturity limits, and to actively manage net counterparty exposure, after collateral, through daily mark-to-market. Whenever the collateral pledged by IBRD related to its borrowings under repurchase agreements and securities lending agreements declines in value, the transaction is re-priced as appropriate by returning cash or pledging additional collateral. The following is a summary of the carrying amount of the securities transferred under repurchase or securities lending agreements, and the related liabilities: Table C8: Amounts related to securities transferred under repurchase or securities lending agreements In millions of U.S. dollars June 30, 2019 June 30, 2018 Financial Statement Presentation Securities transferred under Included under Investments-Trading on the repurchase or securities lending $ 10 $ 29 Balance Sheet. agreements Included under Securities sold under Liabilities relating to securities repurchase agreements, securities lent transferred under repurchase or $ 10 $ 30 under securities lending agreements, securities lending agreements and payable for cash collateral received, on the Balance Sheet. Transfers of securities by IBRD to counterparties are not accounted for as sales as the accounting criteria for the treatment as a sale have not been met. Counterparties are permitted to repledge these securities until the repurchase date. At June 30, 2019, and June 30, 2018, there were no liabilities relating to securities transferred under repurchase or securities lending agreements that had not settled at those dates. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 103 The following tables present the disaggregation of the gross obligation by class of collateral pledged and the remaining contractual maturities for repurchase or securities lending agreements that are accounted for as secured borrowings: Tables C9: Composition of liabilities related to securities transferred under repurchase or securities lending agreements In millions of U.S. dollars June 30, 2019 Remaining contractual maturity of the agreements Overnight and Up to 30 days Total continuous Repurchase or securities lending agreements Government and agency obligations $ 7 $ - $ 7 Equity securities 3 - 3 Total liabilities relating to securities transferred under $ 10 $ - $ 10 repurchase or securities lending agreements In millions of U.S. dollars June 30, 2018 Remaining contractual maturity of the agreements Overnight and Up to 30 days Total continuous Repurchase or securities lending agreements Government and agency obligations $ 14 $ - $ 14 Equity securities 16 - 16 Total liabilities relating to securities transferred under $ 30 $ - $ 30 repurchase or securities lending agreements In the case of resale agreements, IBRD receives collateral in the form of liquid securities and is permitted to repledge these securities. While these transactions are legally considered to be true purchases and sales, the securities received are not recorded on IBRD’s Balance Sheet as the accounting criteria for treatment as a sale have not been met. As of June 30, 2019 and June 30, 2018, there were no unsettled trades pertaining to securities purchased under resale agreements. For resale agreements, IBRD received securities with a fair value of $168 million ($218 million—June 30, 2018). As of June 30, 2019, and June 30, 2018, none of these securities had been transferred under repurchase or security lending agreements. NOTE D—LOANS AND OTHER EXPOSURES IBRD’s loans and other exposures (exposures) are generally made to, or guaranteed by, member countries of IBRD. In addition, IBRD may also make loans to the IFC, an affiliated organization without any guarantee. As of June 30, 2019, all of IBRD’s loans were reported at amortized cost. IBRD’s loan portfolio includes loans with multicurrency terms, single currency pool terms, variable spread terms and fixed spread terms. At June 30, 2019, only loans with variable spread terms and fixed spread terms (including special development policy loans), were available for new commitments. As of June 30, 2019, 90% of IBRD’s loans carried variable interest rates. IBRD uses derivative instruments to manage the currency risk as well as repricing risk between its loans and borrowings. After considering the effects of these derivatives, the loan portfolio carried variable interest rates, with a weighted average interest rate of 2.91% as of June 30, 2019 (2.55%—June 30, 2018). For details regarding derivatives used in the loan portfolio see Note F— Derivative Instruments. The majority of IBRD’s loans outstanding are denominated in US dollars (78%) and Euro (19%). As of June 30, 2019, only 0.22% of IBRD’s loans were in nonaccrual status and all were related to one borrower. The total provision for losses on loans in accrual and nonaccrual status accounted for 0.81% of the total loan portfolio. Based on IBRD’s internal quality indicators, the majority of loans outstanding are in the Medium-risk or High-risk classes.   104 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 A summary of IBRD’s loans outstanding by currency and by interest rate characteristics (fixed or variable) is as follows: Table D1: Loans outstanding currency and interest rate structure In millions of U.S. dollars June 30, 2019 Euro Japanese Yen U.S. dollars Others Loans Outstanding Fixed Variable Fixed Variable Fixed Variable Fixed Variable Fixed Variable Total Multicurrency terms a                                                      Amount $ 25 $ 7 $ 25 $ 5 $ 46 $ 404 $ - $ - $ 96 $ 416 $ 512 Weighted average rate (%) b 2.78   6.62   2.78   6.62   6.07   6.42   -   -   4.37   6.43   6.04 Average Maturity (years) 3.62   -   3.62   -   2.24   -   -   -   2.96   -   0.55 Variable-spread terms                                                      Amount $ 11 $ 22,782 $ - $ 43 $ - $ 116,757 $ - $ 2,610 $ 11 $ 142,192 $ 142,203 Weighted average rate (%) b 0.51   0.38   -   0.74   -   3.30   -   9.35   0.51   2.94   2.94 Average Maturity (years) 2.13   9.82   -   3.42   -   9.43   -   9.21   2.13   9.49   9.49 Fixed-spread terms                                                      Amount $ 5,178 $ 9,629 $ 6 $ 1,186 $ 13,394 $ 21,635 $ 586 $ 458 $ 19,164 $ 32,908 $ 52,072 Weighted average rate (%) b 3.17   0.66   2.28   0.50   4.09   3.52   7.92   7.81   3.96   2.63   3.12 Average maturity (years) 10.26 9.84 1.84 8.47 6.95 9.68 9.97 9.12 7.93 9.68 9.04 Loans Outstanding                                                      Amount $ 5,214 $ 32,418 $ 31 $ 1,234 $ 13,440 $ 138,796 $ 586 $ 3,068 $ 19,271 $ 175,516 $ 194,787 Weighted average rate (%) b 3.16   0.47   2.68   0.53   4.10   3.34   7.92   9.12   3.96   2.89   3.00 Average Maturity (years) 10.21   9.82   3.28   8.26   6.93   9.45   9.97   9.20   7.91   9.50 9.34 Loans Outstanding                                                   $ 194,787 Less accumulated provision for loan losses and deferred loan income    2,035 Net loans outstanding  $ 192,752 Tables D1.1 In millions of U.S. dollars June 30, 2018 Euro Japanese yen U.S. dollars Others Loans Outstanding Fixed Variable Fixed Variable Fixed Variable Fixed Variable Fixed Variable Total Multicurrency terms a Amount $ 31 $ 7 $ 30 $ 5 $ 46 $ 405 $ - $ - $ 107 $ 417 $ 524 Weighted average rate (%) b 2.78 8.44 2.78 8.44 6.09 8.11 - - 4.22 8.11 7.32 Average Maturity (years) 4.12 - 4.11 - 2.54 - - - 3.43 - 0.70 Variable-spread terms Amount $ 14 $ 23,042 $ - $ 49 $ - $ 109,666 $ - $ 2,507 $ 14 $ 135,264 $ 135,278 Weighted average rate (%) b 0.51 0.31 - 0.73 - 2.90 - 9.20 0.51 2.58 2.58 Average Maturity (years) 2.63 10.24 - 3.87 - 9.58 - 9.77 2.63 9.69 9.69 Fixed-spread terms Amount $ 5,156 $ 9,151 $ 7 $ 177 $ 13,710 $ 20,505 $ 601 $ 480 $ 19,474 $ 30,313 $ 49,787 Weighted average rate (%) b 3.31 0.59 2.28 0.51 4.11 3.09 7.92 7.17 4.01 2.38 3.02 Average maturity (years) 10.61 9.80 2.30 3.56 7.19 8.68 10.29 9.46 8.19 9.00 8.69 Loans Outstanding Amount $ 5,201 $ 32,200 $ 37 $ 231 $ 13,756 $ 130,576 $ 601 $ 2,987 $ 19,595 $ 165,994 $ 185,589 Weighted average rate (%) b 3.30 0.39 2.68 0.71 4.11 2.95 7.92 8.87 4.01 2.55 2.71 Average Maturity (years) 10.55 10.12 3.76 3.56 7.18 9.41 10.29 9.72 8.16 9.54 9.40 Loans Outstanding $ 185,589 Less accumulated provision for loan losses and deferred loan income 2,001 Net loans outstanding $ 183,588 a. Variable rates for multicurrency loans are based on the weighted average cost of allocated debt. b. Excludes effects of any waivers of loan interest.   IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 105 The maturity structure of IBRD’s loans is as follows: Table D2: Loans maturity Structure In millions of U.S. dollars June 30,2019 July 1, 2019 through July 1, 2020 through July 1, 2024 through Terms/Rate Type June 30, 2020 June 30, 2024 June 30, 2029 Thereafter Total Multicurrency terms Fixed $ 29 $ 45 $ 22 $ - $ 96 Variable 416 - - - 416 Variable-spread terms Fixed 3 8 - - 11 Variable 5,832 31,278 46,545 58,537 142,192 Fixed-spread terms Fixed 1,632 5,531 4,957 7,044 19,164 Variable 1,893 7,953 8,750 14,312 32,908 All Loans Fixed 1,664 5,584 4,979 7,044 19,271 Variable 8,141 39,231 55,295 72,849 175,516 Total loans outstanding $ 9,805 $ 44,815 $ 60,274 $ 79,893 $ 194,787 Table D2.1 In millions of U.S. dollars June 30, 2018 July 1, 2018 through July 1, 2019 through July 1, 2023 through Terms/Rate Type June 30, 2019 June 30, 2023 June 30, 2028 Thereafter Total Multicurrency terms Fixed $ 29 $ 45 $ 33 $ - $ 107 Variable 417 - - - 417 Variable-spread terms Fixed 3 11 - - 14 Variable 5,735 28,237 43,446 57,846 135,264 Fixed-spread terms Fixed 1,839 5,122 5,177 7,336 19,474 Variable 2,145 8,107 7,889 12,172 30,313 All Loans Fixed 1,871 5,178 5,210 7,336 19,595 Variable 8,297 36,344 51,335 70,018 165,994 Total loans outstanding $ 10,168 $ 41,522 $ 56,545 $ 77,354 $ 185,589 Credit Quality of Sovereign Exposures Based on an evaluation of IBRD’s exposures, management has determined that IBRD has one portfolio segment – Sovereign Exposures. IBRD’s loans constitute the majority of the Sovereign Exposures portfolio segment. IBRD’s country risk ratings are an assessment of its borrowers’ ability and willingness to repay IBRD on time and in full. These ratings are internal credit quality indicators. Individual country risk ratings are derived on the basis of both quantitative and qualitative analysis. The components considered in the analysis can be grouped broadly into eight categories: political risk, external debt and liquidity, fiscal policy and public debt burden, balance of payments risks, economic structure and growth prospects, monetary and exchange rate policy, financial sector risks, and corporate sector debt and vulnerabilities. For the purpose of analyzing the risk characteristics of IBRD’s exposures, these exposures are grouped into three classes in accordance with assigned borrower risk ratings, which relate to the likelihood of loss: Low, Medium and High risk classes, as well as exposures in nonaccrual status. IBRD considers all exposures in nonaccrual status to be impaired. IBRD’s borrowers’ country risk ratings are key determinants in the provision for 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. 106 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 IBRD considers loans to be past due when a borrower fails to make payment on any principal, interest or other charges due to IBRD on the dates provided in the contractual loan agreement. The following tables provides an aging analysis of the loan portfolio: Table D3: Loan portfolio aging structure  In millions of U.S. dollars June 30, 2019 Days past due Up to 45 46-60 61-90 91-180 Over 180 Total Past Due Current Total Risk Class Low $ - $ - $ - $ - $ - $ - $ 23,608 $ 23,608 Medium - - - - - - 85,244 85,244 High 4 - - 19 - 23 85,478 85,501 Loans in accrual status 4 - - 19 - 23 194,330 194,353 Loans in nonaccrual status - - - - 434 434 - 434 Total $ 4 $ - $ - $ 19 $ 434 $ 457 $ 194,330 $ 194,787 Table D3.1 In millions of U.S. dollars June 30, 2018 Days past due Up to 45 46-60 61-90 91-180 Over 180 Total Past Due Current Total Risk Class Low $ - $ - $ - $ - $ - $ - $ 23,606 $ 23,606 Medium - - - - - - 76,153 76,153 High - - - - - - 85,395 85,395 Loans in accrual status - - - - - - 185,154 185,154 Loans in nonaccrual status - - - - 435 435 - 435 Total $ - $ - $ - $ - $ 435 $ 435 $ 185,154 $ 185,589 Accumulated Provision for Losses on Loans and Other Exposures Management determines the appropriate level of accumulated provisions for losses, which reflects the probable losses inherent in IBRD’s exposures. The risk of losses associated with nonpayment of principal amounts due is included in the accumulated provision for losses on loans and other exposures. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 107 Changes to the Accumulated provision for losses on loans and other exposures are summarized below: Table D4: Accumulated provisions In millions of U.S. dollars June 30,2019 June 30, 2018 June 30, 2017 Loans Other a Total Loans Other a Total Loans Other a Total Accumulated provision, beginning of the fiscal year $ 1,553 $ 92 $ 1,645 $ 1,582 $ 89 $ 1,671 $ 1,571 $ 79 $ 1,650 Provision - (release) charge 28 22 50 (34) 3 (31) 2 9 11 Translation adjustment (7) (*) (7) 5 * 5 9 1 10 Accumulated provision, end of the fiscal year $ 1,574 $ 114 $ 1,688 $ 1,553 $ 92 $ 1,645 $ 1,582 $ 89 $ 1,671 Composed of accumulated provision for losses on: Loans in accrual status $ 1,357 $ 1,336 $ 1,365 Loans in nonaccrual status 217 217 217 Total $ 1,574 $ 1,553 $ 1,582 Loans, end of the fiscal year: Loans at amortized cost in accrual status $ 194,353 $ 185,154 $ 179,020 Loans at amortized cost in nonaccrual status 434 435 435 Total $ 194,787 $ 185,589 $ 179,455 a. Provision does not include the recoverable asset received under the EEAs for guarantee received (for more details see Guarantees section). * Indicates amount less than $0.5 million. Reported as follows Balance Sheet Statement of Income Accumulated Provision for Losses on: Loans Accumulated provision for loans losses Provision for losses on loans and other exposures Other exposures (excluding exposures Accounts payable and miscellaneous Provision for losses on loans and other to member countries’ derivatives) Liabilities Exposures Exposures to member countries’ Derivative Assets, net Unrealized mark-to-market gains/losses Derivatives on non-trading portfolios - Other, net At June 30, 2019, principal installments of $19 million from one borrower were overdue by more than three months. These overdue installments have been subsequently received. The following tables provide a summary of selected financial information related to loans in nonaccrual status as of and for the stated fiscal years: Table D5: Loans in nonaccrual status In millions of U.S. dollars June 30, 2019 June 30, 2018 Recorded investment in nonaccrual loans a $ 434 $ 435 Accumulated provision for loan losses on nonaccrual loans 217 217 Average recorded investment in nonaccrual loans for the fiscal year b 434 435 Overdue amounts of nonaccrual loans: 988 954 Principal 434 435 Interest and charges 554 519 a. A loan loss provision has been recorded against each of the loans in nonaccrual status. b. For the fiscal year ended June 30, 2017: $440 million. Table D5.1 In millions of U.S. dollars          2019 2018 2017 Interest revenue not recognized as a result of loans being in nonaccrual status $ 33 $ 35 $ 35 During the fiscal years ended June 30, 2019 and June 30, 2018, no loans were placed into nonaccrual status or restored to accrual status. In addition, during the fiscal year ended June 30, 2019, less than $1 million interest revenue was recognized on loans in nonaccrual status (Nil—June 30, 2018 and $4 million—June 30, 2017). 108 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 Information relating to the sole borrowing member with loans or guarantees in nonaccrual status is as follows: Table D6: Country in nonaccrual status In millions of U.S. dollars    Principal Principal, Interest and Nonaccrual Borrower Outstanding Charges Overdue Since Zimbabwe $ 434 $ 988 October 2000 Guarantees Guarantees of $7,429 million were outstanding at June 30, 2019 ($6,357 million—June 30, 2018). This amount represents the maximum potential amount of undiscounted future payments that IBRD could be required to make under these guarantees, and is not included in the Balance Sheet. These guarantees have original maturities ranging between 5 and 20 years, and expire in decreasing amounts through 2039. At June 30, 2019, liabilities related to IBRD's obligations under guarantees of $510 million ($427 million—June 30, 2018), have been included in Accounts payable and miscellaneous liabilities on the Balance Sheet. These include the accumulated provision for guarantee losses of $108 million ($86 million—June 30, 2018). During the fiscal years ended June 30, 2019 and June 30, 2018, no guarantees provided by IBRD were called. IBRD participates in EEAs with MIGA, for $120 million (see Note H – Transactions with Affiliated Organizations); the African Development Bank, for $1,588 million; and the Inter-American Development Bank, for $2,021 million. While these agreements are not legally considered guarantees, they meet the accounting criteria for financial guarantees and are, therefore, recognized as financial guarantees in IBRD's financial statements. Information on the location and amounts associated with the EEAs included in the Balance Sheet and Statement of Income is presented in the following table: Table D7: Amounts associated with EEA In millions of U.S. dollars June 30, 2019 June 30, 2018 (Accumulated (Accumulated (Stand ready provision) (Stand ready provision) Notional obligation) Recoverable Notional obligation) Recoverable Location on amount Asset asset amount Asset asset Balance Sheet Guarantee provided a,c $ 3,661 $ (231) $ (35) $ 3,671 $ (251) $ (36) Other liabilities Guarantee received b (3,662) 231 33 (3,672) 251 37 Other assets $ (1) $ - $ (2) $ (1) $ - $ 1 a. For the fiscal year ended June 30, 2019, Provisions for losses on loans and other exposures line on the Statement of Income includes $1 million of release in provision relating to Guarantee provided ($4 million of release in provision —June 30,2018). b. For the fiscal year ended June 30, 2019, Other, net, line on the Statement of Income includes $4 million of reduction in recoverable asset relating to Guarantee received ($3 million of reduction in recoverable asset —June 30,2018). c. Notional amount, Stand ready obligation and Provision for the guarantee provided are included in guarantees outstanding of $7,429 million, obligations under guarantees of $510 million and accumulated provision for guarantee losses of $108 million, respectively ($6,357 million, $427 million and $86 million, respectively—June 30, 2018). Waivers of Loan Charges IBRD provides waivers on eligible loans, which include a portion of interest on loans, a portion of the commitment charge on undisbursed balances and a portion of the front-end fee charged on all eligible loans. Partial waivers are approved annually by the Executive Directors of IBRD. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 109 The reduction in net income resulting from waivers of loan charges, is summarized in the following table: Table D8: Waivers of loan charges In millions of U.S. dollars 2019 2018 2017 Interest waivers $ 42 $ 55 $ 67 Commitment charge waivers * * 1 Front-end fee waivers 7 10 12 Total $ 49 $ 65 $ 80 * Indicates amount less than $0.5 million. Segment Reporting Based on an evaluation of IBRD’s operations, Management has determined that IBRD has only one reportable segment since financial results are reviewed and resource allocation decisions are made at the entity level. Concentration Risk Loan revenue comprises interest, commitment fees, loan origination fees and prepayment premia, net of waivers. For the fiscal year ended June 30, 2019, loans to one country individually generated in excess of 10 percent of loan revenue; this amounted to $612 million. The following table presents IBRD’s loan revenue and associated outstanding loan balances by geographic region, as of and for the stated fiscal years: Table D9: Loan revenue and associated outstanding loan balances In millions of U.S. dollars 2019 2018 Region Loans Outstanding Loan Revenue b Loans Outstanding Loan Revenue b Africa $ 5,034 $ 266 $ 4,577 $ 269 East Asia and Pacific 42,320 1,382 39,511 977 Europe and Central Asia 45,442 852 46,522 658 Latin America and the Caribbean 58,623 2,004 56,693 1,576 Middle East and North Africa 27,125 678 23,272 449 South Asia 16,243 505 15,014 329 Other a - - - * Total $ 194,787 $ 5,687 $ 185,589 $ 4,258 a. Represents loans to IFC, an affiliated organization. b. Does not include interest expenses, net of $410 million from loan related derivatives ($656 million—June 30, 2018). Includes commitment charges of $107 million ($87 million—June 30, 2018). * Indicates amount less than $0.5 million. Fair Value Disclosures The table below presents the fair value of all IBRD’s loans, along with their respective carrying amounts: Table D10: Fair value and carrying value of loans In millions of U.S. dollars June 30, 2019 June 30, 2018 Carrying Value Fair Value Carrying Value Fair Value Net loans outstanding $ 192,752 $ 197,367 $ 183,588 $ 186,650 For disclosure purposes, IBRD’s loans would be classified as Level 3 within the fair value hierarchy. 110 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 NOTE E—BORROWINGS IBRD issues unsubordinated and unsecured fixed and variable rate debt in a variety of currencies. Some of these debt instruments are callable. Variable rates may be based on, for example, exchange rates, interest rates or equity indices. Borrowings issued by IBRD are carried and reported at fair value. As of June 30, 2019, the majority of the instruments in the portfolio were classified as Level 2, within the fair value hierarchy. In addition, most of these instruments were denominated in U.S. dollars and Euro (69% and 8%, respectively). IBRD uses derivatives to manage the repricing risk between loans and borrowings. After the effect of these derivatives, the borrowing portfolio carried variable interest rates, with a weighted average cost of 2.22 % as of June 30, 2019 (1.82% as of June 30, 2018). The following table summarizes IBRD’s borrowing portfolio after derivatives:  Table E1: Borrowings after derivatives In millions of U.S. dollars June 30, 2019 June 30, 2018 Borrowings a $ 230,180 $ 208,009 Currency swaps, net 1,929 3,737 Interest rate swaps, net (3,346) 1,906 $ 228,763 $ 213,652 a. Includes $431 million of unsettled borrowings, representing a non-cash financing activity, for which there is a corresponding receivable included in Miscellaneous assets on the Balance Sheet ($126 million—June 30, 2018). For details regarding the derivatives used in the borrowing portfolio, see Note F—Derivative Instruments. The following table provides a summary of the interest rate characteristics of IBRD’s borrowings:  Table E2: Interest rate composition of Borrowings In millions of U.S. dollars June 30, 2019 WAC a (%) June 30, 2018 WAC a (%) Fixed $ 180,156 2.32 $ 165,051 2.24 Variable 46,070 2.42 44,490 2.45 Borrowings b $ 226,226 2.34 % $ 209,541 2.29 % Fair Value Adjustment 3,954 (1,532) Borrowings at fair value $ 230,180 $ 208,009 a. WAC refers to weighted average cost. b. At amortized cost. The currency composition of debt in IBRD’s borrowings portfolio before derivatives was as follows:   Table E3: Currency composition of Borrowings (before derivatives) June 30, 2019 June 30, 2018 U.S. Dollar 68.9 % 69.5 % Euro 7.8 7.9 Australian dollar 5.3 6.0 Pound Sterling 6.0 3.9 Others 12.0 12.7 100.0 % 100.0 % IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 111 The maturity structure of IBRD’s borrowings outstanding was as follows:  Table E4: Maturity structure of Borrowings In millions of U.S. dollars June 30, 2019 June 30, 2018 Less than 1 year $ 50,213 $ 44,867 Between 1-2 years 42,557 39,680 2-3 years 38,361 39,702 3-4 years 21,461 27,528 4-5 years 25,742 14,350 Thereafter 51,846 41,882 $ 230,180 $ 208,009 IBRD’s borrowings have original maturities ranging from 27 days to 50 years, with the final maturity in 2069. During the fiscal year ended June 30, 2019, the amount of interest paid on zero-coupon bonds and bonds with insignificant coupon interest rates was $359 million ($636 million—June 30, 2018 and $1,736 million—June 30, 2017). Fair Value Disclosures IBRD’s fair value hierarchy for borrowings measured at fair value on a recurring basis is as follows: Table E5: Borrowings fair value hierarchy In millions of U.S. dollars June 30, 2019 June 30, 2018 Level 1 $ - $ - Level 2 225,239 203,603 Level 3 4,941 4,406 $ 230,180 $ 208,009 The following table provides a summary of changes in the fair value of IBRD’s Level 3 borrowings: Table E6: Borrowings Level 3 changes In millions of U.S. dollars 2019   2018 Beginning of the fiscal year $ 4,406 $ 2,278 Total realized/unrealized mark-to-market (gains) losses in: Net income 131 (189) Other comprehensive income a (43) 2 Issuances 876 2,481 Settlements (429) (407) Transfers into (out of), net - 241 End of the fiscal year $ 4,941 $ 4,406 a. Starting with the period ended September 30, 2018, OCI includes the DVA on Fair Value Option Elected Liabilities. Valuation adjustments on fair value option elected liabilities Starting July 1, 2018, changes in the fair value of IBRD’s financial liabilities, for which the fair value option has been elected, and that relate to IBRD’s own credit risk are recognized in OCI as a DVA. The following table provides information on the changes in fair value due to the change in IBRD’s own credit risk for financial liabilities measured under the fair value option, included in the Statement of Other Comprehensive Income: Table E7: Changes in fair value due to IBRD’s own credit risk In millions of U.S. dollars Unrealized mark-to-market (losses)/gains due to DVA on fair value option elected liabilities 2019 DVA on Fair Value Option Elected Liabilities $ 551 Amounts reclassified to net income upon derecognition of a liability   (1) Net change in DVA on Fair Value Option Elected Liabilities $ 550 112 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 The following table provides information on the cumulative changes in fair value due to the change in IBRD’s own credit risk for financial liabilities measured under the fair value option, as well as where those amounts are included in the Balance Sheet: Table E8: Cumulative changes in fair value due to the change in IBRD’s own-credit risk In millions of U.S. dollars DVA on fair value option elected liabilities As of June 30, 2019 Reported as follows:   Accumulated other comprehensive loss $ 705 The following table provides information on the unrealized mark-to-market gains or losses included in the statement of income for the stated fiscal years, relating to IBRD’s Level 3 borrowings still held at the reporting periods as well as where those amounts are included in the Statement of Income. Table E9: Unrealized mark-to-market gains or losses relating to IBRD’s Level 3 borrowings In millions of U.S. dollars Unrealized mark-to-market gains (losses) 2019 2018 2017 Statement of Income Unrealized mark-to-market (losses) gains on non-trading portfolios, net $ 14 $ 473 $ (71) The following table provides information on the unrealized mark-to-market gains or losses included in the Statement of Income for the stated fiscal years relating to IBRD’s borrowings held the reporting period, as well as where those amounts are included in the Statement of Income. Table E10: Unrealized mark-to-market gains or losses relating to IBRD’s borrowings In millions of U.S. dollars Unrealized mark-to-market (losses) gains 2019 2018 2017 Statement of Income Unrealized mark-to-market (losses) gains on non-trading portfolios, net $ (6,066) $ 3,070 $ 4,558 IBRD’s Level 3 borrowings primarily relate to structured bonds. The fair value of these bonds is estimated using discounted cash flow valuation models that incorporate model parameters, observable market inputs, and unobservable inputs. The significant unobservable inputs used in the fair value measurement of structured bonds are correlations and long-dated interest rate volatilities. Generally, the movements in correlations are considered to be independent of the movements in long-dated interest rate volatilities. Correlation is the statistical measurement of the relationship between two variables. For contracts where the holder benefits from the convergence of the underlying index prices (e.g. interest rates and foreign exchange rates), an increase in correlation generally results in an increase in the fair value of the instrument. The magnitude and direction of the fair value adjustment will depend on whether the holder is short or long the option. Interest rate volatility is the extent to which the level of interest rates changes over time. For purchased options, an increase in volatility will generally result in an increase in the fair value. In general, the volatility used to price the option depends on the maturity of the underlying instrument and the option strike price. In the fiscal years ended June 30, 2019, and June 30, 2018 the interest rate volatilities for certain currencies were extrapolated for certain tenors and, thus, are considered an unobservable input. In certain instances, particularly for instruments with coupon or repayment terms linked to catastrophic events, management relies on instrument valuations supplied by external pricing vendors.   IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 113 The following table provides a summary of the valuation technique applied in determining fair values of the Level 3 instruments in IBRD’s borrowings and quantitative information regarding the significant unobservable inputs used. Level 3 instruments represent 2% of IBRD’s borrowings. Table E11: Level 3 borrowings valuation technique and quantitative information regarding the significant unobservable inputs In millions of U.S. dollars Fair Value at Fair Value at Valuation Range (average), Range (average), Portfolio Unobservable input June 30, 2019 June 30, 2018 technique June 30, 2019 June 30, 2018 Discounted Correlations -34% to 79% (11%) -34% to 73% (10%) Borrowings $4,941 $4,406 Cash Flow Interest rate volatilities 23% to 94% (58%) 18% to 34% (29%) The table below provides the details of all inter-level transfers. Transfers between Level 2 and Level 3 are due to changes in the observability of inputs. Table E12: Borrowings inter-level transfers In millions of U.S. dollars June 30, 2019 June 30, 2018 Level 2 Level 3 Level 2 Level 3 Borrowings Transfer into (out of) $ - $ - $ 84 $ (84) Transfer (out of) into - - (325) 325 $ - $ - $ (241) $ 241 Presented below is the difference between the aggregate fair value and aggregate contractual principal balance of borrowings: Table E13: Borrowings fair value and contractual principal balance In millions of U.S. dollars Principal Amount Due Fair Value Upon Maturity Difference June 30, 2019 $ 230,180 $ 232,597 $ (2,417) June 30, 2018 $ 208,009 $ 216,458 $ (8,449) NOTE F—DERIVATIVE INSTRUMENTS IBRD uses derivative instruments in its investment, loan and borrowing portfolios, and for asset/liability management purposes (including equity management). It also offers derivative intermediation services to clients and concurrently enters into offsetting transactions with market counterparties. The following table summarizes IBRD’s use of derivatives in its various financial portfolios: Portfolio Derivative instruments used Purpose / Risk being managed Risk management purposes: Currency forward contracts, currency swaps, interest rate swaps, options, Manage currency and interest rate risks in the Investments swaptions and futures contracts, TBA portfolio securities Manage currency risk as well as repricing risks Loans Currency swaps, and interest rate swaps between loans and borrowings Manage currency risk as well as repricing risks Borrowings Currency swaps, and interest rate swaps between loans and borrowings Manage currency risk and stabilize interest Other assets/liabilities Currency swaps, and interest rate swaps revenue (equity management) Other purposes: Client operations Currency swaps, currency forward Assist clients in managing risks contracts, and interest rate swaps 114 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 IBRD engages in an equity management strategy, which employs interest rate swaps to stabilize its interest revenue. Under client operations, derivative intermediation services are provided to the following: Borrowing Countries: Currency and interest rate swap transactions are executed between IBRD and its borrowers under master derivatives agreements. Non-Affiliated Organizations: IBRD has a master derivatives agreement with the International Finance Facility for Immunisation (IFFIm), under which several transactions have been executed. Affiliated Organizations: Derivative contracts are executed between IBRD and IDA, under an agreement allowing IBRD to intermediate derivative contracts on behalf of IDA. As discussed in Note A, unless stated differently, 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 where appropriate. Offsetting assets and liabilities IBRD 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 IBRD the right to liquidate securities held as collateral and to offset receivables and payables with the same counterparty, in the event of default by the counterparty. The following tables summarizes information on derivative assets and liabilities (before and after netting adjustments) that are reflected on IBRD’s Balance Sheet. Gross amounts in the tables represent the amounts receivable (payable) for instruments which are in a net asset (net liability) position. The effects of legally enforceable master netting agreements are applied on an aggregate basis to the total derivative asset and liability position. The net derivative asset positions have been further reduced by the cash and securities collateral received. Table F1: Derivative assets and liabilities before and after netting adjustments In millions of U.S. dollars June 30, 2019 Location on the Balance Sheet Derivative Assets Derivative Liabilities Gross Amounts Gross Amounts Gross Amounts Net Amounts Gross Amounts Net Amounts Offset Offset Interest rate swaps $ 24,072 $ (16,907) $ 7,165 $ 24,553 $ (19,201) $ 5,352 Currency swaps a 49,988 (43,743) 6,245   96,086 (88,142) 7,944 Other b 2 (1) 1   8 (7) 1 Total $ 74,062 $ (60,651) $ 13,411 d $ 120,647 $ (107,350) $ 13,297 d Less:                     Amounts subject to legally enforceable master netting 10,240 e 10,244 f agreements                 Cash collateral received c         331           - Net derivative position on the Balance Sheet      2,840        3,053 Less:                    Securities collateral received c 796                 Net derivative exposure after collateral      $ 2,044           a. Includes currency forward contracts and structured swaps. b. These relate to swaptions, exchange traded options and future contracts and TBA securities. c. Does not include excess collateral received. d. Total is based on amounts where derivatives have been net by instrument. e. Includes $18 million CVA adjustment. f. Includes $22 million DVA adjustment. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 115 Table F1.1 In millions of U.S. dollars June 30, 2018 Location on the Balance Sheet Derivative Assets Derivative Liabilities Gross Amounts Gross Amounts Gross Amounts Net Amounts Gross Amounts Net Amounts Offset Offset Interest rate swaps $ 18,677 $ (13,986) $ 4,691 $ 37,514 $ (29,662) $ 7,852 Currency swaps a 72,225 (65,498) 6,727 73,805 (64,816) 8,989 Other b 2 (2) * 11 (8) 3 Total $ 90,904 $ (79,486) $ 11,418 d $ 111,330 $ (94,486) $ 16,844 d Less:      Amounts subject to legally enforceable master netting 8,866 e 8,912 f agreements      Cash collateral received c       92 - Net derivative position on the Balance Sheet      2,460 7,932 Less:      Securities collateral received c 1,006      Net derivative exposure after collateral     $ 1,454 a. Includes currency forward contracts and structured swaps. b. These relate to swaptions, exchange traded options and future contracts and TBA securities. c. Does not include excess collateral received. d. Total is based on amounts where derivatives have been net by instrument. e. Includes $12 million CVA adjustment. f. Includes $57 million DVA adjustment. * Indicates amount less than $0.5 million. 116 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 The following table provides information about the notional amounts and credit risk exposures of IBRD’s derivative instruments: Table F2: Notional amounts and credit risk exposure of the derivative instruments In millions of U.S. dollars Type of contract June 30, 2019 June 30, 2018 Investments - Trading             Interest rate swaps             Notional principal $ 8,996   $ 3,723 Credit exposure 43     60 Currency swaps (including currency forward contracts)           Credit exposure 156     823 Other a           Notional long position 679     998 Notional short position 38     42 Credit exposure 1 * Loans           Interest rate swaps           Notional principal 23,144     23,410 Credit exposure 38     305 Currency swaps           Credit exposure 768 837 Client operations           Interest rate swaps           Notional principal 20,520     19,029 Credit exposure 1,199     673 Currency swaps           Credit exposure 1,061 1,065 Borrowings           Interest rate swaps Notional principal 250,004 237,174 Credit exposure 4,878 2,511 Currency swaps           Credit exposure 4,260 4,002 Other derivatives           Interest rate swaps           Notional principal 151,713     157,234 Credit exposure 1,007     1,142 Currency swaps           Credit exposure - - Total credit exposure           Interest rate swaps 7,165     4,691 Currency swaps (including currency forward contracts and structured swaps) 6,245     6,727 Other 1     * Total exposure $ 13,411   $ 11,418               a. Includes swaptions, exchange traded options and futures contracts and TBAs. Exchange traded instruments are generally subject to daily margin requirements and are deemed to have no material credit risk. All swaptions, options, and futures contracts are interest rate contracts. * Indicates amount less than $0.5 million.   IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 117 IBRD is not required to post collateral under its derivative agreements as long as it maintains a triple-A credit rating. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position as of June 30, 2019 was $2,777 million ($7,791 million—June 30, 2018). IBRD has not posted any collateral with these counterparties due to its triple-A credit rating. If the credit-risk related contingent features underlying these agreements were triggered to the extent that IBRD would be required to post collateral as of June 30, 2019, the amount of collateral that would need to be posted would be $590 million ($3,986 million—June 30, 2018). Subsequent triggers of contingent features would require posting of additional collateral, up to a maximum of $2,777 million as of June 30, 2019 ($7,791 million—June 30, 2018). In contrast, IBRD received collateral totaling $1,316 million as of June 30, 2019 ($1,457 million—June 30, 2018) in relation to swap transactions (see Note C—Investments). The following table provides information on unrealized mark-to-market gains and losses on non-trading derivatives, and their location on the Statement of Income:   Table F3: Unrealized mark-to-market gains and losses on non-trading derivatives a In millions of U.S. dollars Unrealized mark-to-market gains (losses) Statement of Income line 2019 2018 2017 Interest rate swaps Unrealized mark-to-market $ 4,951 $ (2,482) $ (4,116) Currency swaps (including currency (losses) gains on non- forward contracts and structured swaps) trading portfolios, net 849 (854) (856) Total $ 5,800 $ (3,336) $ (4,972) a. For alternative disclosures about trading derivatives, see Table F4. All of the instruments in IBRD's investment portfolio are held for trading purposes. Within the investment portfolio, IBRD holds highly rated fixed income securities, equity securities as well as derivatives. The trading portfolio is primarily held to ensure the availability of funds to meet future cash flow requirements, and for liquidity management purposes. The following table provides information on the location and amount of unrealized mark-to-market gains and losses on the net investment-trading portfolio and their location on the Statement of Income: Table F4: Unrealized mark-to-market gains and losses on net investment-trading portfolio In millions of U.S. dollars Statement of Income line Unrealized mark-to-market gains on Investments-Trading portfolio a 2019 2018 2017 Type of instrument Fixed income (including associated derivatives) $ 429 $ 449 $ 241 Equity 21 33 50 $ 450 $ 482 $ 291 a. Amounts associated with each type of instrument include gains and losses on both derivative instruments and non-derivative instruments.   118 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 Fair Value Disclosures IBRD’s fair value hierarchy for derivative assets and liabilities measured at fair value on a recurring basis is as follows: Table F5: Derivative assets and liabilities fair value hierarchy In millions of U.S. dollars Fair Value Measurements on a Recurring Basis June 30, 2019 Level 1 Level 2 Level 3 Total Derivative Assets: Currency swaps and currency forward contracts a $ - $ 6,098 $ 147 $ 6,245 Interest rate swaps - 7,037 128 7,165 Other b 1 * - 1 $ 1 $ 13,135 $ 275 $ 13,411 Less: Amounts subject to legally enforceable master netting agreements c 10,240 Cash collateral received 331 Derivative Asset, net $ 2,840 Derivative Liabilities: Currency swaps and currency forward contracts $ - $ 7,735 $ 209 $ 7,944 Interest rate swaps - 5,104 248 5,352 Other b 1 * - 1 $ 1 $ 12,839 $ 457 $ 13,297 Less: Amounts subject to legally enforceable master netting agreements d 10,244 Derivative Liabilities, net $ 3,053 Table F5.1 In millions of U.S. dollars Fair Value Measurements on a Recurring Basis June 30, 2018 Level 1 Level 2 Level 3 Total Derivative Assets: Currency swaps and currency forward contracts a $ - $ 6,605 $ 122 $ 6,727 Interest rate swaps - 4,648 43 4,691 Other b - * - * $ - $ 11,253 $ 165 $ 11,418 Less: Amounts subject to legally enforceable master netting agreements c 8,866 Cash collateral received 92 Derivative Asset, net $ 2,460 Derivative Liabilities: Currency swaps and currency forward contracts $ - $ 8,761 $ 228 $ 8,989 Interest rate swaps - 7,611 241 7,852 Other b 3 - - 3 $ 3 $ 16,372 $ 469 $ 16,844 Less: Amounts subject to legally enforceable master netting agreements d 8,912 Derivative Liabilities, net $ 7,932 a. Includes structured swaps. b. These relate to swaption, exchange traded options and future contracts and TBA securties. c. Includes $18 million CVA adjustment ($12 million—June 30, 2018). d. Includes $22 million DVA adjustment ($57 million—June 30, 2018). * Indicates amount less than $0.5 million.   IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 119 The following tables provide a summary of changes in the fair value of IBRD’s Level 3 derivatives, net: Table F6: Derivatives Level 3 changes in fair value In millions of U.S. dollars June 30, 2019 June 30, 2018 Currency Interest rate Currency Interest rate swaps swaps Total swaps swaps Total Beginning of the fiscal year $ (106) $ (198) $ (304) $ 33 $ (108) $ (75) Total realized/unrealized mark-to-market (losses) gains in: Net income (80) 68 (12) (137) (123) (260) Other comprehensive income 32 (*) 32 (9) 1 (8) Issuances (4) * (4) (12) (145) (157) Settlements 97 10 107 1 178 179 Transfers, net (1) - (1) 18 (1) 17 End of the fiscal year $ (62) $ (120) $ (182) $ (106) $ (198) $ (304) * Indicates amount less than $0.5 million. Unrealized mark-to-market gains or losses included in revenue relating to IBRD’s Level 3 derivatives, net, still held at these dates as well as where those amounts are included in the Statement of Income, are presented in the following table: Table F7: Derivatives Level 3 unrealized mark-to-market gains or losses In millions of U.S. dollars Unrealized mark-to-market gains (losses) 2019 2018 2017 Statement of Income Location Unrealized mark-to-market (losses) gains on non-trading portfolios, net $ 28 $ (460) $ 8 The table below provides the details of all inter-level transfers: Table F8: Derivatives inter level transfers In millions of U.S. dollars June 30, 2019 June 30, 2018 Level 2 Level 3 Level 2 Level 3 Derivative assets, net Transfer into (out of) $ 35 $ (35) $ 154 $ (154) Transfer (out of) into - - (5) 5 35 (35) 149 (149) Derivative liabilities, net Transfer (into) out of $ (34) $ 34 $ (172) $ 172 Transfer out of (into) - - 6 (6) (34) 34 (166) 166 Transfers, net $ 1 $ (1) $ (17) $ 17 Transfers between Level 2 and Level 3 are due to changes in the observability of inputs. The fair value of IBRD’s Level 3 borrowings-related derivatives is estimated using valuation models that incorporate model parameters, observable market inputs and unobservable inputs. The significant unobservable inputs used in the fair value measurement of these derivatives are correlations and long-dated interest rate volatilities. For details on these unobservable inputs see Note E—Borrowings, where the significant unobservable inputs used in the fair value measurement of the borrowings related to these derivatives are disclosed.   120 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 The following table provides a summary of the valuation technique applied in determining fair values of these Level 3 instruments and quantitative information regarding the significant unobservable inputs used. Table F9: Level 3 derivatives valuation technique and quantitative information regarding the significant unobservable inputs: In millions of U.S. dollars Fair Value at Fair Value at Valuation Range (average), Range (average), Portfolio June 30, 2019 June 30, 2018 Technique Unobservable input June 30, 2019 June 30, 2018 Currency swaps, Correlations -34% to 79% (11%) -34% to 73% (10%) Discounted interest rate $ (182) $ (304) Cash Flow Interest rate swaps 23% to 94% (58%) 18% to 34% (29%) volatilities NOTE G—RETAINED EARNINGS, ALLOCATIONS AND TRANSFERS The changes in the components of Retained Earnings are summarized below: Table G1: Retained Earnings composition In millions of US dollars Cumulative Unallocated Restricted Special General Pension Fair Value Net Income Retained   Reserve Reserve c Reserve c Surplus Adjustments (Loss) a Earnings c Total As of June 30, 2016 $ 293   $ 26,925   $  962   $  271   $ (1,679) $     1,200   $ 24  $27,996 Net income allocation a   -    96     (24)    -     631     (703)     *    - Board of Governors- approved transfers funded from Surplus and other transfers b   -    -    -    -    -    -    -    - Net income for the year - - - - - (237) - (237) As of June 30, 2017   293    27,021    938    271    (1,048)    260    24    27,759 Net income allocation a - 672 (128) - (419) (138) 13 - Board of Governors- approved transfers funded from Surplus and other transfers b   -    -    -    (55)    -    55    -    - Net income for the year - - - - - 698 - 698 As of June 30, 2018   293    27,693    810    216    (1,467)    875    37    28,457 Net income allocation a,c -   913   (22)   -   (266)   (627)   3   - Board of Governors- approved transfers funded from Surplus and other transfers b   -    -    -    (90)    -    90    -    - Cumulative effect of change in accounting principle   -    -    -    -    (155)    -    -    (155) Net income for the year   -    -    -    -    -    505    -    505 As of June 30, 2019 $ 293 $28,606 $ 787 $ 126 $ (1,888) $ 843 $ 40 $28,807 a. Amounts retained as Surplus from the allocation of net income are approved by the Board of Governors. b. A concurrent transfer is made from Surplus to Unallocated Net Income (Loss) for all transfers reported on the Statement of Income and authorized to be funded from Surplus. c. May differ from the sum of individual figures due to rounding. * Indicates amount less than $0.5 million.     IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 121 IBRD makes net income allocation decisions on the basis of reported net income, adjusted to exclude the unrealized mark-to-market gains and losses on non-trading portfolios, net, restricted income and Board of Governors-approved and other transfers, and after considering the allocation to the pension reserve. On August 9, 2018, IBRD’s Executive Directors approved the following adjustments and allocations relating to the net income earned in the fiscal year ended June 30, 2018, to arrive at allocable income for that fiscal year:  $266 million increase in the Cumulative Fair Value Adjustments, for the Unrealized mark-to-market losses on non-trading portfolios (this excludes realized amounts).  Add back $178 million related to Board of Governors-approved transfers approved in the fiscal year ended June 30, 2018, to reported Net Income to arrive at allocable income. These transfers relate to income earned in prior fiscal years.  $913 million increase in the General Reserve.  $22 million decrease in the Pension Reserve. On September 5, 2018, IBRD’s Board of Governors approved a transfer of $90 million from Surplus to the Trust Fund for Gaza and West Bank. The transfer was made on September 14, 2018. On October 12, 2018, IBRD’s Board of Governors approved a transfer to IDA of $248 million out of the net income earned in the fiscal year ended June 30, 2018. The transfer to IDA was made on October 23, 2018. Transfers approved during the stated fiscal years are included in the following table: Table G2: Transfers approved In millions of U.S. dollars Transfers funded from: 2019 2018 2017 Unallocated Net Income: IDA $ 248 $ 123 $ 497 Surplus: Trust fund for Gaza and West Bank 90 55 - Total $ 338 $ 178 $ 497 There were no amounts payable for the transfers approved by the Board of Governors at June 30, 2019, and at June 30, 2018. NOTE H—TRANSACTIONS WITH AFFILIATED ORGANIZATIONS IBRD transacts with affiliated organizations by providing loans, administrative and derivative intermediation services, as well as through its pension and other postretirement benefit plans. In addition, IBRD provides transfers to IDA out of its net income, upon approval by the Board of Governors (see Note G—Retained Earnings, Allocations and Transfers). IBRD’s receivables from (payables to) its affiliated organizations are presented in the following table: Table H1: IBRD’s receivables and payables with affiliated organizations In millions of U.S. dollars June 30, 2019 June 30, 2018 IDA IFC MIGA Total IDA IFC MIGA Total Administrative Services $ 327 $ 67 $ 9 $ 403 $ 339 $ 41 $ 12 $ 392 Derivative Transactions a Derivative assets, net 71 - - 71 80 - - 80 Derivative liabilities, net (365) - - (365) (327) - - (327) Pension and Other Postretirement Benefits (683) (414) (15) (1,112) (676) (352) (13) (1,041) Investments - (114) - (114) - (80) - (80) Total $ (650) $ (461) $ (6) $ (1,117) $ (584) $ (391) $ (1) $ (976) a. Presented on a net basis by instrument. For details on derivative transactions relating to swap intermediation services provided by IBRD to IDA see Note F—Derivative Instruments. 122 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 The receivables (payables) balances to (from) these affiliated organizations are reported in the Balance Sheet as follows: Receivables / Payables related to:   Reported as: Loans Loans outstanding a Receivable for administrative services Other assets – Miscellaneous Net assets/liabilities for derivative transactions Derivative assets/liabilities, net Payable for pension and other postretirement benefits Other liabilities - Accounts payable and miscellaneous liabilities a. Includes amounts payable to IDA for its share of investments associated with PCRF. This payable is included in Accounts payable and miscellaneous liabilities on the Balance Sheet. Loans and Other Exposures IBRD has a Local Currency Loan Facility Agreement with IFC, which is capped at $300 million. As of June 30, 2019 and June 30, 2018, there were no loans outstanding under this facility. During the fiscal year ended June 30, 2014, IBRD entered into an EEA with MIGA under which IBRD and MIGA exchange selected exposures, with each divesting itself of exposure in countries where their lending capacities are limited, in return for exposure in countries where they have excess lending capacity. Under the agreement, IBRD and MIGA have each exchanged $120 million of notional exposure as follows: MIGA assumes IBRD's loan principal and interest exposure in exchange for IBRD's assumption of principal and interest exposure of MIGA under its Non-Honoring of Sovereign Financial Obligation agreement. As of June 30, 2019, assets related to IBRD’s right to be indemnified under this agreement amounted to $2 million ($2 million—June 30, 2018), while liabilities related to IBRD’s obligation under this agreement amounted to $2 million ($2 million—June 30, 2018). These include an accumulated provision for guarantee losses of less than $1 million ($1 million—June 30, 2018). Administrative Services Expenses jointly incurred by IBRD and IDA are allocated based on an agreed cost-sharing methodology, and amounts are settled quarterly. For the fiscal year ended June 30, 2019, IBRD’s administrative expenses are net of the share of expenses allocated to IDA of $1,795 million ($1,745 million—fiscal year ended June 30, 2018, and $1,746 million—fiscal year ended June 30, 2017). Revenue Revenue jointly earned by IBRD and IDA is allocated based on an agreed revenue-sharing methodology. Amounts are settled quarterly. For the fiscal year ended June 30, 2019, IBRD’s other revenue is net of revenue allocated to IDA of $316 million ($281 million—fiscal year ended June 30, 2018, and $247 million—fiscal year ended June 30, 2017), and is included in Revenue from externally funded activities on the Statement of Income. Revenue from externally funded activities includes revenue from contracts with customers, who are not affiliated with IBRD, as shown in tables H2 and H3 below: Table H2: Revenue from contracts with customers In millions of U.S. dollars 2019 2018 2017 Description Trust fund fees $ 90 $ 96 $ 89 Administrative and trustee services for trust funds Other 142 129 113 RAS and asset management services $ 232 $ 225 $ 202 Of which: IBRD's share $ 113 $ 113 $ 107 IDA's share 119 112 95 Each revenue stream represents compensation for services provided and the related revenue is recognized over time. IBRD’s rights to consideration are deemed unconditional, and are classified as receivables. IBRD also has an obligation to transfer certain services for which it has received consideration in advance. Such considerations are presented as contract liabilities and are subsequently recognized as revenue, when the related performance obligation is satisfied. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 123 The following table shows IBRD’s receivables and contract liabilities related to revenue from contracts with customers: Table H3: Receivables and contract liabilities related to revenue from contract with customers In millions of U.S. dollars June 30, 2019 June 30, 2018 Receivables $ 34 $ 57 Contract liabilities 161 132 The amount of fee revenue associated with services provided to affiliated organizations is included in Revenue from externally funded activities on the Statement of Income, as follows: Table H4: Fee revenue from affiliated organizations In millions of U.S. dollars 2019 2018 2017 Fees charged to IFC $ 74 $ 66 $ 68 Fees charged to MIGA 5 5 5 Pension and Other Postretirement Benefits The payable to IDA represents IDA’s net share of prepaid cost for pension and other postretirement benefit plans and PEBP assets. These will be realized over the life of the plan participants. The payables to IFC and MIGA represent their respective share of PEBP assets. The PEBP assets are managed by IBRD and are a part of the investment portfolio. For Pension and Other Postretirement Benefits-related disclosures see Note J—Pension and Other Postretirement Benefits. Derivative Transactions These relate to currency forward contracts entered into by IDA with IBRD acting as the intermediary with the market. Investments These relate to investments that IBRD has made on behalf of IFC, associated with the PCRF and are included in Investments-Trading on IBRD’s Balance Sheet. The corresponding payable to IFC is included in the amount payable for investment securities purchased. As a result, there is no impact on IBRD’s investments’ net asset value from these transactions. NOTE I—MANAGEMENT OF EXTERNAL FUNDS AND OTHER SERVICES Trust Funds IBRD, alone or jointly with one or more of its affiliated organizations, administers on behalf of donors, including members, their agencies and other entities, funds restricted for specific uses in accordance with administration agreements with donors. Specified uses could include, for example, co-financing of IBRD lending projects, debt reduction operations, technical assistance including feasibility studies and project preparation, global and regional programs, and research and training programs. These funds are held in trust with IBRD and/or IDA, and are held in a separate investment portfolio which is not commingled with IBRD and/or IDA funds. Trust fund execution may be carried out in one of two ways: Recipient-executed or IBRD-executed. Recipient-executed trust funds involve activities carried out by a recipient third-party “executing agency”. IBRD enters into agreements with and disburses funds to those recipients, who then exercise spending authority to meet the objectives and comply with terms stipulated in the agreements. IBRD-executed trust funds involve IBRD execution of activities as described in relevant administration agreements with donors, which define the terms and conditions for use of the funds. Spending authority is exercised by IBRD, under the terms of the administration agreements. The executing agency services provided by IBRD vary and include for example, activity preparation, analytical and advisory activities and project-related activities, including procurement of goods and services. 124 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 The following table summarizes the expenses pertaining to IBRD-executed trust funds: Table I1: Expenses pertaining to IBRD-executed trust funds In millions of U.S. dollars 2019 2018 2017 IBRD-executed trust fund expenses $ 603 $ 595 $ 542 These amounts are included in Administrative expenses and the corresponding revenue is included in Revenue from externally funded activities on the Statement of Income. Administrative expenses primarily relate to staff costs, travel and consultant fees. The following table summarizes all undisbursed contributions made by third party donors to IBRD-executed trust funds, recognized on the Balance Sheet: Table I2: Undisbursed contributions by third party donors to IBRD-executed trust funds In millions of U.S. dollars 2019 2018 IBRD-executed trust funds $ 602 $ 598 These amounts are included in Other assets - Miscellaneous and the corresponding liabilities are included in Accounts payable and miscellaneous liabilities on the Balance Sheet. Revenues IBRD’s revenues for the administration of trust fund operations were as follows: Table I3: Trust fund administration revenues In millions of U.S. dollars 2019 2018 2017 Revenues $ 44 $ 48 $ 47 These amounts are included in Revenue from externally funded activities on the Statement of Income. Revenue collected from donor contributions but not yet earned by IBRD totaling $68 million at June 30, 2019 ($63 million—June 30, 2018) is included in Other assets - Miscellaneous and in Accounts payable and miscellaneous liabilities, correspondingly, on the Balance Sheet. Investment Management Services IBRD offers treasury and investment management services to affiliated and non-affiliated organizations. In addition, IBRD offers asset management and technical advisory services to central banks of member countries, under the Reserves Advisory and Management Program, for capacity building and other development purposes, and receives a fee for these services. During the fiscal year ended June 30, 2019, IBRD fee revenue from investment management activities totaled $15 million ($15 million—June 30, 2018 and $14 million—June 30, 2017) is included in Revenue from externally funded activities on the Statement of Income. Other Services In June 2009, donors to AMC provided IBRD with commitments to give $1.5 billion through to December 2020, with the GAVI Alliance (GAVI) as the named beneficiary. The assets will be drawn down by GAVI in accordance with the terms of the AMC, which require that the funds be used to make payments for qualifying vaccines. Should a donor fail to pay, IBRD has committed to pay the shortfall. For this commitment, IBRD charges an annual 30 basis point premium on outstanding grant payments not yet paid by AMC donors. As of June 30, 2019, investments and receivables from donors relating to AMC had a net carrying value of $277 million ($346 million—June 30, 2018). Amounts relating to investments totaled $252 million ($250 million—as of June 30, 2018) and are included in IBRD’s investment holdings. Receivables from donors are reported in Other Assets - Miscellaneous. The corresponding payables are reflected in Accounts payable and miscellaneous liabilities. Fee revenue from these arrangements of $2 million ($1 million—June 30, 2018 and $1 million—June 30, 2017) is included in Other non interest revenue. Amounts recorded for the non-contingent and contingent obligations arising from IBRD’s obligation to pay in the event of a donor default are included in IBRD’s obligations under guarantees (Note D—Loans and Other Exposures). IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 125 NOTE J—PENSION AND OTHER POSTRETIREMENT BENEFITS IBRD, IFC and MIGA participate in the SRP, the Retired Staff Benefits Plan and Trust (RSBP) and the PEBP that cover substantially all of their staff members, retirees and beneficiaries. The SRP provides pension benefits and includes a cash balance plan. The RSBP provides certain health and life insurance benefits to eligible retirees. The PEBP provides certain pension benefits administered outside the SRP. IBRD uses a June 30th measurement date for its pension and other postretirement benefit plans. All costs, assets and liabilities associated with these plans are allocated between IBRD, IFC, and MIGA based upon their employees’ respective participation in the plans. Costs allocated to IBRD are then shared between IBRD and IDA based on an agreed cost-sharing ratio. IDA, IFC and MIGA reimburse IBRD for their proportionate share of any contributions made to these plans by IBRD. Contributions to the plans are calculated as a percentage of salary. As of June 30, 2019, the SRP and RSBP were underfunded by $1,407 million and $297 million, respectively. The PEBP, after reflecting IBRD and IDA’s share of assets which are included in the IBRD’s investment portfolio ($1,177 million), was underfunded by $925 million. The following table summarizes the benefit costs associated with the SRP, RSBP, and PEBP for IBRD and IDA: Table J1: Pension Plan benefit costs In millions of U.S. dollars SRP RSBP PEBP   2019 2018 2017 2019 2018 2017 2019 2018 2017 Benefit Cost                                        Service cost $ 471 $ 456 $ 472 $ 124 $ 123 $ 130 $ 86 $ 79 $ 74 Interest cost 733 649 604   120 113 108   71 59 51 Expected return on plan assets (1,009) (901) (857)   (161) (142) (131)   - - - Amortization of unrecognized prior service costs a 3 4 4 18 17 17 3 3 3 Amortization of unrecognized net actuarial losses a 21 76 260 - - 24 65 58 61 Net periodic pension cost $ 219 $ 284 $ 483 $ 101 $ 111 $ 148 $ 225 $ 199 $ 189 of which:                                IBRD’s share $ 99 $ 130 $ 232 $ 45 $ 51 $ 71 $ 102 $ 91 $ 91 IDA’s share 120 154 251 56 60 77 123 108 98                                                                       2019 2018 2017 Net periodic pension cost (all three plans combined)                                IBRD’s share                          $ 246 $ 272 $ 394 IDA’s share                          299 322 426                                      a. Included in Amounts reclassified into net income in Note K—Accumulated Other Comprehensive Loss.     IDA’s share of benefit costs is included as a payable to/receivable from IDA in Accounts payable and miscellaneous liabilities on the Balance Sheet (see Note H—Transactions with Affiliated Organizations). 126 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 The components of net periodic pension cost, other than the service cost component, are included in the line item Pension in the Statement of Income. As of July 1, 2018, the service cost component is included in the line item Administrative expenses. The following table provides the amounts of IBRD’s pension service cost: Table J2: Pension service cost In millions of U.S. dollars June 30, 2019 June 30, 2018   SRP RSBP PEBP Total SRP RSBP PEBP Total                                       Service cost $ 471 $ 124 $ 86 $ 681 $ 456 $ 123 $ 79 $ 658 Of which:                                 IBRD’s share a $ 213 $ 56 $ 39 $ 308 $ 209 $ 56 $ 36 $ 301 IDA’s share 258 68 47 373   247 67 43 357 a. Included in Administrative non interest expenses line on the Statement of Income for the fiscal year ended June 30, 2019 (included in Pension non interest expenses line—for the fiscal year ended June 30, 2018). The following table summarizes the Projected Benefit Obligations (PBO), fair value of plan assets, and funded status associated with the SRP, RSBP, and PEBP for IBRD and IDA. The SRP and RSBP assets are held in separate trusts and the PEBP assets are included in IBRD's investment portfolio. The assets of the PEBP are mostly invested in fixed income, equity instruments and alternative investments. Table J3: PBO, funded status and accumulated benefit obligations In millions of U.S. dollars SRP RSBP PEBP 2019 2018 2019 2018 2019 2018 Projected Benefit Obligations                                   Beginning of year $ 18,429 $ 17,741 $ 2,937 $ 2,939 $ 1,778 $ 1,592 Service cost 471   456   124   123   86   79 Interest cost 733   649   120   113   71   59 Participant contributions 159 156 26 25 10 10 Benefits paid (658) (671) (85) (87) (53) (39) Actuarial loss (gain) 1,453 98 279 (176) 210 77 End of year 20,587 18,429 3,401 2,937 2,102 1,778 Fair value of plan assets                       Beginning of year 17,969   16,756   2,837   2,593         Participant contributions 159   156   26   25         Actual return on assets 1,499   1,507   271   236         Employer contributions 211   221   55   70         Benefits paid (658)   (671)   (85)   (87)         End of year 19,180 17,969 3,104 2,837         Funded Status a $ (1,407) $ (460) $ (297) $ (100) $ (2,102) $ (1,778) Accumulated Benefit Obligations $ 19,157 $ 17,110 $ 3,401 $ 2,937 $ 1,858 $ 1,541 a. Underfunded status is included in Liabilities under retirement benefits plans, on the Balance Sheet. During the fiscal years ended June 30, 2019 and June 30, 2018, there were no amendments made to the retirement benefit plans.   IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 127 The following tables present the amounts included in Accumulated Other Comprehensive Income (Loss) relating to Pension and Other Postretirement Benefits: Table J4: Amounts included in Accumulated Other Comprehensive Loss at June 30, 2019 In millions of U.S. dollars SRP RSBP PEBP Total Net actuarial loss $ 2,818 $ 46 $ 814 $ 3,678 Prior service cost 17   77   18   112 Net amount recognized in Accumulated Other Comprehensive Loss $ 2,835 $ 123 $ 832 $ 3,790 Table J4.1: Amounts included in Accumulated Other Comprehensive Loss at June 30, 2018 In millions of U.S. dollars SRP RSBP PEBP Total Net actuarial loss (gain) $ 1,876 $ (122) $ 669 $ 2,423 Prior service cost 21   94   21   136 Net amount recognized in Accumulated Other Comprehensive Loss $ 1,897 $ (28) $ 690 $ 2,559 The estimated amounts that will be amortized from Accumulated Other Comprehensive Loss into net periodic benefit cost in the fiscal year ending June 30, 2020 are as follows: Table J5: Estimated amounts for amortization for the fiscal year ending June 30, 2020: In millions of U.S. dollars SRP RSBP PEBP Total Net actuarial loss $ 90 $ - $ 82 $ 172 Prior service cost 3 17 3 23 Net amount recognized in Accumulated Other Comprehensive Loss $ 93 $ 17 $ 85 $ 195 Assumptions The actuarial assumptions used are based on financial market interest rates, inflation expectations, past experience, and Management’s best estimate of future benefit changes and economic conditions. Changes in these assumptions will impact future benefit costs and obligations. The expected long-term rate of return for the SRP assets is a weighted average of the expected long-term (10 years or more) returns for the various asset classes, weighted by the portfolio allocation. Asset class returns are developed using a forward-looking building block approach and are not strictly based on historical returns. Equity returns are generally developed as the sum of expected inflation, expected real earnings growth and expected long-term dividend yield. Bond returns are generally developed as the sum of expected inflation, real bond yield, duration- adjusted change in yields and risk premium/spread (as appropriate). Other asset class returns are derived from their relationship to equity and bond markets. The expected long-term rate of return for the RSBP is computed using procedures similar to those used for the SRP. The discount rate used in determining the benefit obligation is selected by reference to the year-end yield of AA corporate bonds. Actuarial gains and losses occur when actual results are different from expected results. Amortization of these unrecognized gains and losses will be included in income if, at the beginning of the fiscal year, they exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. If required, the unrecognized gains and losses are amortized over the expected average remaining service lives of the employee group. 128 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 The following tables present the weighted-average assumptions used in determining the projected benefit obligations and the net periodic pension costs: Table J6: Weighted average assumptions used to determine projected benefit obligations   In percent, except years SRP RSBP PEBP 2019 2018 2017 2019 2018 2017 2019 2018 2017                       Discount rate 3.40 4.10 3.70 3.50 4.10 3.90 3.50 4.10 3.80 Rate of compensation increase 4.90 5.50 5.20         4.90 5.50 5.20 Health care growth rates                     -at end of fiscal year       6.20 6.00 5.50       Ultimate health care growth rate       3.90 4.20 4.00       Year in which ultimate rate is reached 2030 2030 2030                       Table J7: Weighted average assumptions used to determine net periodic pension cost   In percent, except years SRP RSBP PEBP 2019 2018 2017 2019 2018 2017 2019 2018 2017                       Discount rate 4.10 3.70 3.40 4.10 3.90 3.60 4.10 3.80 3.50 Expected return on plan assets 5.70 5.50 5.70 5.70 5.50 5.70       Rate of compensation increase 5.50 5.20 5.30         5.50 5.20 5.30 Health care growth rates                     -at end of fiscal year       6.00 5.50 5.30       Ultimate health care growth rate       4.20 4.00 4.00       Year in which ultimate rate is reached 2030 2030 2030 The medical cost trend rate can significantly affect the reported postretirement benefit income or costs and benefit obligations for the RSBP. The following table shows the effects of a one-percentage-point change in the assumed healthcare cost trend rate: Table J8: Effects if a one-percentage-point change in the assumed healthcare cost trend rate In millions of U.S. dollars One percentage point increase One percentage point decrease Effect on total service and interest cost $ 70   $ (52) Effect on postretirement benefit obligation $ 758 $ (580) Investment Strategy The investment policies establish the framework for investment of the plan assets based on long-term investment objectives and the trade-offs inherent in seeking adequate investment returns within acceptable risk parameters. A key component of the investment policy is to establish a Strategic Asset Allocation (SAA) representing the policy portfolio (i.e., policy mix of assets) around which the plans are invested. The SAA for the plans is reviewed in detail and reset about every three to five years, with more frequent reviews and changes if and as needed based on market conditions. The key long-term objective is to generate asset performance that is reasonable in relation to the growth rate of the underlying liabilities and the assumed sponsor contribution rates, without taking undue risks. Given the relatively long investment horizons of the SRP and RSBP, and the relatively modest liquidity needs over the short-term to pay benefits and meet other cash requirements, the focus of the investment strategy is on generating sustainable long- term investment returns through a globally diversified set of strategies including fixed income, public and private equity and real assets. The SAA is derived using a mix of quantitative analysis that incorporates expected returns and volatilities by asset class as well as correlations across the asset classes, and qualitative considerations such as the liquidity needs of the plans. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 129 The following table presents the policy asset allocation and the actual asset allocations by asset category for the SRP and RSBP: Table J9: Policy and actual asset allocations In percent SRP RSBP Policy allocation Actual Allocation (%) Policy allocation Actual Allocation (%) Asset class 2019 (%) 2019 2018 2019 (%) 2019 2018 Fixed income and Cash 23 20 19 23 22 20 Credit Strategy 5 6 - 5 6 - Public equity 31 30 31 31 28 30 Private equity 20 21 19 20 23 21 Market neutral hedge funds 8 10 11 8 8 10 Real assetsa 13 12 14 13 12 13 Otherb - 1 6 - 1 6 Total 100 100 100 100 100 100 a. Includes public and private real estate, infrastructure and timber. b. Includes authorized investments that are outside the policy allocations primarily in long-term private credit funds. In April 2018, the revised SAAs for SRP and RSBP were approved with an effective date of July 1, 2018. The new SAAs introduce a five percent allocation to ‘credit strategies’ by proportionally reducing the allocation to fixed income and global equities. Significant Concentrations of Risk in Plan Assets The assets of the SRP and RSBP are diversified across a variety of asset classes. Investments in these asset classes are further diversified across funds, managers, strategies, geographies and sectors, to limit the impact of any individual investment. In spite of such level of diversification, equity market risk remains the primary source of the overall return volatility of the Plans. As of June 30, 2019, the largest exposure to a single counterparty was 7% and 6% of the plan assets in SRP and RSBP, respectively. Risk Management Practices Managing investment risk is an integral part of managing the assets of the Plans. Asset diversification is central to the overall investment strategy and risk management approach for the pension plans. Absolute risk indicators such as the overall return volatility and drawdown of the Plans are the primary measures used to define the risk tolerance level and establish the overall level of investment risk. In addition, the level of active risk (defined as the annualized standard deviation of portfolio returns relative to those of the policy portfolio) is closely monitored and managed on an ongoing basis. Market risk is regularly monitored at the absolute level, as well as at the relative levels with respect to the investment policy, manager benchmarks, and liabilities of the Plans. Stress tests are performed periodically using relevant market scenarios to assess the impact of extreme market events. Monitoring of performance (at both manager and asset class levels) against benchmarks, and compliance with investment guidelines, are carried out on a regular basis as part of the risk monitoring process. Risk management for different asset classes is tailored to their specific characteristics and is an integral part of the external managers’ due diligence and monitoring processes. Credit risk is monitored on a regular basis and assessed for possible credit event impacts. The liquidity position of the Plans is analyzed at regular intervals and periodically tested using various stress scenarios to ensure that the Plans have sufficient liquidity to meet all cash flow requirements. In addition, the long-term cash flow needs of the Plans are considered during the SAA exercise and are one of the main drivers in determining maximum allocation to the illiquid investment vehicles. The plans mitigate operational risk by maintaining a system of internal controls along with other checks and balances at various levels. 130 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 Fair Value Measurements and Disclosures All plan assets are measured at fair value on a recurring basis. The following table presents the fair value hierarchy of major categories of plan assets: Table J10: Plan assets fair value hierarchy In millions of U.S. dollars June 30, 2019 SRP RSBP Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Debt securities Discount notes and time deposits $ 25 $ 52 $ - $ 77 $ 3 $ 9 $ - $ 12 Securities purchased under resale agreements 124 - - 124 17 - - 17 Government and agency securities 2,162 471 - 2,633 384 81 - 465 Corporate and convertible bonds - 467 - 467 - 74 - 74 ABS - 159 - 159 - 25 - 25 Mortgage backed securities - 327 - 327 - 51 - 51 Total debt securities 2,311 1,476 - 3,787 404 240 - 644 Equity securities Stocks 2,704 - - 2,704 385 - - 385 Mutual funds 13 - - 13 27 - - 27 Real estate investment trusts (REITs) 145 - - 145 23 - - 23 Total equity securities 2,862 - - 2,862 435 - - 435 Other funds at NAV a Commingled funds - - - 3,147 - - - 471 Private equity funds - - - 5,108 - - - 901 Real estate funds (including infrastructure and timber) - - - 2,155 - - - 350 Hedge funds - - - 2,006 - - - 278 Total other funds - - - 12,416 - - - 2,000 Derivative assets/liabilities 5 (1) - 4 1 (*) - 1 Other assets/liabilities, net b - - - 111 - - - 24 Total assets $ 5,178 $ 1,475 $ - $ 19,180 $ 840 $ 240 $ - $ 3,104 a. Investments measured at fair value using NAV have not been included under the fair value hierarchy. b. Includes receivables and payables carried at amounts that approximate fair value. * Indicates amount less than $0.5 million. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 131 J10.1 In millions of U.S. dollars June 30, 2018 SRP RSBP Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Debt securities Discount notes and time deposits $ 25 $ 8 $ - $ 33 $ 4 $ 1 $ $ 5 Securities purchased under resale agreements 179 - - 179 33 - - 33 Government and agency securities 1,893 419 - 2,312 330 78 - 408 Corporate and convertible bonds - 423 - 423 - 68 - 68 ABS - 177 - 177 - 27 - 27 Mortgage backed securities - 262 - 262 - 42 - 42 Total debt securities 2,097 1,289 - 3,386 367 216 - 583 Equity securities Stocks 2,983 - - 2,983 407 - - 407 Mutual funds 158 - - 158 56 - - 56 Real estate investment trusts (REITs) 304 - - 304 43 - - 43 Total equity securities 3,445 - - 3,445 506 - - 506 Other funds at NAV a Commingled funds - - - 2,567 - - - 389 Private equity funds - - - 4,238 - - - 729 Real estate funds (including infrastructure and timber) - - - 2,104 - - - 318 Hedge funds - - - 2,200 - - - 308 Total other funds - - - 11,109 - - - 1,744 Derivative assets/liabilities 5 6 - 11 1 1 - 2 Other assets/liabilities, net b - - - 18 - - - 2 Total assets $ 5,547 $ 1,295 $ - $ 17,969 $ 874 $ 217 $ - $ 2,837 a. Investments measured at fair value using NAV have not been included under the fair value hierarchy. b. Includes receivables and payables carried at amounts that approximate fair value. Valuation Methods and Assumptions The following are general descriptions of asset categories, as well as the valuation methodologies and inputs used to determine the fair value of each major category of Plan assets. It is important to note that the investment amounts in the asset categories shown in the table above may be different from the asset category allocation shown in the Investment Strategy section of the note. Asset classes in the table above are grouped by the characteristics of the investments held. The asset class break-down in the Investment Strategy section is based on Management’s view of the economic exposures after considering the impact of derivatives and certain trading strategies. Debt securities Debt securities include discount notes and time deposits, U.S. treasuries and agencies, debt obligations of foreign governments, sub-sovereigns and debt obligations in corporations of domestic and foreign issuers. Fixed income also includes investments in ABS such as collateralized mortgage obligations and mortgage backed securities. These securities are valued by independent pricing vendors at quoted market prices for the same or similar securities, where available. If quoted market prices are not available, fair values are based on discounted cash flow models using market- based parameters such as yield curves, interest rates, volatilities, foreign exchange rates and credit curves. Some debt securities are valued using techniques which require significant unobservable inputs. The selection of these inputs may involve some judgment. Management believes its estimates of fair value are reasonable given its processes for obtaining securities prices from multiple independent third-party vendors, ensuring that valuation models are reviewed and validated, and applying its approach consistently from period to period. Unless quoted prices are available, money market instruments and securities purchased under resale agreements are reported at face value which approximates fair value. Equity securities Equity securities (including REITs) represent investments in companies in various industries and countries. Investments in public equity listed on securities exchanges are valued at the last reported sale price on the last business day of the fiscal year. 132 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 Commingled funds Commingled funds are typically collective investment vehicles, such as trusts that are reported at NAV as provided by the investment manager or sponsor of the fund based on valuation of underlying investments. Private equity funds Private equity funds include investments primarily in leveraged buyouts, distressed investments and venture capital funds across North America, Europe and Asia in a variety of sectors. A large number of these funds are in the investment phase of their life cycle. Private Equity investments do not have a readily determinable fair market value and are reported at NAV provided by the fund managers, taking into consideration the latest audited financial statements of the funds. Private equity funds also include private credit investments which comprise direct lending and opportunistic credit funds. Direct lending funds provide private financing to performing medium-size companies primarily owned by private equity sponsors. Opportunistic credit strategies (including distressed debt and multi-strategy funds) have flexible mandates to invest across both public and private markets globally. Private credit investments do not have a readily determinable fair market value and are reported at NAV provided by the fund managers, taking into consideration the latest audited financial statements of the funds. Real estate funds (including infrastructure and timber) Real estate includes several funds which invest in core real estate as well as non-core type of real estate investments such as debt, value add, and opportunistic equity investments. Real estate investments do not have a readily determinable fair market value and are reported at NAV provided by the fund managers, taking into consideration the latest audited financial statements of the funds. Hedge funds Hedge fund investments include those seeking to maximize absolute returns using a broad range of strategies to enhance returns and provide additional diversification. Hedge Funds include investments in equity, event driven, fixed income, multi strategy and macro relative value strategies. These investments do not have a readily determinable fair market value and are reported at NAV provided by external managers or fund administrators (based on the valuations of underlying investments) on a monthly basis, taking into consideration the latest audited financial statements of the funds. Investments in hedge funds and commingled funds can typically be redeemed at NAV within the near term while investments in private equity and most real estate are inherently long-term and illiquid in nature with a quarter lag in reporting by the fund managers. Reporting of those asset classes with a reporting lag, Management estimates are based on the latest available information taking into account underlying market fundamentals and significant events through the balance sheet date. Investment in derivatives Investment in derivatives such as equity or bond futures, TBA securities, swaps, options and currency forwards are used to achieve a variety of objectives that include hedging interest rates and currency risks, gaining desired market exposure of a security, an index or currency exposure and rebalancing the portfolio. Over-the-counter derivatives are reported using valuations based on discounted cash flow methods incorporating market observable inputs. Estimated Future Benefit Payments The following table shows the benefit payments expected to be paid in each of the next five years and subsequent five years. The expected benefit payments are based on the same assumptions used to measure the benefit obligation: Table J11: Expected Benefit Payments In millions of U.S. dollars SRP RSBP PEBP July 1, 2019 - June 30, 2020 $ 862 $ 74 $ 64 July 1, 2020 - June 30, 2021 887 81 67 July 1, 2021 - June 30, 2022 913 88 70 July 1, 2022 - June 30, 2023 943 95 74 July 1, 2023 - June 30, 2024 976 102 79 July 1, 2024 - June 30, 2029 $ 5,368 $ 617 $ 476 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 133 Expected Contributions IBRD’s contribution to the SRP and RSBP varies from year to year, as determined by the Pension Finance Committee, which bases its judgment on the results of annual actuarial valuations of the assets and liabilities of the SRP and RSBP. The best estimate of the amount of contributions expected to be paid to the SRP and RSBP by IBRD and IDA during the fiscal year beginning July 1, 2019 is $211 million and $55 million, respectively. NOTE K—ACCUMULATED OTHER COMPREHENSIVE LOSS Comprehensive income consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income. Comprehensive income (loss) comprises currency translation adjustments, the cumulative effects of a change in accounting principle related to the implementation of U.S. GAAP requirements, pension-related items, and net income. These items are presented in the Statement of Comprehensive Income. Effective from the fourth quarter of the fiscal year ended June 30, 2019, IBRD changed its functional currencies to U.S. dollars and Euro. This change does not impact previously issued financial statements. IBRD recorded translation adjustments relating to non-functional currencies in the Statement of Income from the fourth quarter of the fiscal year ended June 30, 2019. Translation adjustments of assets and liabilities denominated in Euro will continue to be reflected in Accumulated Other Comprehensive Income. Effective July 1, 2018, IBRD adopted ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities which affected the recognition and measurement of financial liabilities where the fair value option has been elected. The ASU requires the portion of the total change in fair value caused by changes in IBRD’s own credit risk (DVA on fair value option elected liabilities) to be presented separately in other comprehensive income. Previously these amounts were recognized in net income. Upon derecognition of a liability designated under the fair value option, the cumulative amount of DVA on fair value option elected liabilities will be reclassified from accumulated other comprehensive income to net income. Upon adoption of this ASU, a cumulative effect adjustment of $155 million was reclassified from retained earnings to accumulated other comprehensive loss, with no impact on the total equity. The following tables present the changes in Accumulated Other Comprehensive Loss (AOCL): Table K1: AOCL changes In millions of U.S. dollars 2019 Balance, Amounts Net beginning of Adjusted reclassified Changes Balance, the fiscal Cumulative beginning Changes in to net during the end of the year adjustment balance AOCL income period period                                        Cumulative Translation Adjustment $ 139 $ - $ 139 $ (157) $ - $ (157) $ (18) DVA on Fair Value option elected liabilities -   155   155   551   (1)   550   705 Unrecognized Net Actuarial (Losses) Gains on Benefit Plans (2,423)   -  (2,423)   (1,341)   86   (1,255)  (3,678) Unrecognized Prior Service (Costs) Credits on Benefit Plans (136)   -   (136)   -   24   24   (112) Other (2)   -   (2)   -   2   2   (*) Total Accumulated Other $ (2,422) $ 155 $ (2,267) $ (947) $ 111 $ (836) $ (3,103) Comprehensive Loss a. See Note J—Pension and Other Post Retirement Benefits. * Indicates amount less than $0.5 million.  134 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 Table K1.1: In millions of U.S. dollars 2018 Balance, Amounts Net beginning reclassified Changes of the fiscal Changes to net during the Balance, end year in AOCL income period of the period                             Cumulative Translation Adjustment $ 46 $  93 $  - $  93 $ 139 Unrecognized Net Actuarial (Losses) (3,257) 700 134 a 834 (2,423) Gains on Benefit Plans   Unrecognized Prior Service (Costs)         (160) - 24 a 24 (136) Credits on Benefit Plans Other (5)   -   3   3   (2) Total Accumulated Other $ (3,376) $ 793 $ 161 $ 954 $ (2,422) Comprehensive Loss In millions of U.S. dollars 2017 Balance, Amounts Net beginning reclassified Changes of the fiscal Changes to net during the Balance, end year in AOCL income period of the period                             Cumulative Translation Adjustment $ (135) $  181 $  - $  181 $ 46 Unrecognized Net Actuarial (Losses) (5,800) 2,198 345 a 2,543 (3,257) Gains on Benefit Plans   Unrecognized Prior Service (Costs)         (184) - 24 a 24 (160) Credits on Benefit Plans Other (7)   -   2   2   (5) Total Accumulated Other $ (6,126) $ 2,379 $ 371 $ 2,750 $ (3,376) Comprehensive Loss a. See Note J—Pension and Other Post Retirement Benefits.       * Indicates amount less than $0.5 million.       IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 135 NOTE L—OTHER FAIR VALUE DISCLOSURES The table below presents IBRD’s estimates of fair value of its financial assets and liabilities along with their respective carrying amounts: Table L1: Fair value and carrying amount of financial assets and liabilities In millions of U.S. dollars June 30, 2019 June 30, 2018 Carrying Value Fair Value Carrying Value Fair Value Assets Due from banks $ 895 $ 895 $ 619 $ 619 Investments-Trading (including Securities purchased under resale agreements) 81,415 81,415 72,569 72,569 Net loans outstanding 192,752 197,367 183,588 186,650 Derivative assets, net 2,840 2,840 2,460 2,460 Liabilities Borrowings 230,180 230,188 208,009 208,019 Securities sold/lent under repurchase agreements/securities lending agreements and payable for cash collateral received 10 10 30 30 Derivative liabilities, net 3,053 3,053 7,932 7,932 Valuation Methods and Assumptions As of June 30, 2019 and June 30, 2018, IBRD had no assets or liabilities measured at fair value on a non-recurring basis. For valuation methods and assumptions of the Investments, Borrowings, and Derivative assets and liabilities, refer to Note A—Summary of Significant Accounting and Related Policies. For additional fair value disclosures regarding Investments, Borrowings, and Derivative assets and liabilities, refer to Note C—Investments, Note E—Borrowings, and Note F—Derivative Instruments, respectively. Due from Banks The carrying amount of unrestricted and restricted currencies is considered a reasonable estimate of the fair value. 136 IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 Unrealized Mark-to-Market Gains or Losses on Investments-Trading and Non-Trading Portfolios, Net The following table reflects the components of the unrealized mark-to-market gains or losses on the Investments- Trading portfolio and non-trading portfolios, net: Table L2: Components of unrealized mark-to-market gains or losses In millions of U.S. dollars                       Fiscal Year Ended June 30, 2019 Unrealized gains (losses)   Realized gains excluding realized Unrealized gains (losses) (losses) amounts a Investments-Trading $ 1,197 $ (747) $ 450 Non-trading portfolios, net             Loan derivatives—Note F 1     (1,486)     (1,485)    Equity management, net -     1,084       1,084 b    Borrowings, including derivatives—Notes E and F 11     109     120    Other assets/liabilities derivatives -     -     -    Client operations derivatives - 15 15 Total non-trading portfolios, net $ 12 $ (278) $ (266) In millions of U.S. dollars                       Fiscal Year Ended June 30, 2018 Unrealized gains (losses)   Realized gains excluding realized Unrealized gains (losses) (losses) amounts a Investments-Trading $ 40 $ 442 $ 482 Non-trading portfolios, net             Loan derivatives—Note F -     916     916  Equity management, net -     (799)       (799) b    Borrowings, including derivatives—Notes E and F *     (381)     (381)    Other assets/liabilities derivatives -     (2)     (2)    Client operations derivatives - * * Total non-trading portfolios, net $ * $ (266) $ (266) In millions of U.S. dollars Fiscal Year Ended June 30, 2017 Unrealized gains (losses)   Realized gains excluding realized Unrealized gains (losses) (losses) amounts a Investments-Trading $ 152 $ 139 $ 291 Non-trading portfolios, net           c   Loans, including derivatives—Notes D and F -     1,529     1,529  Equity management, net -     (1,701)       (1,701) b    Borrowings, including derivatives—Notes E and F 6     (254)     (248)    Other assets/liabilities derivatives -     (5)     (5)    Client operations derivatives - 12 12 Total non-trading portfolios, net $ 6 $ (419) $ (413) a. Adjusted to exclude amounts reclassified to realized gains (losses). b. Includes $6,186 million of unrealized mark-to-market gains related to derivatives associated with borrowings (unrealized mark-to- market losses of $3,451 million—June 30, 2018 and unrealized mark-to-market losses of $4,806 million—June 30, 2017). c. Includes unrealized mark-to-market gains of $1,528 million, related to derivatives associated with loans—June 30, 2017. * Indicates amount less than $0.5 million. NOTE M—CONTINGENCIES From time to time, IBRD may be named as a defendant or co-defendant in legal actions on different grounds in various jurisdictions. The outcome of any existing legal action, in which IBRD has been named as a defendant or co- defendant, as of and for the fiscal year ended June 30, 2019, is not expected to have a material adverse effect on IBRD's financial position, results of operations or cash flows. IBRD FINANCIAL STATEMENTS: JUNE 30, 2019 137 International Development Association Management’s Discussion & Analysis and Financial Statements June 30, 2019 Management’s Discussion and Analysis Contents Section I: Executive Summary Financial Results and Portfolio Performance 4 Key Performance Indicators 6 Section II: Overview Introduction 7 Presentation 7 Financial Business Model 7 Governance and Risk Management 8 Basis of Reporting 8 IDA18 Funding 10 Section III: IDA’s Financial Resources Allocation of IDA18 Resources 10 Section IV: Financial Results Summary of Financial Results 14 Adjusted Net Income 18 Section V: Development Activities, Products and Lending Framework 20 Programs Financial Terms 21 Loans, Grants and Guarantee Activity 23 Section VI: Other Development Activities and Guarantees 25 Programs Risk Management Instruments 25 Debt Relief 26 Trust Funds Administration 26 Buy-down of Loans – Partnership for Polio 27 Liquid Asset Portfolio 28 Section VII: Investment Activities Non-Trading Portfolio 29 Section VIII: Borrowing Activities Concessional Partner Loans 30 Market Debt 30 Other Short-Term Borrowings 30 Section IX: Risk Management Risk Governance 31 Risk Oversight and Coverage 31 Management of IDA’s Risks 33 Section X: Fair Value Analysis Fair Value Analysis and Results 41 Section XI: Critical Accounting Policies and the Use Fair Value of Financial Instruments 43 of Estimates Provision for Losses on Loans and Other Exposures 43 Provision for HIPC Debt Initiative and MDRI 44 Section XII: Governance and Internal Controls General Governance 45 Audit Committee 46 Business Conduct 46 Auditor Independence 46 External Auditors 47 Senior Management Changes 47 Internal Controls 47 Appendix Glossary of Terms 48 List of Tables, Figures and Boxes 49 Management’s Discussion and Analysis Section I: Executive Summary Box 1: Selected Financial Data This Management’s Discussion & Analysis (MD&A) discusses the results of the International Development Association’s (IDA) financial performance for the fiscal year ended June 30, 2019 (FY19). For information relating to IDA’s development operations’ results and corporate performance, refer to the World Bank Corporate Scorecard and Sustainability Review. In millions of U.S. dollars, except ratio in percentage As of and for the fiscal years ended June 30, 2019 2018 2017 2016 2015 Lending Highlights (Sections IV & V) Loans, Grants and Guarantees Commitments a $ 21,932 $ 24,010 $ 19,513 $ 16,171 $ 18,966 Gross disbursements 17,549 14,383 12,718 13,191 12,905 Net disbursements 12,221 9,290 8,154 8,806 8,820 Balance Sheet (Section IV) Total assets b $ 188,553 $ 184,666 $ 173,357 $ 167,985 $ 163,234 Net investment portfolio 32,443 33,735 29,673 29,908 28,418 Net loans outstanding 151,921 145,656 138,351 132,825 126,760 Borrowing portfolio c 10,149 7,318 3,660 2,906 2,150 Total equity 162,982 163,945 158,476 154,700 147,149 Income Statement (Section IV) Interest revenue, net of borrowing $ 1,702 $ 1,647 $ 1,521 $ 1,453 $ 1,435 expenses Transfers from affiliated 258 203 599 990 993 organizations and others Development Grants (7,694) (4,969) (2,577) (1,232) (2,319) Net (Loss) Income (6,650) (5,231) (2,296) 371 (731) Adjusted Net Income d (Section IV) 225 (391) (158) 423 (94) Capital Adequacy (Section IX) Deployable Strategic Capital Ratio 35.3% 37.4% 37.2% NA NA a. Excludes commitments relating to IFC-MIGA Private Sector Window (PSW) activities. b. Effective June 30, 2019, derivatives are presented net by counterparty, after cash collateral received, on the Balance Sheet. The presentation of the prior periods has been updated for comparability (For further details, see Note A: Summary of Significant Accounting and Related Policies in the Notes to the Financial Statements for the fiscal year ended June 30, 2019). c. Includes related derivative balances. d. Effective June 30, 2019, IDA introduced a new income measure to reflect the economic results of its operations. See Table 10 in Section IV: Financial Results. Prior period numbers have been calculated and presented for comparability. IDA Management’s Discussion and Analysis: June 30, 2019 2 Management’s Discussion and Analysis Section I: Executive Summary Section I: Executive Summary With its many years of experience and its depth of IDA and its affiliated organizations seek to help knowledge in the international development arena, countries achieve improvements in growth, job IDA plays a key role in achieving the World Bank creation, poverty reduction, governance, the Group’s (WBG 1 ) goal of helping countries achieve environment, climate adaptation and resilience, human better development outcomes. capital, infrastructure and debt transparency. To meet its development goals, the WBG is increasing its focus Owned by its 173 members, IDA, an entity rated on country programs in order to improve growth and triple-A by the major rating agencies and one of the development outcomes. We are expanding support for five institutions of the WBG, has been providing countries at lower levels of income and fragile and financing and knowledge services to many of the conflict-affected states. The aim is to effectively world’s developing countries for more than 58 years. address issues central to the WBG mission, while IDA was created to supplement the activities and taking into account the global slowdown in growth and objectives of the International Bank for the surge in debt that is not bringing true benefits. Reconstruction and Development, by providing development financing to lower income countries on The fiscal year ended June 30, 2019 was the second more flexible terms. year of the Eighteenth Replenishment of IDA’s resources (IDA18). IDA18 represents an innovative IDA contributes to both the WBG’s twin goals of policy and financing package for FY18 through FY20. ending extreme poverty and promoting shared The IDA18 financing framework represents a shift in prosperity by providing loans, grants, and guarantees IDA’s approach to mobilizing finance since it to countries to help meet their development needs and combines contributions from members with market by leveraging its experience and expertise to provide debt, helping IDA provide $75 billion2 in financing for technical assistance and policy advice. It also supports its clients. Commitments from IDA were $21.9 billion countries with disaster risk financing and insurance during FY19. Cumulative commitments in FY18 and against natural disasters and health-related crises, and FY19, the first two years of IDA18, reached $45.9 facilitates financing through trust fund partnerships. billion, a 31% increase compared to the same period in IDA17 ($35.1 billion). 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). 2 U.S. dollar amounts are based on an IDA18 reference rate of USD/SDR 1.40207. The U.S. dollar amounts are provided for illustrative purposes only, as IDA’s balance sheet is predominantly managed in Special Drawing Rights (SDR). IDA Management’s Discussion and Analysis: June 30, 2019 3 Management’s Discussion and Analysis Section I: Executive Summary Financial Results and Portfolio Performance Equity and Capital Adequacy As of June 30, 2019, IDA’s reported equity was $162.9 billion, a decrease of $1 billion from June 30, 2018 (FY18) ($163.9 billion). The decrease was primarily due to the $6.7 $162.9 billion billion reported net loss and $1.7 billion of negative translation adjustments during the Total Equity year, partially offset by $7.4 billion of cash received from members for subscriptions and contributions. See Section IV: Financial Results. The net loss was primarily driven by the impact of development grants provided to IDA’s eligible members. 35.3% IDA’s main measure for capital adequacy, the deployable strategic capital (DSC) ratio DSC was 35.3% as of June 30, 2019, above the zero percent minimum. IDA’s capital continues to be adequate to support its operations. See Section IX: Risk Management. Lending Operations IDA had $21.9 billion of commitments in FY19, of which $14.1 billion were loan and guarantee commitments. The remaining were grant commitments, which are recorded as $151.9 billion an expense in IDA’s Statement of Income, net of grant cancellations. Net Loans Outstanding IDA’s net loans outstanding increased by $6.3 billion, to $151.9 billion as of June 30, 2019, from $145.7 billion as of June 30, 2018. The key driver of the increase was the $7.8 billion $8.2 billion of net loan disbursements during the year, See Section V: Development Grant Commitments Activities, Products and Programs. Net Investment Portfolio IDA’s investments remain concentrated in the upper end of the credit spectrum, with 60% rated AA or above (See Table 26), reflecting IDA’s objective of principal protection and resulting preference for high quality investments. As of June 30, 2019, the net investment $32.4 billion portfolio was $32.4 billion, a decrease of $1.3 billion compared to June 30, 2018 ($33.7 Net Investment Portfolio billion) primarily driven by net loan disbursements being higher than the cash contributions and debt issuances made during the fiscal year. See Section VII: Investment Activities. Borrowing Portfolio Market borrowings: During FY19, IDA for the first time issued short-term debt instruments. As of June 30, 2019, the total amount outstanding for these instruments was $3.3 billion $1.9 billion. The medium and long-term debt together with associated derivative Market Borrowings instruments amounted to $1.4 billion as of June 30, 2019. Concessional Partner Loans: As of June 30, 2019, total borrowings from members - Concessional Partner Loans, (CPLs) - were $6.8 billion, an increase of $1 billion $6.8 billion Concessional Partner compared to June 30, 2018 ($5.8 billion). Loans 4 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section I: Executive Summary Net Income and Adjusted Net Income For the fiscal year ended June 30, 2019, IDA reported a net loss of $6.7 billion, primarily driven by the impact of $7.7 billion of development grants provided to IDA’s eligible members, which are financed by contributions from members. These contributions carry $6.7 billion voting rights and are therefore recorded as equity, and not reflected in the Statement of Net Loss Income. Effective June 30, 2019, IDA has introduced a new income measure, Adjusted Net Income (ANI), which is used by IDA’s Executive Directors (referred to as the Board in this document) and its management, to monitor the economic results of IDA’s operations. $0.2 billion ANI is defined as net income on a reported basis adjusted to exclude certain items such Adjusted Net Income as activities directly funded by contributions from members and unrealized mark-to- market gains/losses on non-trading portfolios. (See Section IV: Financial Results for details). For the fiscal year ended June 30, 2019, IDA’s Adjusted Net Income was $225 million, an increase of $616 million compared to the $391 million loss for the fiscal year ended June 30, 2018. The increase was primarily due to the unrealized mark-to-market gains/losses on the investment-trading portfolio between FY19 ($310 million of gains) and FY18 ($168 million of losses). IDA Management’s Discussion and Analysis: June 30, 2019 5 Management’s Discussion and Analysis Section I: Executive Summary Key Performance Indicators In billions of U.S. dollars (except for ratio) Lending – During FY19, IDA committed $21.9 billion in loans, grants and guarantees to help its eligible member countries to finance their development. The majority of IDA’s loans typically disburse over a period of 5 to 10 years and have repayment periods of up to 40 years. Therefore, each replenishment generally results in a steady increase in IDA’s net loans outstanding. Since IDA’s loans are primarily in SDR, their reported balance is affected by the appreciation /depreciation of the SDR against the U.S. dollar. Consistent with the increase in the size of the IDA18 replenishment and increased allocations, IDA’s grant expense has increased. Commitments Net Loans Outstanding Grant Expense Gross Disbursements Net Disbursements 30 160 30 24 120 24 18 18 80 12 12 40 6 6 0 0 0 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 FY15 FY16 FY17 FY18 FY19 Equity, Liquidity and Borrowings – Each successive replenishment has increased the amount of equity available to finance IDA’s operations. Since IDA’s resources are managed primarily in SDR, the reported balance of IDA’s equity is affected by the appreciation /depreciation of the SDR against the U.S. dollar. IDA has maintained high levels of liquidity in its investment portfolio to ensure that it can meet its liquidity needs, even under potential scenarios of severe market disruptions. From FY18, the borrowings balance reflects borrowings from members and capital market debt. Equity Net Investment Portfolio Borrowing portfolio 225 50 50 180 40 40 135 30 30 90 20 20 45 10 10 0 0 0 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 Financial Results and Capital Adequacy – IDA’s reported net losses are primarily driven by its grant activity, as previously discussed. Given the long duration of IDA’s investment portfolio, which is carried at fair value, results are also affected by unrealized mark-to-market gains and losses due to movements in the relevant yield curves. IDA’s Adjusted Net Income has been relatively stable when compared with the volatility of IDA’s reported net income. See Table 10. The DSC measures the amount of capital available to support future commitments over and above the current loan portfolio. Adjusted Net Income Deployable Strategic Capital Ratio Reported Net Income 45% 5 37.2% 37.4% 35.3% 0 30% (5) 15% (10) Minimum Ratio = 0% (15) 0% FY15 FY16 FY17 FY18 FY19 Jun 17 Jun 18 Jun 19 6 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section II: Overview Section II: Overview Introduction replenishment process. As a result of the strong support of member countries, IDA has built up a Every three years, representatives of IDA’s members3 substantial equity base, amounting to $163 billion as meet to assess IDA’s financial capacity and the of June 30, 2019. IDA first introduced debt into its medium-term demand for new IDA business model in IDA17, starting from FY15, through financing. Members decide the policy framework, concessional partner loans (CPLs) received from some agree upon the amount of financing to be made of its members. CPLs are also part of the IDA18 available for the replenishment period, and commit to framework. In order to make the most efficient use of additional contributions of equity that are required to the strong equity base that has been built up over the meet these goals. The meetings culminate in a decades, IDA has moved to a hybrid financing model replenishment agreement that determines the size, by including market debt in its business model starting sources (both internal and external), and uses of funds from FY18. By prudently leveraging its equity and for the following three years. blending market debt with additional equity Presentation contributions from members, IDA has increased its financial efficiency, and scaled up its financing to This document provides Management’s Discussion support the escalating demand for its resources to and Analysis (MD&A) of the financial condition and deliver on the following priorities: results of operations for IDA for the fiscal year ended June 30, 2019. A Glossary of Terms is provided at the  retain IDA’s mandate to provide concessional end of this document. financing on terms that respond to clients’ needs; and IDA undertakes no obligation to update any forward-  ensure long-term financial sustainability of looking statements. Certain reclassifications of prior IDA’s financial model through a prudent risk years’ information have been made to conform with management framework. the current year’s presentation. For further details see Note A: Summary of Significant Accounting and Concessional lending, including grants, is primarily Related Policies in the Notes to the Financial financed by IDA’s equity. Non-concessional lending Statements for the year ended June 30, 2019. will primarily be financed by market debt. To the extent that market debt will be used to finance Financial Business Model concessional lending, it will be blended with member IDA has financed its operations over the years with its contributions, which will provide an interest subsidy. own equity, including regular additions to equity See Figure 1. provided by member countries as part of the Figure 1: IDA's Financial Business Model Reflows and Operating Results Borrowings Non – Concessional Lending Investments Equity Concessional Lending and Grants 3 IDA’s members are owners and hold voting rights in IDA. Members do not, however, hold shares in IDA and are therefore not referred to as shareholders. Payments for subscriptions and contributions from members increase IDA’s paid-in equity and are financially equivalent to paid-in capital in multilateral development organizations with capital structures. IDA Management’s Discussion and Analysis: June 30, 2019 7 Management’s Discussion and Analysis Section II: Overview Governance and Risk Management IDA’s 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. The following table shows a summary of IDA’s risk management framework which has been enhanced starting from FY18 given the new hybrid financing model under IDA18 (Discussed in Section IX). Governance Structure  IDA’s governance structure is led by IDA’s Board of Governors, Executive Directors and IDA Deputies.  The Finance and Risk Committee (FRC), a vice president-level committee chaired by the World Bank Group Managing Director and Chief Financial Officer provides a governance structure for decisions that have financial or operational risk implications.  The Enterprise Risk Committee (ERC), a vice president-level committee chaired by the World Bank Group Managing Director and Chief Administrative Officer provides a governance role over risk matters relating to corporate security, business continuity and IT security. Capital Adequacy Sufficiency of Equity to withstand  Capital adequacy is ensured using a solvency-based capital adequacy framework; the unexpected shocks Deployable Strategic Capital (DSC) framework. The DSC includes a buffer of ten percent of equity and loan loss reserve. This buffer is held in addition to the capital required to protect against potential losses from existing exposures under currently prevailing conditions. IDA’s financing activities are managed so that the DSC is maintained above the minimum ratio of zero. Credit Risk Loan Portfolio Credit Quality  IDA’s Credit Risk Management Framework includes regular comprehensive country risk Concentration Risks assessments. IDA’s lending volumes are based on the Performance Based Allocation (PBA) mechanism and the allocation framework agreed at each replenishment, taking into account capital adequacy requirements and the single borrower limit (SBL), which is established in line with Basel-based principles. Capital adequacy is determined based on country credit-risk ratings derived using IDA’s comprehensive internal ratings assessment methodology. Counterparty Credit Risk  Counterparty risk is mitigated through approval and monitoring procedures, including assigning credit limits. Market Risk Interest Rates  Asset Liability Management (ALM) policies ensure the alignment of interest rates between assets (loans and investments) and related funding. Funding risk related to the mismatch between the maturity profile of debt and the related assets funded by debt is monitored through duration management and adjustments to capital requirements. Exchange Rates  Currency risk management policies ensure broad alignment between lending commitments to eligible members and all sources of new and existing funding. Liquidity Risk Prudential Minimum  The prudential minimum is set at 80% of 24 months of projected net outflows and is held in the investment portfolio. The investment portfolio has been transitioned from a core liquidity approach toward a three sub-portfolio structure: Operational, Stable and Discretionary. Basis of Reporting adjusted net income, as discussed in Section IV: Financial Results. IDA prepares its financial statements in conformity with accounting principles generally accepted in the Effective June 30, 2019, the presentation of derivative United States of America (U.S. GAAP), referred to in instruments on IDA’s Balance Sheet was aligned with this document as the “reported basis”. IDA’s the preferred accounting treatment, which is also the functional currencies are the SDR and its component prevailing market practice of netting derivative asset currencies of U.S. dollar, Euro, Japanese Yen, Pound and liability positions. This practice nets derivative Sterling and Chinese Renminbi. For the convenience asset and liability positions, and the related cash of its members and other users, IDA’s financial collateral received, by counterparty under specific statements are reported in U.S. dollars. Management conditions when a legally enforceable master netting uses the reported net income as the basis for deriving agreement exists between IDA and its counterparties. This is a change from the previous presentation, where 8 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section II: Overview interest rate swaps were presented on the Balance Notes to the Financial Statements for the year ended Sheet on a net basis by instrument, and currency swaps June 30, 2019. were presented on a gross basis, reflecting the way that swaps were settled.   Fair Value Results The new net presentation more closely reflects IDA’s IDA reflects all financial instruments at fair value in net counterparty credit risk. The change has been made Section X: Fair Value Analysis of the MD&A. The fair for the current period, and the presentation of prior value of these instruments is affected by changes in period information has been aligned for comparability. market variables such as interest rates, exchange rates, The change does not affect total equity, the Statement and credit risk. Management uses fair value to assess of Cash Flows or any line item within the Statements the performance of the investment-trading portfolio, of Income, Comprehensive Income and Retained and to manage various market risks, including interest Earnings. For more details, see Note A – Summary of rate risk and commercial counterparty credit risk. Significant Accounting and Related Polices in the IDA Management’s Discussion and Analysis: June 30, 2019 9 Management’s Discussion and Analysis Section III: IDA’s Financial Resources Section III: IDA’s Financial Resources IDA’s triennial replenishments have grown from $690 the concessionality of the proposed financing to million for the initial replenishment to $75 billion in borrowers, market conditions, and capital adequacy IDA18. Since its inception, IDA has provided $391 requirements. For the three-year funding cycle of billion of loans and grants. For FY19, IDA’s IDA18, the agreed resource envelope totals $75 commitments reached $21.9 billion spread over 254 billion, supported by $27 billion of member new operations. contributions. IDA18 Funding Allocation of IDA18 Resources IDA’s Commitment Authority, the resource envelope Eligibility for IDA’s resources is determined primarily available for financing lending and grant by a member’s relative poverty. Relative poverty is commitments made during the three-year defined as Gross National Income (GNI) per capita replenishment period, is based on the long-term below an established threshold and is updated outlook of IDA’s financial sustainability. This takes annually. For FY20, the threshold is $1,175 (FY19: into account the amount of member contributions and $1,145). As of July 1, 2019, 76 countries are eligible to borrow from IDA on concessional terms. These are as follows: “Non-Gap” Countries 34 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 for IBRD financing. 1 country with loans in nonaccrual status, where the GNI per capita currently exceeds the IDA operational cutoff, is classified as “IDA-only” based on its classification at the time it became a nonaccrual country. “IDA Only” “Gap” Countries 10 countries that are eligible only for IDA resources, which are (a) determined by IDA countries 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 for IBRD financing. “Small Island 11 Small Island Economies that are eligible only for IDA resources through the Small Economies” Island Economies Exception: the special treatment that IDA accords Small Island Economies which have per capita incomes above the IDA operational cut-off but have no or very limited creditworthiness which limits or precludes their access to IBRD borrowing. “Small State 3 Small State Economies that are eligible only for IDA resources through the Small Economies” State Economies Exception: the special treatment that IDA accords Small State Economies which have per capita incomes above the IDA operational cut-off but have no or very limited creditworthiness which limits or precludes their access to IBRD borrowing. “Blend” 16 countries (including 6 Small Island Economies) which are determined: (a) by IDA countries to be eligible for IDA financing; and (b) by IBRD to be creditworthy for IBRD financing. 1 country with loans in nonaccrual status, which was classified as “Blend” at the time it became a nonaccrual country. Allocation - Performance Based Allocation Country Policy and Institutional Assessment (CPIA). (PBA) System The CPIA reflects the results of an exercise that rates eligible countries against a set of criteria including: IDA’s resources are allocated to eligible members, economic management; structural policies; policies using its Performance Based Allocation (PBA) system for social inclusion and equity; and public-sector and the allocation framework agreed during each management and institutions. The CPIA and portfolio replenishment. These allocations depend on several performance together constitute the IDA Country factors: the overall availability of IDA’s resources, Performance Rating (CPR). In addition to the CPR, individual country’s needs, their policy performance population and per capita income factor into a and institutional capacity, and each country’s country’s final allocation, which can also reflect performance relative to others. The PBA system is remedies under the Non-Concessional Borrowing designed to provide resources where they are likely to Policy (NCBP) options, if applicable. be most helpful in reducing poverty. Following a review of IDA’s resource allocation Under the PBA, the main factor that determines the framework under IDA18, the base allocation per allocation of IDA’s core concessional resources country was increased to SDR 45 million (SDR 12 among eligible countries is the performance in the 10 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section III: IDA’s Financial Resources million in IDA17) per replenishment or SDR 15 environment through advisory and analytical work; (b) million annually. financing projects through policy and investment loans; and (c) convening state and nonstate actors for In recognition of the change in IDA’s business model, coordination and collective actions. and to ensure that its lending decisions are compatible with the capital adequacy requirements of a triple-A In the past, on an exceptional basis, IDA had financed rating, the allocation framework for IDA18 is aligned through concessional loans and grants the following with the SBL and capital adequacy requirements under regional projects, where participation of a country the DSC Framework, see Section IX: Risk with overdue payments was crucial to the success of Management. the regional project. Concessional Financing  In April 2017, the Kenya Displacement project ($103 million) through Intergovernmental Concessional financing is provided in the form of Authority on Development (IGAD) that included loans, grants and guarantees. Eligibility and financing for Somalia. percentage of allocation for grants for IDA-only countries is based on an assessment of the country’s  In December 2014, Kariba Dam Rehabilitation risk of debt distress, where the higher the risk Project ($75 million) that included benefits for assessment, the greater the proportion of grant Zimbabwe. financing. Gap and Blend countries are only eligible for grant financing via the Refugee sub-window, if  In September 2003, West Africa HIV/AIDS applicable. project for the Abidjan-Lagos Transport Corridor ($17 million) that included benefits for Togo, a Core Financing, represents $53.1 billion of the country with overdue payments at that time. IDA18 resource envelope, which is allocated based on the PBA. The amount available for each country is a In the above cases, financing was not made directly to function of the country’s CPR rating and per capita the country with overdue payments. Implementation income. arrangements were such that a regional bank or another participating country took on the obligation of Non-Core Financing allows IDA to respond to the regional project on behalf of the country with specific needs of its members. In IDA18, $10.8 billion overdue payments to IDA. of the IDA18 resource envelope will be used to fund Crisis Response Window the following windows. The primary objective of the CRW is to provide IDA countries with additional resources that will help them Regional Program To support the regional Window approaches to development to respond to major natural disasters, or public health including for infrastructure; emergencies and severe economic crises, so that they $7.4 billion includes a new Refugee sub- could return to their long-term development paths. An window to help IDA countries allocation is made to the CRW under each that host refugees with $2.2 billion of allocation. replenishment. The CRW has been allocated $2.3 billion under IDA18, with $150 million utilized in Crisis Response To support IDA members’ Window (CRW) response to severe natural FY19. disasters, economic crises, During FY19, in response to the significant human $2.3 billion and public health emergencies. loss and destabilization caused by Cyclone Idai in Malawi, Mozambique and Zimbabwe. As part of a Arrears Clearance Set- To support applicable multi-country regional response package, in July Aside (Arrears members to re-engage with Clearance Framework) IDA. 2019, IDA’s Board approved an exceptional grant of $72 million to support the people of Zimbabwe, a $1.1 billion country that is overdue on its payments to IDA and For FY19, $20.5 billion of concessional resources IBRD. The grant amount will be provided through have been committed. third-party UN agencies towards a harmonized multi- sector livelihood support and recovery operation Regional Program Window focused on social welfare and community The Regional Program Window was developed as a interventions. In a similar situation in 2017, IDA funding mechanism to provide additional resources to provided a $50 million grant to UN agencies to support finance projects that help low‐income countries a multi-country response for drought and famine in achieve their regional integration objectives. IDA Somalia, another country with overdue payments to fosters regional integration by playing three IDA. overlapping roles: (a) supporting an enabling IDA Management’s Discussion and Analysis: June 30, 2019 11 Management’s Discussion and Analysis Section III: IDA’s Financial Resources Arrears Clearance Framework (ii) Arrears Clearance Set-Aside IDA has a policy of not providing financing to The arrears clearance set-aside (ACSA) forms part of borrowers who are overdue on their payments to IDA. IDA’s overall financing commitments. It is financed However, it may engage in these countries under by additional member contributions under the limited and clearly defined circumstances. IDA’s replenishments. In IDA15, the arrears clearance was arrears clearance framework sets out these further spelled out. IDA members agreed to ring-fence circumstances, including (i) pre-arrears clearance arrears clearance support to IDA countries that were in grants; and (ii) the arrears clearance set-aside Highly arrears as of December 31, 2006 and meet a very Indebted Poor Countries Debt Initiative (HIPC) narrow and well-defined set of criteria– see below, decision point, that can only be financed under the including eligibility for support under the HIPC arrears clearance operations. initiative. Amounts were set aside within the IDA replenishment so that when circumstances allow, IDA (i) Pre-Arrears Clearance Grants (PAC) would be able to help countries clear arrears and fully IDA’s PAC framework allows IDA to engage early re-engage with the World Bank. However, no amount with countries that are in the process of emerging from had been utilized as of June 30, 2019. conflict with large and protracted arrears. This was To be considered for any arrears clearance support, the first introduced in IDA12 to be used to finance high country would need to meet the following criteria: (i) priority activities related to the preparation of a eligibility for HIPC debt relief; (ii) agreement to program of social and economic recovery and to build implement a medium-term growth-oriented reform resilience until the arrears are fully cleared. program; (iii) sustainable macro and sustainable debt Conditions constituting this framework include service through undertaking an International Monetary indications that: Fund (IMF) program if needed; and (iv) agreement to a financing plan for full clearance of arrears, including  early performance is promising as evidenced by the normalization with other Multilateral Development recipient country having taken convincing steps Banks (MDBs). In addition, to receive support for towards social and economic recovery; arrears clearance, project proposals should meet re-  arrears to IDA are large and protracted, and cannot engagement criteria based on facts and circumstances be easily or quickly cleared using domestic of each case. resources; Non-Concessional Financing  a concerted international effort to provide positive Non-Concessional financing comprises loans and financial flows and other assistance is underway, guarantees whose terms are aligned with those of and other creditors have agreed not to make net IBRD’s flexible loans and guarantees. Under IDA18, withdrawals of financial resources from the $8.7 billion of resources have been allocated to non- country; concessional financing, of which $6.7 billion relates to the Scale-up Facility and $2 billion relates to  alternative sources of financing for post-conflict transitional support for graduating countries. recovery are inadequate or available only on inappropriate terms; and Scale-up Facility: The Scale-up Facility is a window of resources established to enhance support for high-  Pari passu sharing arrangements are in place quality, transformational projects with strong between preferred creditors, for any payments development impact. Allocation of Scale-up Facility made by the country in advance of arrears resources to the regions will broadly conform to the clearance. allocations under the PBA, excluding countries at a The PAC program has met its objectives with each of high risk of debt distress. Allocations are balanced the prior PAC recipients successfully clearing all their between IDA-only and blend countries, and to avoid arrears to IDA and subsequently remaining current on countries from having a concentration of Scale-up their obligations. Prior PAC recipients are Democratic Facility resources. Implementation arrangements will Republic of the Congo, Cote d’Ivoire, Afghanistan, prioritize a country’s ability to absorb resources and Liberia and Myanmar, for an amount totaling $447 the proposed projects’ alignment with IDA18 policy million between 2001 and 2012. In FY19, IDA’s priorities and WBG goals. Board approved $140 million of PAC grants for Transitional Support for Graduating Countries: A Somalia to support national priorities related to member country that was once eligible for IDA resilience and recovery and the country’s reform financing may no longer be eligible and be deemed to momentum towards HIPC Decision Point. have “graduated” from IDA to IBRD as a result of an improvement in growth, poverty reduction and 12 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section III: IDA’s Financial Resources creditworthiness. While graduation from IDA investment in infrastructure projects and public- represents an important milestone of progress in a private partnerships. country’s development, in some cases it could adversely impact a country’s capacity to maintain  Local Currency Facility: Administered by IFC, development momentum, if it leads to a significant this facility is designed to provide local currency decline in available financing for that country. During denominated loans, investments or hedges to private the IDA18 replenishment discussions, it was agreed sector clients who operate in markets where there that IDA would provide transitional support to these are limited currency hedging capabilities.  In the members in order to ensure a smooth transition from absence of currency hedging instruments and IDA to IBRD. Accordingly, it was agreed that creditworthy counterparties, IDA would enter into transitional support would be given at non- swaps or an indemnity agreement with the IFC. concessional terms to new graduates. Bolivia, Sri  Blended Finance Facility: Administered by IFC, Lanka and Vietnam graduated from IDA on June 30, this facility blends PSW financing support with IFC 2017, and may receive up to $2 billion in exceptional investments to support small and medium transitional support for the IDA18 period only. enterprises (SMEs), agribusiness and other $3.1 billion of Scale-up Facility resources and $0.8 pioneering investments. billion of transitional support have been committed  MIGA Guarantee Facility: Administered by under IDA18. MIGA, this facility is designed to expand the Private Sector Window (PSW) coverage of MIGA Political Risk Insurance (PRI) products through shared first-loss or risk In IDA18, a $2.5 billion IFC-MIGA Private Sector participation similar to reinsurance. Window was created with the goal of mobilizing private sector investment in IDA-only and IDA- During FY19, PSW commitments were approved for eligible Fragile and Conflict-affected States. The PSW $393 million, bringing the cumulative approved PSW is deployed through four facilities. These facilities commitments to $578 million as of June 30, 2019. Of have been designed to target critical challenges faced these, $132 million of the window has been utilized as by the private sector in these difficult markets and will of June 30, 2019. See Table G4 in Note G – leverage IFC and MIGA’s business platforms and Transactions with Affiliated Organizations in the instruments. The facilities are as follows: Notes to the Financial Statements for the year ended June 30, 2019. The utilized amount is comprised of:  Risk Mitigation Facility: Involves both MIGA and  $106 million for guarantees IFC and is designed to provide project-based  $25 million for derivatives guarantees to encourage/mobilize private sector  $1 million in exposure through the funding of IFC’s PSW-related equity investments. IDA Management’s Discussion and Analysis: June 30, 2019 13 Management’s Discussion and Analysis Section IV: Financial Results Section IV: Financial Results Summary of Financial Results million of grant activity, primarily in the Africa region, for which IDA is compensated by member IDA had a net loss of $6,650 million in FY19 contributions that are recorded in equity. compared with a net loss of $5,231 million in FY18. The net loss in FY19 was largely driven by $7,694 Table 1: Condensed Statement of Income In millions of U.S. dollars For the fiscal year ended June 30, 2019 2018 Variance Interest Revenue Loans $ 1,462 $ 1,376 $ 86 Investments, net 466 420 46 Other, net (8) - (8) Borrowings, net (218) (149) (69) Interest Revenue, net of borrowing expenses 1,702 1,647 55 Provision for losses on loans and other exposures, (charge) (316) (548) 232 Other revenue / (expenses), net (Table 8) 37 (23) 60 Net non-interest expenses (Table 7) (1,479) (1,464) (15) Transfers from affiliated organizations and others 258 203 55 Non-functional currency translation adjustment gains, net 105 89 16 Unrealized mark-to-market gains (losses) on investments-trading portfolio, net a 351 (128) 479 Unrealized mark-to-market gains (losses) on non-trading portfolios, net 386 (38) 424 Development grants (7,694) (4,969) (2,725) Net Loss $ (6,650) $ (5,231) $ (1,419) a. Includes IDA’s share of income from post-employment benefit plan (PEBP) and post-retirement contribution reserve (PCRF) assets – $41 million (FY18 - $40 million) Table 2: Condensed Balance Sheet In millions of U.S. dollars As of June 30, 2019 2018 Variance Assets Due from Banks $ 138 $ 523 $ (385) Investments 32,770 36,075 (3,305) Net loans outstanding 151,921 145,656 6,265 Derivative assets, net 487 250 237 Other assets 3,237 2,162 1,075 Total assets $ 188,553 $ 184,666 $ 3,887 Liabilities Borrowings $ 10,202 $ 7,305 $ 2,897 Derivative liabilities, net 22 296 (274) Other liabilities 15,347 13,120 2,227 Equity 162,982 163,945 (963) Total liabilities and equity $ 188,553 $ 184,666 $ 3,887 14 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section IV: Financial Results Equity billion was offset by the encashment of notes of $4 billion. IDA’s equity was $162.9 billion as of June 30, 2019, a $1 billion decrease compared with June 30, 2018. Accumulated deficit - The $6.7 billion increase in The decrease was primarily due to: accumulated deficit is primarily due to the impact of grant activity as discussed earlier.  $6.7 billion of net losses incurred during the year. The net loss reflects the impact of IDA’s Total Assets grant expenses during the year, and, As of June 30, 2019, total assets were $188.6 billion,  $1.7 billion of negative currency translation an increase of $3.9 billion from June 30, 2018 ($184.7 adjustments from depreciation of the SDR billion). The increase was driven by an increase in net against the U.S. dollar, partially offset by loans outstanding, partially offset by a decrease in investments.  $7.4 billion of cash received from members for subscriptions and contributions. Loan Portfolio and Grant Activity Table 3: Changes in Equity As of June 30, 2019, IDA’s net loans outstanding In millions of U.S. dollars (after accumulated provision for losses on loans) were Equity as of June 30, 2018 $ 163,945 $151.9 billion, $6.3 billion higher compared with June Activity during the year: 30, 2018. The increase was mainly due to $8.2 billion Subscriptions and contributions paid-in 8,617 in net positive loan disbursements, partially offset by Nonnegotiable, noninterest-bearing demand (1,197) currency translation losses of $1.7 billion, consistent obligations with the 1.2% depreciation of the SDR against the U.S. Change in Accumulated deficit (6,650) dollar during the year. As of June 30, 2019, 95% of Change in Accumulated other comprehensive income (1,733) IDA’s total loans outstanding were denominated in Total activity $ (963) SDR. Equity as of June 30, 2019 $ 162,982 Loans Outstanding Loans outstanding as of June 30, 2019 were $157 Demand obligations – Demand obligations are billion. Of this amount, the Africa and South Asia nonnegotiable and noninterest-bearing instruments of regions accounted for 79%. See Table 4 for details. payment. Payments on these instruments are due to IDA upon demand and the instruments are typically held in central bank accounts in IDA’s name. During FY19, the receipt of new notes amounting to $5.4 Table 4: Loans Outstanding by Region In millions of U.S. dollars As of June 30, 2019 % of Total 2018 % of Total Variance Africa $ 65,359 42 % $ 59,220 39 % $ 6,139 East Asia and Pacific 19,442 12 19,638 13 (196) Europe and Central Asia 7,700 5 7,389 5 311 Latin America and the Caribbean 2,701 2 2,605 2 96 Middle East and North Africa 2,689 2 2,891 2 (202) South Asia 58,662 37 58,285 39 377 Total $ 156,553 100 % $ 150,028 100 % $ 6,525 IDA’s loans generally disburse within five to ten years for investment project financing and one to three years for development policy financing, therefore, each year’s disbursements also include amounts relating to commitments made in earlier years (See Table 5). Principal repayments and prepayments increased by $0.2 billion in FY19, from $5.1 billion in FY18 to $5.3 billion in FY19. IDA Management’s Discussion and Analysis: June 30, 2019 15 Management’s Discussion and Analysis Section IV: Financial Results Table 5: Gross Disbursements of Loans and Grants by Region In millions of U.S. dollars 2019 2018 For the fiscal year ended June 30, Loans Grantsa Total Loans Grantsa Total Africa $ 7,496 $ 2,694 $ 10,190 $ 6,341 $ 1,865 $ 8,206 East Asia and Pacific 1,172 110 1,282 1,176 76 1,252 Europe and Central Asia 843 88 931 249 49 298 Latin America and the Caribbean 202 138 340 125 98 223 Middle East and North Africa 44 603 647 47 522 569 South Asia 3,805 354 4,159 3,602 233 3,835 Total $ 13,562 $ 3,987 $ 17,549 $ 11,540 $ 2,843 $ 14,383 a. Excludes Project Preparation Advances (PPA). As of June 30, 2019, 62% of IDA’s loans were on regular terms (75 bps SDR equivalent service charges), See Table 6. During FY19, IDA’s interest revenue increased by $62 million and service charge revenue increased by $24 million compared with FY18. These increases were driven by the increased volume of loans. Table 6: Revenue by Category In millions of U.S. dollars Interest Service charges Balance as of June 30, For the fiscal year ended June 30, Category 2019 2018 2019 2018 2019 2018 Loans Concessional Regular $ 97,467 $ 93,179 $ 14 $ 15 $ 690 $ 665 Blend 55,977 54,546 254 220 410 411 Hard 1,375 1,313 38 38 10 10 Non-concessional a Transitional support 777 468 23 8 - - Scale up Facility 957 522 23 9 - - Total $ 156,553 $ 150,028 $ 352 $ 290 $ 1,110 $ 1,086 a. In addition, $13 million of commitment charges were earned in FY19 under the non-concessional lending ($8 million in FY18) As of June 30, 2019, IDA’s payable for development Borrowing Portfolio grants was $12.3 billion, $3.6 billion higher than June 30, 2018 ($8.7 billion). This increase reflects grant As part of IDA18, five members have agreed to expenses of $7.7 billion in FY19 which, consistent provide IDA with concessional loans totaling $5.2 with the larger IDA18 envelope, were $2.7 billion billion. As of June 30, 2019, IDA has signed higher compared to FY18 ($5 billion), partially offset concessional loan agreements totaling $5.1 billion of by grant disbursements of $4 billion. which $3 billion was received as loan proceeds. As of June 30, 2019, total borrowings from members were Investment Portfolio $6.8 billion. IDA’s net investment portfolio was $32.4 billion as of During FY19, IDA for the first time issued short-term June 30, 2019, compared with $33.7 billion as of June debt instruments. As of June 30, 2019, the total 30, 2018. The key drivers were: amount outstanding for these instruments was $1.9  The outflow of $17.5 billion in loan and grant billion. See Notes to Financial Statements - Note D – disbursements, Borrowings. Offset by inflows of: Transfers from Affiliated Organizations  $7.4 billion relating to member contributions, On October 12, 2018, IBRD’s Board of Governors  $5.3 billion in the form of loan repayments and approved a transfer of $248 million to IDA, bringing prepayments, and the cumulative transfers to $15,497 million. The  $2.7 billion of proceeds from short-term debt transfer was received on October 23, 2018. issuances and borrowings from members. 16 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section IV: Financial Results Net Non-Interest Expense the table below include costs related to IDA-executed trust funds and other externally funded activities. As shown in Table 7, IDA’s net non-interest expenses primarily comprise administrative expenses, net of IDA’s net non-interest expenses were $1,479 million revenue from externally-funded activities. IBRD and for FY19 as compared to $1,464 million in FY18. IDA's administrative budget is a single resource The key drivers during the year were i) the increase in envelope that funds the combined work programs of costs allocated to IDA under the cost sharing IBRD and IDA. The allocation of administrative methodology, due to the increase in client engagement expenses between IBRD and IDA is based on an activities associated with IDA18 offset by ii) lower agreed cost and revenue sharing methodology, pension costs as a result of lower amortization of approved by their Boards, which is primarily driven by unrecognized actuarial losses during FY19 and, iii) the the relative level of activities relating to lending, increase in revenue from externally funded activities. knowledge services and other services between these See Table 7 for a comparison of the main sources of two institutions. The administrative expenses shown in Administrative expenses and revenue from externally funded activities between FY19 and FY18. Table 7: Net Non-Interest Expenses In millions of U.S. dollars FY19 Vs FY18 Vs For the fiscal year ended June 30, 2019 2018 2017 FY18 FY17 Administrative expenses: Staff costs $ 1,049 $ 990 $ 879 $ 59 $ 111 Travel 189 183 165 6 18 Consultant and contractual services 464 450 436 14 14 Pension and other post-retirement benefits 299 322 426 (23) (104) Communications and technology 61 62 56 (1) 6 Equipment and buildings 149 148 138 1 10 Other expenses 30 29 21 1 8 Total administrative expenses $ 2,241 $ 2,184 $ 2,121 $ 57 $ 63 Contributions to special programs 21 21 25 - (4) Revenue from externally funded activities: Reimbursable advisory services (59) (51) (42) (8) (9) Reimbursable revenue - IDA-executed trust funds (467) (460) (400) (7) (60) Revenue – trust funds administration (46) (48) (42) 2 (6) Restricted revenue (34) (21) (22) (13) 1 Other revenue (177) (161) (141) (16) (20) Total revenue from externally funded activities $ (783) $ (741) $ (647) $ (42) $ (94) Total Net Non-Interest Expenses (Table 1) $ 1,479 $ 1,464 $ 1,499 $ 15 $ (35) Table 8: Other revenue / (expenses), net In millions of U.S. dollars FY19 Vs FY18 Vs For the fiscal year ended June 30, 2019 2018 2017 FY18 FY17 Other (primarily Project Preparation Advances (PPA) grants) $ 12 a $ (41) $ (10) $ 53 $ (31) Guarantee fees 12 10 7 2 3 Commitment charges 13 8 1 5 7 Other revenue / (expenses), net (Table 1) $ 37 $ (23) $ (2) $ 60 $ (21) a. PPA grant cancellations exceeded new PPA grants approved in FY19. IDA Management’s Discussion and Analysis: June 30, 2019 17 Management’s Discussion and Analysis Section IV: Financial Results 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 FY19, IDA’s budget anchor was 97.6%, lower by 5% compared to FY18 primarily due to higher interest revenue from loans and expenditure restraint. See Table 9. Table 9: Budget Anchor In millions of U.S. dollars For the fiscal year fiscal year ended June 30, 2019 2018 Total net Non-interest Expenses (From Table 7) $ 1,479 $ 1,464 Pension and Externally Financed Outputs (EFO) adjustmentsa (23) (64) Net administrative expenses for Budget Anchor $ 1,456 $ 1,400 Interest Revenue from Loans (From Table 1) $ 1,462 $ 1,376 Commitment fee and Guarantee income (From Table 8) 25 18 Mark-to-market gains (losses) on revenue-related forward currency contracts 5 (28) Total revenue for Budget Anchor $ 1,492 $ 1,366 Budget Anchor 97.6% 102.5% a. These amounts are excluded from the definition of net Non-interest expenses to reflect the way in which IDA is managed. Adjusted Net Income unrealized mark-to-market gains and losses on the ALM, borrowing, and non-trading investment Effective June 30, 2019, a business-driven net-income portfolios. measure, Adjusted Net Income (ANI), was introduced. This non-GAAP measure reflects the economic results  Pension, Post-Employment Benefit Plan (PEBP) of IDA’s operations and is used internally by IDA’s and Post-Retirement Contribution Reserve Management and the Board as a financial (PCRF) adjustments: While IDA is not a sustainability measure. ANI is defined as IDA’s net participating sponsor to these benefit plans, IDA income on a reported basis, adjusted to exclude the shares in the costs and reimburses IBRD for its following items. proportionate share of any contributions made to these plans by IBRD, as part of a Board-approved  Development financing activities directly funded cost sharing ratio. The Pension adjustment by contributions from members: Development reflects the difference between IDA’s share of grants provided to clients are treated as expenses, cash contributions to both the pension plans and while contributions from members which finance PCRF, and the accounting expense, as well as the these activities, are reflected directly in IDA’s investment revenue earned on those assets related equity since they carry voting rights. to the PEBP and PCRF. The PCRF was  Contributions/grants received from affiliated established by the Board to stabilize contributions organizations or other similar contributions to the pension and post-retirement benefits plans. These mainly comprise contributions from IBRD, Management has designated the income from IFC and other contributions from trust funds. these assets to meet the needs of the pension These are intended to finance development plans. As a result, PEBP and PCRF investment activities similar to member contributions but are revenue is excluded from adjusted net income. not directly included in equity as they do not carry  Other Adjustments: Under certain arrangements voting rights. (such as Externally Funded Outputs (EFOs)), IDA  Non-functional currency translation adjustment receives a share of the revenue earned from (gains) losses: These represent unrealized agreements with donors under which funds exchange rate gains/losses resulting from the received are to be used to finance specified translation of loans, borrowings, development outputs or services. These funds may be utilized grants payable and all other assets and liabilities only for the purposes specified in the agreements still held on IDA’s Balance Sheet, that are and are therefore considered restricted until denominated in currencies other than the applied for these purposes. Income attributable to component currencies of SDR. these arrangements is excluded from reported income since there is no discretion about the use  Unrealized mark-to-market gains/losses on non- of these funds. trading portfolios: These mainly comprise 18 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section IV: Financial Results As illustrated in Table 10, the key difference between ANI and reported net loss relate to development grants and unrealized mark-to-market gains on non-trading portfolios. Table 10: Adjusted Net Income In millions of U.S. dollars For the fiscal year ended June 30, 2019 2018 Net Loss $ (6,650) $ (5,231) Adjustments to Reconcile Net Income / (Loss) to Adjusted Net Income: Expenses relating to development financing activities directly funded by contributions from members Development grants $ 7,694 $ 4,969 PPA grants (12) 41 Amortization of CPL discounts 75 53 Provision for debt relief (Highly Indebted Poor Countries Debt Initiative (HIPC) / Multilateral Debt Relief Initiative (MDRI)) - (release) charge (115) 7 Contributions from affiliated organizations and others (258) (203) Non-functional currency translation adjustment gains (105) (89) Unrealized market-to-market (gains) losses on non-trading portfolios (386) 38 Pension, PEBP and PCRF adjustments Pension adjustment 34 66 PEBP/PCRF income (41) (40) EFO income (11) (2) $ 6,875 $ 4,840 Adjusted Net Income (Loss) $ 225 $ (391) IDA Management’s Discussion and Analysis: June 30, 2019 19 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Section V: Development Activities, Products and Programs Lending Framework project by staff. Under a Multiphase Programmatic Approach approved by the Board on July 21, 2017, the IDA provides financing to lower-income countries Board may approve an overall program framework, its primarily through loans, grants and guarantees. IDA financing envelope and the first appraised phase, and has a common framework which extends across all its then authorize Management to appraise and commit development activities. The main elements of this financing for later program phases. Disbursements are framework are: financing principles, financing cycles subject to the fulfillment of conditions set out in the and financing categories. loan or grant agreement. Financing Principles During implementation of IDA-supported operations, IDA’s operations are required to conform to the staff review progress, monitor compliance with IDA’s general principles derived from its Articles of policies, and assist in resolving any problems that may Agreement. These principles are described in Box 2. arise. An independent unit, the Independent Within the scope permitted by the Articles of Evaluations Group, also assesses the extent to which Agreement, application of these financing principles operations have met their major objectives, and these must be developed and adjusted in light of experience evaluations are reported directly to the Board. and changing conditions. Financing Categories Financing Cycles Most of IDA’s lending is of three types: investment The process of identifying and appraising a project and project financing, development policy financing, and approving and disbursing the funds often extends over program-for-results. Figure 2 shows the percentage of several years. However, in response to emergency loans approved for investment lending, development situations, such as natural disasters and financial policy operations and program-for-results over the crises, IDA is able to accelerate the preparation and past five years. approval cycle. In most cases, IDA’s Board approve each loan, grant and guarantee after appraisal of a Box 2: Financing Principles (i) IDA may provide financing for its development operations in the form of loans, grants, and guarantees directly to its members, public or private entities and regional or public international organizations. (ii) IDA’s financing of its development operations is designed to promote economic development, increase productivity and thus raise standards of living in its member countries. Investment projects financed by IDA are required to meet IDA’s standards for technical, economic, financial, institutional and environmental soundness. Specific provisions apply to development policy financing, including the treatment of the macroeconomic framework, poverty and social impact, environment, forests and other natural resources. (iii) Decisions to approve financing are based upon, among other things, studies by IDA of a member country’s economic structure, including assessments of its resources and ability to generate sufficient foreign exchange to meet debt-service obligations. (iv) IDA must be satisfied that in the prevailing market conditions (taking into account the member’s overall external financing requirements); the recipient would be unable to obtain financing under conditions which, in the opinion of IDA, are reasonable for the recipient. This would include loans made by private sources or IBRD. (v) The use of funds by recipients is supervised. IDA makes arrangements intended to ensure that funds provided are used only for authorized purposes and, where relevant, with due attention to considerations of cost-effectiveness. This policy is enforced primarily by requiring recipients (a) to submit documentation establishing, to IDA’s satisfaction, that the expenditures financed with the proceeds of loans or grants are made in conformity with the applicable financing agreements, and (b) to maximize competition in the procurement of goods and services by using, wherever possible, international competitive bidding procedures or, when it is not appropriate, other procedures that ensure maximum economy and efficiency. In addition, IDA considers the use of recipient country procurement, financial management and environmental and social safeguard systems in selected operations once these systems and capacity, have been assessed by IDA as acceptable. 20 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Figure 2: Share of Financing Categories for Annual Commitments Percentage Share a Investment Lending Development Policy Program-for-Results FY19 71% 22% 7% FY18 62% 9% 29% FY17 78% 10% 12% FY16 76% 12% 12% FY15 79% 14% 7% 0% 20% 40% 60% 80% 100% a. May differ from the sum of individual figures shown due to rounding Investment Project Financing (IPF) stakeholders by providing a platform to collaborate in larger country programs. PforR disburses when agreed IPF is used in all sectors, it supports a wide range of results are achieved and verified. Results are identified activities including capital-intensive investments, and agreed upon during the preparation stage. agricultural development, service delivery, credit and grant delivery, community-based development, and FY19 commitments under PforR totaled $1.6 billion, institution building. IPF is usually disbursed over the compared with $7 billion in FY18, reflecting a long-term (5 to 10-year horizon). decrease in commitments in countries in Africa and South Asia. FY19 commitments under IPF amounted to $15.6 billion, compared with $14.8 billion in FY18. These three complementary categories support the policy and institutional changes needed to create an Development Policy Financing (DPF) environment conducive to sustained and equitable DPF provides rapidly-disbursing financing (1 to 3 growth. years) to help a borrower address actual or anticipated financing requirements. DPF aims to support the Financial Terms borrower in achieving sustainable development Commitment Currency through a program of policy and institutional actions, for example, strengthening public financial The currency of commitment for IDA grants and management, improving the investment climate, concessional loans is predominantly the SDR. addressing bottlenecks to improve service delivery, However, in response to client needs to reduce and diversifying the economy. DPF supports such currency exposure and simplify debt management, reforms through non-earmarked general budget IDA offers a Single Currency Lending option that financing that is subject to the borrower's own allows IDA recipients to denominate new IDA loans implementation processes and systems. Commitments in U.S. dollar, Euro, Pound Sterling or Japanese Yen. under DPF for FY19 were $4.8 billion (FY18 - $2.1 Further, non-concessional loans provided under billion). IDA18 from the Scale-up Facility and for transitional support, may only be denominated in either U.S. Program-for-Results (PforR) dollar, Euro, Pound Sterling or Japanese Yen. As of PforR helps countries improve the design and June 30, 2019, $9.6 billion of U.S. dollar denominated implementation of their development programs and loans and U.S. dollar equivalent $10.9 billion in Euro achieve specific results by strengthening institutions denominated loans had been approved under the and building capacity. It helps strengthen partnerships Single Currency lending program, of which $4.8 with government, development partners and other billion in U.S. dollar equivalent were outstanding. IDA Management’s Discussion and Analysis: June 30, 2019 21 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Table 11: Summary of Financial Terms for IDA Lending Products, effective July 1, 2019 Maturity/Grace Instrument typea Currencies Current Charges Interest rates Period Grant SDR Not applicable None Not applicable 75bps SDR equivalent Regular-Term loan JPY 38/6 years Not applicable service charge Regular-Small Economy SDR, USD, EUR, 75bps SDR equivalent 40/10 years Not applicable loan GBP, JPY service charge SDR, USD, EUR, 75bps SDR equivalent 1.25% SDR equivalent Blend-Term loan 30/5 years GBP, JPY service charge interest rate 20 years maximum Market-based floating Non-concessional loans 25 bps one-time front- USD, EUR, GBP, weighted average reference rate (6-month) a) Transitional support end fee JPY maturity with 35 plus a spread (variable b) Scale-up Facility (SUF) 25 bps commitment fee years final maturity spread or fixed spread)b Before Drawdown: Front end fee and renewal fee are set at 0.5% and 0.25% respectively under SUF option, and at 0% under PBA or Catastrophe Deferred Draw Undisbursed balances option. SDR, USD, EUR, Down Option (CAT DDO) After Drawdown: GBP, JPY (New in IDA18) - Under PBA or Undisbursed balances option - IDA concessional rates would apply. - Under SUF option - non-concessional rates would apply. 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. Charges on Loans and Grants Table 11 provides a summary of the financial terms of IDA’s lending products based on eligibility, effective Service charges and interest income earned on IDA’s July 1, 2019. loans are reported as Interest revenue on loans on the Statement of Income. Commitment charges earned on Repayment Terms loans and grants (if any) are reported as non-interest revenue from commitment charges on the Statement Loans approved through June 30, 1987 have a final of Income. maturity of 50 years, including a grace period of 10 years. In recent replenishments, differentiation in Service Charge. A service charge is levied on the IDA’s lending terms has been introduced to recognize principal amount disbursed and outstanding on all the variation in economic development of broad Regular, Small Economy, and Blend term loans, categories of IDA recipients. regardless of repayment terms, at 0.75% per annum. Since 1987, the legal agreements of regular, blend and Interest. Interest is charged on all loans subject to hard-term loans include an accelerated repayment blend terms approved under IDA16, IDA17 and clause to double the principal repayments of the loan, IDA18, all hard-term loans, transitional support loans if the borrower’s GNI per capita exceeds a specific and loans provided under the Scale-up Facility. threshold and the borrower is eligible for IBRD Further, new loans offered under transitional support financing. Implementation is subject to negotiation and the Scale-up Facility are available at floating with the borrower and approval by IDA’s Board after interest rates on IBRD terms. All other rates are fixed. considering a borrower’s economic development. The borrower can further negotiate either to (a) shorten the Commitment Charge. A commitment charge, which loan’s maturity (principal option), (b) pay interest at a is payable on any undisbursed loan or grant amount, is rate that would result in the same net present value set by the Board at the beginning of each fiscal year. (interest option), or a combination of the two options. Commitment charges are set at a level to ensure that net loan revenue covers administrative expenses over As of June 30, 2019, the acceleration clause has been the medium term. From FY09 to FY19, the implemented for the qualifying IDA loans of 16 commitment charge on undisbursed concessional borrowers that have graduated from IDA since the loans had been set at nil, and for grants it had been set introduction of the accelerated repayment clause. Of at nil from FY03 to FY19. For FY19, the commitment these 16 borrowers, 11 borrowers selected the charge on transitional support loans and Scale-up principal option, 4 borrowers selected the interest Facility loans was set at 0.25%. For FY20, option, and one borrower selected a combination of the commitment charges have been set at the same levels two options. As part of IDA18, the implementation of as those set for FY19. 22 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs the acceleration clause for new eligible borrowers is Commitments of guarantees in FY19 were $358 temporarily suspended. million, a decrease of $105 million over FY18 ($463 million). In terms of regional focus, Africa accounted Loans, Grants and Guarantee Activity for all of the FY19 and FY18 guarantee commitments. Commitments Also, see Section VI: Other Development Activities and Program (See Table 12). Commitments of loans in FY19 were $13.8 billion, a decrease of $4.8 billion (26%) over FY18 ($18.5 Commitments of grants in FY19 were $7.8 billion, an billion). increase of $2.8 billion (56%) over FY18 ($5 billion). (See Table 13). Table 12: Commitments of Loans and Guarantees by Region In millions of U.S. dollars For the fiscal year ended June 30, 2019 2018 Variance Africa $ 8,305 $ 11,574 $ (3,269) East Asia and Pacific 934 530 404 Europe and Central Asia 346 861 (515) Latin America and the Caribbean 281 273 8 Middle East and North Africa 56 30 26 South Asia 4,193 5,739 (1,546) Total $ 14,115 $ 19,007 $ (4,892) Table 13: Commitments of Grants by Region In millions of U.S. dollars For the fiscal year ended June 30, 2019 2018 Variance Africa $ 5,882 $ 3,837 $ 2,045 East Asia and Pacific 338 101 237 Europe and Central Asia 237 96 141 Latin America and the Caribbean 149 155 (6) Middle East and North Africa 555 400 155 South Asia 656 414 242 Total $ 7,817 $ 5,003 $ 2,814 IDA currently has lending, grant, and guarantee activities in over 107 countries. The concentration of IDA’s outstanding loan portfolio among its largest borrowers for the average of last five years (FY14 through FY18) compared with FY19 has been relatively stable (See Figure 3). The top five borrowers with the largest loan outstanding balances represented 47% of total loans outstanding as of June 30, 2019. See Table 14. Figure 3: Exposure of Largest IDA Borrowing Countries 67% 67% 50% 47% 36% 33% 18% 14% Top 1 Top 3 Top 5 Top 10 Average (FY14-FY18) FY19 IDA Management’s Discussion and Analysis: June 30, 2019 23 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Table 14: Top Five Borrowers with the Largest Loan Outstanding Balance as of June 30, 2019 In millions of U.S. dollars, or as otherwise indicated Country Total India Bangladesh Pakistan Vietnam Nigeria Others Eligibility IBRD IDA only Blend IBRD Blend Loans Outstanding $ 156,553 $ 22,599 $ 15,620 $ 13,992 $ 12,982 $ 9,212 $ 82,148 % of Total Loans Outstanding 100% 14% 10% 9% 8% 6% 53% Weighted Average Maturity (Years) 12.1 5.4 13.9 11.1 12.7 14.1 13.5 Loans outstanding by terms Concessional Regular 97,467 4,364 15,328 834 7,490 5,323 64,128 Blend 55,977 17,024 288 12,485 5,215 3,827 17,138 Hard 1,375 444 - 455 270 62 144 Non-concessional Transitional support 777 767 - - - - 10 Scale Up Facility 957 - 4 218 7 - 728 Undisbursed balance 59,051 3,707 6,875 4,301 4,589 5,250 34,329 24 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section VI: Other Development Activities and Programs Section VI: Other Development Activities and Programs IDA has products, services and programs, other than intended to cover risks only to the extent necessary to lending, that it offers to its borrowing member obtain the required private financing, taking into countries to help them meet their development goals. account country, market and, if appropriate, project These include guarantees, debt relief, trust fund circumstances. IDA’s guarantees require a sovereign administration, and externally funded reimbursable counter-guarantee and indemnity, comparable to the advisory services. requirement of a sovereign guarantee for IDA lending to sub-sovereign and non-sovereign borrowers. See Guarantees Table 15 for the types of guarantees that IDA IDA offers both Project-based and Policy-based provides. These guarantees are separate and distinct Guarantees. These guarantees are available for from those offered under the Private Sector Window, projects and programs in member countries to help see Section III: IDA’s Financial Resources. mobilize private financing for development purposes. IDA’s guarantees are partial in nature as they are Table 15: Types of Guarantees Project-based Project-based guarantees are provided to mobilize private financing for a project and/or mitigate payment guarantees and/or performance related risks of a project. There are two types: 1. Loan guarantees: these cover loan-related debt service defaults caused by the government’s failure to meet specific payment and/or performance obligations arising from contract, law or regulation. Loan guarantees include coverage for debt service defaults on: (i) commercial debt, normally for a private sector project; and, (ii) a specific portion of commercial debt irrespective of the cause of such default, normally for a public-sector project. 2. Payment guarantees: These cover payment default on non-loan related government payment obligations to private entities and foreign public entities arising from contract, law or regulation. Policy-based guarantees are provided to mobilize private financing for sovereigns or sub-sovereigns. They Policy-based cover debt service default, irrespective of the cause of such default, on a specific portion of commercial debt guarantees owed by government and associated with the supported government’s program of policy and institutional actions. Table 16: Pricing for IDA’s Project-Based and Policy-Based Guarantees, effective July 1, 2019 Guarantees on Concessional Terms Guarantees on Non-Concessional Terms Charges Private Projects Public Projects Private Projects Public Projects Front-end fee N.A. N.A. 25 bps 25 bps Initiation fee a 15 bps N.A. 15 bps N.A. b Processing fee 50 bps N.A. 50 bps N.A. Standby fee 0 bps 0 bps 25 bps 25 bps Guarantee fee 75 bps 75 bps 50-100 bps c 50-100 bpsc a. The Initiation fee is 15 basis points of the guaranteed amount or $100,000, whichever is greater. b. The processing fee is determined on a case-by-case basis. c. Based on the weighted average maturity of the guarantee. Guarantee Exposure For additional information, see the Notes F and G to IDA’s Financial Statements. IDA’s exposure on its guarantees (measured by discounting each guaranteed amount from its next call Risk Management Instruments date), was $2,033 million as of June 30, 2019 ($1,741 million—June 30, 2018). The $292 million increase in IDA facilitates access to risk management solutions to guarantee exposure is primarily due to a $354 million mitigate the financial effects of natural disasters for guarantee that became effective in FY19. The borrowing members. Financial solutions can include maximum potential undiscounted future payments that disaster risk financing through catastrophe swaps, IDA could be required to make under these guarantees insurance and reinsurance contracts, and regional is $2,094 million as of June 30, 2019 ($1,808 pooling facilities. million—June 30, 2018). In addition, IDA had $106 In order to promote countries’ resilience to disasters million of exposure under PSW guarantees as of June and expand the range of IDA’s crisis instruments, 30, 2019. See Section III: IDA’s Financial Resources. members endorsed the introduction of the Catastrophe Deferred Draw-Down Option (CAT-DDO) for IDA Management’s Discussion and Analysis: June 30, 2019 25 Management’s Discussion and Analysis Section VI: Other Development Activities and Programs IDA18. The CAT-DDO is a contingent credit line that serve member recipients and donors alike. The provides immediate liquidity to countries in the partnerships funded by trust funds often serve as a aftermath of a catastrophe and serves as early platform from which IDA and its members can draw financing while funds from other sources such as on the WBG’s diverse technical and financial bilateral aid or reconstruction loans are being resources to achieve development goals that cannot be mobilized. CAT-DDOs are intended to enhance IDA addressed effectively by any single member, given countries’ capacity to plan for and manage crises. As their complexity, scale, and scope. IDA’s roles and of June 30, 2019, the exposure under CAT-DDO was responsibilities in managing trust funds depend on the $188 million. type of fund, outlined as follows: Debt Relief IDA’s Trust Funds: The Heavily Indebted Poor Countries Debt Initiative IDA-Executed Trust Funds (BETFs): IDA, alone or (HIPC Initiative) and the Multilateral Debt Relief jointly with one or more of its affiliated organizations, Initiative (MDRI) were implemented in 1996 and 2006 implements or supervises the activities financed by respectively as a part of a global effort focused on trust funds. These trust funds support IDA’s work heavily indebted poor countries with strong policy program. IDA, as an executing agency, disbursed $467 performance. The initiatives aim to reduce the external million in FY19 ($460 million in FY18) of trust fund debt of eligible countries as part of a broader poverty program funds. reduction strategy, whilst safeguarding the long-term Recipient-Executed Trust Funds (RETFs) are financial capacity of IDA and other participating provided to a third party, normally in the form of multilateral institutions; and encouraging the best use project financing, and are supervised by IDA. of additional member resources for development, by allocating these resources to low-income countries on Financial Intermediary Funds (FIFs): IDA, as a the basis of policy performance. trustee, provides financial management services such as receiving, holding and transferring funds to In order to receive irrevocable debt relief, eligible multiple implementing entities. countries are required to maintain macroeconomic stability, carry out key structural and social reforms, Table 17 shows IDA’s revenue earned from Trust and implement a Poverty Reduction Strategy, in Fund Activity during FY19 and FY18. For additional addition to being in good standing with respect to all information, see Notes to Financial Statements-Note eligible debt repayments. To ensure IDA’s financial H-Trust Funds Administration. capacity was not eroded, members agreed to Table 17: Revenue earned from Trust Fund Activity compensate IDA with additional contributions to In millions of U.S. dollars offset the impact of the forgone reflows, resulting from For the fiscal year ended June 30, 2019 2018 the provision of debt relief. Revenue Fees from Trust Fund $ 46 $ 48 Administration During FY19, HIPC debt relief was provided on $10 million of loans ($10 million in FY18). There was no HIPC debt relief on service charges for FY19 and The cash and investment assets held in trust by IDA as FY18. On a cumulative basis, debt relief has been administrator and trustee as of June 30, 2019 and June given on $2.1 billion of loans and $335 million of 30, 2018 are summarized in Table 18. service charges as of June 30, 2019. The accumulated Table 18: Cash and Investment Assets Held in Trust by provision for debt relief was recorded at the inception IDA of the initiative and is adjusted to reflect the impact of In millions of U.S. dollars any changes in the decision and completion point dates Total fiduciary assets of the related countries. As of June 30, 2019 2018 During FY19, there was no cancellation of eligible IDA-executed $ 48 $ 44 Jointly administered with 810 loans under MDRI (Nil - FY18). On a cumulative affiliated organization 862 basis, debt relief has been provided on $40.2 billion of Recipient-executed 1,946 2,040 loans under the MDRI as of June 30, 2019. The Financial intermediary funds 228 220 provision for the debt relief was recorded at the Execution not yet assigned a 3,745 2,664 beginning of the MDRI Initiative. Total $ 6,829 $ 5,778 Trust Funds Administration a. These represent assets held in trust for which the determination as to the type of execution is yet to be finalized Trust Funds are an integral part of the WBG’s development activities, providing resources and added flexibility in providing development solutions that 26 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section VI: Other Development Activities and Programs Externally funded Reimbursable Advisory Buy-down of Loans – Partnership for Services (RAS) Polio IDA provides technical assistance to its member The Partnership for Polio program to fund the countries, both in connection with, and independent immunization of children in countries with high-risk of, lending operations. There is a growing demand of polio is a funding mechanism that allows the from members for strategic advice, knowledge purchase of oral vaccines from the proceeds of loans. transfer, and capacity building. Such assistance includes assigning qualified professionals to survey Under this program, IDA enters into an arrangement developmental opportunities in member countries, with third party donors who make payments on the analyzing their fiscal, economic and developmental borrower’s service and commitment charges through a environment, assisting member countries in devising trust fund until the borrower reaches agreed coordinated development programs, appraising performance goals. The trust fund then buys down the projects suitable for investment, and assisting member related loans for an amount equivalent to the present countries in improving their asset and liability value of the remaining cash flows of the related loans, management techniques. While most of IDA’s ensuring IDA incurs no economic loss. The trust fund advisory services and analytical work is financed by subsequently cancels the purchased loans, converting its own budget or donor contributions (Trust Funds), them to grant terms. During FY19 and FY18, there clients may also pay for such services. In FY19, were no loans purchased under the buy-down income relating to reimbursable advisory services was mechanism. $59 million (FY18 - $51 million). IDA Management’s Discussion and Analysis: June 30, 2019 27 Management’s Discussion and Analysis Section VII: Investment Activities Section VII: Investment Activities As of June 30, 2019, IDA’s net investment portfolio  Tranche 1: Remains as a separate “Tranche 1” totaled $32.4 billion (Figure 4), of which $31.7 billion Sub-Portfolio and is managed as an asset-liability represents the liquid asset portfolio (trading portfolio), management (ALM) Sub-Portfolio, as defined in and $0.7 billion represents the non-trading portfolio. the IDA17 Investment Strategy, until needed for See Note C: Investments in the Notes to the Financial disbursements. Under this strategy, the duration Statements for the year ended June 30, 2019. of IDA’s investments is aligned with that of the Figure 4: Net Investment Portfolio future net cash outflows. In billions of U.S. dollars The primary objective of IDA’s liquid asset portfolio strategy continues to be preservation of capital within 40 institutional constraints. Consistent with this primary 33.7 32.4 35 29.7 objective, IDA invests in high quality instruments. 30 IDA aims to earn reasonable investment returns, while 25 ensuring timely availability of funds for future cash 20 flow requirements, including disbursements for loans, 15 grants, debt service, and administrative expenses. 10 Table 19: Liquid Asset Portfolio Composition 5 In millions of U.S. dollars - FY17 FY18 FY19 As of June 30, 2019 2018 Liquid Asset Portfolio Operational $ 6,352 $ 9,461 Liquid Asset Portfolio Stable 15,317 5,958 IDA’s liquid asset portfolio is undergoing a Discretionary 254 1,506 realignment during the years under IDA18, as market Tranche 1 9,799 15,998 debt will be introduced gradually when needed. The Total $ 31,722 $ 32,923 majority of IDA’s liquid assets will continue to be funded by equity over this period. In addition, IDA’s liquid asset portfolio has transitioned from a tranche During FY19 and FY18, the liquid asset portfolio had structure to a sub-portfolio structure as follows: a relatively long duration, as a result of IDA’s interest immunization strategy, implemented through Tranche  Operational Sub-Portfolio: Holds liquidity to 1. The longer duration of the portfolio leads to higher meet daily cash requirements. Tranche 3 (Short- sensitivity to market rates, and relatively large term Investment Tranche) has become the unrealized mark-to market gains/losses depending on Operational Sub-Portfolio. the magnitude of the changes in interest rates. IDA’s  Stable Sub-Portfolio: Sized initially to hold the return for FY19 was 2.29% primarily due to unrealized prudential minimum level of liquid assets less the mark-to-market gains reflecting the decrease in yield eligible amount of Tranche 1 assets which covers curves across major currencies. Table 20 provides a net liabilities maturing over the next 24 months breakdown of the average balances and returns of and any eligible amounts from the discretionary IDA’s liquid asset portfolio. For details on returns of sub-portfolio. Tranche 2 (Medium Term the total portfolio, refer to Section IV: Financial Investment Tranche) has become the Stable Sub- Results. Portfolio.  Discretionary Sub-Portfolio: Created to invest additional liquidity beyond what is required for the Operational and Stable sub-portfolios. 28 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section VII: Investment Activities Table 20: Average Balances and Returns by Sub-Portfolio In millions of U.S. dollars, except rates in percentages FY19 FY18 Average Average Sub Portfolios Return Return Balance Balance Operational $ 7,614 0.81% $ 8,155 0.74% Stable 10,027 1.91% 5,022 0.65% a a Discretionary 989 2.60% 1,503 0.40% Tranche 1 13,411 3.38% 16,915 0.70% Total $ 32,041 2.29% $ 30,468 0.65% a. Since its creation in April 2018. IDA’s liquid assets are held mainly in the following minimum was $15.9 billion. The prudential minimum types of highly rated, fixed-income instruments. See for FY20 has been set at $18.8 billion. See Section IX Table 25 for eligibility criteria for IDA’s investments. – Risk Management for details on how IDA manages liquidity risk.  Government and Agency Obligations.  Time deposits, and other unconditional Non-Trading Portfolio obligations of banks and financial During FY15, with the proceeds of a concessional loan institutions. from a member, IDA purchased a debt security issued by the IFC. IDA elected to measure the security at fair  Asset-backed securities (including mortgage- value, so that the measurement method (fair value) backed securities). could be consistently applied to all its investments.  Currency and interest rate derivatives The changes in fair value for this security are reflected (including currency forward contracts). in the Statement of Income. As of June 30, 2019, the non-trading portfolio had a fair value of $721 million  Exchange-traded options and futures. ($812 million in FY18). See Note C: Investments in IDA’s prudential minimum liquidity policy, ensures the Notes to the Financial Statements for the year that it holds sufficient liquidity. The prudential ended June 30, 2019. minimum liquidity level is set at 80% of 24 months of projected net outflows. For FY19, the prudential IDA Management’s Discussion and Analysis: June 30, 2019 29 Management’s Discussion and Analysis Section VIII: Borrowing Activities Section VIII: Borrowing Activities Concessional Partner Loans Market Debt Introduced in IDA17, Concessional Partner Loans In April 2018, for the first time, IDA issued $1.5 (CPLs) will continue as a source of funding in IDA18. billion of debt in the international capital markets. This The terms in IDA18 are similar to IDA17, where the debt was denominated in U.S. dollars and has a borrowing terms of the concessional loans from maturity of five years. As part of IDA’s asset-liability members aim to follow the concessional features of management strategy, IDA also entered into derivative IDA’s loans. transactions to convert the fixed-rate bond into a floating-rate instrument. The maturities of the CPLs are either 25 or 40 years to match the terms of IDA’s loans, with a grace period of During FY19, IDA for the first time issued short-term 5 years for a 25-year loan and 10 years for a 40-year debt instruments. As of June 30, 2019, the total loan. The loans have an all-in SDR equivalent coupon amount outstanding for these instruments was $1.9 of up to one percent. billion, which was also the maximum month-end balance outstanding during the year. The weighted- Voting rights are allocated to members who provide average rate for short-term debt instruments at the end concessional loans following the drawdowns by IDA, of the fiscal year was 2.54%. and are based on the cash paid, computed as the derived grant element of the loan. The grant element, Other Short-Term Borrowings which is paid in and recorded as equity, is a function of the terms of the loan and the discount rate agreed Under its Investment Guidelines, IDA is allowed to upon during the replenishment discussions - 2.35% enter into transactions involving securities sold under SDR equivalent for 25-year maturity and 2.70% for repurchase agreements and securities lent under 40-year maturity in IDA18. In IDA17 the discount rate securities lending agreements. These transactions are was a single rate of 2.65% SDR equivalent. accounted for as short-term borrowings. The agreements are secured predominantly by high quality As of June 30, 2019, the borrowings outstanding collateral, including government issued debt, and are balance relating to concessional loans from members used both to enhance returns and for liquidity was $6.8 billion, an increase of $1 billion as compared management purposes. to June 30, 2018 ($5.8 billion). The increase is primarily due to additional loan proceeds received As of June 30, 2019, securities lent or sold under during the current fiscal year. Interest expense repurchase agreements totaled $698 million, a associated with these loans was $128 million in FY19 decrease of $1,843 million over June 30, 2018. Table (FY18 - $103 million). 21 provides details on these short-term borrowing activities. Table 21: Other Short-Term Borrowings In millions of U.S. dollars, except rates in percentages As of June 30, 2019 2018 2017 Securities sold under repurchase agreements and securities lent under securities lending agreements, Balance at year-end $ 698 $ 2,541 $ 2,560 Average monthly balance during the year $ 1,417 $ 2,767 $ 2,576 Maximum month-end balance $ 2,465 $ 4,090 $ 3,261 Weighted-average rate at end of fiscal year 2.71% 1.84% 0.74% Weighted-average rate during the fiscal year 2.20% 0.98% 0.58% 30 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section IX: Risk Management Section IX: Risk Management Risk Governance IDA’s financial and operational risk governance structure is built on the “three lines of defense” IDA’s risk management processes and practices principle where: continually evolve to reflect changes in activities in response to market, credit, product, operational, and  Business units are responsible for directly other developments. The Board, particularly Audit managing risks in their respective functional Committee members, periodically review trends in areas, IDA’s risk profiles and performance, and any major  The Vice President and WBG Chief Risk Officer developments in risk management policies and (CRO) provides direction, challenge, and controls. oversight over financial and operational risk Management believes that effective risk management activities, and is critical for its overall operations. Accordingly, the  Internal Audit provides independent oversight. risk management governance structure is designed to IDA’s risk management process comprises: risk manage the principal risks IDA assumes in its identification, assessment, response and risk activities, and supports Management in its oversight monitoring and reporting. IDA has policies and function, particularly in coordinating different aspects procedures under which risk owners and corporate of risk management and in connection with risks that functions are responsible for identifying, assessing, are common across functional areas. responding to, monitoring and reporting risks. Figure 5: Financial and Operational Risk Management Structure rd Internal Audit 3 Line of Defense Risk Oversight nd CRO 2 Line of Defense Risk Coverage Financial Risk Operational Risk Risk Owners Business Units st 1 Line of Defense Risk Process Monitor & Identify Assess Respond Report Risk Oversight and Coverage practices across the WBG. The CRO also helps enhance cooperation between the entities and Financial and Operational Risk Management facilitates knowledge sharing in the risk management The CRO has an overview of both financial and function. operational risks. These risks include (i) country credit The risk of development outcomes (development risks in the core sovereign lending business, (ii) outcome risks) of IDA’s lending activities is market and counterparty risks including liquidity risk, monitored at the corporate level by Operations Policy and (iii) operational risks relating to people, processes and Country Services (OPCS). Where fraud and and systems. In addition, the CRO works closely with corruption risks may impact IDA-financed projects, IBRD, IFC, and MIGA’s Management to review, OPCS, the Regions and Practice Groups, and the measure, aggregate, and report on risks and share best Integrity Vice Presidency jointly address such issues. IDA Management’s Discussion and Analysis: June 30, 2019 31 Management’s Discussion and Analysis Section IX: Risk Management The following three departments report directly to the CRO: The Credit Risk Department  Identifies, measures, monitors, and manages country credit risk faced by IDA. (CROCR)  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. The Market and Counterparty  Responsible for market, liquidity, and counterparty credit risk oversight, Risk Department (CROMC) 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. The Operational Risk  Provides direction and oversight for operational risk activities by business Department (CROOR) 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 6 depicts IDA’s management risk committee structure for financial and operational risks: Figure 6: Management Risk Committee Structure for Financial and Operational Risks 32 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section IX: Risk Management Financial Risk Committees: operational risk profile. The ORC is chaired by the CRO and escalates significant risks/decisions to the The Finance and Risk Committee (FRC), a Vice FRC and ERC. President level committee, provides a high-level governance structure for decisions that may have Management of IDA’s Risks financial risks. The FRC is chaired by the Managing Director and WBG Chief Financial Officer (MDCFO) IDA assumes financial risks in order to achieve its and approves, clears, or discusses: (a) risk policy and development and strategic objectives. IDA’s financial procedure documents related to financial integrity, risk management framework is designed to enable and income sustainability and balance sheet strength, and support the institution in achieving its goals in a (b) issues and new business initiatives with policy financially sustainable manner. IDA manages credit, implications related to IDA’s risks in the areas of market and operational risks for its financial activities finance, which include country credit, market, which include lending, borrowing and investing counterparty, liquidity, model risks, and operational (Table 22). The primary financial risk to IDA is the risks related to the finance business functions. The country credit risk inherent in its loan and guarantee FRC helps to integrate individual components of portfolio. IDA is also exposed to risks in its liquid finance and risk management activities by building on asset and derivative portfolios, where the major risks mechanisms and processes already in place and are interest rate, exchange rate, commercial provides a forum for discussing and communicating counterparty, and liquidity risks. IDA’s operational significant risk related issues. The FRC meets risk management framework is based upon a regularly to discuss the financial performance, new structured and uniform approach to identify, assess products and services, and risk management of IDA. and monitor key operational risks across business units. The Board, particularly the Audit Committee, The New Business Committee (NBC) is a standing periodically reviews trends in IDA’s risk profiles and committee of the FRC. The NBC provides advice, performance, as well as any major developments in guidance and recommendations to the FRC, by risk management policies and controls. performing due diligence over new financial products Table 22: Summary of IDA's Specific Risk Categories or services to ensure that Management has a full Types of Financial How the risk is managed understanding of the rationale, costs, risks and rewards Risk of the product or service being considered. Credit Risk Operational Risk Committees: Country Credit Risk IDA’s credit-risk-bearing capacity and individual country exposure The Enterprise Risk Committee (ERC) is a limits. corporate committee that has oversight over operational and non-financial risks across IDA. Counterparty Credit Counterparty credit limits and Chaired by IDA’s Managing Director and Chief Risk collateral. Administrative Officer (MDCAO), it consists of a Vice President level committee members to review Market Risk and discuss enterprise risk matters. Specifically, the Interest Rate Risk Interest rate derivatives to match Committee has a governance role over risk matters the sensitivity of assets and liabilities. relating to corporate security, business continuity and IT security. The ERC also sponsors the further Exchange Rate Risk Currency derivatives to match the development of the enterprise risk management currency composition of assets framework including an annual high-level survey of and liabilities. emerging top risks for IDA. Liquidity Risk Minimum liquidity target levels. Operational Risk Committee (ORC) is the main governance committee for operational risk and Operational Risk Mitigating controls and appropriate provides a mechanism for an integrated review and risk response measures. response across IDA units on operational risks associated with people, processes, and systems Capital Adequacy including business continuity, and recognizing that business units remain responsible for managing IDA uses a solvency-based capital adequacy model, operational risks. The Committee’s key which mandates that IDA holds capital for credit risk, responsibilities include monitoring significant market risk and operational risk covering all activities operational risk matters and events on a quarterly basis and assets on its books. The main measure of capital to ensure that appropriate risk-response measures are adequacy is Deployable Strategic Capital (DSC), taken and reviewing and concluding on IDA’s overall which is the capital available to support future IDA Management’s Discussion and Analysis: June 30, 2019 33 Management’s Discussion and Analysis Section IX: Risk Management commitments, over and above the current portfolio. allowance to reflect losses that result from valuing IDA is required, by the Board, to keep the DSC at IDA’s concessional loan portfolio in present value levels greater than or equal to zero percent. The DSC terms using market interest rates. This allowance is is calculated as the amount by which Total Resources calculated using a stressed interest rate to account for Available (TRA) exceed Total Resources Required a potential future rise in market interest rates. The CB (TRR), plus a Conservation Buffer (CB). The TRA is an extra buffer in the amount of 10 percent of TRA. consists of IDA’s existing equity plus its outstanding As of June 30, 2019, the DSC was 35.3%, lower by loan loss reserve. The TRR is the minimum capital 2.1% compared with June 30, 2018 (37.4%). The required to cover expected and unexpected losses, decrease in the ratio was mainly due to the increase in (under a stressed but still plausible downside TRR which was primarily due to the increase in total scenario), in connection with all of IDA’s currently exposure at default. See Table 23 below. existing operations and assets. It also includes a capital Table 23: Deployable Strategic Capital Ratio In billions of U.S. dollars except ratios in percentages As of June 30, 2019 2018 Total Resources Available (TRA) $ 167.6 $ 168.3 Total Resources Required (TRR)a 91.6 88.5 Conservation Buffer (CB) 16.8 16.8 Deployable Strategic Capital (DSC = TRA - TRR - CB) $ 59.2 $ 63.0 Deployable Strategic Capital as a percentage of Total Resources Available 35.3% 37.4% a. TRR is increased for the $2.5 billion allocated to the Private Sector Window as it is utilized. Asset Coverage Principles Country Credit Risk In addition to the DSC framework, IDA has policies in IDA’s lending management framework encompasses place to ensure alignment of its lending and borrowing the long-standing PBA mechanism and allocation activities. Specifically, the Board approved the framework agreed at each replenishment, following asset coverage principles: complemented by additional considerations required when accessing debt markets to ensure adherence to  Management will monitor the level of assets risk management (capital adequacy) requirements. available to satisfy all of IDA’s borrowings and shall adjust future lending and grant While the PBA framework was not originally intended commitments should the level of asset coverage as a credit quality metric, it incorporates factors related fall below the level expected for a triple-A entity. to country credit risk. The PBA determines the volume of concessional IDA resources allocated to each  Management will monitor IDA’s liquidity to country, based on performance in implementing ensure its ability to satisfy its borrowing and policies that promote economic growth and poverty commitment obligations even under stressed reduction, as assessed under the Country Policy and conditions taking into account the level expected Institutional Assessment (CPIA). The CPIA includes for a triple-A entity without callable capital. economic management criteria, such as fiscal policy  If IDA’s access to the capital markets or and debt policy and management. alternative sources of cash funding is impaired, then no additional loan, credit or grant In addition to these considerations in the PBA, IDA commitments will be approved until access to assesses the country credit risk of all its borrowers. cash funding, has resumed or all market debt is Based on these risk ratings, to manage overall repaid. portfolio risk, the allocation outcomes of the PBA and other mechanisms are reviewed to ensure that they are Credit Risk compatible with the Deployable Strategic Capital IDA faces two types of credit risk: country credit risk Framework and Single Borrower Limit. and counterparty credit risk. Country credit risk is the Single Borrower Limit risk of loss due to a country not meeting its contractual obligations, and counterparty credit risk is the risk of Portfolio concentration risk, which arises when a small loss attributable to a counterparty not honoring its group of borrowing countries account for a large share contractual obligations. IDA is exposed to commercial of loans outstanding, is a key consideration for IDA. as well as noncommercial counterparty credit risk. Concentration risk is managed through the SBL, which caps exposure to any single borrowing country 34 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section IX: Risk Management at 25 percent of equity, in line with the Basel-based developing countries. In each case, IDA agreed to maximum exposure limit. provide debt relief in return for future compensation from members for forgone reflows, ensuring that For FY20 the SBL has been set at $41 billion (25 IDA’s financial capacity would not be reduced. For a percent of $163 billion of equity as of June 30, 2019), borrower to be eligible for debt relief on its loans with the same as for FY19. Currently, the maximum IDA, they are required to maintain macroeconomic country exposure levels compatible with IDA’s stability, carry out key structural and social reforms, overall capital adequacy target are lower than the SBL and maintain all loans in accrual status. for all IDA-borrowing countries. As a consequence, the SBL is not currently a constraining factor. Probable Losses, Overdue Payments and Non- Performing Loans As of June 30, 2019, the ten countries with the highest exposures accounted for 67% of IDA’s total exposure When a borrower fails to make payments on any (Figure 3). IDA’s largest exposure to a single principal, interest or other charges due to IDA, IDA borrowing country, India, was $23 billion as of June may suspend disbursements immediately on all loans 30, 2019 (Table 14). Monitoring these exposures and grants to that borrower. IDA’s current practice is relative to the SBL, however, requires consideration of to exercise this option using a graduated approach the repayment profiles of existing loans, as well as (Table 24). These practices also apply to member disbursement profiles and projected new loans and countries eligible to borrow from both IDA and IBRD, guarantees. and whose payments on IBRD loans may become overdue. It is IDA’s practice not to reschedule interest Debt Relief or principal payments on its loans or participate in debt IDA has participated in two comprehensive debt relief rescheduling agreements with respect to its loans. As initiatives, HIPC and MDRI, adopted by the global of June 30, 2019, one of the IDA borrowing countries development community to reduce the debt burdens of in the accrual portfolio had overdue payments beyond 45 days. Table 24: Treatment of Overdue Payments 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 Overdue by 30 days 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. 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 Overdue by 45 days 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. 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 by 60 days 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. 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 Overdue by more not yet paid on loans outstanding are deducted from the income for the current period. To the extent that than six months these payments are received, they are included in income. At the time of arrears clearance, a decision is made on the restoration of accrual status on a case-by-case basis; 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 24, defined set of criteria are met, including a clear path to IDA has provided financing to countries with overdue arrears clearance. For more details on exceptional payments, in very specific situations: financing, see Section III: IDA’s Financial Resources.  IDA has provided grants from its Crisis Response The loan-loss provision is calculated using IDA’s Window to third party UN agencies for use in exposure, the expected default frequency (EDF), or Somalia and Zimbabwe in response to major probability of default, and the estimated loss in the crises, and; event of default. Probable losses inherent in the loan portfolio attributable to country credit risk are covered  IDA has financed a few regional projects, for the by the accumulated provision for losses on loans and benefit of countries with overdue payments to other exposures, including PSW exposures, while IDA, through its Regional Program Window. unexpected losses owing to country credit risk are In addition, IDA may engage with countries with covered by equity. overdue payments when a very narrow and well- IDA Management’s Discussion and Analysis: June 30, 2019 35 Management’s Discussion and Analysis Section IX: Risk Management A key determinant in the provision for losses on loans Derivative Instruments and other exposures is IDA’s borrowing country credit In the normal course of its business, IDA enters into risk ratings. These ratings are IDA’s own assessment various derivative instruments to manage foreign of borrowers’ ability and willingness to repay IDA on exchange and interest rate risks. These instruments are time and in full. also used to help borrowers to manage their financial In FY19, IDA recorded a $316 million loan loss risks. Derivative transactions are conducted with other provisioning charge, compared with a $548 million financial institutions and, by their nature, entail charge of provision in FY18. As of June 30, 2019, IDA commercial counterparty credit risk. had $157 billion of loans outstanding, of which loans While the volume of derivative activity can be in non-accrual status represent 1.6%. IDA’s total measured by the contracted notional value of provision for losses on loans was $2.8 billion derivatives, notional value is not an accurate measure (excluding accumulated provision for losses on debt of credit or market risk. IDA uses the estimated relief) which represents a provisioning rate of 1.8%. replacement cost of the derivative instruments, or IDA’s provisioning rate on loans for FY15 through potential future exposure (PFE), to measure credit risk FY19 has been between 1.0% to 1.8%. For a summary with counterparties.  of countries with loans or guarantees in nonaccrual status as of June 30, 2019, see Notes to Financial Under IDA’s mark-to-market collateral arrangements, Statements–Note F–Loans and Other Exposures. IDA receives collateral when mark-to-market exposure is greater than the ratings-based collateral Commercial Counterparty Credit Risk threshold. As of June 30, 2019, IDA had received $11 IDA is exposed to commercial counterparty credit million of cash collateral for its derivative transactions risk. This is the normal risk that counterparties fail to (June 30, 2018 – $2 million). meet their payment obligations under the terms of the Since becoming a rated entity, IDA has started to contract or other financial instruments. Effective expand the number of derivative agreements that it has management of counterparty credit risk is vital to the with commercial counterparties. In these agreements, success of IDA’s funding, investment, and IDA is not required to post collateral as long as it asset/liability management activities. The monitoring maintains a triple-A credit rating. See Notes to and management of these risks is continuous as the Financial Statements - Note E–Derivative Instruments market environment evolves. for more details. IDA mitigates the counterparty credit risk from its Investment Securities investment and derivative holdings through the credit approval process, the use of collateral agreements and IDA’s Board-approved General Investment risk limits, and other monitoring procedures. The Authorization provides the basic authority for IDA to credit approval process involves evaluating invest its liquid assets. Furthermore, all investment counterparty and product specific creditworthiness, activities are conducted in accordance with a more assigning internal credit ratings and limits, and detailed set of Investment Guidelines set by determining the risk profile of specific transactions. management. The Investment Guidelines are approved Credit limits are set and monitored throughout the by the MDCFO and implemented by the Treasurer. year. Counterparty exposure is updated daily, taking The most recent update was in FY18, to incorporate into account; current market values of assets held, the changes required under the IDA18 hybrid estimates of potential future movements of exposure financing model. Issuer and product investment for derivative instruments, and related counterparty eligibility and risk parameters relative to benchmarks collateral agreements. Collateral posting requirements are core components of these Guidelines. The are based on thresholds driven by public credit ratings. Guidelines also include a consultative loss limit to Collateral held includes cash and highly rated liquid reflect a level of tolerance for the risk of investment securities. underperforming the benchmark in any fiscal year and a duration deviation metric. Clear lines of IDA’s liquid asset portfolio consists mostly of responsibility for risk monitoring and compliance are sovereign government bonds, debt instruments issued highlighted in the Guidelines. Credit risk appetite is by sovereign government agencies, and time deposits conveyed through specific eligibility criteria (Table with banks. More than half of these investments are 25). IDA has procedures in place to monitor with issuers and counterparties rated triple-A or performance against this limit and potential risks, and double-A. (Table 26) it takes appropriate actions if the limit is reached. All investments are subject to additional conditions specified by the Chief Risk Officer department, as deemed necessary. 36 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section IX: Risk Management Table 25: Eligibility Criteria for IDA’s Investments Eligible Investmentsa Description IDA may only invest in obligations issued or unconditionally guaranteed by governments of Sovereigns member countries with a minimum credit rating of AA-. However, no rating is required if government obligations are denominated in the national currency of the issuer. IDA may invest only in obligations issued by an agency or instrumentality of a government of Agencies a member country, a multilateral organization, or any other official entity other than the government of a member country, with a minimum credit rating of AA-. Corporates and asset-backed IDA may only invest in securities with a triple-A credit rating. securities IDA may only invest in time deposits issued or guaranteed by financial institutions, whose Time depositsb senior debt securities are rated at least A-. Commercial Paper IDA may only invest in short-term borrowings (less than 190 days) from commercial banks, corporates, and financial institutions with at least two Prime-1 ratings. Securities lending, and borrowing, repurchases, IDA may engage in securities lending, against adequate collateral repurchases and reverse repurchases, against adequate margin protection, of the securities described under the resales, and reverse sovereigns, agencies, and corporates and asset-backed security categories. repurchases IDA may engage in collateralized forward transactions, such as swap, repurchase, resale, Collateral Assets securities lending, or equivalent transactions that involve certain underlying assets not independently eligible for investment. In each case, adequate margin protection needs to be received. a. All investments are subject to approval by the Chief Risk Officer department and must appear on the “Approved List” created by the department. b. Time deposits include certificates of deposit, bankers’ acceptances and other obligations issued or unconditionally guaranteed by banks or other financial institutions. Commercial Counterparty Credit Risk Exposure The credit quality of IDA’s investment portfolio remains concentrated in the upper end of the credit As a result of IDA’s use of mark-to-market collateral spectrum with 60% of the portfolio rated AA or above arrangements for swap transactions, its residual as of June 30, 2019, reflecting IDA’s continued commercial counterparty credit risk exposure is preference for highly rated securities and concentrated in the investment portfolio, in counterparties across all categories of financial instruments issued by sovereign governments and instruments. Total commercial counterparty credit non-sovereign holdings (including Agencies, Asset exposure, net of collateral held, was $32,292 million backed securities, Corporates, and Time Deposits). as of June 30, 2019. (Table 26). Table 26: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating In millions of U.S. dollars, except rates in percentages As of June 30, 2019 June 30, 2018 Counterparty Non- Total % of Non- Total % of Sovereigns Sovereigns Rating a Sovereigns Exposure Total Sovereigns Exposure Total AAA $ 2,744 $ 7,294 $ 10,038 31 $ 6,586 $ 5,003 $ 11,589 32 AA 1,613 7,579 9,192 29 2,659 6,861 9,520 27 A 9,435 3,626 13,061 40 9,752 4,783 14,535 41 BBB or below - 1 1 * 30 3 33 * Total $ 13,792 $ 18,500 $ 32,292 100 $ 19,027 $ 16,650 $ 35,677 100 a. Average rating is calculated using available ratings for the three major rating agencies; however, if ratings are not available from each of the three rating agencies, IDA uses the average of the ratings available from any of such rating agencies or a single rating to the extent that an instrument or issuer (as applicable) is rated by only one rating agency. * indicates percentage less than 0.5% For the contractual value, notional amounts and Credit and Debit Valuation Adjustments  related credit risk exposure amounts by instrument see Most outstanding derivative positions are transacted Notes to Financial Statements - Note E- Derivative over-the-counter and therefore valued using internally Instruments. developed valuation models. For commercial and non- commercial counterparties where IDA has a net exposure (net receivable position), IDA calculates a IDA Management’s Discussion and Analysis: June 30, 2019 37 Management’s Discussion and Analysis Section IX: Risk Management Credit Value Adjustment (CVA) to reflect credit risk. maturity and instrument type. Given IDA’s lengthy For net derivative positions with commercial and non- disbursement profile, the duration of IDA’s assets are commercial counterparties where IDA is in a net relatively long. This long duration, combined with payable position, IDA calculates a Debit Valuation volatility in market interest rates, would result in Adjustment (DVA) to reflect its own credit risk. significant year-on-year variability in the fair value of IDA’s equity (difference between the fair value of The CVA is calculated using the fair value of the IDA’s assets and its liabilities). Management derivative contracts, net of collateral received under continues to monitor and evaluate mitigation credit support agreements, and the probability of measures. However, since the loan portfolio is not counterparty default based on the Credit Default reported at fair value under U.S. GAAP the impact of Swaps (CDS) spread and, where applicable, proxy this variability on IDA’s reported Balance Sheet is not CDS spreads. IDA does not currently hedge this fully evident. Table 27 provides a fair value estimate exposure. The DVA calculation is generally of IDA’s financial assets and liabilities. consistent with the CVA methodology and incorporates IDA’s own credit spread as observed As of June 30, 2019, IDA’s investment-trading through the CDS market. As of June 30, 2019, IDA portfolio (liquid asset portfolio) had a duration of recorded a CVA adjustment on its balance sheet of $2 eighteen months. During FY19, this portfolio million, and a DVA of less than $1 million, on experienced unrealized mark-to-market gains of $351 outstanding derivatives. million as a result of the decrease in the yield curves of major currencies. In contrast, the portfolio Market Risk experienced unrealized mark-to-market losses of $128 IDA is exposed to changes in interest and exchange million in FY18, due to the decrease in yield curves rates. The introduction of market debt financing into during that time. IDA’s business model from IDA18 presents additional Under IDA18, the investment-trading portfolio was exposures. Accordingly, IDA has updated its ALM adjusted to reflect the new financing model. The Framework in order to minimize its exposure to portfolio has transitioned from the previous tranche market risk associated with this new debt issuance. structure to a sub-portfolio structure which is The impending discontinuance of LIBOR and the comprised of a Stable portfolio, Discretionary transition to alternative reference rates also presents a portfolio and an Operational portfolio. See Section significant risk to IDA’s activities.  VII: Investment Activities. IDA uses derivatives to manage its exposure to various Under the new integrated financing model, IDA market risks. These are used to align the interest and employs the following strategies to continue to currency composition of its assets (loan and enhance its management of interest rate risk: investment trading portfolios) with that of its liabilities (borrowing portfolio) and equity. Figure 7 below  The capital adequacy policies factor in the illustrates the use of derivatives for market borrowing sensitivity to interest rates. portfolios. Loan and investment portfolios are largely  Matching interest rates between assets and related maintained in SDR and its component currencies. funding to minimize open interest rate positions. Figure 7: Use of Derivatives for Market Borrowings  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 U.K. Financial Conduct Authority (FCA), regulator of the London Interbank Offered Rate (LIBOR), announced that banks would not be required to submit rates for LIBOR after 2021. The announcement created uncertainty about LIBOR’s future and its implications for other rates and indices Interest Rate Risk used as benchmarks. IDA is exposed to interest rate risk due to mismatches IDA’s investment, loan, and borrowing portfolios all between its assets (loan and investment portfolios) and have instruments that use LIBOR as a reference rate, its liabilities (borrowing portfolio) both in terms of as well as derivative transactions that support these 38 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section IX: Risk Management portfolios. The planned replacement of LIBOR in Accumulated Other Comprehensive Income, in presents risks to the financial instruments IDA holds equity. Translation adjustments relating to non- or originates. The risks related to the transition include functional currencies are reported in IDA’s Statement valuation issues that may arise from the unavailability of Income (see Note A: Summary of Significant of suitable alternative reference rates, operational risk, Accounting and Related Policies in the Notes to the and potential impacts on financial results. Financial Statements). Given the uncertainty about availability of suitable IDA uses currency forward contracts to convert future alternative reference rates, IDA is actively inflows from members’ receivables provided in participating in industry working groups and national currencies into the five currencies of the SDR collaborating with stakeholders to prepare for the basket. As of June 30, 2018, IDA had entered into change. IDA has an ongoing program to identify, $13.2 billion in notional foreign exchange forwards evaluate and mitigate the risks involved with the directly with market counterparts in order to manage transition of its transactions and products to alternative exchange rate risk. IDA’s economic hedges have been reference rates. regularly rebalanced during FY19. For further details, see Notes to Financial Statements–Note E–Derivative Exchange Rate Risk Instruments. IDA faces foreign exchange rate risk exposure as a The payable leg of the currency forward contracts result of the currency mismatch between its economically hedging member equity contribution commitments for loans and grants, which are mainly pledges is denominated in non-functional currencies. denominated in SDRs; equity contributions from Accordingly, appreciation (depreciation) of these members, which are typically denominated in national currencies against the U.S. dollar results in exchange currencies; and the portion of IDA’s internal resources rate losses (gains), which are reported in the Statement and expenditures that is denominated in U.S. dollars. of Income. The translation adjustment on future Changes in exchange rates affect the capital adequacy inflows from members is the economic offset to the of IDA when the currency of the equity funding the translation adjustment on non-functional currencies of loan portfolio is different from that of the loan currency forward contracts. exposure. Accordingly, the aim of IDA’s exchange Figure 8: Translation Adjustment on non-functional rate risk management is the protection of IDA’s currencies financial capacity, as measured by the capital adequacy framework. (in millions of U.S. dollars) a The key components of IDA’s foreign exchange risk TA on non-functional currencies mitigation framework include: TA on future inflows from members' receivables  Aligning the currency composition of the funding sources with the currency composition of IDA’s FY19 (126) 105 assets.  Non-SDR sources of funding will be hedged to FY18 (185) 89 SDRs, where required, to lock-in the SDR value. (200) (100) - 100 200 Adjusting the currency of funding sources when single currency credits are approved, in order to a. Reported in IDA’s Statement of Income maintain the alignment of currency composition of loans to sources of funding. In FY19, the translation adjustment gains on non- functional currencies were due to the depreciation of  Aligning the currency composition of its equity to the majority of the non-functional currencies against that of the currency composition of required capital the U.S. dollar. The depreciation was more prominent (“Total Resources Required” measure in capital in FY19 compared to FY18. adequacy framework). The difference between the reported translation The reported levels of its assets, liabilities, income, adjustments and the effect of foreign exchange and expenses in the financial statements are affected movements on the economic offsets (future inflows), by exchange rate movements in all the currencies in primarily represent the effect of foreign exchange which IDA transacts, relative to its reporting currency, movements on the member equity contributions in the U.S. dollar. These movements are shown as non-functional currencies that are not economically currency translation adjustments. Translation hedged through forward contracts due to their adjustments relating to the revaluation of assets and relatively small contribution amount or the liabilities denominated in SDR and SDR component unpredictability of the expected payment date. These currencies, (IDA’s functional currencies), are reflected IDA Management’s Discussion and Analysis: June 30, 2019 39 Management’s Discussion and Analysis Section IX: Risk Management residual equity contributions are hedged using a shock scenarios as well as to give it flexibility in currency correlation methodology under the overall timing its borrowing transactions and to meet working currency management framework. capital needs. Liquidity Risk Operational Risk Liquidity risk arises in the general funding of IDA’s Operational risk is defined as the risk of loss resulting activities and in managing its financial position. It from inadequate or failed internal processes, people includes the risk of IDA being unable to fund its and systems, or from external events. portfolio of assets at appropriate maturities and rates, IDA recognizes the importance of operational risk and the risk of being unable to liquidate a position in a management activities, which are embedded in its timely manner at a reasonable price. financial operations. As part of its business activities, IDA’s liquidity management guidelines were revised IDA is exposed to a range of operational risks in FY18 to reflect the integrated financing model including physical security and staff health and safety, under IDA18. IDA’s aggregate liquid asset holdings cyber security, business continuity, and external are now kept above a specified prudential minimum to vendor risks. IDA’s approach to managing operational safeguard against cash flow interruptions. The risk includes a dedicated program for these risks and a Prudential Minimum is equal to 80% of 24 months of robust process that includes identifying, assessing and projected net outflows. For FY19 the prudential prioritizing operational risks, monitoring and minimum was $15.9 billion. For FY20, the prudential reporting relevant key risk indicators, aggregating and minimum has been set at $18.8 billion. analyzing internal and external events, and identifying emerging risks that may affect business units and IDA will hold liquidity above the prudential minimum developing risk response and mitigating actions. to ensure sufficient liquidity under a wide range of 40 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section X: Fair Value Analysis Section X: Fair Value Analysis Fair Value Analysis and Results The fair value of loans is calculated using market- based methodologies, which incorporate the Fair value reflects the most current and complete respective borrowers’ Credit Default Swap (CDS) expectation and estimation of the value of assets and spreads and, where applicable, proxy CDS spreads. liabilities. It aids comparability and can be useful in Basis adjustments are applied to market recovery decision-making. On a reported basis, IDA’s loans and levels to reflect IDA’s recovery experience. The fair borrowings, in the form of concessional loans from value of borrowings from members is calculated using members, are carried at amortized cost, while all a discounted cash flow method which relies on market instruments in its investment portfolio (trading and observable inputs such as yield curves, foreign non-trading) and existing market debt are carried at exchange rates, basis spreads and funding spreads. fair value. Whilst IDA intends to hold its loans and borrowings to maturity, a fair value estimate of IDA’s Loan Portfolio financial assets and liabilities along with their As of June 30, 2019, for the fair value basis, there was respective carrying values is presented in Table 27. an $18.2 billion negative adjustment on IDA’s net The fair value of these instruments is affected by loans outstanding bringing the fair value to $133.8 changes in market variables such as interest rates, billion. This compares with a $27.1 billion adjustment exchange rates, and credit risk. Management uses fair as of June 30, 2018, bringing the fair value to $118.5 value to assess the performance of the investment- billion. The $9 billion variance in the adjustment was trading portfolio, and to manage various market risks, driven primarily by the decrease in derived SDR including interest rate risk and commercial interest rates. counterparty credit risk. Table 27 shows that IDA’s Borrowings equity on a fair value basis ($143 billion) is less than on a carrying value basis ($163 billion) primarily due The fair value of borrowings from members increased to the $18.2 billion negative fair value adjustment on from $6.7 billion as of June 30, 2018 to $8.5 billion as IDA’s net loans outstanding. This negative fair value of June 30, 2019. The increase was primarily driven adjustment arises due to the concessional nature of by the new borrowings during the year and impact of IDA’s loans; IDA’s interest rates are below market decrease in interest rates. rates for the given maturity of its loans and risk profile of the borrowers. IDA Management’s Discussion and Analysis: June 30, 2019 41 Management’s Discussion and Analysis Section X: Fair Value Analysis Table 27: Fair Value Estimates and Reported Basis Value In millions of U.S. dollars As of June 30, 2019 2018 Carrying Carrying Fair Value Fair Value Value Value Assets Due from Banks $ 138 $ 138 $ 523 $ 523 Investments (including securities purchased under resale agreements) 32,770 32,770 36,075 36,075 Net Loans Outstanding 151,921 133,764 145,656 118,508 Derivative assets, net 487 487 250 250 Receivable from affiliated organization 878 878 816 816 Other assets 2,359 2,359 1,346 1,346 Total Assets $ 188,553 $ 170,396 $ 184,666 $ 157,518 Liabilities Borrowings Concessional partner loans $ 6,770 $ 8,507 $ 5,811 $ 6,660 Market Borrowings 3,432 3,432 1,494 1,494 Securities sold/lent under repurchase agreements/securities lending agreements, and payable for cash collateral received 698 698 2,541 2,541 Derivative liabilities, net 22 22 296 296 Payable for grants 12,345 12,345 8,743 8,743 Payable to affiliated organization 522 522 479 479 Other liabilities 1,782 1,782 1,357 1,357 Total Liabilities $ 25,571 $ 27,308 $ 20,721 $ 21,570 Equity $ 162,982 $ 143,088 $ 163,945 $ 135,948 Total Liabilities and Equity $ 188,553 $ 170,396 $ 184,666 $ 157,518 42 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section XI: Critical Accounting Policies and the Use of Estimates Section XI: Critical Accounting Policies and the Use of Estimates IDA’s significant accounting policies, as well as classification of each financial instrument. All the estimates made by Management, are integral to its financial models used for input to IDA’s financial financial reporting. While all of these policies require statements are subject to both internal and periodic a certain level of judgment and estimates, significant external verification and review by qualified policies require Management to make highly difficult, personnel. complex, and subjective judgments as these relate to matters inherently uncertain and susceptible to change. Provision for Losses on Loans and Note A to the financial statements contains a summary Other Exposures of IDA’s significant accounting policies including a IDA’s accumulated provision for losses on loans and discussion of recently issued accounting other exposures reflects the probable losses inherent in pronouncements. its nonaccrual and accrual portfolios after taking into Fair Value of Financial Instruments consideration the expected relief under the HIPC Debt Initiative and MDRI and any provision for losses on All fair value adjustments are recognized through the the buy-down of loans. The provision required is a Income Statement. Since IDA has elected the fair function of the expected default frequency and the value option for existing market debt instruments in its assumed severity of the loss given default for each of borrowing portfolio, starting July 1, 2018, upon the borrowers. adoption of ASU 2016-01, IDA will reflect the portion of the change in fair value of these instruments that The expected default frequency is based on the results from a change in IDA’s own credit in Other borrower’s assigned risk rating. The determination of Comprehensive Income. a borrower’s risk rating is based on a quantitative framework which relies primarily on considerations of The fair values of financial instruments are based on a political risk, external debt and liquidity, fiscal policy three-level hierarchy. and public debt burden, balance of payments risks, For financial instruments classified as Level 1 or 2, economic structure and growth prospects, monetary less judgment is applied in arriving at fair value and exchange rate policy, financial sector risks and measures as the inputs are based on observable market corporate sector debt and other vulnerabilities. IDA data. For financial instruments classified as Level 3, periodically reassesses the adequacy of the unobservable inputs are used. These require accumulated provision for losses on loans and other Management to make important assumptions and exposures. judgments in determining fair value measures. Adjustments to the accumulated provision are Investments measured at net asset value per share (or recorded as a charge or a release of provision in the its equivalent) are not classified in the fair value Statement of Income. Actual losses may differ from hierarchy. expected losses due to unforeseen changes in any of Derivative contracts include currency forward the factors that affect borrowers’ creditworthiness. contracts, swaptions, plain vanilla swaps, and The Credit Risk Committee monitors aspects of structured swaps are valued using the standard country credit risk, in particular, reviewing the discounted cash flow methods using market provision for losses on loans and guarantees taking observable inputs such as yield curves, foreign into account, among other factors, any changes in exchange rates and basis spreads. exposure, risk ratings of borrowing member countries, In instances where management relies on instrument or movements between the accrual and non-accrual valuations supplied by external pricing vendors, there portfolios. are procedures in place to validate the appropriateness Additional information on IDA’s provisioning policy of the models used as well as the inputs applied in and the status of nonaccrual loans can be found in the determining those values. Notes to Financial Statements-Note A-Summary of The majority of IDA’s financial instruments which are Significant Accounting and Related Policies and Note recorded at fair value are classified as Level 1 and F- Loans and Other Exposures. Level 2 as of June 30, 2019, as the inputs are based on observable market data and less judgment is applied in arriving at fair value measures. On a quarterly basis, the methodology, inputs and assumptions are reviewed to assess the appropriateness of the fair value hierarchy IDA Management’s Discussion and Analysis: June 30, 2019 43 Management’s Discussion and Analysis Section XI: Critical Accounting Policies and the Use of Estimates Provision for HIPC Debt Initiative and IDA records a provision for all the estimated probable MDRI write-offs of loans outstanding for debt relief to be delivered under the HIPC Debt Initiative and MDRI. The HIPC Debt Initiative is a comprehensive approach Donors have agreed to compensate IDA through to reduce the external debt of the world’s poorest, most member contributions for the foregone loan reflows heavily indebted countries. See Section VI: Other under the HIPC Debt Initiative and MDRI. Development Activities and Programs and Section IX: Risk Management. The adequacy of the accumulated provision for the HIPC Debt Initiative and MDRI is based on both The list of countries potentially eligible under the quantitative and qualitative analyses of various HIPC framework has been limited. No new countries factors, including estimates of Decision and are considered for eligibility unless they met the Completion Point dates of eligible countries. IDA criteria as at the end of 2004 as specified in the periodically reviews these factors and reassesses the initiative. adequacy of the accumulated provision for the HIPC Debt Initiative and MDRI. Adjustments to the The MDRI, approved by the Board in June 2006, accumulated provision are recorded as a charge provides additional debt relief through cancellation of against or addition to income. eligible debt owed to IDA by countries that reach the HIPC completion point. 44 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section XII: Governance and Internal Controls Section XII: Governance and Internal Controls Figure 9: Governance Structure Board of Governors Executive Committee on Development Audit Committee Directors Effectiveness Budget Committee Committee on Governance and Executive Directors’ Administrative Matters Human Resources President Committee General Governance on issues, their role is primarily to serve the Board in discharging its responsibilities. IDA’s decision-making structure consists of the Board of Governors, the Executive Directors, the President, The committees are made up of eight members and Management and staff. The Board of Governors is the function under their respective terms of reference. highest decision-making authority. Governors are These committees are as follows: appointed by their member governments for a five- • Audit Committee - assists the Boards in year term, which is renewable. The Board of overseeing the IDA’s finances, accounting, risk Governors may delegate authority to the Executive management and internal controls (See further Directors (referred to as the Board in this document) explanation below). to exercise any of its powers, except for certain powers enumerated in the IDA Articles. IDA has its own • Budget Committee - assists the Boards in policies and frameworks that are carried out by staff approving the World Bank’s budget and in that share responsibilities for both IDA and IBRD. overseeing the preparation and execution of the IDA’s business plans. The committee provides Executive Directors guidance to management on strategic directions of In accordance with the Articles, Executive Directors IDA. are appointed or elected every two years by their • Committee on Development Effectiveness - member governments. The Board currently has 25 supports the Boards in assessing the IDA’s Executive Directors who represent all 173-member development effectiveness, providing guidance countries. Executive Directors are neither officers nor on strategic directions of IDA, monitoring the staff of IDA. The President is the only member of the quality and results of operations. Board from management, and he serves as a non- voting member and as Chairman of the Board. • Committee on Governance and Executive Directors’ Administrative Matters - assists the The Board is required to consider proposals made by Boards in issues related to the governance of IDA, the President on IDA loans, grants and guarantees and the Boards’ own effectiveness, and the on other policies that affect its general operations. The administrative policy applicable to Executive Board is also responsible for presenting to the Board Directors’ offices. of Governors, at the Annual Meetings, audited accounts, an administrative budget, and an annual • Human Resources Committee- strengthens the report on operations and policies and other matters. efficiency and effectiveness of the Board in discharging its oversight responsibility on the The Board and its committees are in continuous World Bank’s human resources strategy, policies sessions at the main World Bank offices in and practices, and their alignment with the Washington DC, as business requires. Each business needs of the organization. committee's terms of reference establish its respective roles and responsibilities. As committees do not vote IDA Management’s Discussion and Analysis: June 30, 2019 45 Management’s Discussion and Analysis Section XII: Governance and Internal Controls Audit Committee The Audit Committee has the authority to seek advice and assistance from outside legal, accounting, or other Membership advisors as it deems necessary. The Audit Committee consists of eight Executive Business Conduct Directors. Membership in the Audit Committee is determined by the Board, based on nominations by the The WBG promotes a positive work environment in Chairman of the Board, following informal which staff members understand their ethical consultation with Executive Directors. obligations to the institution. In support of this commitment, the institution has in place a Code of Key Responsibilities Conduct. The WBG has both an Ethics Helpline and a The Audit Committee is appointed by the Board for Fraud and Corruption hotline. A third-party service the primary purpose of assisting the Board in offers many methods of worldwide communication. overseeing IDA’s finances, accounting, risk Reporting channels include telephone, mail, email, or management, internal controls and institutional confidential submission through a website. integrity. Specific responsibilities include: IDA has in place procedures for receiving, retaining,  Oversight of the integrity of IDA’s financial and handling recommendations and concerns relating statements. to business conduct identified during the accounting, internal control, and auditing processes.  Appointment, qualifications, independence and performance of the External Auditor. WBG staff rules clarify and codify the staff’s obligations in reporting suspected fraud, corruption, or  Performance of the Internal Audit Department. other misconduct that may threaten the operations or  Adequacy and effectiveness of financial and governance of the WBG. These rules also offer accounting policies and internal controls and the protection from retaliation. mechanisms to deter, prevent and penalize fraud Auditor Independence and corruption in IDA operations and corporate procurement. The appointment of the external auditor for IDA is governed by a set of Board-approved principles. These  Effective management of financial, fiduciary and include: compliance risks in IDA.  Limits on the external auditor’s provision of non-  Oversight of the institutional arrangements and audit-related services; processes for risk management across IDA  Requiring all audit-related services to be pre- In carrying out its role, the Audit Committee discusses approved on a case-by-case basis by the Board, financial issues and policies that affect IDA’s financial upon recommendation of the Audit Committee; position and capital adequacy, with Management, and external auditors, and internal auditors. It also recommends the annual audited financial statements  Renewal of the external audit contract every five for approval to the Board. The Audit Committee years, with a limit of two consecutive terms and monitors and reviews developments in corporate mandatory rotation thereafter. governance and its own role on an ongoing basis. In FY17, the Board approved amendments to the Executive Sessions policy on the appointment of an external auditor which now permits the external auditor to provide non- Under the Audit Committee's terms of reference, it prohibited, non-audit related services subject to may convene an executive session at any time, without monetary limits. Management’s presence. The Audit Committee meets separately in executive session with the external and Broadly, the list of prohibited non-audit services internal auditors. include those that would put the external auditor in the roles typically performed by management and in a Access to Resources and to Management position of auditing their own work, such as Throughout the year, the Audit Committee receives a accounting services, internal audit services, and large volume of information to enable it to carry out provision of investment advice. The total non-audit its duties and meets both formally and informally services fees over the term of the relevant external throughout the year to discuss relevant matters. It has audit contract shall not exceed 70 percent of the audit complete access to Management, and reviews and fees over the same period. discusses with Management topics considered in its Communication between the external auditor and the terms of reference. 46 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Section XII: Governance and Internal Controls Audit Committee is ongoing and carried out as often  Akihiko Nishio was appointed as Vice President, as deemed necessary by either party. The Audit Development Finance (DFi), succeeding Axel Committee meets periodically with the external Van Trotsenburg who was appointed as the new auditor and individual committee members have Vice President for Latin America & Caribbean independent access to the external auditor. IDA’s region. external auditors also follow the communication requirements with the Audit Committee set out under Internal Controls generally accepted auditing standards in the United Internal Control over Financial Reporting States. Each fiscal year, Management evaluates the internal External Auditors control over financial reporting to determine whether The external auditor is appointed to a five-year term, any changes made in these controls during the fiscal with a limit of two consecutive terms, and is subject to year materially affect, or would be reasonably likely to annual reappointment based on the recommendation materially affect, IDA’s internal control over financial of the Audit Committee and approval of a resolution reporting. The internal control framework by the Board. FY18 was the final year of KPMG promulgated by the Committee of Sponsoring LLP’s second term as IDA’s external auditor. Organizations of the Treadway Commission (COSO), “Internal Control - Integrated Framework (2013)” Following a mandatory rebidding of the external audit provides guidance for designing, implementing and contract, IDA’s Board approved the appointment of conducting internal control and assessing its Deloitte & Touche, LLP as IDA’s external auditor for effectiveness. IDA uses the 2013 COSO framework to a five-year term commencing in FY19. assess the effectiveness of the internal control over financial reporting. As of June 30, 2019, management Senior Management Changes maintained effective internal control over financial reporting. See “Management’s report regarding Effective February 1, 2019, Jim Yong Kim resigned as effectiveness of Internal Control over Financial the President of the World Bank Group. David Reporting” on page 52. Malpass was appointed as the President of the World Bank Group effective April 9, 2019. IDA’s internal control over financial reporting was audited by Deloitte & Touche, LLP, and their report Effective December 1, 2018, Arunma Oteh retired as expresses an unqualified opinion on the effectiveness Vice President and Treasurer of IDA. Jingdong Hua of IDA’s internal control over financial reporting as of was appointed as Vice President and Treasurer of IDA, June 30, 2019. See Independent Auditor’s Report on effective January 1, 2019. page 54. Effective December 3, 2018, Joaquim Levy retired as Disclosure Controls and Procedures Managing Director and WBG Chief Financial Officer (MDCFO). On July 12, 2019, Anshula Kant was Disclosure controls and procedures are designed to appointed as the new MDCFO. Bernard Lauwers has ensure that information required to be disclosed is been the acting MDCFO and will continue in that role gathered and communicated to Management as until Ms. Kant assumes her position. appropriate, to allow timely decisions regarding required disclosure by IDA. Management conducted Effective February 1, 2019: an evaluation of the effectiveness of such controls and  Bernard Lauwers accepted a special assignment procedures and the President and the MDCFO have with the office of the Chief Executive Officer, and concluded that these controls and procedures were Jorge Familiar was appointed as the new Vice effective as of June 30, 2019. President and World Bank Group Controller. IDA Management’s Discussion and Analysis: June 30, 2019 47 Management’s Discussion and Analysis Appendix Appendix Glossary of Terms Blend Borrower: IDA Member that is eligible to borrow from IDA on the basis of per capita income and is also eligible to borrow from IBRD. Given the access to both sources of funds, blend borrowers are expected to limit IDA funding to social sector projects and to use IBRD resources for projects in the other sectors. Board: The Executive Directors as established by IDA’s Articles of Agreement. Commitment Authority: Total value of resources available during a particular replenishment including member equity contributions, borrowings, internal resources, IBRD transfers, IFC grants and other resources. Completion Point: When conditions specified in the legal notification sent to a country are met and the country’s other creditors have confirmed their full participation in the HIPC debt relief initiative. When a country reaches its Completion Point, IDA’s commitment to provide the total debt relief for which the country is eligible, becomes irrevocable. Consultative Loss Limit: Reflects a level of IDA’s tolerance for risk of underperforming the benchmark in any fiscal year. Deputies: Representatives of IDA’s contributing partners, known as “the IDA Deputies”. Duration: Duration provides an indication of the interest rate sensitivity of a fixed income security to changes in its underlying yield. Encashment: Draw down (payment in cash) of a demand note in accordance with a schedule agreed for each replenishment. Externally Financed Output (EFO): An instrument for receiving external contributions to support the Bank’s work program, typically, for amounts under $1 million, however larger amounts can also be received. Graduate Member: A member country that was once eligible to borrow from IDA, however due to improvements in the member’s economic results is no longer eligible to borrow from IDA and is deemed to have “graduated” to IBRD. Instrument of Commitment (IoC): The instrument through which a government commits to make a subscription or a subscription and contribution to IDA’s resources. Net Disbursements: Loans and grant disbursements net of repayments and prepayments. Prudential Minimum: The minimum amount of liquidity that IDA is required to hold. It represents 80% of twenty- four months coverage as calculated at the start of every fiscal year. Replenishment: The process of regular review of the adequacy of IDA resources and authorization of additional subscriptions. Under IDA’s Articles, replenishments are required to be approved by IDA’s Board of Governors by a two-thirds majority of the total voting power. Special Drawing Rights (SDR): The SDR is an international reserve asset, created by the International Monetary Fund in 1969 to supplement the existing official reserves of member countries. The SDR is defined as a basket of currencies, consisting of the Chinese Renminbi, Euro, Japanese Yen, Pound Sterling, and U.S. dollar. The basket composition is reviewed every five years to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems. Voting Rights: IDA’s voting rights consist of a combination of membership and subscription votes. World Bank: The World Bank consists of IBRD and IDA. World Bank Group (WBG): The World Bank Group consists of the IBRD, IDA, IFC, MIGA and ICSID. 48 IDA Management’s Discussion and Analysis: June 30, 2019 Management’s Discussion and Analysis Appendix List of Tables, Figures and Boxes Tables Table 1: Condensed Statement of Income 14 Table 2: Condensed Balance Sheet 14 Table 3: Changes in Equity 15 Table 4: Loans Outstanding by Region 15 Table 5: Gross Disbursements of Loans and Grants by Region 16 Table 6: Revenue by Category 16 Table 7: Net Non-Interest Expenses 17 Table 8: Other revenue / (expenses), net 17 Table 9: Budget Anchor 18 Table 10: Adjusted Net Income 19 Table 11: Summary of Financial Terms for IDA Lending Products, effective July 1, 2019 22 Table 12: Commitments of Loans and Guarantees by Region 23 Table 13: Commitments of Grants by Region 23 Table 14: Top Five Borrowers with the Largest Loan Outstanding Balance as of June 30, 2019 24 Table 15: Types of Guarantees 25 Table 16: Pricing for IDA’s Project-Based and Policy-Based Guarantees, effective July 1, 2019 25 Table 17: Revenue earned from Trust Fund Activity 26 Table 18: Cash and Investment Assets Held in Trust by IDA 26 Table 19: Liquid Asset Portfolio Composition 28 Table 20: Average Balances and Returns by Sub-Portfolio 29 Table 21: Other Short-Term Borrowings 30 Table 22: Summary of IDA's Specific Risk Categories 33 Table 23: Deployable Strategic Capital Ratio 34 Table 24: Treatment of Overdue Payments 35 Table 25: Eligibility Criteria for IDA’s Investments 37 Table 26: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating 37 Table 27: Fair Value Estimates and Reported Basis Value 42 Figures Figure 1: IDA's Financial Business Model 7 Figure 2: Share of Financing Categories for Annual Commitments 21 Figure 3: Exposure of Largest IDA Borrowing Countries 23 Figure 4: Net Investment Portfolio 28 Figure 5: Financial and Operational Risk Management Structure 31 Figure 6: Management Risk Committee Structure for Financial and Operational Risks 32 Figure 7: Use of Derivatives for Market Borrowings 38 Figure 8: Translation Adjustment on non-functional currencies 39 Figure 9: Governance Structure 45 Boxes Box 1: Selected Financial Data 2 Box 2: Financing Principles 20 IDA Management’s Discussion and Analysis: June 30, 2019 49 Management’s Discussion and Analysis This page intentionally left blank 50 IDA Management’s Discussion and Analysis: June 30, 2019 INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA) FINANCIAL STATEMENTS AND INTERNAL CONTROL REPORTS TABLE OF CONTENTS June 30, 2019 FINANCIAL STATEMENTS Management’s Report Regarding Effectiveness of Internal Control Over Financial Reporting 52 Independent Auditors’ Report on Effectiveness of Internal Control Over Financial Reporting 54 Independent Auditors’ Report 56 Balance Sheet 58 Statement of Income 60 Statement of Comprehensive Income 61 Statement of Changes in Accumulated Deficit 61 Statement of Cash Flows 62 Supplemental Information Summary Statement of Loans 66 Statement of Voting Power and Subscriptions and Contributions 68 Notes to Financial Statements 70 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 57 MANAGEMENT’S REPORT REGARDING EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING 52 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 53 INDEPENDENT AUDITORS’ REPORT ON EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING 54     55 INDEPENDENT AUDITORS’ REPORT 56 57 BALANCE SHEET June 30, 2019 and June 30, 2018 Expressed in millions of U.S. dollars 2019 2018 Assets Due from Banks—Notes C and L Unrestricted cash $ 112 $ 495 Restricted cash 26 28 138 523 Investments (including securities transferred under repurchase or securities lending agreements of $702 million - June 30, 2019; $2,321 million - June 30, 2018)—Notes C, G and L 32,770 36,056 Securities Purchased Under Resale Agreements—Notes C and L - 19 Derivative Assets, net—Notes A, C and E 487 250 Receivable from Affiliated Organization—Note G 878 816 Other Receivables Receivable from investment securities traded—Note C 1,230 277 Accrued interest and commitment charges 400 392 1,630 669 Loans Outstanding (Summary Statement of Loans, Notes F and L) Total Loans 215,604 211,271 Less: Undisbursed balance (59,051) (61,243) Loans outstanding 156,553 150,028 Less: Accumulated provision for losses on loans (4,638) (4,383) Add: Deferred loans origination costs 6 11 Net loans outstanding 151,921 145,656 Other Assets—Note H 729 677 Total Assets $ 188,553 $ 184,666 58 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 2019 2018 Liabilities Borrowings—Notes D and L Concessional partner loans (at amortized cost) $ 6,770 $ 5,811 Market borrowings (at fair value) 3,432 1,494 10,202 7,305 Securities Sold Under Repurchase Agreements, Securities Lent under Securities Lending Agreements, and Payable for Cash Collateral Received—Note C and L 698 2,541 Derivative Liabilities, net —Notes A, C and E 22 296 Payable for Development Grants—Note I 12,345 8,743 Payable to Affiliated Organization—Note G 522 479 Other Liabilities Payable for investment securities purchased—Note C 887 556 Accounts payable and miscellaneous liabilities—Notes F and H 895 801 1,782 1,357 Total Liabilities 25,571 20,721 Equity Members' Subscriptions and Contributions (Statement of Voting Power and Subscriptions and Contributions and Note B) Unrestricted 267,562 268,382 Restricted 324 328 Subscriptions and contributions committed 267,886 268,710 Less: Subscriptions and contributions receivable (30,138) (39,596) Cumulative discounts/ acceleration credits on subscriptions and contributions (3,670) (3,653) Subscriptions and contributions paid-in 234,078 225,461 Nonnegotiable, Noninterest-bearing Demand Obligations on Account of Members' Subscriptions and Contributions Unrestricted (11,187) (9,989) Restricted (50) (51) (11,237) (10,040) Deferred Amounts to Maintain Value of Currency Holdings (244) (244) Accumulated Deficit (Statement of Changes in Accumulated Deficit) (57,207) (50,557) Accumulated Other Comprehensive Income—Note J (2,408) (675) Total Equity 162,982 163,945 Total Liabilities and Equity $ 188,553 $ 184,666 The Notes to Financial Statements are an integral part of these Statements. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 59 STATEMENT OF INCOME For the fiscal years ended June 30, 2019, June 30, 2018 and June 30, 2017 Expressed in millions of U.S. dollars 2019 2018 2017 Interest revenue Loans, net—Note F $ 1,462 $ 1,376 $ 1,232 Investments, net—Notes C, E, G and L 466 420 391 Other, net (8) - - Borrowings, net—Notes C and D (218) (149) (102) Interest revenue, net of borrowing expenses 1,702 1,647 1,521 Provision for losses on loans and other exposures—Note F (316) (548) 56 Non-interest revenue Revenue from externally funded activities—Notes G and H 783 741 647 Commitment charges—Notes F 13 8 1 Other 12 10 7 Total 808 759 655 Non-interest expenses Administrative—Notes G, H and K (2,241) (2,184) (2,121) Contributions to special programs—Note G (21) (21) (25) Other 12 (41) (10) Total (2,250) (2,246) (2,156) Transfers from affiliated organizations and others—Notes G and H 258 203 599 Development grants—Note I (7,694) (4,969) (2,577) Non-functional currency translation adjustment gains (losses), net 105 89 (49) Unrealized mark-to-market gains (losses) on Investments-Trading portfolio, net—Notes E and L 351 (128) (367) Unrealized mark-to-market gains (losses) on Non-Trading portfolios, net Asset-liability management—Notes E and L 359 (17) 54 Investments—Note L 32 (21) (32) Other (5) - - Total 386 (38) 22 Net Loss $ (6,650) $ (5,231) $ (2,296) The Notes to Financial Statements are an integral part of these Statements. 60 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 STATEMENT OF COMPREHENSIVE INCOME For the fiscal years ended June 30, 2019, June 30, 2018 and June 30, 2017 Expressed in millions of U.S. dollars 2019 2018 2017 Net Loss $ (6,650) $ (5,231) $ (2,296) Other Comprehensive Loss—Note J Currency translation adjustments on functional currencies (1,735) 1,364 (820) Net Change in Debit Valuation Adjustment (DVA) on Fair Value option elected liabilities 2 - - Comprehensive Loss $ (8,383) $ (3,867) $ (3,116) STATEMENT OF CHANGES IN ACCUMULATED DEFICIT For the fiscal years ended June 30, 2019, June 30, 2018 and June 30, 2017 Expressed in millions of U.S. dollars 2019 2018 2017 Accumulated Deficit at beginning of the fiscal year $ (50,557) $ (45,326) $ (43,030) Net loss for the year   (6,650) (5,231) (2,296) Accumulated Deficit at end of the fiscal year $ (57,207) $ (50,557) $ (45,326) The Notes to Financial Statements are an integral part of these Statements. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 61 STATEMENT OF CASH FLOWS For the fiscal years ended June 30, 2019, June 30, 2018 and June 30, 2017 Expressed in millions of U.S. dollars 2019 2018 2017 Cash flows from investing activities Loans Disbursements $ (13,562) $ (11,540) $ (10,613) Principal repayments 5,277 5,042 4,513 Principal prepayments 51 51 51 Non-trading securities—Investments Principal payments received 122 126 113 Net cash used in investing activities (8,112) (6,321) (5,936) Cash flows from financing activities Members' subscriptions and contributions 7,421 9,335 6,893 Medium and long-term borrowings (new issues) 872 3,603 786 Short-term borrowings (new issues), original maturities greater than 90 days 1,724 - - Net short-term borrowings (original maturities less than 90 days) 140 - - Net derivatives- borrowings (2) 11 - Net cash provided by financing activities 10,155 12,949 7,679 Cash flows from operating activities Net loss (6,650) (5,231) (2,296) Adjustments to reconcile net loss to net cash used in operating activities Provision for losses on loans and other exposures 316 548 (56) Non-functional currency translation adjustment (gains) losses, net (105) (89) 49 Unrealized mark-to-market (gains) losses on non-trading portfolios, net (386) 38 (22) Other non-interest expenses (12) 41 10 Amortization of discount on borrowings 88 53 35 Changes in: Investments—Trading, net 2,956 (4,208) (708) Net investment securities traded/purchased (643) 286 (123) Net derivatives—Investments (14) (329) 42 Net derivatives—Asset-liability management 127 (4) 210 Net securities purchased/sold under resale/repurchase agreements and payable for cash collateral received (1,811) 188 430 Net receivable from affiliated organizations (26) (11) 104 Payable for development grants 3,697 2,117 522 Accrued interest and commitment charges (13) (28) (33) Other assets 379 (466) (144) Accounts payable and miscellaneous liabilities (332) 504 27 Net cash used in operating activities (2,429) (6,591) (1,953) Effect of exchange rate changes on unrestricted and restricted cash 1 3 20 Net (decrease) increase in unrestricted and restricted cash—Note A (385) 40 (190) Unrestricted cash and restricted cash at beginning of the fiscal year 523 455 645 Unrestricted and restricted cash at end of the fiscal year $ 138 $ 495 $ 455 62 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 STATEMENT OF CASH FLOWS For the fiscal years ended June 30, 2019, June 30, 2018 and June 30, 2017 Expressed in millions of U.S. dollars 2019 2018 2017 Supplemental disclosure Increase (Decrease) in ending balances resulting from exchange rate fluctuations: Loans outstanding $ (1,696) $ 1,410 $ (588) Investment portfolio (334) 92 (208) Derivatives—Asset-liability management 293 5 (139) Borrowings 12 (16) (67) Principal repayments written off under Heavily Indebted Poor Countries (HIPC) Debt Initiative 10 10 9 Loans prepaid—carrying value 54 54 54 Interest paid on borrowings 88 49 46 The Notes to Financial Statements are an integral part of these Statements. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 63 SUMMARY STATEMENT OF LOANS June 30, 2019 Amounts expressed in millions of U.S. dollars Percentage of Undisbursed Loans Borrower or guarantor Total loans loans loans a outstanding outstanding c Afghanistan $ 344 $ - $ 344 $ 0.22 % Albania 624 * 624 0.40 Angola 566 26 540 0.35 Armenia 1,073 26 1,047 0.67 Azerbaijan 416 * 416 0.27 Bangladesh 22,495 6,875 15,620 9.97 Benin 1,532 525 1,007 0.64 Bhutan 277 2 275 0.18 Bolivia 947 195 752 0.48 Bosnia and Herzegovina 1,074 40 1,034 0.66 Botswana 1 - 1 * Burkina Faso 2,502 951 1,551 0.99 Burundi 140 - 140 0.09 Cabo Verde, Republic of 431 104 327 0.21 Cambodia 1,152 576 576 0.37 Cameroon 2,103 862 1,241 0.79 Central African Republic 164 61 103 0.07 Chad 179 - 179 0.11 China 1,455 - 1,455 0.93 Comoros 38 25 13 0.01 Congo, Democratic Republic of 2,046 843 1,203 0.77 Congo, Republic of 360 181 179 0.11 Côte d'Ivoire 3,042 1,958 1,084 0.69 Djibouti 282 123 159 0.10 Dominica 100 64 36 0.02 Dominican Republic 2 - 2 * Ecuador 2 - 2 * Egypt, Arab Republic of 537 - 537 0.34 El Salvador 3 - 3 * Equatorial Guinea 22 - 22 0.01 Eritrea 434 - 434 0.28 Eswatini 1 - 1 * Ethiopia 13,420 4,572 8,848 5.65 Gambia, The 159 42 117 0.08 Georgia 1,049 22 1,027 0.66 Ghana 4,975 982 3,993 2.55 Grenada 130 9 121 0.08 Guinea 606 239 367 0.23 Guinea-Bissau 278 160 118 0.08 Guyana 116 38 78 0.05 Honduras 1,105 184 921 0.59 India 26,306 3,707 22,599 14.43 Indonesia 1,069 - 1,069 0.68 Iraq 302 - 302 0.19 Jordan 111 13 98 0.06 Kenya 10,337 3,603 6,734 4.30 Kosovo 223 159 64 0.04 Kyrgyz Republic 863 209 654 0.42 Lao People's Democratic Republic 889 251 638 0.41 Lebanon 100 75 25 0.02 Lesotho 571 224 347 0.22 64 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 SUMMARY STATEMENT OF LOANS June 30, 2019 Amounts expressed in millions of U.S. dollars Percentage Undisbursed Loans Borrower or guarantor Total loans of loans loans a outstanding outstanding c Liberia $ 664 $ 244 $ 420 0.27 % Madagascar 2,272 602 1,670 1.07 Malawi 1,628 677 951 0.61 Maldives 100 16 84 0.05 Mali 2,253 515 1,738 1.11 Mauritania 437 53 384 0.25 Mauritius 2 - 2 * Moldova 865 242 623 0.40 Mongolia 719 146 573 0.37 Montenegro 40 - 40 0.03 Morocco 3 - 3 * Mozambique 3,292 322 2,970 1.90 Myanmar 2,611 1,239 1,372 0.88 Nepal 3,926 1,201 2,725 1.74 Nicaragua 913 259 654 0.42 Niger 1,975 836 1,139 0.73 Nigeria 14,462 5,250 9,212 5.88 North Macedonia 225 - 225 0.14 Pakistan 18,293 4,301 13,992 8.94 Papua New Guinea 631 205 426 0.27 Paraguay 4 - 4 * Philippines 58 - 58 0.04 Rwanda 2,352 647 1,705 1.09 Samoa 116 11 105 0.07 São Tomé and Príncipe 11 - 11 0.01 Senegal 3,684 1,298 2,386 1.52 Serbia 286 - 286 0.18 Sierra Leone 532 215 317 0.20 Solomon Islands 115 77 38 0.02 Somalia 413 - 413 0.26 South Sudan 84 5 79 0.05 Sri Lanka 4,067 1,044 3,023 1.93 St. Kitts and Nevis 1 - 1 * St. Lucia 143 61 82 0.05 St. Vincent and the Grenadines 120 87 33 0.02 Sudan 1,205 - 1,205 0.77 Syrian Arab Republic 14 - 14 0.01 Tajikistan 568 231 337 0.22 Tanzania 9,851 2,821 7,030 4.49 Timor-Leste 60 31 29 0.02 Togo 244 161 83 0.05 Tonga 50 8 42 0.03 Tunisia 3 - 3 * Turkey 7 - 7 * Uganda 4,967 1,614 3,353 2.14 Uzbekistan 2,390 1,074 1,316 0.84 Vanuatu 103 24 79 0.05 Vietnam 17,570 4,588 12,982 8.29 Yemen, Republic of 1,576 27 1,549 0.99 Zambia 1,746 684 1,062 0.68 Zimbabwe 461 - 461 0.30 Subtotal—Members c $ 215,065 $ 58,742 $ 156,323 99.85 % IDA FINANCIAL STATEMENTS: JUNE 30, 2019 65 SUMMARY STATEMENT OF LOANS June 30, 2019 Amounts expressed in millions of U.S. dollars Percentage Undisbursed Loans Borrower or guarantor Total loans of loans loans a outstanding outstanding c African Trade Insurance Agency b $ 8 $ - $ 8 0.01 % Bank Of The States Of Central Africa b 60 22 38 0.02 Caribbean Development Bank b 12 - 12 0.01 West African Development Bank b 382 210 172 0.11 Subtotal—Regional development banks $ 462 $ 232 $ 230 0.15 % Private Sector Window (PSW) Loans 77 77 - - Total—June 30, 2019 c $ 215,604 $ 59,051 $ 156,553 100.00 % Total—June 30, 2018 $ 211,271 $ 61,243 $ 150,028 * Indicates amount less than $0.5 million or 0.005 percent NOTES a. Of the undisbursed balance at June 30, 2019, IDA has entered into irrevocable commitments to disburse $369 million ($446 million—June 30, 2018). b. The loans to these regional development banks and agencies are for the benefit of members of IDA or territories of members of IDA. c. 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. 66 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2019 Amounts expressed in millions of U.S. dollars Subscriptions and Percentage of total contributions Member a Number of votes votes committed b Part I Members Australia 352,907 1.24 5,035.63 Austria 252,065 0.89 3,609.75 Belgium 310,148 1.09 4,953.40 Canada 751,964 2.65 12,250.15 Denmark 262,912 0.93 3,948.65 Estonia 51,776 0.18 17.27 Finland 180,220 0.63 2,095.37 France 1,076,432 3.79 18,966.50 Germany 1,521,007 5.36 27,258.44 Greece 57,143 0.20 212.34 Iceland 62,920 0.22 92.15 Ireland 104,607 0.37 813.67 Italy 646,025 2.28 10,581.18 Japan 2,368,422 8.34 46,945.03 Kuwait 118,651 0.42 1,056.60 Latvia 58,278 0.21 16.10 Lithuania 51,627 0.18 14.43 Luxembourg 78,879 0.28 395.74 Netherlands 561,549 1.98 9,707.18 New Zealand 78,353 0.28 381.96 Norway 294,472 1.04 4,310.73 Portugal 70,654 0.25 317.86 Russian Federation 90,647 0.32 749.70 Slovenia 60,323 0.21 46.00 South Africa 74,314 0.26 237.17 Spain 302,966 1.07 4,632.29 Sweden 578,162 2.04 8,800.66 Switzerland 365,119 1.29 5,775.35 United Arab Emirates 1,367 0.00 5.58 United Kingdom 1,865,947 6.57 31,925.87 United States 2,891,199 10.20 53,242.92 Subtotal—Part I Members b 15,541,055 54.76 % $ 258,395.67 Part II Members Afghanistan 59,204 0.21 1.50 Albania 61,859 0.22 0.37 Algeria 116,182 0.41 30.57 Angola 153,438 0.54 8.41 Argentina 405,920 1.43 156.22 Armenia 65,146 0.23 0.69 Azerbaijan 69,886 0.25 1.14 Bahamas, The 59,906 0.21 8.54 Bangladesh 150,243 0.53 8.08 Barbados 62,860 0.22 2.36 Belize 19,834 0.07 0.27 Benin 60,820 0.21 0.78 Bhutan 58,732 0.21 0.08 Bolivia, Plurinational State of 75,994 0.27 1.65 Bosnia and Herzegovina 52,455 0.18 2.48 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 67 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2019 Amounts expressed in millions of U.S. dollars Subscriptions and Percentage of total contributions Member a Number of votes votes committed b Botswana 51,149 0.18 1.63 Brazil 477,996 1.68 842.93 Burkina Faso 63,810 0.22 0.80 Burundi 55,801 0.20 1.10 Cabo Verde, Republic of 43,840 0.15 0.13 Cambodia 71,089 0.25 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 0.21 39.12 China 639,287 2.25 1,112.08 Colombia 94,824 0.33 24.90 Comoros 47,140 0.17 0.13 Congo, Democratic Republic of 82,699 0.29 4.61 Congo, Republic of 52,210 0.18 0.74 Costa Rica 27,985 0.10 0.28 Côte d’Ivoire 67,377 0.24 1.56 Croatia 88,373 0.31 5.94 Cyprus 71,625 0.25 25.07 Czech Republic 125,900 0.44 139.35 Djibouti 48,116 0.17 0.26 Dominica 58,892 0.21 0.14 Dominican Republic 27,780 0.10 0.58 Ecuador 50,151 0.18 0.94 Egypt, Arab Republic of 131,110 0.46 18.64 El Salvador 46,516 0.16 0.49 Equatorial Guinea 6,167 0.02 0.41 Eritrea 44,036 0.16 0.14 Eswatini 22,322 0.08 0.42 Ethiopia 49,232 0.17 0.70 Fiji 19,809 0.07 0.76 Gabon 2,093 0.01 0.63 Gambia, The 55,208 0.19 0.42 Georgia 62,770 0.22 0.97 Ghana 86,677 0.31 3.15 Grenada 26,427 0.09 0.13 Guatemala 40,696 0.14 0.56 Guinea 37,287 0.13 1.33 Guinea-Bissau 44,500 0.16 0.22 Guyana 71,323 0.25 1.26 Haiti 52,038 0.18 1.10 Honduras 52,855 0.19 0.43 Hungary 196,307 0.69 155.61 India 818,208 2.88 436.16 Indonesia 249,419 0.88 111.21 Iran, Islamic Republic of 115,867 0.41 24.21 Iraq 70,212 0.25 1.13 Israel 85,565 0.30 121.85 Jordan 24,865 0.09 0.41 Kazakhstan 23,297 0.08 8.50 68 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2019 Amounts expressed in millions of U.S. dollars Subscriptions and Percentage of contributions Member a Number of votes total votes committed b Kenya 77,960 0.27 2.43 Kiribati 43,592 0.15 0.10 Korea, Republic of 269,605 0.95 2,337.41 Kosovo, Republic of 48,357 0.17 0.85 Kyrgyz Republic 64,522 0.23 0.58 Lao People's Democratic Republic 48,910 0.17 0.73 Lebanon 8,562 0.03 0.56 Lesotho 54,505 0.19 0.23 Liberia 52,038 0.18 1.12 Libya 44,771 0.16 1.41 Madagascar 67,377 0.24 1.39 Malawi 56,040 0.20 0.98 Malaysia 103,243 0.36 59.81 Maldives 55,046 0.19 0.05 Mali 62,445 0.22 1.36 Marshall Islands 4,902 0.02 0.01 Mauritania 52,210 0.18 0.78 Mauritius 72,736 0.26 1.35 Mexico 142,236 0.50 168.34 Micronesia, Federated States of 18,424 0.06 0.03 Moldova 56,582 0.20 0.88 Mongolia 45,818 0.16 0.30 Montenegro 56,819 0.20 0.75 Morocco 103,422 0.36 5.56 Mozambique 62,670 0.22 2.06 Myanmar 82,096 0.29 2.57 Nepal 54,710 0.19 0.73 Nicaragua 62,982 0.22 0.44 Niger 52,210 0.18 0.76 Nigeria 103,869 0.37 19.45 North Macedonia 47,095 0.17 1.09 Oman 56,788 0.20 1.42 Pakistan 235,088 0.83 50.83 Palau 3,804 0.01 0.03 Panama 10,185 0.04 0.03 Papua New Guinea 67,754 0.24 1.28 Paraguay 46,493 0.16 0.44 Peru 89,473 0.32 18.10 Philippines 144,457 0.51 28.78 Poland 564,123 1.99 127.63 Romania 96,010 0.34 5.19 Rwanda 52,038 0.18 1.12 Samoa 43,901 0.15 0.14 São Tomé and Principe 49,519 0.17 0.12 Saudi Arabia 932,483 3.29 2,765.59 Senegal 72,243 0.25 2.65 Serbia 86,096 0.30 7.10 St. Kitts and Nevis 13,868 0.05 0.17 St. Lucia 30,532 0.11 0.23 St. Vincent and the Grenadines 49,929 0.18 0.12 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 69 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2019 Amounts expressed in millions of U.S. dollars Subscriptions and Number of Percentage of contributions Member a votes total votes committed b Sierra Leone 63,638 0.22 1.04 Singapore 50,734 0.18 253.83 Slovak Republic 90,751 0.32 33.97 Solomon Islands 43,901 0.15 0.13 Somalia 10,506 0.04 0.95 South Sudan 52,447 0.18 0.45 Sri Lanka 104,139 0.37 4.36 Sudan 65,003 0.23 1.50 Syrian Arab Republic 11,027 0.04 1.19 Tajikistan 53,918 0.19 0.54 Tanzania 68,943 0.24 2.32 Thailand 109,402 0.39 14.38 Timor-Leste 45,123 0.16 0.44 Togo 61,840 0.22 1.19 Tonga 49,514 0.17 0.11 Trinidad and Tobago 81,067 0.29 2.13 Tunisia 2,793 0.01 1.89 Turkey 167,396 0.59 196.44 Tuvalu 6,338 0.02 0.02 Uganda 50,392 0.18 2.31 Ukraine 115,569 0.41 8.06 Uzbekistan 73,936 0.26 1.93 Vanuatu 50,952 0.18 0.31 Vietnam 61,168 0.22 2.23 Yemen, Republic of 68,976 0.24 2.20 Zambia 84,527 0.30 3.66 Zimbabwe 105,982 0.37 6.41 Subtotal—Part II Members b 12,844,256 45.24% $ 9,490 Total—June 30, 2019 b 28,385,311 100.00% $ 267,886 Total—June 30, 2018 27,897,259 $ 268,710 NOTES a. See Notes to Financial Statements—Note A for an explanation of the two categories of membership b. 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. 70 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 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. The principal purpose of IBRD is to promote sustainable economic development and reduce poverty in its member countries, primarily by providing loans, guarantees and related technical assistance for specific projects and for programs of economic reform in developing member countries. IFC's purpose is to encourage the growth of productive private enterprises in its member countries through loans and equity investments in such enterprises without a member's guarantee. MIGA’s purpose is to encourage the flow of investments for productive purposes between member countries and, in particular, to developing member countries by providing guarantees against noncommercial risks for foreign investment in its developing member countries. 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 disclosure 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 (irrevocable commitments, guarantees, repaying project preparation facilities and deferred drawdown options-DDOs that are effective). On August 8, 2019, the Executive Directors approved these financial statements for issue, which was also the date through which IDA’s Management evaluated subsequent events. Certain reclassifications of the prior year’s information have been made to conform with the current year’s presentation. Effective June 30, 2019, the presentation of derivative instruments on IDA’s Balance Sheet was aligned with the preferable accounting treatment and the prevailing market practice of netting derivative asset and liability positions and the related cash collateral received by 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. This is a change from the historical presentation, where interest rate swaps were presented on the Balance Sheet on a net basis by instrument, and currency swaps were presented on a gross basis, which reflected the way in which swaps are routinely settled in on-going business. The change to a net presentation has been made in the current period and the presentation of the prior period has been aligned for comparability. See table below for details of the adjustments made to the June 30, 2018 Balance Sheet. There was no impact to total equity, operating activities in the Statement of Cash Flows or any line item within the Statement of Income, Statement of Comprehensive Income or Statement of Changes in Accumulated Deficit. See Note E —Derivative Instruments, for additional details on the accounting for derivative instruments. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 71 In millions U.S. dollars June 30, 2018 June 30, 2018 Adjustments As reported Adjusted Derivative Assets Asset-liability management $ 15,715 $ (15,715) $ - Borrowings 1 (1) - Investments 6,198 (6,198) - Net derivative positions at counterparty level after cash collateral 250 250 received 21,914 (21,664) 250 Total Assets $ 206,330 $ (21,664) $ 184,666 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral 2,543 (2) 2,541 received Derivative Liabilities Asset-liability management $ 15,745 $ (15,745) $ - Borrowings 15 (15) - Investments 6,198 (6,198) - Net derivative positions at counterparty level after cash collateral 296 296 received 21,958 (21,662) 296 Total Liabilities $ 42,385 $ (21,664) $ 20,721 Total Equity $ 163,945 $ - $ 163,945 Total Liabilities and Equity $ 206,330 $ (21,664) $ 184,666 Translation of Currencies IDA’s financial statements are expressed in terms of 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 exchange rates in effect during each month. Translation adjustments relating to the revaluation of loans, borrowings, development grants payable and all other 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. 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 commitment authority framework 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 72 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 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 when they pay a particular contribution amount before the relevant due date, and acceleration credits when they pay their full contribution amount before the due date. IDA retains the related revenue 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), IDA’s Executive Directors approved the use of a limited amount of concessional debt funding, referred to as concessional partner loans, which is continuing in the Eighteenth Replenishment of IDA’s Resources (IDA18). 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 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 based on the proceeds received. For the purposes of its financial resources, 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 Non-negotiable, Non interest bearing Demand Obligations on Account of Member 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. 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. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 73 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 (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 country’s per capita income must be below a certain cut-off level ($1,145 for the fiscal year ended June 30, 2019 and $1,165 for the fiscal year ended June 30, 2018) and the country may have only limited or no access to IBRD lending. Loans are carried in the financial statements at amortized cost, less an accumulated provision for loan losses, plus the deferred loan origination costs. Commitment charges on the undisbursed balance of loans, are recognized in revenue as earned. Incremental direct costs associated with originating loans are capitalized and amortized over the life of the loans. It is IDA’s practice not to reschedule service charge, interest or principal payments on its loans or participate in debt rescheduling agreements with respect to its loans. 74 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 IDA considers all exposures in nonaccrual status to be impaired. It is the policy of IDA to place into nonaccrual status all loans and other exposures made to, or guaranteed by, a member or to the territory of a member if principal or charges with respect to any such loan and other exposures are overdue by more than six months, unless IDA’s Management determines that the overdue amount will be collected in the immediate future. In addition, if loans by IBRD to a member government are placed into nonaccrual status, all loans and other exposures to that member will also be placed into nonaccrual status by IDA. On the date a member’s loans and other exposures are placed into nonaccrual status, unpaid charges that had been accrued on loans are deducted from the revenue from loans of the current period. Revenue on nonaccrual loans is included in the Statement of Income only to the extent that payments have actually been received by IDA. If collectability risk is considered to be particularly high at the time of arrears clearance, the member’s loans and other exposures may not automatically emerge from nonaccrual status, even though the member’s eligibility for new loans may have been restored. In such instances, a decision on the restoration of accrual status is made on a case-by-case basis after a suitable period of payment or policy performance has passed from the time of arrears clearance. The repayment obligations of loans funded from resources through the Fifth Replenishment are expressed in the loan agreements in terms of 1960 dollars. In June 1987, the Executive Directors decided to value those loans at the rate of $1.20635 per 1960 dollar on a permanent basis. Loans funded from resources provided under the Sixth Replenishment and thereafter are denominated in SDRs, with the exception of loans provided under the Single Currency Lending program, which allows IDA recipients to denominate new IDA loans in one of the five constituent currencies of the SDR basket. Buy-down of Loans The Investment Partnership for Polio program to fund the immunization of children in high-risk polio countries has a funding mechanism that allows the purchase of oral vaccines from the proceeds of loans, which are subsequently converted to grant terms under the “buy-down mechanism”, upon attainment of agreed performance goals. Pursuant to the applicable buy-down terms, IDA enters into an arrangement with third party donors who make payments on the borrower’s service and commitment charges through a trust fund, until the borrower reaches agreed performance goals. At that time, the trust fund buys down the related loans for an amount equivalent to the present value of the remaining cash flows of the related loans, based on appropriate discount rates. The trust fund subsequently cancels the purchased loans, thereby converting them to grant terms. IDA records a provision for losses on loans equivalent to the difference between the carrying amount of the loans to be bought down and the estimated amount to be received, when all performance goals as well as conditions necessary to effect the buy-down have been completed. The provision is recorded as a reduction of disbursed and outstanding loans under the accumulated provision for losses on loans and other exposures, and as a corresponding expense. Upon purchase of the loans, the applicable portion of the loans will be written-off and the related accumulated provision for losses on loans and other exposures will be reduced accordingly. Development Grants Development grants are currently recorded as an expense, and a liability is recognized, upon approval of the development grant by the Executive Directors. However, effective from the quarter ending September 30, 2019, as a result of ASU 2018-08, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, development grants made by IDA that are deemed to be conditional, will be expensed when all the conditions have been met, which generally occurs at the time of disbursement. Development grants that are deemed to be unconditional, will continue to be expensed upon approval. Commitment charges on the undisbursed balance of development grants, are recognized in revenue as earned. Project Preparation Advances Project Preparation Advances (PPAs) are advances made to borrowers to finance project preparation costs pending the approval of follow-on development operations. If approved under grant terms, these amounts are charged to expenses upon approval by Management. To the extent there are follow-on loans or grants, these PPAs are refinanced out of the proceeds of the loans and grants. Accordingly, the PPA grant amounts initially charged to expense are reversed upon approval of the follow-on development grants or loans. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 75 Guarantees Financial guarantees are commitments issued by IDA to guarantee payment performance by a member country (the debtor) to a third party in the event that a member government (or government-owned entity) fails to perform its contractual obligations to a third party. Guarantees are regarded as outstanding when the underlying financial obligation of the borrower is incurred, and called when a guaranteed party demands payment under the guarantee. IDA would be required to perform under its guarantees if the payments guaranteed are not made by the borrower and the guaranteed party called the guarantee by demanding payment from IDA in accordance with the terms of the guarantee. For guarantees, at inception of the guarantees, IDA records the fair value of the obligation to stand ready and a corresponding guarantee fee receivable, included in Accounts payable and miscellaneous liabilities and Other Assets, respectively, on the Balance Sheet. Upfront guarantee fees received are deferred and amortized over the life of the guarantee. In the event that a sovereign guarantee is called, IDA has the contractual right to require payment from the member country. IDA records a contingent liability for the probable losses related to guarantees outstanding. 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 Accounts payable and miscellaneous liabilities on the Balance Sheet. HIPC Debt Initiative The HIPC Debt Initiative was launched in 1996 as a joint effort by bilateral and multilateral creditors to ensure that reform efforts of HIPCs would not be put at risk by unsustainable external debt burdens. Under the Enhanced HIPC Framework, implementation mechanisms include: (i) partial forgiveness of IDA debt service as it comes due, and ii) in the case of countries with a substantial amount of outstanding IBRD debt, partial repayment with IDA resources (excluding transfers from IBRD) of outstanding IBRD debt. Upon signature by IDA of the country specific legal notification, immediately following the decision by the Executive Directors of IDA to provide debt relief to the country (the Decision Point), the country becomes eligible for debt relief up to the nominal value equivalent of one third of the net present value of the total HIPC debt relief committed to the specific country. A Completion Point is reached when the conditions specified in the legal notification are met and the country’s other creditors have confirmed their full participation in the debt relief initiative. When the country reaches its Completion Point, IDA’s commitment to provide the total debt relief for which the country is eligible, becomes irrevocable. IDA’s provisioning policy for the HIPC Debt Initiative is discussed below. Donors compensate IDA on a “pay-as-you-go” basis to finance IDA’s forgone loan reflows (principal and service charge repayments) under the HIPC Debt Initiative. This means that for the debt relief provided by writing off the principal and charges during a replenishment, the donors compensate IDA for the forgone reflows through additional contributions in the relevant replenishment. These additional resources are accounted for, as equity, as subscriptions and contributions because they carry voting rights. MDRI Debt relief provided under the MDRI, which is characterized by the write-off of eligible loans upon qualifying borrowers reaching the HIPC Completion Point date, is in addition to existing debt relief commitments provided by IDA and other creditors under the HIPC Debt Initiative. When a country reaches Completion Point, the applicable loans are written off. This write off occurs at the beginning of the quarterly period following the date on which the country reaches Completion Point. For forgone repayments under MDRI, donors established a separate MDRI replenishment spanning fiscal years 2007 through 2044 and pledged to compensate IDA for the costs of providing debt relief under MDRI on a “dollar-for-dollar” basis. These additional resources are accounted for as subscriptions and contributions. Accumulated Provision for Losses on Loans and Other Exposures The accumulated provision for losses on loans and other exposures also includes the accumulated provision for HIPC Debt Initiative and MDRI. 76 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 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 decision and completion point dates. IDA periodically reviews these factors and reassesses the adequacy of the accumulated provision for the HIPC Debt Initiative and MDRI. Adjustments to the accumulated provision are recorded as a charge to or release of provision in the Statement of Income. Upon approval by the Executive Directors of IDA of debt relief for a country under the Enhanced HIPC Initiative, the principal component of the estimated debt relief costs is recorded as a reduction of the disbursed and outstanding loans under the accumulated provision for losses, and as a charge to the Statement of Income. This estimate is subject to periodic revision. The accumulated provision for HIPC Debt Initiative is written off as and when debt relief is provided. Following the Executive Directors' approval of IDA's participation in the MDRI in June 2006, IDA fully provided for the estimated probable 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. The provision is recorded as a reduction of the disbursed and outstanding loans under the accumulated provision for losses and as a charge to expenses. The applicable loans are written off when the country reaches the Completion Point and the related provision reduced accordingly. Loans and Other Exposures Delays in receiving loan payments result in present value losses since IDA does not charge fees or additional interest on any overdue service charges or interest. These present value losses are equal to the difference between the present value of payments of service charges, interest and other charges made according to the related loan’s contractual terms and the present value of its expected future cash flows. Except for debt relief provided under the HIPC Debt Initiative and MDRI, and any provision for losses under the mechanism to buy-down loans, 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 the buy-down mechanism. The risk of losses associated with nonpayment of principal amounts due is included in the accumulated provision for losses on loans and other exposures. Management determines the appropriate level of the accumulated provision for losses, which reflects the probable losses inherent in IDA’s exposures. Probable losses comprise estimates of losses arising from default and non payment of principal amounts due, as well as present value losses due to delay in receiving payments when compared to the schedule of payments. Several steps are taken to determine the appropriate level of provision. First, the exposures are disaggregated into two groups: exposures in accrual status and exposures in nonaccrual status. In each group, the net exposures for each borrower (defined as the nominal amount of loans disbursed and outstanding less the accumulated provision for loss under the HIPC Debt Relief Initiative, MDRI and the buy-down mechanism, plus other applicable exposures) are then assigned the credit risk rating of that borrower. With respect to countries with exposures in accrual status, these exposures are grouped according to the assigned borrower risk rating. The determination of borrowers' ratings is based on both quantitative and qualitative factors. Countries are rated using IDA’s internal comprehensive credit risk rating methodology. Second, each risk rating is mapped to an expected default frequency (probability of default) based on historical experience. Finally, the provision required is calculated by multiplying the net exposures by the expected default frequency and by the assumed severity of loss given default. The severity of loss given default, which is assessed periodically, and is based on the historical experience of IDA, is dependent on the borrower’s eligibility, namely: IDA, Blend (IBRD and IDA) and IBRD, with the highest severity associated with IDA, borrower’s eligibility is assessed at least annually. IDA reassesses the adequacy of the accumulated provision and the reasonableness of the inputs used, on a periodic basis, at least annually, and adjustments to the accumulated provision are recorded as a charge to or release of provision in the Statement of Income. This methodology is also applied to countries with exposures in nonaccrual status; however, at times, to reflect certain distinguishing circumstances of a particular nonaccrual situation, Management may use different input assumptions for a particular country. In light of the IDA18 replenishment which commenced on July 1, 2017, IDA’s management completed a review of the credit risk rating methodology used for IDA’s loan loss provisioning. The review resulted in a refinement of the rating methodology, consisting of the adoption of more granular scale at the lower end of the ratings spectrum. The impact of this refinement is disclosed in Note F – Loans and Other Exposures. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 77 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. Statement of Cash Flows For the purpose of IDA's Statement of Cash Flows, cash is defined as the amount of Unrestricted cash and Restricted cash under the Due from banks line on the Balance Sheet. 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. Until June 30, 2014, all investment securities were held in a trading portfolio. During the year ended June 30, 2015, IDA also purchased a security from IFC which is held in a non-trading portfolio. While IDA does not plan to sell the security, IDA elected to measure it at fair value, so that all its investment securities would be 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 To-Be- Announced (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 market observable 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 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. IDA may require collateral in the form of approved liquid securities from individual counterparties or cash, 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 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 and securities lent under securities lending agreements 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 Borrowings, net line in the Statement of Income. Borrowings IDA introduced long term borrowings through concessional partner loans for the first time under IDA17, which commenced on July 1, 2014. The borrowing terms of the concessional partner loans aim to match the concessional features of IDA’s loans. These borrowings are unsecured and unsubordinated fixed rate debt in SDR component 78 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 currencies. IDA may prepay some or the entire outstanding amounts without penalty. These borrowings are carried and reported at amortized cost. Starting with IDA18, IDA commenced issuing debt instruments in the capital markets. IDA has elected to adopt the fair value option for all such instruments. Changes in fair value have been recognized in the related Unrealized mark-to-market gains and losses on non-trading portfolios, net, line in the Statement of Income for the period ending June 30, 2018. Since the fair value option has been elected for these instruments, starting in the quarter ending September 30, 2018, changes in the portion of the fair value that relate to IDA’s own credit risk, will be 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 LIBOR (see Accounting and Reporting Developments for additional details). Plain vanilla bonds and discount notes, if any, are valued using the standard discounted cash flow method which relies on market observable 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, if any. For the purpose of the Statement of Cash Flows, new issuances and retirements pertaining to short term borrowings, if any, which have a maturity of less than 90 days, are presented on a net basis. In contrast, short term borrowings which have a maturity greater than 90 days 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 Borrowings, net line in the Statement of Income. For presentation purposes, amortization of discounts and premiums is also included in the Borrowings, 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. Through March 31, 2019, the presentation of derivative instruments on IDA’s Balance Sheet was consistent with the manner in which these instruments are settled; interest rate swaps are settled on a net basis and were presented on a net basis and currency swaps are settled on a gross basis and were presented on a gross basis. Starting from June 30, 2019, the presentation of derivative instruments on IDA’s Balance Sheet has been changed to align with the preferable accounting treatment and prevailing market and industry practice of netting derivative asset and liability positions and the related cash collateral received by 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. A master netting agreement is an industry standard agreement with a counterparty that permits multiple transactions governed by that agreement to be terminated or accelerated and settled through a single payment in a single currency in the event of a default (e.g., bankruptcy, failure to make a required payment or securities transfer or deliver collateral when due). Obligations under master netting agreements are often secured by collateral posted under an industry standard credit support annex to the master netting agreement. Upon default by the counterparty, the collateral agreement grants an entity the right to set-off any amounts payable by the counterparty against any posted collateral. IDA uses derivative instruments in its investment trading portfolio to manage interest rate and currency risks. These derivatives are carried and reported at fair value. Interest revenue (expenses) are reflected as part of Interest revenue, while unrealized mark-to-market gains and losses on these derivatives are reflected as part of the Unrealized mark- to-market gains (losses) on Investments-Trading portfolio, net line in the Statement of Income. IDA also uses derivatives in its loan, asset-liability management and borrowing portfolios. In the asset-liability management portfolio, currency forward contracts are used to manage foreign exchange fluctuation risks. In the loan and borrowing portfolios, interest rate swaps are being used to modify the interest rate characteristics of this portfolio. The interest component of these derivatives is recognized as an adjustment to the loan revenue and borrowing costs over the life of the derivative contracts and is included in Loans, net and Borrowings, net lines on IDA FINANCIAL STATEMENTS: JUNE 30, 2019 79 the Statement of Income. Changes in fair values of these derivatives are accounted for through the Statement of Income as Unrealized mark-to-market gains and losses on non-trading portfolios, net. For the purpose of the Statement of Cash Flows, IDA has elected to report the cash flows associated with the derivative instruments that are used to economically hedge its borrowings and investments, in a manner consistent with the presentation of the related borrowing and investment cash flows. Derivative contracts include currency forward contracts, TBA securities, swaptions, exchange traded options and futures contracts, currency swaps and interest rate swaps. Currency swaps and interest rate swaps are primarily plain vanilla instruments. Currency and interest rate swaps are valued using the standard discounted cash flow methods using market observable inputs such as yield curves, foreign exchange rates, basis spreads and funding spreads. Most outstanding derivative positions are transacted over-the-counter and are therefore valued using internally developed valuation models. For commercial and non-commercial counterparties where IDA has a net exposure (net receivable position), IDA calculates a Credit Value Adjustment (CVA) to reflect credit risk. For net derivative positions with commercial and non-commercial counterparties where IDA is in a net payable position, IDA calculates a DVA to reflect its own credit risk. The CVA is calculated using the fair value of the derivative contracts, net of collateral received under credit support agreements, and the probability of counterparty default based on the Credit Default Swap (CDS) spread and, where applicable, proxy CDS spreads. The DVA calculation is generally consistent with the CVA methodology and incorporates IDA’s own credit spread as observed through the CDS market. Valuation of Financial Instruments IDA has an established and documented process for determining fair values. Fair value is based upon quoted market prices for the same or similar securities, where available. Financial instruments for which quoted market prices are not readily available are valued based on discounted cash flow models and other established valuation models. These models primarily use market-based or independently sourced market parameters such as yield curves, interest rates, volatilities, foreign exchange rates and credit curves, and may incorporate unobservable inputs. Selection of these inputs may involve some judgment. In instances where Management relies on instrument valuations supplied by external pricing vendors, there are procedures in place to validate the appropriateness of the models used as well as the inputs applied in determining those values. To ensure that the valuations are appropriate where internally-developed models are used, IDA has various internal controls in place. As of June 30, 2019 and June 30, 2018, IDA had no financial assets or liabilities measured at fair value on a non- recurring basis. Fair Value Hierarchy Financial instruments are categorized based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), the next highest priority to observable market-based inputs or inputs that are corroborated by market data (Level 2) and the lowest priority to unobservable inputs that are not corroborated by market data (Level 3). Financial assets and liabilities recorded at fair value on the Balance Sheet are categorized based on the inputs to the valuation techniques as follows: Level 1: Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: Financial assets and liabilities whose values are based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in non-active markets; or pricing models for which all significant inputs are observable, either directly or indirectly for substantially the full term of the asset or liability. Level 3: Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. IDA’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur. 80 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 Accounting for Contributions to Special Programs IDA recognizes an expense for Contributions to Special Programs, when these have been incurred. Transfers Transfers from IBRD’s net income, and, grants made from the retained earnings of IFC to IDA are recorded through the Statement of Income and as a receivable on the Balance Sheet upon approval by the Board of Governors of IBRD and upon execution of a grant agreement between IFC and IDA, respectively. In addition, IDA periodically receives transfers from trust funds and private institutions. IDA does not assign any voting rights for these transfers and grants. Temporary restrictions relating to these transfers may arise from the timing of receipt of cash, or donor imposed restrictions as to use. When the cash is received and any other restrictions on the transfers and grants are complied with, the temporary restrictions are removed. Donor Contributions to Trust Funds For those IDA-executed trust funds where IDA acts as an intermediary agent, undisbursed third party donor contributions are recorded as assets held on behalf of the specified beneficiaries, with corresponding liabilities. Amounts disbursed from these trust funds are recorded as expenses with the corresponding amounts recognized as revenue. For Recipient-executed trust funds, since IDA acts as a trustee, no assets or liabilities relating to these activities are recorded on the Balance Sheet. In some trust funds, execution is split between Recipient-executed and IDA-executed portions. Decisions on assignment of funding resources between the two types of execution may be made on an ongoing basis; therefore the execution of a portion of these available resources may not yet be assigned. IDA also acts as a financial intermediary to provide specific administrative or financial services with a limited fiduciary or operational role. These arrangements, referred to as Financial Intermediary Funds, include, for example, administration of debt service trust funds, financial intermediation and other more specialized limited fund management roles. For these arrangements, funds are held and disbursed in accordance with instructions from donors or, in some cases, an external governance structure or a body operating on behalf of donors. For Financial Intermediary Funds, since IDA acts as a trustee, no assets or liabilities relating to these activities are recorded on IDA’s Balance Sheet. Accounting and Reporting Developments Evaluated Accounting Standards: In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and subsequent related amendments. The ASUs provide a common framework for revenue recognition for U.S. GAAP and supersede most of the existing revenue recognition guidance in U.S. GAAP. For IDA, the ASUs became effective from the quarter ended September 30, 2018. IDA primarily earns revenue from financial instruments, which is not within the scope of the ASUs. In Addition, IDA has a revenue sharing arrangement with IBRD that is not in the scope of the ASUs. The ASUs did not have an impact on IDA’s financial statements. In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU makes targeted amendments to existing guidance on recognition and measurement of financial instruments that primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The new guidance requires that changes in the fair value of financial liabilities measured under the fair value option that are attributable to instrument-specific credit risk are reported in Other Comprehensive Income. The ASU became effective for IDA from the quarter ended September 30, 2018. Given the immateriality of the amounts, no transition adjustment was recorded to reclassify amounts relating to IDA’s own credit on fair value option elected liabilities, previously included in Accumulated deficit, to Accumulated other comprehensive loss. The adoption of the ASU also required changes to the Statement of Comprehensive Income, Note D - Borrowings and Note J –Accumulated Other Comprehensive Income, which are related to DVA. Further amendments were made to Note F – Loans and other exposures, in line with the ASU’s disclosure requirements. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 81 In June 2018, the FASB issued ASU 2018-08, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The ASU, which applies to all entities that receive or make contributions, clarifies and improves current guidance about whether a transfer of assets should be accounted for as a contribution or an exchange transaction, and provides additional guidance about how to determine whether a contribution is conditional. For contributions received, the ASU became effective from the quarter ended September 30, 2018. IDA has evaluated the ASU and determined that the guidance on contributions received has no impact on its financial statements. IDA also evaluated the impact of the portion of the ASU applicable to contributions made, which will be effective from the quarter ending September 30, 2019. As a result of this ASU, most development grant agreements signed after July 1, 2019 that fall within the scope of this ASU will be expensed when all conditions have been met, which generally occurs at the time of disbursement. Development grants that are deemed to be unconditional, will continute to be expensed upon approval. Given the immateriality of the amounts subject to reclassification under the following ASUs, IDA has applied the requirements prospectively upon effectiveness, from the quarter ended September 30, 2018: In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU provides classification guidance on eight specific cash flow classification issues for which U.S. GAAP did not provide guidance. For IDA, the ASU became effective from the quarter ended September 30, 2018. This ASU has no impact on IDA’s financial statements as of June, 30, 2019. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted cash. The ASU requires that the amounts of restricted cash and cash equivalents are included in the total of cash and cash equivalents at the beginning and end of the period in the Statement of Cash Flows. For IDA, the ASU became effective from the quarter ended September 30, 2018. Accounting Standards Under Evaluation: In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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. Current U.S. GAAP requires an “incurred loss” methodology for recognizing credit losses. The new model, referred to as 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 will be effective beginning from the quarter ending September 30, 2020. IDA is currently evaluating the impact of the ASUs on its 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 will be effective for IDA from the quarter ending September 30, 2020, with early adoption permitted. IDA is currently evaluating the impact of the ASU on its financial statements. 82 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 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, 2019 June 30, 2018 Beginning of the fiscal year $ 225,461 $ 215,403 Cash contributions received a 3,431 4,849 Demand obligations received 5,404 5,171 Translation adjustment (218) 38 End of the fiscal year $ 234,078 $ 225,461 a. Includes any restricted cash subscriptions. During the fiscal year ended June 30, 2019, IDA encashed demand obligations totaling $3,990 million ($4,486 million—fiscal year ended June 30, 2018). NOTE C—INVESTMENTS Overview The investment securities held by IDA are designated as either trading or non-trading. These securities are carried and reported at fair value, or at face value which approximates fair value. As of June 30, 2019, the majority of IDA’s Investments comprised government and agency obligations (70%), with all the instruments being classified as either Level 1 or Level 2 within the fair value hierarchy. As of June 30, 2019, exposure to one counterparty was in excess of 10 % of the total Investments-Trading. This related to Japanese instruments, which represented 21% of Investments-Trading. In addition, as of June 30, 2019, the majority of the instruments were denominated in U.S. dollars (36%), Euro (24%), Japanese yen (22%), Chinese Renminbi (8%) and Pound sterling (6%). IDA uses derivative instruments to align the currency composition of the investment portfolio to the SDR basket of currencies and to manage other currency and interest rate risks in the portfolio. After considering the effects of these derivatives, the investment portfolio had an average repricing of 2.9 years and the following currency composition of U.S. dollars (40%), Euro (28%), Japanese Yen (14%), Chinese Renminbi (9%) and Pound sterling (9%). The credit quality of IDA’s investment portfolio remains concentrated in the upper end of the credit spectrum with 60% of the portfolio rated AA and above as of June 30, 2019, reflecting IDA’s continued preference for highly rated securities and counterparties across all categories of financial instruments. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 83 A summary of IDA’s Investments and the currency composition is as follows: Table C1: Investments-composition In millions of U.S. dollars June 30, 2019 June 30, 2018 Trading Government and agency obligations $ 22,820 $ 27,702 Time deposits 7,499 6,875 Asset-backed securities (ABS) 1,730 667 $ 32,049 $ 35,244 Non-trading (at fair value) Debt securities 721 812 Total $ 32,770 $ 36,056 The following table summarizes the currency composition of IDA’s Investment: Table C2: Investments-Currency composition In millions of U.S. dollars June 30, 2019 June 30, 2018 Average Repricing Average Repricing Carrying Value (years) a Carrying Value (years) a Chinese Renminbi $ 2,619 $ 2.00 $ 2,455 $ 2.92 Euro 7,888 1.50 8,614 2.01 Japanese yen 7,297 0.54 7,137 0.71 Pound sterling 2,026 1.71 2,899 1.63 U.S. dollar 11,692 5.89 13,130 4.26 Other 1,248 0.68 1,821 0.53 Total $ 32,770 $ 2.87 $ 36,056 $ 2.51 a. The average repricing represents the remaining period to the contractual repricing or maturity date, whichever is earlier.This indicates the average length of time for which interest rates are fixed. 84 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 IDA manages its investments on a net portfolio basis. The following table summarizes IDA’s net portfolio position: Table C3: Net investment portfolio position In millions of U.S. dollars June 30, 2019 June 30, 2018 Investments Trading $ 32,049 $ 35,244 Non-trading (at fair value) 721 812 Total 32,770 36,056 Securities purchased under resale agreements - 19 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received a (709) (2,543) Derivative Assets Currency swaps and currency forward contracts 7 68 Interest rate swaps * 6 Other b 4 2 Total 11 76 Derivative Liabilities Currency swaps and currency forward contracts (75) (66) Interest rate swaps (2) (10) Other b (*) (*) Total (77) (76) Cash held in investment portfolio c 105 482 Receivable from investment securities traded 1,230 277 Payable for investment securities purchased (887) (556) Net Investment Portfolio $ 32,443 $ 33,735 a. Includes $11 million of cash collateral received from counterparties under derivative agreements ($2 million - June 30, 2018). 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. * Indicates amount less than $0.5 million. The following table summarizes the currency composition of IDA’s Net Investment Portfolio Table C4: Net investment portfolio-Currency composition In millions of U.S. dollars June 30, 2019 June 30, 2018 Average Repricing Average Repricing Carrying Value (years) a Carrying Value (years) a Chinese Renminbi $ 2,762 1.89 $ 3,632 2.02 Euro 9,149 1.33 8,624 2.04 Japanese yen 4,668 0.64 4,809 0.89 Pound sterling 2,877 1.25 3,071 1.53 U.S. dollar 12,930 5.59 13,593 4.10 Other 57 0.17 6 (0.94) Total $ 32,443 2.90 $ 33,735 2.65 a. The average repricing represents the remaining period to the contractual repricing or maturity date, whichever is earlier.This indicates the average length of time for which interest rates are fixed. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 85 IDA uses derivative instruments to manage currency and interest rate risk in the investment portfolio. For details regarding these instruments, see Note E—Derivative Instruments. As of June 30, 2019, there were short sales totaling $42 million ($19 million—June 30, 2018) included in Payable for investment securities purchased on the Balance Sheet. These are reported at fair value on a recurring basis. Fair Value Disclosures The following tables present IDA’s fair value hierarchy for investment assets and liabilities measured at fair value on a recurring basis: Table C5: Fair value hierarchy of investment assets and liabilities In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2019 Level 1 Level 2 Level 3 Total Assets: Investments—Trading Government and agency obligations $ 8,708 $ 14,112 $ - $ 22,820 Time deposits 269 7,230 - 7,499 ABS - 1,730 - 1,730 Total Investments—Trading 8,977 23,072 - 32,049 Investments—Non-trading (at fair value) - 721 - 721 Securities purchased under resale agreements - - - - Total $ 8,977 $ 23,793 $ - $ 32,770 Liabilities: Securities sold under repurchase agreements and securities lent under security lending agreements a $ - $ 698 $ - $ 698 Total $ - $ 698 $ - $ 698 a. Excludes amount payable for cash collateral received ($11 million). In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2018 Level 1 Level 2 Level 3 Total Assets: Investments—Trading Government and agency obligations $ 12,541 $ 15,161 $ - $ 27,702 Time deposits 299 6,576 - 6,875 ABS - 667 - 667 Total Investments—Trading 12,840 22,404 - 35,244 Investments—Non-trading (at fair value) - 812 - 812 Securities purchased under resale agreements - 19 - 19 Total $ 12,840 $ 23,235 $ - $ 36,075 Liabilities: Securities sold under repurchase agreements and securities lent under security lending agreements a $ - $ 2,541 $ - $ 2,541 Total $ - $ 2,541 $ - $ 2,541 a. Excludes amount payable for cash collateral received ($2 million). During the fiscal years ended June 30, 2019 and June 30, 2018, there were no securities transferred between levels of the fair value hierarchy. Presented below is the difference between the aggregate fair value and aggregate contractual principal balance of non-trading securities in the investment portfolio: 86 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 Table C6: Investment portfolio-Non-trading securities In millions of U.S. dollars Principal Fair value amount due Difference June 30, 2019 $ 721 $ 721 $ - June 30, 2018 $ 812 $ 843 $ (31) The maturity structure of IDA’s non-trading investment portfolio was as follows: Table C7: Maturity structure of non-trading securities In millions of U.S. dollars Period June 30, 2019 June 30, 2018 Less than 1 year $ 124 $ 122 Between 1 - 2 years 125 124 2 - 3 years 113 125 3 - 4 years 96 113 4 - 5 years 77 96 Thereafter 186 263 $ 721 $ 843 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 non performance by obligors and counterparties under the terms of the contracts. For all securities, IDA limits trading to a list of authorized dealers and counterparties. In addition, credit limits have been established for counterparties by type of instrument and maturity category. Swap Agreements: Credit risk is mitigated through a credit approval process, volume limits, monitoring procedures and the use of mark-to-market collateral arrangements. IDA may require collateral in the form of cash or other approved liquid securities from individual counterparties to mitigate its credit exposure. As of June 30, 2019, IDA had received cash collateral of $10 million related to swap agreements (Nil – June 30, 2018). IDA has entered into master derivative agreements, which contain legally enforceable close-out netting provisions. These agreements may further reduce the gross credit risk exposure related to the swaps. Credit risk with financial assets subject to a master derivative arrangement is further reduced under these agreements to the extent that payments and receipts with the counterparty are netted at settlement. The reduction in exposure as a result of these netting provisions can vary due to the impact of changes in market conditions on existing and new transactions. The extent of the reduction in exposure may therefore change substantially within a short period of time following the balance sheet date. For more information on netting and offsetting provisions, see Note E—Derivative Instruments. The following is a summary of the collateral received by IDA related to swap transactions: Table C8: Collateral received In millions of U.S. dollars June 30, 2019 June 30, 2018 Collateral received Cash $ 10 $ - Securities - - Total collateral received $ 10 $ - Collateral permitted to be repledged $ 10 $ - Amount of collateral repledged - - Amount of Cash Collateral invested - - IDA FINANCIAL STATEMENTS: JUNE 30, 2019 87 Securities Lending: IDA may engage in securities lending and repurchases, against adequate collateral, as well as securities borrowing and reverse repurchases (resales) of government and agency obligations, and ABS. These transactions have been conducted under legally enforceable master netting arrangements, which allow IDA to reduce its gross credit exposure related to these transactions. As of June 30, 2019, there were no amounts which could potentially be offset as a result of legally enforceable master netting arrangements ($19 million— June 30, 2018). Transfers of securities by IDA to counterparties are not accounted for as sales as the accounting criteria for the treatment as a sale have not been met. Counterparties are permitted to repledge these securities until the repurchase date. Securities lending agreements and repurchase agreements expose IDA to several risks, including counterparty risk, reinvestment risk, and risk of a collateral gap (increase or decrease in the fair value of collateral pledged). IDA has procedures in place to ensure that trading activity and balances under these agreements are below predefined counterparty and maturity limits, and to actively monitor net counterparty exposure, after collateral, through daily mark-to-market. Whenever the collateral pledged by IDA related to its borrowings under securities lending agreements and repurchase agreements declines in value, the transaction is re-priced as appropriate by returning cash or pledging additional collateral. The following is a summary of the carrying amount of the securities transferred under repurchase or securities lending agreements, and the related liabilities: Table C9: Amounts related to securities transferred under repurchase or securities lending agreements In millions of U.S. dollars June 30, 2019 June 30, 2018 Financial Statement Presentation Securities transferred under Included under Investments - Trading on repurchase or securities lending $ 702 $ 2,321 the Balance Sheet agreements Included under Securities Sold under Liabilities relating to securities Repurchase Agreements, Securities Lent transferred under repurchase or $ 698 $ 2,541 under Securities Lending Agreements, and securities lending agreements Payable for Cash Collateral Received on the Balance Sheet. As of June 30, 2019, none of the liabilities relating to securities transferred under repurchase or securities lending Agreements remained unsettled at that date ($226 million— June 30, 2018). There were no replacement trades entered into in anticipation of maturing trades of a similar amount ($202 million— June 30, 2018). The following tables present the disaggregation of the gross obligation by class of collateral pledged and the remaining contractual maturities for repurchase agreements or securities lending transactions that are accounted for as secured borrowings: 88 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 Table C10: Composition of liabilities related to securities transferred under repurchase or securities lending agreements In millions of U.S. dollars As of June 30, 2019 Remaining contractual maturity of the agreements Overnight and continuous Up to 30 days Total Repurchase or Securities Lending agreements Government and agency obligations $ 698 $ - $ 698 Total liabilities for Securities sold under repurchase agreements and Securities Lent under Securities Lending Agreements $ 698 $ - $ 698 In millions of U.S. dollars As of June 30, 2018 Remaining contractual maturity of the agreements Overnight and continuous Up to 30 days Total Repurchase or Securities Lending agreements Government and agency obligations $ 1,853 $ 688 $ 2,541 Total liabilities for Securities sold under repurchase agreements and Securities Lent under Securities Lending Agreements $ 1,853 $ 688 $ 2,541 In the case of resale agreements, IDA received collateral in the form of liquid securities and is permitted to repledge these securities. While these transactions are legally considered to be true purchases and sales, the securities received are not recorded on IDA’s balance sheet as the accounting criteria for treatment as a sale have not been met. As of June 30, 2019, there were no securities purchased under resale agreements. As of June 30, 2018, for the securities purchased under resale agreements, none of these securities remained unsettled on that date. In addition, IDA received securities with a fair value $19 million, and none of these securities had been transferred under repurchase or securities lending agreements. NOTE D—BORROWINGS IDA’s borrowings comprise both concessional partner loans made by IDA’s members as well as 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 carried and reported at amortized cost, and have original maturities of 25 or 40 years, with the final maturity being 2058. This does not include the effect of the amounts relating to proceeds received under the grant component of the concessional partner loan agreements, for which voting rights have been received. These amounts are reflected in equity. Table D1: Borrowings-concessional partner loans outstanding In millions of U.S dollars Concessional Partner Loans outstanding Net unamortized Principal at face value premium (discount) Net carrying value June 30, 2019 $ 8,462 $ (1,692) $ 6,770 June 30, 2018 $ 7,461 $ (1,650) $ 5,811 During the fiscal year ended June 30, 2018, IDA issued its first bond in the international capital markets. This bond has a notional principal value of $1.5 billion and carries a fixed interest rate of 2.75%. It is denominated in U.S. dollars and has a tenor of 5 years maturing in 2023. IDA has elected the fair value option for this instrument. As part IDA FINANCIAL STATEMENTS: JUNE 30, 2019 89 of IDA’s asset-liability management strategy, IDA also entered into derivative transactions to convert the fixed rate bond into a floating rate instrument. During March 2019, IDA started issuing short-term borrowings in the international capital markets. These short- term borrowings have maturities ranging from 34 days to 1 year. IDA has elected the fair value option for these instruments. As of June 30, 2019, IDA had $1.9 billion of short-term borrowings outstanding. As of June 30, 2019, all of the instruments in IDA’s borrowing portfolio were classified as Level 2, within the fair value hierarchy. In addition, these instruments were denominated in U.S. dollars, Japanese yen, Pound Sterling and Euro (44%, 31%, 14% and 11% respectively). For details regarding the derivatives used in the borrowing portfolio, see Note E—Derivative Instruments. The following table provides a summary of the interest rate characteristics of IDA’s borrowings: Table D2: Borrowings - Interest rate composition In millions of U.S. dollars June 30, 2019 WAC a (%) June 30, 2018 WAC a (%) Fixed $ 10,143 2.23 % $ 7,308 2.31 % Variable - - - Borrowings b $ 10,143 2.23 % $ 7,308 2.31 % Fair Value Adjustment 59 (3) Total Borrowings $ 10,202 $ 7,305 a. WAC refers to weighted average cost. b. At amortized cost. The currency composition of debt in IDA’s borrowing portfolio before derivatives was as follows: Table D3: Borrowings - Currency composition before derivatives June 30, 2019 June 30, 2018 Euro 11 % 14 % Japanese Yen 31 31 Pound Sterling 14 19 U.S. dollar 44 36 100 % 100 % The maturity structure of IDA’s borrowings outstanding was as follows: Table D4: Borrowings - Maturity structure In millions of U.S. dollars Period June 30, 2019 June 30, 2018 Between Less than 1 year $ 1,919 $ - 1 - 2 years 111 44 2 - 3 years 122 113 3 - 4 years 1,690 124 4 - 5 years 138 1,630 Thereafter 7,914 7,044 Total a $ 11,894 $ 8,955 a. For June 30, 2019, total includes net unamortized discount of $1,692 million ($1,650 million—June 30, 2018) for Concessional Partner Loans. IDA’s borrowings have original maturities ranging from 34 days to 40 years with the final maturity in 2058. Fair Value Disclosures The table below presents the fair value of IDA’s borrowings for disclosure purposes, along with their respective carrying amounts: 90 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 Table D5: Borrowings-Fair value and carrying amounts In millions of U.S. dollars June 30, 2019 June 30, 2018 Carrying Value Fair Value Carrying Value Fair Value Concessional partner loans $ 6,770 $ 8,507 $ 5,811 $ 6,660 Market borrowings 3,432 3,432 1,494 1,494 $ 10,202 $ 11,939 $ 7,305 $ 8,154 The following table provides information on the unrealized mark-to-market gains or losses on market borrowings included in the Statement of Income as well as where those amounts are included in the Statement of Income: Table D6: Unrealized mark-to-market gains or losses relating to market borrowings In millions of U.S. dollars Unrealized mark-to-market gains (losses) 2019 2018 2017 Statement of Income Unrealized mark-to-market (losses) gains on non-trading portfolios, net $ (63) $ 3 $ - Presented below is the difference between the aggregate fair value and aggregate contractual principal balance of borrowings: Table D7: Borrowings-Fair value and contractual principal balance In millions of U.S. dollars Principal Due Upon Fair Value Maturity Difference a June 30, 2019 $ 11,939 $ 11,846 $ 93 June 30, 2018 $ 8,154 $ 8,961 $ (807) a. Includes $48 million for market borrowing at fair value as of June 30, 2019 ($(6) million – June 30, 2018) IDA FINANCIAL STATEMENTS: JUNE 30, 2019 91 NOTE E—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. Portfolio Derivative instruments used Purpose/Risk being managed Risk management purposes: Interest rate swaps, currency forward contracts, Manage currency and interest rate risk in the Investments—Trading currency swaps, options, swaptions, futures portfolio. contracts, and TBA securities Manage foreign exchange and interest rate Currency forward contracts, currency swaps and Other assets/liabilities risks. interest rate swaps Loans Interest rate swaps Manage interest rate risk in the portfolio. Borrowings Interest rate swaps Manage interest rate risk in the portfolio. Other purposes: Client operations Structured swaps Assist clients in managing risks. As discussed in Note A, unless stated differently, the derivatives in the related tables of Note E are presented on a net basis by instrument. A reconciliation to the Balance Sheet presentation is shown where appropriate. 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 default by the counterparty. The following tables summarize information on derivative assets and liabilities (before and after netting adjustments) that are reflected on IDA’s Balance Sheet as of June 30, 2019 and June 30, 2018. Gross amounts in the tables represent the amounts receivable (payable) for instruments which are in a net asset (net liability) position. The effects of legally enforceable master netting agreements are applied on an aggregate basis to the total derivative asset and liability positions. The net derivative asset positions have been further reduced by the cash and securities collateral received. 92 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 Table E1: Derivatives assets and liabilities before and after netting adjustments In millions of U.S. dollars June 30, 2019 Located on the Balance Sheet Derivative Assets Derivative Liabilities Gross Gross Gross Amounts Net Gross Amounts Net Amounts Offset Amounts Amounts Offset Amounts Interest rate swaps $ 297 $ (244) $ 53 $ 89 $ (80) $ 9 Currency swaps a 12,539 (11,948) 591 6,143 (5,982) 161 Other b 4 - 4 * - * Total $ 12,840 $ (12,192) $ 648 d $ 6,232 $ (6,062) $ 170 d Less: Amounts subject to legally enforceable master netting agreements $ 150 e $ 148 f c Cash collateral received 11 - Net derivative positions on the Balance Sheet $ 487 $ 22 Less: Securities collateral received c - Net derivative exposure after collateral $ 487 In millions of U.S. dollars June 30, 2018 Located on the Balance Sheet Derivative Assets Derivative Liabilities Gross Gross Gross Amounts Net Gross Amounts Net Amounts Offset Amounts Amounts Offset Amounts Interest rate swaps $ 236 $ (229) $ 7 $ 396 $ (370) $ 26 Currency swaps a 9,511 (9,055) 456 12,880 (12,395) 485 Other b 2 - 2 * - * Total $ 9,749 $ (9,284) $ 465 d $ 13,276 $ (12,765) $ 511 d Less: Amounts subject to legally enforceable master netting agreements $ 213 e $ 215 f c Cash collateral received 2 - Net derivative positions on the Balance Sheet 250 296 Less: Securities collateral received c - Net derivative exposure after collateral $ 250 a. Includes currency forward contracts. b. These include swaptions, exchange traded options, futures contracts and TBA securities. c. Does not include excess collateral received. d. Total is based on amounts where derivatives have been net by instrument. e. Includes $2 million CVA adjustment ($* million-June 30, 2018). f. Includes $* million DVA adjustment ($2 million-June 30, 2018). * Indicates amount less than $0.5 million. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 93 The following table provides information about the notional amounts and credit risk exposures, at the instrument level, of IDA’s derivative instruments. Table E2: Notional amounts and credit risk exposure of the derivative instruments: In millions of U.S. dollars Type of contract June 30, 2019 June 30, 2018 Investments - Trading Interest rate swaps Notional principal $ 338 $ 978 Credit exposure * 6 Currency swaps (including currency forward contracts) Credit exposure 7 68 Other a Notional long position 10,466 4,960 Notional short position 3,598 5,209 Credit exposure 2 2 Asset-liability management Currency forward contracts (including currency swaps) Credit exposure 584 388 Other derivatives b Interest rate swaps Notional principal 3,080 3,021 Credit exposure 53 1 Currency swaps Credit exposure * - Total credit exposure at the instrument level Interest rate swaps 53 7 Currency swaps (including currency forward contracts) 591 456 Other derivatives b 2 2 Total exposure $ 646 $ 465 a. Includes swaptions. exchange traded options, futures contracts and TBA securities. Exchange traded instruments are generally subject to daily margin requirements and are deemed to have no material credit risk. All options and futures contracts are interest rate contracts. b.Include Borrowing, PSW and Loan swaps * Indicates amount less than $0.5 million. Under almost all of its International Swaps and Derivative Association (ISDA) Master Agreements, IDA is not required to post collateral as long as it maintains liquidity holdings at predetermined levels that are a proxy for a triple-A credit rating. After becoming a rated entity, IDA has started to enter into derivative agreements with commercial counterparties in which IDA is not required to post collateral as long as it maintains a triple-A rating. The aggregate fair value of all derivative instruments with credit- risk related contingent features that are in a liability position as of June 30, 2019 is $10 million ($298 million —June 30, 2018). As of June 30, 2019, IDA was not required to post any collateral in accordance with the relevant agreements. If the credit-risk related contingent features underlying these agreements were triggered to the extent that IDA would be required to post collateral as of June 30, 2019, the amount of collateral that would need to be posted would be $9 million ($62 million—June 30, 2018). Subsequent triggers of contingent features would require posting of additional collateral, up to a maximum of $10 million as of June 30, 2019 ($298 million—June 30, 2018). 94 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 Amounts of gains and losses on the Asset-liability management derivative instruments and their location on the Statement of Income are as follows: Table E3: Unrealized mark-to-market gains or losses on non-trading derivatives In millions of U.S. dollars Gains (Losses) Fiscal Year Ended June 30, Statement of Income Location 2019 2018 2017 Interest rate swaps Unrealized mark-to-market $ 58 $ (3) $ - gains (losses) on Non-Trading Currency forward contracts and currency swaps portfolios, net 359 (17) 54 Total $ 417 $ (20) $ 54 The majority of the instruments in IDA’s investment portfolio are held for trading purposes. Within the trading portfolio, IDA holds highly rated fixed income instruments as well as derivatives. The trading portfolio is primarily held to ensure the availability of funds to meet future cash flow requirements and for liquidity management purposes. The following table provides information on the amount of gains and losses on IDA’s investment trading portfolio (derivative and non-derivative instruments), and their location on the Statement of Income: Table E4: Unrealized mark-to-market gains or losses on investment trading portfolio In millions of U.S. dollars Gains (Losses) Fiscal Year Ended June 30, Statement of Income Location 2019 2018 2017 Type of instrument Unrealized mark-to-market (losses) gains on Investment- Fixed income (including related derivatives) Trading portfolios, net $ 351 $ (128) $ (367) IDA FINANCIAL STATEMENTS: JUNE 30, 2019 95 Fair Value Disclosures IDA’s fair value hierarchy for derivative assets and liabilities measured at fair value on a recurring basis is as follows: Table E5: Derivative assets and liabilities fair value hierarchy In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2019 Level 1 Level 2 Level 3 Total Derivative assets: Currency swaps and currency forward contracts a $ - $ 591 $ - $ 591 Interest rate swaps - 53 - 53 Other b 2 2 - 4 2 646 - 648 Less: Amounts subject to legally enforceable master netting agreements c 150 Cash collateral received 11 Net derivative position on the Balance Sheet 487 Derivative liabilities: Currency swaps and currency forward contracts $ - $ 161 $ - $ 161 Interest rate swaps - 9 - 9 Other b - * - * - 170 - 170 Less: Amounts subject to legally enforceable master netting agreements d 148 Net derivative position on the Balance Sheet 22 In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2018 Level 1 Level 2 Level 3 Total Derivative assets: Currency swaps and currency forward contracts a $ - $ 456 $ - $ 456 Interest rate swaps - 7 - 7 Other b - 2 - 2 - 465 - 465 Less: Amounts subject to legally enforceable master netting agreements c 213 Cash collateral received 2 Net derivative position on the Balance Sheet 250 Derivative liabilities: Currency swaps and currency forward contracts $ - $ 485 $ - $ 485 Interest rate swaps - 26 - 26 Other b - * - * - 511 - 511 Less: Amounts subject to legally enforceable master netting agreements d 215 Net derivative position on the Balance Sheet 296 a. Includes structured swaps b. These include swaptions, exchange traded options, futures contracts and TBA securities. c. Includes $2 million CVA adjustment ($* million-June 30, 2018). d. Includes $* million DVA adjustment ($2 million-June 30, 2018). * Indicates amounts less than $0.5 million Inter-level transfers During the fiscal years ended June 30, 2019 and June 30, 2018, there were no inter-level transfers in the derivatives portfolio. 96 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 NOTE F—LOANS AND OTHER EXPOSURES IDA’s loans and other exposures are generally made to, or guarantted by, member countries of IDA. Loans are carried at amortized cost. Based on IDA’s internal credit quality indicators, the majority of the loans outstanding are in the Medium and High risk classes. As of June 30, 2019, loans outstanding totaling $2,527 million (representing about 1.6% of the portfolio) from five borrowers, were in nonaccrual status. Maturity Structure The maturity structure of loans outstanding was as follows: Table F1: Loans outstanding - Maturity structure In millions of U.S. dollars June 30, 2019 June 30, 2018 July 01, 2019 through June 30, 2020 $ 7,281 July 01, 2018 through June 30, 2019 $ 6,718 July 01, 2020 through June 30, 2024 29,020 July 01, 2019 through June 30, 2023 27,126 July 01, 2024 through June 30, 2029 38,284 July 01, 2023 through June 30, 2028 36,471 Thereafter 81,968 Thereafter 79,713 Total $ 156,553 Total $ 150,028 Currency Composition Loans outstanding had the following currency composition: Table F2: Loans outstanding - Currency composition In millions of U.S. dollars June 30, 2019 June 30, 2018 Euro $ 2,285 $ 1,327 U.S. dollar 5,964 4,996 SDR 148,304 143,705 $ 156,553 $ 150,028 Credit Quality of Sovereign Loans Based on an evaluation of IDA’s exposures, management has determined that IDA has one portfolio segment – Sovereign Exposures. IDA’s loans constitute the majority of the Sovereign Exposures portfolio segment. IDA’s country risk ratings are an assessment of its borrowers’ ability and willingness to repay IDA on time and in full. These ratings are internal credit quality indicators. Individual country risk ratings are derived on the basis of both quantitative and qualitative analyses. The components considered in the analysis can be grouped broadly into eight categories: political risk, external debt and liquidity, fiscal policy and public debt burden, balance of payments risks, economic structure and growth prospects, monetary and exchange rate policy, financial sector risks, and corporate sector debt and vulnerabilities. For the purpose of analyzing the risk characteristics of IDA’s exposures, these exposures are grouped into three classes in accordance with assigned borrower risk ratings, which relate to the likelihood of loss: Low, Medium and High risk classes, as well as exposures in nonaccrual status. IDA considers all exposures in nonaccrual status to be impaired. IDA’s borrower country risk ratings are key determinants in the provision for loan 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. 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: IDA FINANCIAL STATEMENTS: JUNE 30, 2019 97 Table F3: Loans-Aging structure In millions of U.S. dollars June 30, 2019 Total Past Days past due Up to 45 46-60 61-90 91-180 Over 180 Due Current Total Risk Class Low $ - $ - $ - $ - $ - $ - $ 1,469 $ 1,469 Medium - - - - - - 24,176 24,176 High 2 - * - - 2 128,379 128,381 Loans in accrual status 2 - * - - 2 154,024 154,026 Loans in nonaccrual status 12 1 5 22 1,319 1,359 1,168 2,527 Total $ 14 $ 1 $ 5 $ 22 $ 1,319 $ 1,361 $ 155,192 $ 156,553 In millions of U.S. dollars June 30, 2018 Total Past Days past due Up to 45 46-60 61-90 91-180 Over 180 Due Current Total Risk Class Low $ - $ - $ - $ - $ - $ - $ 2,065 $ 2,065 Medium - - - - - - 25,815 25,815 High 1 - - - - 1 119,596 119,597 Loans in accrual status 1 - - - - 1 147,476 147,477 Loans in nonaccrual status 11 2 5 23 1,241 1,282 1,269 2,551 Total $ 12 $ 2 $ 5 $ 23 $ 1,241 $ 1,283 $ 148,745 $ 150,028 * Indicates amount lessthan $0.5 million. Accumulated Provision for Losses on Loans and Other Exposures Provision for Losses on Loans and Other Exposures Management determines the appropriate level of accumulated provision for losses, which reflects the probable losses inherent in IDA’s exposures. Probable losses comprise estimates of losses arising from default and nonpayment of principal amounts due, as well as present value losses. Management reassesses the adequacy of the accumulated provision and the reasonableness of the inputs used, on a periodic basis, at least annually, and adjustments are recorded as a charge against or addition to revenue. Provision for HIPC Debt Initiative and MDRI includes provisions which are 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 loss. 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. 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. In light of the IDA18 replenishment, IDA’s management refined its approach to the credit risk rating of IDA’s sovereign borrowers. The net impact of this refinement on IDA’s accumulated provision at June 30, 2018, was $409 million. Changes to the accumulated provision for losses on loans and other exposures for the fiscal years ended are summarized below: 98 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 Table F4: Accumulated provisions In millions of U.S. dollars June 30, 2019 June 30, 2018 Debt relief Debt relief under under Loans HIPC/MDRI Other Total Loans HIPC/MDRI Other Total Accumulated provision, beginning of the fiscal year $ 2,439 $ 1,944 $ 56 $ 4,439 $ 1,913 $ 1,940 $ 25 $ 3,878 Provision, net - charge (release) a 417 (115) 14 316 510 7 31 548 Loans written off under: Prepayments (3) - - (3) (3) - - (3) HIPC/MDRI - (10) - (10) - (10) - (10) Translation adjustment (27) (7) * (34) 19 7 * 26 Accumulated provision, end of the period $ 2,826 $ 1,812 $ 70 $ 4,708 $ 2,439 $ 1,944 $ 56 $ 4,439 Composed of accumulated provision for losses on: Loans in accrual status $ 2,524 $ 105 $ 2,629 $ 2,160 $ 117 $ 2,277 Loans in nonaccrual status 302 1,707 2,009 279 1,827 2,106 Total $ 2,826 $ 1,812 $ 4,638 $ 2,439 $ 1,944 $ 4,383 Loans: Loans in accrual status $ 154,026 $ 147,477 Loans in nonaccrual status 2,527 2,551 Total $ 156,553 $ 150,028 a. For the fiscal year ended June, 2019, the provision includes: $3 million for the discount on prepayment of loans from one IDA graduate country ($3 million - June 30, 2018). * Indicates amount less than $0.5 million. Reported as Follows Balance Sheet Statement of Income Accumulated Provision for Losses on: Provision for losses on loans and other Loans Accumulated provision for losses on loans exposures, net Debt Relief under Provision for losses on loans and other Accumulated provision for losses on loans HIPC/MDRI exposures, net Provision for losses on loans and other Other Exposures Other liabilities exposures, net Loans to be written off under MDRI During the fiscal years ended June 30, 2019 and June 30, 2018, there were no loans written off under the MDRI. Overdue Amounts As of June 30, 2019, there were no principal or charges under loans in accrual status which were overdue by more than three months. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 99 The following tables provide a summary of selected financial information related to loans in nonaccrual status: Table F5: Loans in nonaccrual status In millions of U.S. dollars Overdue amounts Average Provision Provision Nonaccrual Recorded recorded Principal for debt for loan Borrower since investment a investment b Outstanding relief losses c Principal Charges Eritrea March 2012 $ 434 $ 435 $ 434 $ 295 $ 28 $ 75 $ 26 Somalia July 1991 413 414 413 387 5 259 88 Sudan January 1994 1,205 1,207 1,205 1,025 36 762 225 Syrian Arab Republic June 2012 14 14 14 - 3 10 1 Zimbabwe October 2000 461 462 461 - 230 253 59 Total - June 30, 2019 $ 2,527 $ 2,532 $ 2,527 $ 1,707 $ 302 $ 1,359 $ 399 Total - June 30, 2018 $ 2,551 $ 2,576 $ 2,551 $ 1,827 $ 279 $ 1,282 $ 383 a. A loan loss provision has been recorded against each of the loans in nonaccrual status. b. Represents the average for the fiscal years. For the fiscal year ended June 30, 2017: $2,503 million. c. Loan loss provisions are determined after taking into account accumulated provision for debt relief. In millions of U.S. dollars Fiscal Year Ended June 30, 2019 2018 2017 Service charge revenue not recognized as a result of loans being in nonaccrual status $ 19 $ 19 $ 19 During the fiscal years ended June 30, 2019 and June 30, 2018, no loans were placed into nonaccrual status. During the fiscal year ended June 30, 2019, service charge revenue recognized on loans in nonaccrual status was less than $1 million, (Nil—fiscal year ended June 30, 2018 and $3 million—fiscal year ended June 30, 2017). Guarantees Guarantees of $2,200 million were outstanding as of June 30, 2019 ($1,808 million – June 30, 2018). This amount includes $106 million relating to the Private Sector Window (PSW) ($36 million—June 30, 2018). The outstanding amount of guarantees represents the maximum potential undiscounted future payments that IDA could be required to make under these guarantees, and is not included on the Balance Sheet. The guarantees issued by IDA have original maturities ranging between 4 and 22 years, and expire in decreasing amounts through 2039. As of June 30, 2019, liabilities related to IDA’s obligations under guarantees of $147 million ($123 million— June 30, 2018), have been included in Other liabilities on the Balance Sheet. These include the accumulated provision for guarantee losses of $58 million ($47 million— June 30, 2018). During the fiscal years ended June 30, 2019 and June 30, 2018, no guarantees provided by IDA were called. Segment Reporting Based on an evaluation of its operations, Management has determined that IDA has only one reportable segment. Concentration Risk Loan revenue comprises service charges and interest charges on outstanding loan balances. For the fiscal year ended June 30, 2019, loan revenue from three countries of $249 million, $182 million and $147 million, respectively were in excess of ten percent of total loan revenue. 100 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 The following table presents IDA’s loans outstanding and associated loan revenue by geographic region as of and for the stated: Table F6: Loans outstanding and revenue by geographic region In millions of U.S. dollars June 30, 2019 June 30, 2018 Loans Service and Loans Service and Region Outstanding Interest Charges Outstanding Interest Charges Africa $ 65,359 $ 491 $ 59,220 $ 438 East Asia and Pacific 19,442 202 19,638 197 Europe and Central Asia 7,700 117 7,389 111 Latin America and the Caribbean 2,701 30 2,605 28 Middle East and North Africa 2,689 22 2,891 23 South Asia 58,662 600 58,285 579 Total $ 156,553 $ 1,462 $ 150,028 $ 1,376 Buy-down of Loans During the fiscal years ended June 30, 2019 and June 30, 2018, there were no loans purchased under the buy-down mechanism by the Global Program to Eradicate Poliomyelitis Trust Fund. Fair Value Disclosures IDA’s loans are carried and reported at amortized cost. The table below presents the fair value of loans for disclosure purposes, along with their respective carrying amounts: Table F7: Loans-Fair value and carrying amounts In millions of U.S. dollars June 30, 2019 June 30, 2018 Carrying Value Fair Value Carrying Value Fair Value Net Loans Outstanding $ 151,921 $ 133,764 $ 145,656 $ 118,508 NOTE G—TRANSACTIONS WITH AFFILIATED ORGANIZATIONS IDA transacts with affiliated organizations as a recipient of transfers and grants, administrative and derivative intermediation services as well as through cost sharing of IBRD’s sponsored pension and other postretirement benefit plans. Transfers and Grants Cumulative transfers and grants made to IDA as of June 30, 2019 were $19,406 million ($19,148 million—June 30, 2018). Details by transferor are as follows: Table G1: Cumulative transfers and grants In millions of U.S. dollars Beginning of the Transfers during End of the fiscal Transfers from fiscal year the fiscal year year Total $ 19,148 $ 258 $ 19,406 Of which from: IBRD 15,249 248 15,497 IFC 3,672 - 3,672 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 101 Receivables and Payables The total amounts receivable from or (payable to) affiliated organizations comprised: Table G2: IDA’s receivables and Payables with affiliated organizations In millions of U.S. dollars June 30, 2019 June 30, 2018 IBRD IFC Total IBRD IFC Total Administrative Services a $ (327) $ - $ (327) $ (339) $ - $ (339) Derivative Transactions Derivative assets, net 365 - 365 327 8 335 Derivative liabilities, net (71) (1) (72) (80) (9) (89) PSW-Blended Finance Facility - 1 1 - - - Pension and Other Postretirement Benefits 683 - 683 676 - 676 Investments - 721 721 - 812 812 $ 650 $ 721 $ 1,371 $ 584 $ 811 $ 1,395 a. Includes $195 million for the fiscal year ended June 30, 2019 ($140 million-June 30, 2018) receivable from IBRD for IDA's share of investments associated with Post-Retirement Contribution Reserve Fund (PCRF), which is a fund established to stabilize contributions made to the pension plans. The receivables from (payables to) these affiliated organizations are reported in the Balance Sheet as follows: Receivables / Payables related to: Reported as: Receivable for pension and other postretirement benefits Receivable from affiliated organization Net receivables (payables) for derivative transactions Derivative assets/liabilities, net Payable for administrative services a Payable to affiliated organization a. Includes amounts receivable from IBRD for IDA’s share of investments associated with PCRF. This receivable is included in Receivable from affiliated organization on the Balance Sheet. Administrative Services: The payable to IBRD represents IDA’s share of joint administrative expenses, net of other revenue jointly earned. The allocation of expenses is based upon an agreed cost sharing formula, and amounts are settled quarterly. Beginning from the period ending September 30, 2016, the allocation of expenses jointly incurred by IBRD and IDA also includes Contributions to special programs. During the fiscal year ended June 30, 2019, IDA’s share of joint administrative expenses and contributions to special programs totaled $1,795 million ($1,745 million—fiscal year ended June 30, 2018 and $1,746 million—fiscal year ended June 30, 2017). This amount excludes IDA- executed trust fund expenses of $467 million ($460 million— fiscal year ended June 30, 2018 and $400 million—fiscal year ended June 30, 2017). Other revenue: Includes IDA’s share of other revenue jointly earned with IBRD during the fiscal year ended June 30, 2019 totaling $316 million ($281 million—fiscal year ended June 30, 2018 and $247 million—fiscal year ended June 30, 2017). This amount excludes IDA- executed trust fund revenue of $467 million ($460 million—fiscal year ended June 30, 2018 and $400 million—fiscal year ended June 30, 2017). The allocation of revenue is based upon an agreed revenue sharing formula, and amounts are settled quarterly. The amount of fee revenue associated with services provided to other affiliated organizations is included in Other revenue on the Statement of Income, as follows: Table G3: Fee revenue from affiliated organizations In millions of U.S. dollars Fiscal Year Ended June 30, 2019 2018 2017 Fees charged to IFC $ 77 $ 66 $ 61 Fees charged to MIGA 5 5 5 102 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 Pension and Other Postretirement Benefits: The receivable from IBRD represents IDA’s net share of prepaid costs for pension and other postretirement benefit plans and Post-Employment Benefits Plan (PEBP) assets. These will be realized over the lives of the plan participants. Derivative transactions: These relate to currency forward contracts entered into by IDA with IBRD acting as the intermediary with the market and primarily convert donors’ expected contributions in national currencies under the Sixteenth and Seventeenth replenishments of IDA’s resources into the five currencies of the SDR basket. Investments – non-trading During the fiscal year ended June 30, 2015, IDA purchased a debt security issued by IFC for a principal amount of $1,179 million, amortizing over a period of 25 years. The investment carries a fixed interest rate of 1.84% and has a weighted average maturity of 4 years. As of June 30, 2019, the principal amount due on the debt security was $721 million ($843 million—fiscal year ended June 30, 2018), and it had a fair value of $721 million ($812 million— fiscal year ended June 30, 2018). The investment is reported under Investments in the Balance Sheet. During the fiscal year ended June 30, 2019, IDA recognized interest income of $14 million ($17 million—fiscal year ended June 30, 2018 and $19 million—fiscal year ended June 30, 2017). PSW As part of the IDA18 replenishment, IDA’s Executive Directors approved the creation of a $2.5 billion IDA18 IFC- MIGA PSW to mobilize private sector investments in IDA-only countries and IDA-eligible Fragile and Conflict Affected States (FCS). Under the fee arrangement for the PSW, IDA will receive fee income for transactions executed under this window and will reimburse IFC and MIGA for the related costs incurred in administering these transactions. The following tables provide a summary of all PSW related transactions under which IDA has an exposure as of June 30, 2019: Table G4: Summary of PSW related transactions In millions of U.S. dollars Net Asset/ Balance Sheet Facility Notional (Liability) Description Location position Local Currency Facility $ 25 $ (1) Currency swaps with IFC to support local currency Derivative assets/ denominated loans liabilities, net In millions of U.S. dollars Accumulated Balance Sheet Facility Exposure Description Provision Location MIGA Guarantee Facility $ 89 $ 5 Expanding the coverage of MIGA Political Risk Off Balance Sheet Insurance (PRI) products through shared first-loss or item risk participation similar to reinsurance Blended Finance Facility 17 2 Sharing the first loss to support IFC's Small Loan Off Balance Sheet Guarantee Program in PSW eligible countries item Blended Finance Facility 1 N/A Funding for IFC's PSW equity investment Other assets NOTE H—TRUST FUNDS ADMINISTRATION IDA, alone or jointly with one or more of its affiliated organizations, administers on behalf of donors, including members, their agencies and other entities, funds restricted for specific uses in accordance with administration agreements with donors. Specified uses include, for example, co-financing of IDA lending projects, debt reduction operations for IDA members, technical assistance for borrowers including feasibility studies and project preparation, global and regional programs, and research and training programs. These funds are held in trust by IDA and/or IBRD, and are held in a separate investment portfolio which is not commingled with IDA and/or IBRD funds. Trust fund execution may be carried out in one of two ways: Recipient-executed or IDA-executed. Recipient-executed trust funds involve activities carried out by a recipient third-party “executing agency”. IDA enters into agreements with and disburses funds to such recipients, who then exercise spending authority to meet the objectives and comply with terms stipulated in the agreements. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 103 IDA-executed trust funds involve execution of activities by IDA as described in relevant administration agreements with donors, which define the terms and conditions for use of the funds. Spending authority is exercised by IDA, under the terms of the administration agreements. The executing agency services provided by IDA vary and include for example, activity preparation, analytical and advisory activities and project-related activities, including procurement of goods and services. The following table summarizes the expenses pertaining to IDA-executed trust funds: Table H1: Expenses pertaining to IDA-executed trust funds In millions of U.S. dollars Fiscal Year Ended June 30, 2019 2018 2017 IDA-executed trust funds expenses $ 467 $ 460 $ 400 These amounts are included in Administrative expenses and the corresponding revenue is included in Revenue from externally funded activities in the Statement of Income. Administrative expenses primarily relate to staff cost, travel and consultant fees. The following table summarizes undisbursed contributions made by third party donors to IDA-executed trust funds, recognized on the Balance Sheet: Table H2: Undisbursed contributions made by third party donors to IDA-executed trust funds In millions of U.S. dollars June 30, 2019 June 30, 2018 IDA-executed trust funds $ 519 $ 476 These amounts are included in Other Assets and the corresponding liabilities are included in Accounts payable and miscellaneous liabilities on the Balance Sheet. Revenues IDA’s revenues for the administration of trust fund operations were as follows: Table H3: IDA’s revenues for the administration of trust fund operations In millions of U.S. dollars Fiscal Year Ended June 30, 2019 2018 2017 Revenues $ 46 $ 48 $ 42 These amounts are included in Other non-interest revenue in the Statement of Income. Amounts collected from donor contributions but not yet earned totaling $61 million at June 30, 2019 ($56 million— June 30, 2018) are included in Other Assets and in Accounts payable and miscellaneous liabilities, correspondingly, on the Balance Sheet. Transfers Received Under the agreements governing the administration of certain trust funds, IDA may receive any surplus assets as transfers upon the termination of these trust funds. In addition, as loans are repaid to trust funds, in certain cases the repayments are transferred to IDA. During the fiscal year ended June 30, 2019 funds recorded as Transfers from affiliated organizations and others under these arrangements totaled $10 million (less than $1 million—fiscal years ended June 30, 2018 and June 30, 2017 respectively). 104 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 NOTE I—DEVELOPMENT GRANTS For the fiscal years ended June 30, 2019 and June 30, 2018, the commitment charge rate on the undisbursed balances of IDA grants was set at nil percent. A summary of changes to the amounts payable for development grants is presented below: Table I1: Grants payable In millions of U.S. dollars June 30, 2019 June 30, 2018 Balance, beginning of the fiscal year $ 8,743 $ 6,583 Commitmentsa 7,680 4,964 Disbursements (including PPA grant activity) (3,984) (2,847) Translation adjustment (94) 43 Balance, end of the fiscal year $ 12,345 $ 8,743 a. Excludes $14 million Pandemic Emergency Financing Facility (PEF) disbursements made from PEF Financial Intermediary Funds. ($5 million - June 30, 2018) NOTE J—ACCUMULATED OTHER COMPREHENSIVE INCOME Comprehensive income consists of net income (loss) and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income (loss). For IDA, comprehensive income (loss) is comprised of net income (loss), currency translation adjustments on functional currencies and the DVA on fair value option elected liabilites. These items are presented in the Statement of Comprehensive Income. The following table presents the changes in Accumulated Other Comprehensive Income balances: Table J1: Changes in AOCI In millions of U.S. dollars Fiscal Year Ended June 30, 2019 2018 2017 Balance, beginning of the fiscal year $ (675) $ (2,039) $ (1,219) Currency translation adjustments on functional currencies (1,735) 1,364 (820) DVA on Fair Value option elected liabilities 2 - - Balance, end of the fiscal year $ (2,408) $ (675) $ (2,039) NOTE K—PENSION AND OTHER POSTRETIREMENT BENEFITS The staff of IBRD perform functions for both IBRD and IDA, but all staff compensation is paid directly by IBRD. Accordingly, a portion of IBRD's staff and associated administrative costs is allocated to IDA based on an agreed cost sharing ratio computed every year using various indicators. The methodology for computing this share ratio is approved by the Executive Directors for both institutions. IBRD, along with IFC and MIGA sponsor the Staff Retirement Plan and Trust (SRP), the Retired Staff Benefits Plan and Trust (RSBP) and the PEBP that cover substantially all of their staff members. The SRP provides regular defined pension benefits and also includes a cash balance component. The RSBP provides certain health and life insurance benefits to eligible retirees. The PEBP provides certain pension benefits administered outside the SRP. June 30 is used as the measurement date for these pension and other postretirement benefit plans. All costs, assets and liabilities associated with these plans are allocated between IBRD, IFC, and MIGA based upon their employees’ respective participation in the plans. While IDA is not a participating entity 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 IBRD’s allocation of staff and IDA FINANCIAL STATEMENTS: JUNE 30, 2019 105 associated administrative costs to IDA based on an agreed cost sharing ratio. During the fiscal year ended June 30, 2018, IDA’s share of IBRD’s costs relating to all the three plans totaled $299 million ($322 million—fiscal year ended June 30, 2018 and $426 million—fiscal year ended June 30, 2017). The cost of any potential future liability arising from these plans would be shared by IBRD and IDA using the applicable share ratio. As of June 30, 2019, the SRP and the RSBP were underfunded by $1407 million and $297 million, respectively. The PEBP, after reflecting IBRD and IDA’s share of assets which are included in IBRD’s investment portfolio of $1,177 million, was underfunded by $925 million. NOTE L—OTHER FAIR VALUE DISCLOSURES The table below presents IDA’s estimates of fair value of its financial assets and liabilities along with their respective carrying amounts. Table L1: Fair value and carrying amounts of financial assets and liabilities In millions of U.S. dollars June 30, 2019 June 30, 2018 Carrying Value Fair Value Carrying Value Fair Value Assets Due from Banks $ 138 $ 138 $ 523 $ 523 Investments (including securities purchased under resale agreements) 32,770 32,770 36,075 36,075 Net Loans Outstanding 151,921 133,764 145,656 118,508 Derivative Assets, net 487 487 250 250 Liabilities Borrowings Concessional partner loans 6,770 8,507 5,811 6,660 Market borrowings 3,432 3,432 1,494 1,494 Securities sold/ lent under repurchase agreements/ securities lending agreements and payable for cash collateral received 698 698 2,541 2,541 Derivative Liabilities, net 22 22 296 296 Valuation Methods and Assumptions As of June 30, 2019 and June 30, 2018, IDA had no financial assets or liabilities measured at fair value on a non– recurring basis. For additional fair value disclosures regarding Investments, Borrowings, Derivative assets and liabilities, refer to Note C—Investments, Note D—Borrowings and Note E—Derivative Instruments, respectively. Due from Banks: The carrying amount of unrestricted and restricted cash is considered a reasonable estimate of the fair value of these positions. 106 IDA FINANCIAL STATEMENTS: JUNE 30, 2019 Unrealized Mark-to-Market Gains (Losses) on Trading and Non-Trading Portfolios, Net The following table reflects the components of the unrealized mark-to-market gains or losses on IDA’s trading and non-trading portfolios, net. Table L2: Components of unrealized mark-to-market gains or losses In millions of U.S. dollars Fiscal Year Ended June 30, 2019 Unrealized gains Realized gains Unrealized gains (losses) excluding (losses) (losses) realized amounts a Investments- Trading—Note E $ (34) $ 385 $ 351 Non-trading portfolios, net Asset-liability management—Note E - 359 359 Investment portfolio—Note C - 32 32 Other b - (5) (5) Total $ - $ 386 $ 386 In millions of U.S. dollars Fiscal Year Ended June 30, 2018 Unrealized gains Realized gains Unrealized gains (losses) excluding (losses) (losses) realized amounts a Investments- Trading—Note E $ (195) $ 67 $ (128) Non-trading portfolios, net Asset-liability management—Note E - (17) (17) Investment portfolio—Note C - (21) (21) Total $ - $ (38) $ (38) In millions of U.S. dollars Fiscal Year Ended June 30, 2017 Unrealized gains Realized gains Unrealized gains (losses) excluding (losses) a (losses) realized amounts Investments- Trading—Note E $ 233 $ (600) $ (367) Non-trading portfolios, net Asset-liability management—Note E - 54 54 Investment portfolio—Note C - (32) (32) Total $ - $ 22 $ 22 a. Adjusted to exclude amounts reclassified to realized gains/losses. b. Other is comprised of mark to market gains or losses on the borrowing and loan portfolios NOTE M—CONTINGENCIES From time to time, IDA may be named as a defendant or co-defendant in legal actions on different grounds in various jurisdictions The outcome of any existing legal action, in which IDA has been named as a defendant or co- defendant, as of and for the fiscal year ended June 30, 2019, is not expected to have a material adverse effect on IDA's financial position, results of operations or cash flows. IDA FINANCIAL STATEMENTS: JUNE 30, 2019 107