International Bank for Reconstruction and Development Management’s Discussion & Analysis and Financial Statements June 30, 2018 Management’s Discussion and Analysis Section I: Executive Summary Contents Section I: Executive Summary Goals and the 2030 Development Agenda 3 Financial Results and Portfolio Performance 4 Key Performance Indicators 6 Section II: Overview Introduction 7 Presentation 8 Financial Business Model 8 Basis of Reporting 11 Section III: Financial Results Summary of Financial Results 13 Net Income 14 FY17 Net Income 20 Allocable Income and Income Allocation 22 Section IV: Lending Activities Lending Commitments and Disbursements 25 Lending Categories 26 Currently Available Lending Products 27 Discontinued Lending Products 29 Waivers 29 Section V: Other Development Activities Guarantees 31 Grants 33 Externally Funded Activities 33 Section VI: Investment Activities Liquid Asset Portfolio 35 Other Investments 36 Section VII: Borrowing Activities Short-Term Borrowings 38 Medium- and Long-Term Borrowings 39 Section VIII: Capital Activities Capital Structure 40 Usable Equity 42 Section IX: Risk Management Risk Governance 44 Risk Oversight and Coverage 44 Summary and Management of IBRD’s Specific Risks 47 Section X: Fair Value Analysis Effect of Interest Rates 58 Effect of Credit 58 Changes in Accumulated Other Comprehensive Income 59 Section XI: Contractual Obligations Contractual Obligations 62 Section XII: Pension and Other Post-Retirement Benefits Governance 63 Funding and Investment Policies 63 Environmental, Social and Governance (ESG) Policies 64 Projected Benefit Obligation 64 Section XIII: Critical Accounting Policies and The Use of Provision for Losses on Loans and Other Exposures 65 Estimates Fair Value of Financial Instruments 65 Pension and Other Post-Retirement Benefits 66 Section XIV: Governance and Controls General Governance 67 Board Membership 67 Audit Committee 68 Business Conduct 68 Auditor Independence 68 Internal Control 69 Appendix Glossary of Terms 70 Abbreviations and Acronyms 71 Eligible Borrowing Member Countries by Regiona 72 List of Tables, Figures and Boxes 72 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 1 Management’s Discussion and Analysis Section I: Executive Summary This Management’s Discussion & Analysis (MD&A) discusses the results of the International Bank for Reconstruction and Development’s (IBRD) financial performance for the fiscal year-ended June 30, 2018. For information relating to IBRD’s development operations’ results and corporate performance, refer to the World Bank Corporate Scorecard and Sustainability Review ( http://www.worldbank.org/en/results). 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 2018 2017 2016 2015 2014 Lending Highlights (See Section IV) Commitments a $ 23,002 $ 22,611 $ 29,729 $ 23,528 $ 18,604 Gross disbursements b 17,389 17,861 22,532 19,012 18,761 Net disbursements b 5,638 8,731 13,197 9,999 8,948 Reported Basis Income Statement (See Section III) Board of Governors-approved and other transfers $ (178) $ (497) $ (705) $ (715) $ (676) Net Income/(loss) 698 (237) 495 (786) (978) Balance Sheet Total assets $ 403,056 $ 405,898 $ 371,260 $ 343,225 $ 358,883 Net investment portfolio (See Section VI) 73,492 71,667 51,760 45,105 42,708 Net loans outstanding (See Section IV) 183,588 177,422 167,643 155,040 151,978 Borrowing portfolio (See Section VII) 213,652 207,144 178,231 158,853 152,643 Allocable Income (See Section III) Allocable income $ 1,161 $ 795 $ 593 $ 686 $ 769 Allocated as follows: General Reserve c 913 672 96 36 - International Development Association 248 123 497 650 635 Surplus - - - - 134 Usable Equity d, e (See Section VIII) $ 43,518 $ 41,720 $ 39,424 $ 40,195 $ 40,467 Capital Adequacy (See Section IX) Equity-to-loans ratio f 22.9% 22.8% 22.7% 25.1% 25.7% 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. The June 30, 2018 amount represents the proposed transfer to the General Reserve from FY18 net income, which was approved on August 9, 2018 by the Board. d. Excluding amounts associated with unrealized mark-to-market gains/losses on non-trading portfolios, net and related cumulative translation adjustments. e. As defined in Table 27: Usable Equity. Includes the proposed transfer to the General Reserve. f. As defined in Table 28: Equity-to-Loans Ratio. 2 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section I: Executive Summary Section I: Executive Summary Goals and the 2030 Development Agenda With its many years of experience and its depth of knowledge in the international development arena, IBRD plays a key role in achieving the World Bank Group’s (WBG 1) overarching goals of ending extreme poverty by 2030 and promoting shared prosperity in a sustainable manner, and has identified three key priorities to achieve this: sustainable and inclusive growth, investment in human capital, and strengthening resilience. These goals and priorities reflect and support the international community’s development agenda set for 2030, which include the Sustainable Development Goals (SDGs). The Forward Look: A Vision for the WBG in 2030, describes how the WBG will deliver on its twin goals and its three priorities. The Forward Look rests on four pillars: serving all clients; leading on global issues; mobilizing resources for development; and improving the business model. See Figure 1. At IBRD’s Spring Meetings in April 2018, the Board of Governors (Governors) endorsed a package that includes a General Capital Increase (GCI) and a Selective Capital Increase (SCI) that would provide up to $7.5 billion in additional paid-in capital, as well as institutional and financial reforms designed to ensure long-term financial sustainability. The package provides support for the priorities identified under the Forward Look strategy. Figure 1: WBG Goals and 2030 Development Agenda WBG Goals: Eradicating Extreme Poverty and Boosting Shared Prosperity Three Priorities Sustainable & Inclusive Human Capital Resilience Growth Forward Look Leading Global Mobilization for Improving Business Serving All Clients Agenda Development Model 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, 2018 3 Management’s Discussion and Analysis Section I: Executive Summary Significant progress has been made in the implementation of the Forward Look strategy. The following are key highlights of this progress: Serving All Clients $23 billion IBRD is directing more resources to meet client countries’ development priorities. Total Commitments In FY18, commitments in lower- middle-income countries represented 53% of Of which total commitments (FY17 - 39%). The proposed capital increases would provide additional capacity for lending, consistent with maintaining an appropriate Equity- $12 billion to-Loans ratio. Commitments to Lower-Middle-Income Countries Leading on Global Issues 39 % IBRD is bringing knowledge, convening power, and capacity to address global Climate Co-Benefit issues. It is increasing financing for projects with climate co-benefits as part of a Commitments broad climate action plan; expanding financing and integrating tools for crisis response to help countries recover from conflict, natural disasters, or pandemics; 51 % Gender Commitments and helping to level the playing field for women in business. Improving the Business Model IBRD, along with other WBG entities, is implementing ways to serve its clients more effectively and efficiently. Various administrative reforms and agile programs are underway to simplify procedures, create operating efficiencies and improve operational delivery. Procurement policy modernization, which promotes internationally recognized core principles of value for money 2, is creating more opportunities to deliver more value to borrowers. Significant progress has been made to ensure budget spending discipline and efficiency, which has resulted in an improvement in the Budget Anchor. In addition, as part of the package endorsed by the Governors in April 2018, IBRD will continue to strengthen its financial management by introducing a financial sustainability framework in FY19. Financial Results and Portfolio Performance The financial performance of IBRD reflects the impact from the measures put in place in previous years to increase its financial capacity, and ensure its long-term financial sustainability. At the end of the fiscal year-ended June 30, 2018, the Executive Directors (the Board) approved the retention of $913 million in the General Reserve out of the allocable income for the fiscal year-ended June 30, 2018 (FY18). This compares with a retention of $672 million at the end of the fiscal year-ended June 30, 2017. The key factor driving this increase in reserve retention was the higher allocable income as discussed in the next section. 2 Economy, Efficiency, Effectiveness, Cost-effectiveness. 4 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section I: Executive Summary Net Income and Allocable Income IBRD had a net income of $698 million on a reported basis for the fiscal year- ended June 30, 2018, compared with a net loss of $237 million in the fiscal year- $698 million Net Income ended June 30, 2017. 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, which is the income measure used as the basis for making net income allocation decisions. IBRD’s allocable income was $1,161 million for the fiscal year-ended June 30, 2018, compared with $795 million for the fiscal year-ended June 30, 2017. The higher allocable income was primarily driven by the increase in loan spread revenue and the containment of net administrative expenses, as evidenced by the improvement in the Budget Anchor (FY18 88%; FY17 107%). $1,161 million Allocable Income Loans IBRD’s lending operations during the fiscal year-ended June 30, 2018, resulted in $23 billion of loan commitments and $5.6 billion of net loan disbursements. The latter was the key driver in the increase in net loans outstanding, from $177 billion $184 billion Net Loans Outstanding at the end of the fiscal year-ended June 30, 2017 to $184 billion at the end of the fiscal year-ended June 30, 2018. Investments IBRD’s investment portfolio increased by $2 billion, from $72 billion as of June 30, 2017 to $74 billion as of June 30, 2018. The investments remain concentrated in the upper end of the credit spectrum, with 70% rated AA or above, reflecting $74 billion Net Investment Portfolio IBRD’s objective of principal protection and resulting preference for high quality investments. Borrowings IBRD raised medium and long-term debt of $36 billion during FY18, resulting in a $7 billion increase in the portfolio during the year, from $207 billion as of June 30, 2017 to $214 billion as of June 30, 2018. The funds raised financed $214 billion Borrowing Portfolio development lending operations, and also satisfied the increase in liquidity requirements. The debt issuances were highly diversified; 27 currencies, ranging from sizes of $0.2 million to $3 billion, with an average maturity of 4.6 years. Usable Equity IBRD’s usable equity continues to be adequate to support current lending operations. IBRD’s Governors are voting on capital increase resolutions that would allow IBRD to lend more, consistent with maintaining an appropriate $44 billion Usable Equity Equity-to-Loans ratio. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 5 Management’s Discussion and Analysis Section I: Executive Summary Key Performance Indicators LENDING - In FY18, IBRD committed $23 billion through 124 projects to help developing countries find solutions to global and local development challenges. Lending commitments (including guarantees of $0.4 billion) were higher in FY18 relative to a year earlier by 2% (Table 8). At June 30, 2018, IBRD’s net loans outstanding amounted to $184 billion (Table 2), 3.5% above a year earlier. In billions of U.S dollars Commitments Disbursements Net Loans outstanding GROSS NET 35 35 250 30 30 200 25 25 20 20 150 15 15 100 10 10 5 50 5 0 0 0 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 CAPITAL ADEQUACY AND LIQUIDITY – The Equity-to- Loans ratio of 22.9% as of June 30, 2018, remained largely unchanged (22.8% as of June 30, 2017), as the impact of the increase in loan and other exposures was offset by the favorable impact of the increase in the General Reserve, and the decrease in the underfunded status of the pension plans. The net investment portfolio remained at high-levels due to pre-funding activities and management’s intention to keep liquidity volumes higher to enhance IBRD’s ability to meet its financial commitments, even under potential scenarios of severe market disruptions. 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 10% policy minimum 50 50 0% 0 0 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 FINANCIAL RESULTS – On a reported basis, IBRD had a net income of $698 million for FY18. This net income primarily reflects strong net interest revenue results and contained net administrative expenses, partially offset by net unrealized mark-to-market losses experienced 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 $1,161 million for FY18, higher by $366 million as compared with the allocable income for FY17 (See Section III). In millions of U.S dollars Net Income/Loss Allocable Income 1,500 Unrealized gains/losses 1,500 1,000 1,250 500 1,000 0 750 -500 500 -1,000 250 -1,500 0 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 6 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section II: Overview Section II: Overview Introduction IBRD, an international organization owned by its 189- IBRD is one of the largest Multilateral Development member countries, is one of the five institutions of the Banks (MDB) in the world and is able to combine WBG. Each of these institutions is legally and knowledge services and financing with global reach. financially independent, with separate assets and The value of IBRD is in its ability to help its eligible liabilities. IBRD is not liable for the obligations of the borrowing members address their development other institutions. challenges and meet their rising demand for innovative products. Figure 2 illustrates how IBRD creates value. Figure 2: How IBRD Creates Value IBRD provides loans, guarantees, and knowledge for development focused projects and programs to creditworthy middle-income and low-income countries to support sustainable development. While its main business activity is extending loans to its eligible member countries, by operating across a full range of country clients, IBRD maintains a depth of development knowledge, uses its convening power to advance the global public goods agenda, and coordinates responses to regional and global challenges. Member countries use IBRD’s technical advice and analysis to develop or implement better policies, programs, and reforms that help to sustain development over the long term, with products ranging from flagship reports, development data, and reports on key economic and social issues, to knowledge-sharing workshops, policy notes, and implementation action plans. The analysis often underpins partnership frameworks, government programs, and projects supported by IBRD lending and guarantees. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 7 Management’s Discussion and Analysis Section II: Overview Presentation Related Policies in the Notes to the Financial Statements for the year-ended June 30, 2018. This document provides Management’s Discussion and Analysis (MD&A) of the financial condition and Financial Business Model results of operations for IBRD for the fiscal year- IBRD’s objective is not to maximize profits, but to ended June 30, 2018. At the end of this document there earn adequate income to ensure that it has the long- is a Glossary of Terms and a list of Abbreviations and term financial capacity necessary to support its Acronyms. development activities. IBRD seeks to generate IBRD undertakes no obligation to update any forward- sufficient revenue to finance its operations as well as looking statements. Certain reclassifications of prior to be able to set aside funds in reserves to strengthen years’ information have been made to conform to the its financial position, and provide support to IDA and current year’s presentation. For further details, see to trust funds via income transfers for other Note A: Summary of Significant Accounting and developmental purposes. Figure 3: IBRD’s Financial Business Model The financial strength of IBRD is based on the support it receives from its shareholders, and on its array of In order to be able to meet its development goals, it is financial policies and practices. Shareholder support important for IBRD to intermediate funds for lending for IBRD is reflected in the capital backing it continues from the international capital markets. IBRD’s loans to receive from its members and in the record of its are financed through its equity, and from borrowings borrowing member countries in meeting their debt raised in the capital markets. IBRD is rated triple-A by service obligations to IBRD. IBRD’s sound financial the major rating agencies and its bonds are viewed as and risk management policies and practices have high quality securities by investors. IBRD’s funding enabled it to maintain its capital adequacy, diversify its strategy is aimed at achieving the best long-term value funding sources, hold a portfolio of liquid investments on a sustainable basis for its borrowing members. This to meet its financial commitments, and limit its risks, strategy has enabled IBRD to borrow at favorable including credit and market risks. market terms and pass the savings on to its borrowing Figure 3 illustrates IBRD’s financial business model. members. IBRD issues its securities both through IBRD offers its borrowers, in middle income and global offerings and bond issues tailored to the needs creditworthy low-income countries, long-term loans of specific markets or investor types. This is done by that can have a final maturity of up to 35 years. offering bonds to investors in various currencies, Borrowers may customize their repayment terms to maturities, markets, and with fixed and variable terms, meet their debt management or project needs. Loans often opening new markets for international investors are offered on both fixed and variable terms, and in by offering new products or bonds in emerging-market multiple currencies; though borrowers have generally currencies. IBRD’s annual funding volumes vary from preferred loans denominated in U.S dollars and euros. year to year, and funds raised are used to finance IBRD also supports its borrowers by providing access IBRD’s development projects and programs in to risk management tools such as derivative member countries. Funds not deployed for lending are instruments, including currency and interest rate swaps maintained in IBRD’s investment portfolio to supply and interest rate caps and collars. liquidity for its operations. 8 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section II: Overview IBRD makes extensive use of derivatives to manage its investments with the debt funding the liquidity exposure to various market risks from the above portfolio. Figure 5 below illustrates the use of activities. These are used to align the interest and derivatives in the liquidity portfolio: currency composition of its assets (loan and investment Figure 5: Use of Derivatives for Investments trading portfolios) with that of its liabilities (borrowing portfolio), and to stabilize the earnings on its equity. Alignment of Assets and Liabilities – IBRD borrows in multiple currency and interest rate bases on a global scale. It then lends the proceeds of these 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 which are best matched to their circumstances. In addition to meeting borrower preferences, such options are expected to help borrowers mitigate their currency and interest rate risk. In the absence of active risk management, IBRD would be exposed to substantial Equity Management – IBRD’s equity is deployed to market risk and asset-liability management fund its lending activities. Given IBRD’s risk imbalances. To address such imbalances, IBRD uses management strategy (See section IX), earnings on derivatives to swap its payment obligations on bonds equity reflect short-term variable rates. If left to a currency and interest rate basis that is aligned with unmanaged, the revenue from these loans would be its loan portfolio. Likewise, when a borrower exercises highly sensitive to fluctuations in short-term interest a conversion option on a loan to change its currency or rates. To manage this exposure, Management has put interest rate basis, IBRD uses derivatives to convert its in place an Equity Management Framework (EMF) exposure back to a currency and interest rate basis, that with the primary goal of providing income stability for is aligned with its loan portfolio. Thus, IBRD’s IBRD. Under this framework, IBRD uses derivatives payment obligations on its borrowings are aligned with to convert the variable rate cash flows on loans funded its loans funded by such borrowings – generally, after by equity back to fixed rate cash flows (See Risk the effect of derivatives, IBRD primarily pays U.S. Management, Section IX). See Figure 6 below: dollar, short-term variable rates on its borrowings, and Figure 6: Use of Derivatives for EMF receives U.S. dollar, short-term variable rates on its loans. Figure 4 below illustrates the use of derivatives in the loan and borrowing portfolios: Figure 4:Use of Derivatives for Loans and Borrowings Management believes that these risk management strategies, taken together, effectively manage market risk in IBRD’s operations from an economic perspective. However, these strategies entail the extensive use of derivatives, which introduce volatility through unrealized mark-to-market gains and losses on the reported basis income statement (particularly given Derivatives are also used to manage market risk in the the long-term nature of some of IBRD’s assets and liquidity portfolio. In line with its development liabilities). Accordingly, Management makes decisions mandate, IBRD maintains a large liquidity balance to on income allocation without reference to unrealized ensure that it can make payments on its borrowing mark-to-market gains and losses on risk management obligations and loan disbursements, even in the event instruments in the non-trading portfolios – see Basis of of severe market disruptions. Pending disbursement, Reporting – Allocable Income. the liquidity portfolio is invested on a global basis in multiple currencies and interest rates. Derivatives are also used to align the currency and duration of IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 9 Management’s Discussion and Analysis Section II: Overview Financial Performance IDA, IBRD’s primary sources of revenue are from loans and • Implementation of a new external funds costs investments (both net of funding costs), and equity recovery framework, and contribution. These revenues cover, administrative • The establishment and achievement of expenses, provisions for losses on loans and other administrative spending targets. exposures 3 (LLP), as well as transfers to Reserves, To increase capital utilization, IBRD has developed Surplus, and for other development purposes including and implemented an MDB Exposure Exchange transfers to IDA. Framework (MDB EEA) with the Inter-American In addition to the revenue generated from activities as Development Bank (IADB) and the African shown in Figure 7, IBRD also earns revenue from other Development Bank (AfDB), helping all three development activities, in the form of non-interest institutions improve the diversification of their revenue from externally funded activities. portfolios. Mobilization of external funds from third-party At IBRD’s Spring Meetings in April 2018, the partners includes trust funds, reimbursable funds and Governors endorsed in principle, a package designed fee-based services from member countries, primarily to enhance IBRD’s financial capacity on a sustainable from Reimbursable Advisory Services (RAS), basis. That package includes: Externally Financed Outputs (EFO), and the Reserves Advisory Management Program (RAMP). The growth 1) A General and Selective Capital increase that of non-interest revenue from externally funded will provide up to $7.5 billion in additional paid- activities provides an additional means to expand in capital; Governors are currently voting on capacity to support the development needs of client resolutions to implement these capital increases; countries. Management continues to strengthen and align this revenue source with the overall WBG 2) New loan pricing measures implemented on strategy and priorities. See Section V for a detailed July 1, 2018; the Executive Directors approved discussion on externally funded activities. the new pricing structure on June 26, 2018; The financial results for FY18 reflect the impact from 3) An increase in the Single Borrower Limit (SBL) the measures put in place to further enhance IBRD’s with differentiation based on per capita income; financial position. These measures are intended to the Executive Directors approved the new SBL gradually increase IBRD’s equity, lending capacity, and its ability to fund priorities that meet shareholder structure on June 28, 2018; goals while also ensuring its long-term financial 4) Continued efficiency measures and sustainability. The measures included: administrative simplification; and • The introduction of pricing measures in 5) A financial sustainability framework that will FY14–15, which have led to an increase in include a sustainable lending limit and crisis loan spread revenue, buffers; that framework will be developed by • Reducing the policy minimum for the Equity- management and presented to the Executive to-Loans ratio from 23% to 20%, Directors for approval in FY19. • Adoption of an income-based formula to calibrate IBRD’s annual income transfers to 3 Other exposures include deferred drawdown options (DDO), irrevocable commitments, exposures to member countries’ derivatives and guarantees. 10 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section II: Overview Figure 7: 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 Cost of Interest Margin L Loan revenue debt o LLP a n Reserves s Allocable IDA, Other Income Equity Equity transfers & Contribution Surplus Basis of Reporting management measure which reflects income available for allocation. IBRD’s definition of allocable income Audited Financial Statements starts with the net income on a reported basis, and IBRD’s financial statements conform with accounting includes certain adjustments, which are approved by principles generally accepted in the United States of the Board at the end of every fiscal year. These America (U.S. GAAP), referred to in this document as adjustments relate to the following: the “reported basis”. All instruments in the investment • Unrealized mark-to-market gains/losses on and borrowing portfolios and all other derivatives are non-trading portfolios, reported at fair value, with changes in fair value reported in the Statement of Income. IBRD’s loans are • Expenses related to transfers allocated from the reported at amortized cost, except for loans with previous years’ allocable income but expensed embedded derivatives, if any, which are reported at in the current year, fair value. Management uses the reported net income • Differential between reported pension expense as the basis for deriving allocable income, as discussed and the contributions made to the pension plans below. and the Post-Retirement Contribution Reserve Fund (PCRF), Fair Value Results • Investment revenue on the portion of assets IBRD reflects all financial instruments at fair value in related to the pension plan, which is included in Section X of this document. The fair value of these IBRD’s investment portfolio, and instruments is affected by changes in market variables such as interest rates, exchange rates, and credit risk. • Other amounts including temporarily restricted Management uses fair value to assess the performance revenue (i.e. funds received from donors/others of the investment-trading portfolio; to manage various to finance specific products or outputs and as a market risks, including interest rate risk and result not considered allocable), and revenue commercial counterparty credit risk. related to the Pilot Auction Facility (PAF) and the Pandemic Emergency Financing Facility Allocable Income (PEF). IBRD’s Articles of Agreement (the Articles) require See Financial Results Section (Section III) and Table that the Governors determine the allocation of income 7 for a detailed discussion on the adjustments made to at the end of every fiscal year. Allocable income, reported net income to arrive at allocable income. which is a non-GAAP financial measure, is an internal IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 11 Management’s Discussion and Analysis Section II: Overview The volatility in IBRD’s reported net income is For trading portfolios (investment portfolio), allocable primarily driven by the unrealized mark-to-market income includes both unrealized mark-to-market gains gains and losses on the derivative instruments in and losses, as well as realized amounts. IBRD’s non-trading portfolios (loans, borrowings, and Management has consistently followed this practice of EMF). IBRD’s risk management strategy entails the excluding unrealized mark-to-market gains and losses extensive use of derivatives to manage market risk. on its non-trading portfolios from reported net income These derivatives are primarily used to align the to arrive at allocable income, since adopting FASB’s interest rate and currency bases of its assets and guidance on derivatives and hedging in FY01. liabilities. IBRD has elected not to designate any Accordingly, in years in which reported net income hedging relationships for accounting purposes. Rather, has been positively impacted by unrealized mark-to- all derivative instruments are marked to fair value on market gains on the non-trading portfolios, IBRD did the Balance Sheet, with changes in fair values not take these unrealized mark-to-market gains into accounted for through the Statement of Income. account in making income allocation decisions. In line with IBRD’s financial risk management Likewise, in the case of unrealized mark-to-market policies, IBRD expects to maintain its non-trading losses on the non-trading portfolios, IBRD portfolio positions. As a result, for non-trading consistently excludes these amounts from reported net portfolios, allocable income only includes amounts income to arrive at allocable income. which have been realized. 12 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 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, 2018 compared with the fiscal year-ended June 30, 2017, as well as changes in its financial position between June 30, 2018 and June 30, 2017. Summary of Financial Results Table 1: Condensed Statement of Income In millions of U.S. dollars For the fiscal year ended June 30, 2018 2017 2016 FY18 vs FY17 FY17 vs FY16 Interest Revenue, net of Funding Costs Interest margin $ 1,184 $ 1,022 $ 921 $ 162 $ 101 Equity contribution, (including EMF) a 746 719 831 27 (112) Investments, net 231 170 110 61 60 Net Interest Revenue $ 2,161 $ 1,911 $ 1,862 $ 250 $ 49 Provision for losses on loans and other exposures, net - release /(charge) b 28 (14) (15) 42 1 Net non-interest expenses (Table 4) (1,185) (1,347) (1,319) 162 (28) Net other revenue b (Table 3) 138 129 41 9 88 Board of Governors-approved and other transfers (178) (497) (705) 319 208 Unrealized mark-to-market gains/(losses) on (266) (419) 631 153 (1,050) non- trading portfolios, net a Net Income (Loss) $ 698 $ (237) $ 495 $ 935 $ (732) Adjustments to reconcile net income/(loss) to allocable income: Pension and other adjustments 19 116 24 (97) 92 Board of Governors-approved and other transfers 178 497 705 (319) (208) Unrealized mark-to-market gains/(losses) on 266 419 (631) (153) 1,050 non-trading portfolios, net a Allocable Income $ 1,161 $ 795 $ 593 $ 366 $ 202 a. This includes the reclassification of net realized mark- to-market gains of $39 million for FY16, associated with the termination of certain positions under the EMF, from unrealized mark-to-market losses on non-trading portfolios, net, to equity contribution. There were no realized gains for FY17 & FY18 for the EMF portfolio (See Table 6). b. Includes a $3 million reduction (expense) in the recoverable asset for FY18 and $3 million for FY17. FY16 amount includes a $42 million increase (income) 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. Table 2: Condensed Balance Sheet In millions of U.S. dollars As of June 30, 2018 2017 Variance Investments and due from banks $ 73,188 $ 73,656 $ (468) Net loans outstanding 183,588 177,422 6,166 Receivable from derivatives 141,716 150,112 (8,396) Other assets 4,564 4,708 (144) Total Assets $ 403,056 $ 405,898 $ (2,842) Borrowings 208,009 205,942 2,067 Payable for derivatives 147,096 153,129 (6,033) Other liabilities 6,107 7,029 (922) Equity 41,844 39,798 2,046 Total Liabilities and Equity $ 403,056 $ 405,898 $ (2,842) IBRD’s principal assets are its loans to member While IBRD’s net loans outstanding grew by 3.5%, countries. These are financed by IBRD’s equity and total assets as of June 30, 2018 decreased by about 1% proceeds from the capital markets. compared to June 30, 2017, primarily as a result of a decrease in the receivable for derivatives, due to maturities and the increase in USD interest rates IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 13 Management’s Discussion and Analysis Section III: Financial Results during the year. Derivatives are presented on IBRD’s Results from Lending activities balance sheet based on the manner in which they are settled. As a result, currency swaps are presented on a Interest Margin gross basis and interest rate swaps are presented on a Net interest margin is the spread earned (loan revenue net basis. As of June 30, 2018, while IBRD’s less associated funding costs) on loans funded by derivative assets were $141,716 million on the balance borrowings and IBRD’s equity. This spread is largely sheet, IBRD’s net derivative exposure, after master unaffected by changes in short-term interest rates due netting agreements and collateral, was $1,454 million, to the cost-pass through nature of IBRD’s loans of which $254 million was commercial credit (Figure 10). IBRD’s FY18 net interest margin was exposure (See Table 29 and Notes to Financial $1,184 million, an increase of $162 million compared Statements, Note F: Derivative Instruments). with FY17. The higher net interest margin was driven The following is a discussion on the key drivers of by the impact from the pricing measures adopted in IBRD’s financial performance, including a FY14, as well as the increase in lending volume. reconciliation between IBRD’s reported net income Figure 9: Net Interest Margin and allocable income. Net Loans Outstanding Interest margin Net Income 200 168 177 184 1,400 1,200 On a reported basis, IBRD had net income of $698 150 1,000 million for FY18. This net income primarily reflects (In $ Millions) (In $ Billions) higher net interest revenue, lower BOG transfers and 100 800 lower unrealized mark-to-market losses experienced 600 on the non-trading portfolios (See Figure 8). After 400 50 adjustments, IBRD had allocable income of $1,161 200 million for FY18, higher by $366 million as compared 0 0 to FY17 (See Table 1). The higher allocable income in FY16 FY17 FY18 FY18 was primarily due to increases in IBRD’s business revenue (loan interest margin, net investment revenue, commitment and guarantee fees, and Figure 10: Derived Spread reimbursable revenue from IBRD executed trust funds); and the containment of net administrative 300 Basis expenses (See Table 5). Also contributing to the Points 255 increase in allocable income was the favorable change 250 Loan - Weighted Average Return before funding costs (after swaps) in the provision for loan losses and other exposures, 200 which resulted in a release of $28 million in FY18. 182 150 Figure 8: Net Income and Unrealized gains / (losses) Derived Spread Net Income/Loss 100 Unrealized gains/losses 73 1,000 50 Weighted Average Funding Cost 500 (after swaps) In $ millions 0 0 June 30, 2014 June 30, 2015 June 30, 2016 June 30, 2017 June 30, 2018 -500 -1,000 Loan Portfolio -1,500 Client demand for IBRD’s loans remains high; FY14 FY15 FY16 FY17 FY18 however, the 20% minimum threshold level for the Equity-to-Loans ratio has limited IBRD’s lending capacity. The resolutions for the proposed General Capital Increase (GCI) and Selective Capital Increase (SCI) have been circulated to the Governors for their approval. The proposed capital increases would provide additional capacity for lending, consistent with maintaining an appropriate Equity-to-Loans ratio. At June 30, 2018, IBRD’s net loans outstanding amounted to $184 billion, 3.5% above a year earlier (Figure 9). The increase was mainly attributable to 14 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section III: Financial Results $5.6 billion in net loan disbursements made in FY18, E: Borrowings in the Notes to the Financial and currency translation gains of $0.5 billion, Statements). primarily due to the 2% appreciation of the euro In FY18, to fund its operations, IBRD raised medium- against the U.S. dollar during the year. and long-term debt of $36 billion in 27 different Gross disbursements in FY18 were $17.4 billion, 2.6% currencies, $19.5 billion below FY17 (Table 22). The lower than FY17, primarily due to lower development decrease in medium- and long-term debt issuances in policy operation disbursements during the year FY18 is primarily a result of the decrease in net loan (Section IV). disbursements, as well as lower debt servicing and refinancing requirements. Results from Investing activities Figure 12: Borrowing Portfolio Net Investment Revenue In billions of U.S. dollars During FY18, interest revenue from investments, net 250 207 214 of funding costs, amounted to $231 million. This 200 178 compares with $170 million during FY17. The $61 million increase was primarily due to increased 150 volume and the results from cross-currency 100 management strategies. 50 Investment Portfolio 0 FY16 FY17 FY18 IBRD’s investment portfolio consists mainly of the liquid asset portfolio. As of June 30, 2018, the net investment portfolio totaled $74 billion, with $72 Equity Contribution and Equity Management billion representing the liquid asset portfolio. This Framework compares with $72 billion a year earlier, of which $70 billion represented the liquid asset portfolio (see Note Equity contribution is comprised of interest revenue C: Investments in the Notes to the Financial earned from the EMF positions, and any gains which Statements). The growth in the investment portfolio is have been realized during the year as a result of the primarily due to the increase in the net receivable for termination of certain EMF positions. Equity derivatives, associated with the increase in interest contribution also includes equity savings (revenue rates during the year. earned from the proportion of loans funded by equity), and certain minor adjustments including those relating Figure 11: Net Investment Portfolio to discontinued loan products. In billions of U.S. dollars Figure 13: Equity Contribution 80 72 74 In millions of U.S. dollars 70 60 52 FY18 50 40 FY17 30 FY16 20 10 FY15 0 FY14 FY16 FY17 FY18 0 200 400 600 800 1,000 1,200 1,400 The level of liquidity reflects management’s decision Realized Gains Interest Revenue Equity Savings to increase the Prudential Minimum liquidity requirement, as well as, the higher projected debt For FY18, equity contribution was $746 million, service and loan disbursements for the coming fiscal marginally higher compared with $719 million in year (Section IX). FY17 (See Table 1). EMF continues to bring stability to equity contribution and represents 35% of the net Results from Borrowing activities interest revenue for FY18 (38% - FY17). Borrowing portfolio A further discussion on the EMF strategy and how As of June 30, 2018, the borrowing portfolio totaled IBRD manages its exposure to short-term interest rates $214 billion, $7 billion above June 30, 2017 (see Note is included in the Risk Management Section (Section IX). IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 15 Management’s Discussion and Analysis Section III: Financial Results Net Other Revenue Plan (PEBP) and PCRF assets. The increase in Table 3 below provides details on the composition of commitment fee revenue in FY18 compared with net other revenue. FY17, was due to the higher balance of undisbursed Net other revenue increased by $9 million (7%) loans which are subject to the FY14 pricing measures. relative to FY17, driven by the increase in revenue from commitment and guarantee fees, partially offset by lower earnings from the Post-Employment Benefit Table 3: Net Other Revenue In millions of U.S. dollars FY18 vs FY17 vs For the fiscal year-ended June 30, 2018 2017 2016 FY17 FY16 Loan commitment fees $ 87 $ 70 $ 34 $ 17 $ 36 Guarantee fees 14 8 7 6 1 Net Earnings from PEBP and PCRF 34 47 (6) (13) 53 PAF and PEF a 1 8 6 (7) 2 Others 2 (4) * 6 (4) Net other revenue (Table 1) $ 138 $ 129 $ 41 $ 9 $ 88 a. For further discussion on PAF and PEF, see "Other adjustments" on Table 7. *indicates amount less than $0.5 million. Expenses as a result of the lower amortization of unrecognized net actuarial losses and service costs during FY18. Net Non-Interest Expenses Figure 14: Net Non-Interest Expenses As shown in Table 4, IBRD’s net non-interest In millions of U.S. dollars expenses primarily comprise administrative expenses, Net Non-Interest Expenses net of revenue from externally funded activities. 1,400 IBRD/IDA's administrative budget is a single resource 1,300 envelope that funds the combined work programs of 1,200 IBRD and IDA. The allocation of administrative 1,100 expenses and revenue between IBRD and IDA is 1,000 based on an agreed cost and revenue sharing 900 methodology, approved by their Boards, which is 800 primarily driven by the relative level of lending, FY14 FY15 FY16 FY17 FY18 knowledge services, and other services between these two institutions. The staff costs and consultant and contractual services shown in the table below include Efficiency Measures costs related to IBRD executed trust funds, which are IBRD aims to have its net administrative expenses recovered through revenue from externally funded covered by its loan spread revenue (loan interest activities. margin, commitment and guarantee fees). Thus, IBRD The decrease in net non-interest expenses relative to monitors its net administrative expenses as a FY17 was primarily due to the impact of the lower percentage of its loan spread revenue, using a measure allocation of administrative expenses to IBRD, and referred to as the Budget Anchor. due to lower pension and post-retirement benefit costs, 16 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section III: Financial Results Table 4: Net Non-Interest Expenses In millions of U.S. dollars FY18 vs FY17 vs For the fiscal year-ended June 30, 2018 2017 2016 FY17 FY16 Administrative expenses Staff costs $ 951 $ 904 $ 915 $ 47 $ (11) Travel 181 175 183 6 (8) Consultant fees and contractual services 437 454 482 (17) (28) Pension and other post-retirement benefits 272 394 231 (122) 163 Communications and Technology 54 55 58 (1) (3) Equipment and buildings 128 130 139 (2) (9) Other expenses 26 33 45 (7) (12) Total administrative expenses $ 2,049 $ 2,145 $ 2,053 $ (96) $ 92 Grant Making Facilities (See Section V) 18 22 67 (4) (45) Revenue from externally funded activities (See Section V) Reimbursable revenue – IBRD executed trust funds (595) (542) (515) (53) (27) Reimbursable advisory services (52) (47) (51) (5) 4 Revenue - Trust fund administration (48) (47) (51) (1) 4 Restricted revenue (primarily externally financed outputs) (22) (24) (20) 2 (4) Revenue - Asset management services (28) (27) (27) (1) - Other revenue (137) (133) (137) (4) 4 Total Revenue from externally funded activities (882) (820) (801) (62) (19) Total Net Non-Interest Expenses (Table 1) $ 1,185 $ 1,347 $ 1,319 $ (162) $ 28 Table 5: Budget Anchor Ratio In millions of U.S. dollars FY18 vs FY17 vs For the fiscal year ended June 30, 2018 2017 2016 FY17 FY16 Total net Non-Interest Expenses (From Table 4) $ 1,185 $ 1,347 $ 1,319 $ (162) $ 28 Pension adjustment (From Table 7) a (56) (175) (18) 119 (157) EFO adjustment a 2 4 (5) (2) 9 Net administrative expenses $ 1,131 $ 1,176 $ 1,296 $ (45) $ (120) Loan interest margin (From Table 1) 1,184 1,022 921 162 101 Loan commitment fees (From Table 3) 87 70 34 17 36 Guarantee fees (From Table 3) 14 8 7 6 1 Total loan spread revenue $ 1,285 $ 1,100 $ 962 $ 185 $ 138 Budget Anchor 88% 107% 135% 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. In FY18, IBRD’s Budget Anchor was 88%, an Figure 15: Budget Anchor In millions of U.S. dollars improvement of 19 percentage points compared with 107% in FY17, reflecting the increase in IBRD’s loan 1600 135% spread revenue during the year, and the decrease in 107% 88% administrative expenses resulting from the improved 1200 discipline in administrative spending, and the impact of the lower allocation of administrative expenses to 800 IBRD, in accordance with the IBRD/IDA cost sharing methodology (See Table 5 for details of the Budget 400 Anchor components). 0 FY16 FY17 FY18 Net administrative expenses Net loan spread revenue Budget anchor IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 17 Management’s Discussion and Analysis Section III: Financial Results Provision for losses on loans and other the introduction in FY17 of a formula based approach exposures for determining IBRD’s transfers to IDA, which links such transfers with IBRD’s allocable income level. In FY18, IBRD recorded a release of provision for losses on loans and other exposures of $28 million, Unrealized mark-to-market gains/losses on compared with a charge of $14 million in FY17. The non-trading portfolios release was primarily due to the impact from the annual update of inputs to the loan loss provisioning These mainly comprise unrealized mark-to-market methodology. The provisioning rate as of June 30, gains and losses on the loan, borrowing, and EMF 2018, was largely unchanged compared with the prior portfolios. Since these are non-trading portfolios, any year, and remained at less than 1% of IBRD’s loan unrealized mark-to-market gains and losses associated exposures (see Notes to Financial Statements, Note D: with these positions, are excluded from reported net Loans and Other Exposures). income to arrive at allocable income. As a result, from a long-term financial sustainability perspective, Board of Governors and approved transfers income allocations are made on the basis of amounts For FY18, IBRD recorded expenses of $178 million which have been realized (with the exception of the relating to Board of Governors-approved and other Investment trading portfolio, as previously discussed). transfers, which relates to the transfer to IDA from For FY18, $266 million of net unrealized mark-to- FY17 allocable income (see Notes to Financial market losses ($419 million net unrealized mark-to- Statements, Note G: Retained Earnings, Allocations market losses in FY17) were excluded from reported and Transfers). This compares with $497 million net income to arrive at allocable income (See Table 1). recorded in FY17. The main reason for the decrease is Table 6: Unrealized Mark-to-Market gains/losses, net In millions of U.S. dollars For the fiscal year-ended June 30, 2018 Unrealized gains Realized gains (losses), excluding Total (losses) realized amounts a Borrowing portfolio b $ (381) $ * $ (381) Loan portfolio b 916 - 916 EMF (799) - (799) Asset-liability management portfolio c (2) - (2) Client operations portfolio * - * Total $ (266) $ * $ (266) For the fiscal year-ended June 30, 2017 Unrealized gains Realized gains (losses), excluding Total (losses) realized amounts a Borrowing portfolio b $ (254) $ 6 $ (248) Loan portfolio b 1,529 - 1,529 EMF (1,701) - (1,701) Asset-liability management portfolio c (5) - (5) Client operations portfolio 12 - 12 Total $ (419) $ 6 $ (413) a. Includes adjustments to reclassify net realized mark-to-market gains (losses) to the related interest revenue and expense lines for allocable income purposes. b. Includes related derivatives. c. Included in other derivatives on the Balance Sheet. * Indicates amount less than $0.5 million. 18 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section III: Financial Results Loan Portfolio unrealized mark-to-market gains and losses on the borrowing related derivatives are correspondingly On a reported basis, all loans are reported at amortized offset by unrealized mark-to-market gains and losses cost, whereas the derivatives which convert loans to on the underlying borrowings. Since IBRD does not variable rate instruments are reported at fair value. As hedge its own credit, the main component of the net a result, while from an economic perspective, IBRD’s unrealized mark-to-market gains and losses relates to loans after the effect of derivatives carry variable the impact of the change in IBRD’s own credit. See interest rates, and therefore have a low sensitivity to Section X for more details. interest rates, this is not evident in the reported net income. In order to show the economic effect of its risk EMF management policies, IBRD reflects its loans at fair The EMF uses derivatives to convert variable rate cash value in the MD&A. See Section X for more details. flows on loans funded by equity to fixed rate cash Borrowing Portfolio flows. These derivatives are at fair value on a reported basis. See Sections IX and X for more details on the On a reported basis, all the derivatives and the related activity and the underlying strategy. underlying borrowings are at fair value, and therefore, IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 19 Management’s Discussion and Analysis Section III: Financial Results The following section is a discussion of IBRD’s portfolio, compared with FY16, primarily due to an Results of Operations on a Reported and Allocable improvement in market conditions in FY17. Income basis, for the fiscal year-ended June 30, 2017 compared with the fiscal year-ended June 30, 2016, Investment Portfolio and changes in its financial position between June 30, IBRD’s investment portfolio consists mainly of the 2017 and June 30, 2016. liquid asset portfolio. As of June 30, 2017, the net investment portfolio totaled $71.7 billion, with $70.1 FY17 Net Income billion representing the liquid asset portfolio. This On a reported basis, IBRD had a net loss of $237 compares with $51.8 billion a year earlier, of which million for FY17. This net loss primarily relates to the $50.5 billion represented the liquid asset portfolio (see unrealized mark-to-market losses experienced on the Note C: Investments in the Notes to the Financial non-trading portfolios (See Figure 8). After Statements). The increased level of liquidity reflects adjustments, IBRD had allocable income of $795 management’s decision to increase the Prudential million for FY17, higher by $202 million as compared Minimum liquidity requirement, as well as to FY16 (See Table 1). The higher allocable income anticipation of higher projected debt service and loan in FY17 was primarily due to increases in IBRD’s disbursements for the coming fiscal year. business revenue (loan interest margin, net investment Results from Borrowing activities revenue, commitment and guarantee fees, and reimbursable revenue from IBRD executed trust Borrowing portfolio funds); and a reduction in net administrative expenses (See Table 5). The impact of these factors was offset As of June 30, 2017, the borrowing portfolio totaled by the decrease in IBRD’s equity contribution. $207.1 billion, $28.9 billion above June 30, 2016 (see Note E: Borrowings in the Notes to the Financial The following is a discussion of the key drivers of Statements). The increase in borrowing activity is in IBRD’s financial performance: response to the higher liquidity requirements. Results from Lending activities In FY17, to fund its operations, IBRD raised medium- and long-term debt of $55.5 billion in 24 different Interest Margin currencies, $7.5 billion below FY16. The decrease in IBRD’s FY17 net interest margin was $1,022 million, medium- and long-term debt issuances in FY17 is an increase of $101 million compared with FY16. The primarily a result of the decrease in net loan higher net interest margin was driven by the increase disbursements. in lending volumes, as well as the impact from the pricing measures adopted in FY14. Loan Portfolio At June 30, 2017, IBRD’s net loans outstanding amounted to $177.4 billion (Table 2), 6% above a year earlier (Figure 9). The increase was mainly attributable to $8.7 billion in net loan disbursements made in FY17, and currency translation gains of $1.1 billion, primarily due to the 2% appreciation of the euro against the U.S. dollar during the year. Gross disbursements in FY17 were $17.9 billion, 21% lower than FY16, primarily due to lower development policy operation disbursements during the year. (Section IV) Results from Investing activities Net Investment Revenue During FY17, interest revenue from investments, net of funding costs, amounted to $170 million. This compares with $110 million during FY16. The $60 million increase was primarily due to higher unrealized mark-to-market gains on the investment 20 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section III: Financial Results Equity Contribution Expenses For FY17, equity contribution was $719 million Board of Governors and approved transfers compared with $831 million in FY16 (See Table 1). The decrease is mainly due to lower revenue from the For FY17, IBRD recorded expenses of $497 million EMF as a result of the maturing of higher yielding relating to Board of Governors-approved and other instruments during the year. Despite the decrease, transfers, which relates to the transfer to IDA from revenue from EMF continues to bring stability to FY16 allocable income (see Note G: Retained equity contribution and represents 38% of the net Earnings, Allocations and Transfers in the Notes to the interest revenue for FY17. Financial Statements). Net Other Income Net Non-Interest Expenses The $88 million increase in net other revenue relative The increase in net non-interest expenses relative to to FY16, was driven by the increase in earnings from FY16 was primarily due to higher pension and post- PEBP and PCRF assets, and commitment fees. The retirement benefit costs, as a result of the increase in increase in PEBP revenue is due to positive investment the underfunded status at June 30, 2016. This increase returns experienced during the year. The increase in was driven by the decrease in the discount rate during commitment fee revenue in FY17 compared with FY16, and resulted in a higher amortization of FY16, was due to the higher balance of undisbursed unrecognized actuarial losses during FY17. loans which are subject to the FY14 pricing measures. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 21 Management’s Discussion and Analysis Section III: Financial Results Allocable Income and Income prior year’s net income allocation process and Allocation subsequent decisions on uses of surplus, as well as on payments from restricted retained earnings. Net income allocation decisions are based on allocable income. Management recommends to the Board, Since these amounts primarily relate to allocations out allocations out of net income at the end of each fiscal of IBRD’s FY17 allocable income, Surplus, or year to augment reserves and support developmental restricted retrained earnings, they are excluded from activities. As illustrated in Table 7, the key differences the FY18 reported net income to arrive at the FY18 between allocable income and reported net income allocable income. relate to unrealized mark-to-market gains and losses Pension, PEBP and PCRF adjustments on IBRD’s non-trading portfolios, and expenses related to Board of Governors-approved and other The Pension adjustment reflects the difference transfers. between IBRD’s cash contributions to the pension plans, PCRF, and the accounting expense, as well as Unrealized mark-to-market gains/losses on non- investment revenue earned on those assets related to trading portfolios the PEBP and PCRF, the latter being established by These mainly comprise unrealized mark-to-market the Board to stabilize contributions to the pension and gains and losses on the loan, borrowing, and EMF post-retirement benefits plans. Management believes portfolios as discussed previously. For FY18, the allocation decision should be based on IBRD’s Management recommended and the Board approved cash contributions to the pension plans and PCRF the exclusion of $266 million of net unrealized mark- rather than pension expenses. In addition, to-market losses from reported net income to arrive to Management has designated the income from these allocable income. assets to meet the needs of the pension plans. As a result, PEBP and PCRF investment revenue is Board of Governors approved and other transfers excluded from allocable income. In FY18, Board of Governors-approved and other transfers refer Management recommended and the Board approved to the allocations recommended by the Board and the exclusion of $22 million net, to arrive at allocable income. approved by the Board of Governors, as part of the Table 7: Allocable Income In millions of U.S. dollars For the fiscal years ended June 30, 2018 2017 Net Income (Loss) $ 698 $ (237) Adjustments to Reconcile Net Income to Allocable Income: Board of Governors-approved and other transfers 178 497 Unrealized mark-to-market losses/(gains) on non-trading portfolios, net a 266 419 Pension 56 175 PEBP and PCRF income (34) (47) Other Adjustments (3) (12) Allocable Income $ 1,161 $ 795 Recommended Allocations General Reserve 913 672 Transfer to IDA 248 123 Total Allocations $ 1,161 $ 795 a. Includes adjustments to reclassify net realized mark-to-market gains (losses) to the related interest revenue and expense lines for allocable income purposes. Other Adjustments should be excluded from allocable income since there is no discretion about the use of the funds. • Under certain arrangements (such as EFOs), In line with this, these amounts are transferred IBRD enters into agreements with donors under to restricted retained earnings. In FY18, the net which IBRD receives funds to be used to balance of these restricted funds increased by finance specified IBRD outputs or services. $2 million. Management recommended and the These funds may be utilized only for the Board approved that this increase in restricted purposes specified in the agreements, and are funds of $2 million be excluded from the therefore considered restricted until applied by reported net income to arrive at the FY18 IBRD for these purposes. Management believes allocable income. that income attributable to these arrangements 22 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section III: Financial Results • The income recognized for the right to receive recommended and the Board approved that this reimbursement from the Financial Intermediary expense of $2 million be excluded from the Fund (FIF) for the Pilot Auction Facility (PAF) reported net income to arrive at the FY18 for Methane and Climate Change Mitigation 4 allocable income. is excluded, as this is required for the payout for Income Allocation the changes in market value on put options under the PAF. Therefore, it is not available for During FY17, the Board approved a formula-based other uses. In FY18, $3 million of revenue was approach for determining IBRD’s transfers to IDA. recognized in reported net income. The formula based approach, links transfers, to Management recommended and the Board IBRD’s allocable income level for that year, ensuring approved that this revenue of $3 million be that the majority of allocable income is retained to excluded from the reported net income to arrive grow IBRD’s reserves. at the FY18 allocable income. The change in IBRD’s strong support to IDA is reflected in the $15 the market value of the put option is also billion of cumulative income transfers, which have excluded from reported net income to arrive at been made since IDA’s first replenishment. allocable income, as part of the unrealized mark-to market gains/(losses) on non-trading The annual IDA transfer recommendations are still portfolios. subject to approval by the Board of Governors as part of the net income allocation process in accordance • The revenue (expense) associated with the right with IBRD’s Articles. In making their decisions, to receive reimbursement from the Financial Governors will continue to take the overall financial Intermediary Fund for the Pandemic standing of IBRD into consideration. Emergency Financing Facility 5 (PEF) is excluded, as this is required for payment Allocable income in FY18 was $1,161 million. Of this obligations relating to the pandemic catastrophe amount, the Board approved the allocation of $913 bonds, and the pandemic catastrophe insurance; million to the General Reserve on August 9, 2018. and therefore, it is not available for other uses. Based on the new methodology, the Board In FY18, $2 million of expense was recognized recommended to IBRD’s Board of Governors a in reported net income. Management transfer of $248 million to IDA. Figure 16: FY18 Allocable Income and Income Allocation In millions of U.S. dollars Interest Interest Margin Equity Contribution Investment Revenue 1,184 746 Income 231 LLP Uses (28) Administrative Expenses, net of Allocable Income 1,161 Other Revenue 1,028 IDA Transfers 248 General Reserves 913 -100 400 900 1,400 1,900 2,400 4 In FY16, IBRD issued put options for methane and climate rights. IBRD did not issue any put options under PAF for change mitigation. The PAF is a climate finance model FY18. The notional amount of options issued during FY17 developed by IBRD to stimulate investment in projects that was $13 million. 5 reduce greenhouse gas emissions in developing countries. The PEF was launched with the aim of establishing a fast- The PAF is a pay-for-performance mechanism which uses disbursing mechanism that can provide funding for response auctions to allocate public funds and attract private sector efforts that help prevent low-frequency, high-severity investment to projects that reduce methane emissions by outbreaks from becoming pandemics. The PEF has been providing a medium-term guaranteed floor price on emission established as a FIF. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 23 Management’s Discussion and Analysis Section IV: Lending Activities Section IV: Lending Activities IBRD provides financing instruments and knowledge development that integrate the public and private services to middle-income and creditworthy low- sectors; capture and leverage knowledge; and build income countries to reduce poverty and promote global leadership. Figure 17 illustrates the shared prosperity, while ensuring that social, composition of the Global Practices. environmental, and governance considerations are Projects and programs supported by IBRD are taken into account. Country teams with an designed to achieve a positive social impact and understanding of each country’s circumstances work undergo a rigorous review and internal approval with clients to tailor the mix of instruments, products, process, aimed at safeguarding equitable and and services. sustainable economic growth, that includes early Engagements with borrowing members are screening to identify environmental and social impacts increasingly aligned with IBRD’s strategic priorities, and designing mitigation actions. including engagements that support global public Identifying and appraising a project, and approving goods such as climate, fragility and women’s and disbursing a loan, can often take several years. empowerment. However, IBRD has shortened the preparation and During FY18, the growth in business in lower-middle approval cycle for countries in emergency situations income countries outpaced that of upper-middle (e.g., natural disasters) and in crises (e.g., food, fuel, income countries, resulting in more complex and and global economic crises). riskier lending operations, which are generally also Loan disbursements must meet the requirements set costlier to deliver. Despite the increase in costlier out in loan agreements. During implementation of operations, IBRD has been able to maintain its IBRD-supported operations, IBRD’s staff review financial sustainability through spending discipline progress, monitor compliance with IBRD policies, and and a commitment to efficiency measures, as help resolve any problems that may arise. The evidenced by the improvement in the Budget Anchor. Independent Evaluation Group, an IBRD unit whose Over the past decades, considerable advancements in director general reports to the Board, evaluates the poverty reduction have been made globally. The extent to which operations have met their development World Bank estimates suggest that, for the first time in objectives. Figure 18 illustrates the project life cycle history, the number of people living in extreme for a World Bank project. poverty has fallen below 10 percent of the global All IBRD loans, are made to, or guaranteed by, population. Despite this achievement, hundreds of member countries. IBRD may also make loans to IFC millions of people still live on less than $1.90 a day, without any guarantee. In most cases, IBRD’s the current benchmark for extreme poverty. A Executive Directors approve each loan and guarantee continuation of these advancements offers an after appraisal of a project by staff. Under a new opportunity to end extreme poverty. Multiphase Programmatic Approach approved by the IBRD has both a country based focus and a global Executive Directors on July 21, 2017, Executive approach. To facilitate this, IBRD has established the Directors may approve an overall program framework, Global Practices to assemble its best experts and its financing envelope and the first appraised phase, knowledge, and make them more accessible to and then authorize Management to appraise and member countries. The Global Practices, which are commit financing for later program phases. grouped together into four thematic clusters, enhance the sharing of global technical expertise to deliver client solutions across 13 specialized areas of 24 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section IV: Lending Activities Figure 17: Global practices composition Figure 18: Project Life Cycle Identification Preparation Appraisal Negotiations Approval Implementation Completion Effective July 1, 2018, eligible countries with 2017 per projects, totaling $23 billion, which were 2% higher capita Gross National Income (GNI) of more than than FY17. The increase was evident in Investment $1,145 are eligible to borrow from IBRD. Since 1946, Project Financing and Program For Results operations IBRD has extended, net of cumulative cancellations, (Figure 21). New loan commitments in FY18 reflect a about $635.3 billion in loans. IBRD does not currently higher allocation of resources supporting operations in sell its loans, nor does Management believe there is a the Sustainable Development (SD) and Human market for such loans. Development (HD) global practice clusters, amounting to 40% and 20%, respectively, of the FY18 Lending Commitments and activity (Figure 20). Disbursements New loan commitments supporting operations in SD were largely concentrated in agriculture and water; Demand for IBRD’s loans remains high; however, the while those in HD were largely concentrated in Health, 20% minimum threshold level for the Equity-to-Loans Nutrition & Population, and Education. ratio has limited IBRD’s lending capacity. In FY18, IBRD had new loan commitments, through 124 Figure 19: Commitments and Disbursements Trend Figure 20: Commitments by Global Practice Cluster In billions of U.S. dollars Commitments and Disbursements Trend 29% Sustainable Development 40% 50 40 11% Human Development 20% 30 20 Equitable Growth, Finance 32% & Institutions 17% 10 0 28% FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Infrastructure 23% Commitments Gross Disbursements FY17 FY18 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 25 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, 2018 % of total 2017 % of total Variance Africa $ 1,120 5% $ 1,163 5% $ (43) East Asia and Pacific 3,981 17 4,404 19 (423) Europe and Central Asia 3,550 15 4,569 20 (1,019) Latin America and the Caribbean 3,898 17 5,373 24 (1,475) Middle East and North Africa 5,945 26 4,869 22 1,076 South Asia 4,508 20 2,233 10 2,275 Total $ 23,002 100% $ 22,611 100% $ 391 Table 9: Gross Disbursements by Region In millions of U.S. dollars For the fiscal year-ended June 30, 2018 % of total 2017 % of total Variance Africa $ 734 4% $ 427 2% $ 307 East Asia and Pacific 3,476 20 3,961 22 (485) Europe and Central Asia 4,134 24 2,799 16 1,335 Latin America and the Caribbean 4,066 23 3,885 22 181 Middle East and North Africa 3,281 19 5,335 30 (2,054) South Asia 1,698 10 1,454 8 244 Total $ 17,389 100% $ 17,861 100% $ (472) Lending Categories strengthening public financial management, improving the investment climate, addressing IBRD’s lending is classified in three categories: bottlenecks to improve service delivery, and investment project financing, development policy diversifying the economy. DPF supports reforms financing, and program-for-results (Figure 21). through non-earmarked general budget financing. Investment Project Financing (IPF) DPF provides fast-disbursing financing (roughly 1 to 3 years) to help borrowers address actual or IPF provides financing for a wide range of activities anticipated development financing requirements. aimed at creating the physical and social infrastructure FY18 commitments under this lending category necessary to reduce poverty and create sustainable totaled $5.0 billion, compared with $7.6 billion in development. IPF is usually disbursed over the long- FY17. term (roughly a 5 to 10-year horizon). FY18 commitments under this lending category amounted to Program-for-Results (PforR) $14.4 billion, compared with $12.9 billion in FY17. PforR helps countries improve the design and The increase in IPF commitments is evident in Middle implementation of their development programs and East and North Africa ($2.2 billion), and South Asia achieve specific results by strengthening institutions ($1.6 billion), and reflects a shift in activity towards and building capacity. PforR disburses when agreed operations in lower-middle-income countries. In FY18 results are achieved and verified. Results are identified commitments to lower-middle-income countries and agreed upon during the loan preparation stage. increased by 38% compared with FY17. FY18 commitments under this lending category Development Policy Financing (DPF) totaled $3.5 billion compared with $2.1 billion in FY17, reflecting an increase in commitments in South DPF aims to support borrowers in achieving Asia. sustainable development through a program of policy and institutional actions. Examples of DPF include 26 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section IV: Lending Activities Figure 21: Commitments by Instrument Percent FY18 22% 63% 15% FY17 34% 57% 9% FY16 45% 38% 17% FY15 30% 66% 4% FY14 43% 54% 3% 0% 25% 50% 75% 100% Development Policy Investment Project Program-for-Results Currently Available Lending Products local currency loans may carry fixed or variable- spread terms. The balance of such loans outstanding as As of June 30, 2018, 85 member countries were of June 30, 2018 and June 30, 2017, was $3.5 billion, eligible to borrow from IBRD. See Appendix for a list respectively. Box 2 below shows the components of of eligible countries. the spread on IBRD’s IFLs and how these are determined. IBRD Flexible Loans (IFLs) Box 2: Determination of Spreads for IFLs IFLs allow borrowers to customize their repayment Contractual lending spread Subject to the Board’s terms (i.e., grace period, repayment period, and periodic review amortization profile) to meet their debt management Maturity Premium or project needs. The IFL offers two types of loan Market Risk Premium Set by Management terms: variable-spread terms and fixed-spread terms. Funding Cost Margin As of June 30, 2018, 73% of IBRD’s loans outstanding carried variable-spread terms and 27% had fixed- spread terms. See Table 11 for details of loan terms for For fixed-spread IFLs, Management ensures that the IFL loans. funding cost margin and the market risk premium reflect the underlying market conditions that are IFLs include options to manage the currency and/or constantly evolving. These are communicated to the interest rate risk over the life of the loan. The Board at least quarterly. outstanding balance of loans, for which currency or interest rate conversions have been exercised as of The ability to offer long-term financing distinguishes June 30, 2018, was $25 billion (also $25 billion on development banks from other sources of funding for June 30, 2017). IFLs may be denominated in the member countries. Since IBRD introduced maturity- currency or currencies chosen by the borrower, as long based pricing in 2010, most countries continue to as IBRD can efficiently intermediate in that currency. choose loans with the longest maturities despite a Through the use of currency conversions, some higher maturity premium, highlighting the value of borrowing member countries have converted their longer maturities to member countries (See Table 10). IBRD loans into domestic currencies to reduce their foreign currency exposure for projects or programs that do not generate foreign currency revenue. These IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 27 Management’s Discussion and Analysis Section IV: Lending Activities Table 10: Commitments by Maturity In millions of U.S. dollars For the fiscal year-ended June 30, 2018 For the fiscal year-ended June 30, 2017 Variable Fixed Variable Maturity Bucket Fixed Spread Total Total Spread Spread Spread < 8 years $ 442 $ 514 $ 956 $ 288 $ 82 $ 370 8-10 years 133 2,476 2,609 871 67 938 10-12 years 7 2,387 2,394 445 3,176 3,621 12-15 years 2,016 3,172 5,188 1,461 3,104 4,565 15-18 years 915 3,218 4,133 1,195 2,579 3,774 >18 years 2,617 4,677 7,294 3,413 4,579 7,992 Guarantee Commitments 428 1,351 Total Commitments $ 6,130 $ 16,444 $ 23,002 $ 7,673 $ 13,587 $ 22,611 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 in commodity prices or terms of trade. The Catastrophe Risk DDO (CAT DDO) enables borrowers to Loans with a access immediate funding to respond rapidly in the wake of a natural disaster. Under the DPL DDO, Deferred Drawdown borrowers may defer disbursement for up to three years, renewable for an additional three years. The Option 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, 2018, the amount of DDOs disbursed and outstanding was $6.1 billion (compared to $7.6 billion on June 30, 2017), and the undisbursed amount of effective DDOs totaled $3.7 billion, compared to $4.4 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, 2018, the outstanding balance of such loans was $163 million (compared to $251 million a year earlier). IBRD made no new SDPL commitments in either FY18 or FY17. 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 with their loans. These instruments may be executed either under a master derivatives agreement, which Loan-Related substantially conforms to industry standards, or under individually negotiated agreements. Under these Derivatives 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 on June 30, 2018, compared with $11 billion – June 30, 2017. 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, 2018, there were no loans outstanding with the IFC. 28 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section IV: Lending Activities Lending Terms Applicable to IBRD Products Until the end of FY18, loans for all eligible members were subject to the same pricing. However, as part of the capital package endorsed by the Governors at IBRD’s Spring Meetings in April 2018, the Executive Directors approved on June 26, a new pricing structure of a standard set of maturity premium increases adopted for specific circumstances of different borrowers’ income groups 6 via discounts/surcharges, as well as exemptions for specific categories of borrowers. The new pricing structure is effective July 1, 2018. The new maturity premia are expected to increase loan interest revenue, while also offering borrowers flexibility by way of choices across the maturity spectrum. Table 11: Loan Terms Available Through June 30, 2018 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 0-50b 0-50b – Market risk premium 10-15b – – Actual funding spread to Projected funding variable rate index of Funding cost margin spread to six-month IBRD borrowings in the – variable rate indexc previous six-month period Charges Front-end fee 25 25 100 Late service charge on principal payments received after 30 days of due dated 50 50 – Commitment Fee 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. c. Projected funding spread to variable rate index (e.g., London Interbank Offered Rate (LIBOR)) is based on the weighted average maturity of the loan. d. See Box 8 in Section IX for a discussion of overdue payments. Discontinued Lending Products Waivers IBRD’s loan portfolio includes a number of lending Loan terms offered prior to September 28, 2007, included a partial waiver of interest and commitment charges on products whose terms are no longer available for new eligible loans. Waivers are approved annually by the commitments. These products include currency pool Board. For FY19, the Board has approved the same loans and fixed-rate single-currency loans. As of June waiver rates as in FY18 for all eligible borrowers with 30, 2018, loans outstanding of $524 million carried eligible loans. The reduction in net income in FY18 due to previously approved waivers was $65 million (FY17: $80 terms no longer offered. million). 6 Blends, small states, FCS countries and recent IDA graduates are exempt from the maturity premium increase regardless of their income levels (Group A); Countries with above- Graduation Discussion Income (GDI) for at least two consecutive Fiscal Years are classified as above- GDI/below-HIC countries for pricing purposes; Applied increased maturity premium (Group C); Countries with high income for at least two consecutive Fiscal Years are classified as high-income countries for pricing purposes; Applied increased maturity premium and subject to surcharge (Group D); All other countries are classified as Below- GDI Countries: Applied increased maturity premium but eligible for discount (Group B).For additional information visit https://www.worldbank.org/en/about/unit/treasury. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 29 Management’s Discussion and Analysis Section IV: Lending Activities Figure 22 illustrates a breakdown of IBRD’s loans The loans outstanding after the use of derivatives for outstanding and undisbursed balances by loan terms, risk management purposes is discussed under Market as well as loans outstanding by currency composition. Risk in Section IX. Figure 22: Loan Portfolio In millions of U.S. dollars Figure 22a. Loans Outstanding by Loan Terms In millions of U.S. dollars, except for ratios June 30, 2018 June 30, 2017 Fixed Spread Fixed terms Spread 28% terms, 27% $185,589 $179,455 Variable Variable Spread Spread terms terms, 73% 72% Figure 22b. Undisbursed Balances by Loan Terms In millions of U.S. dollars, except for ratios June 30, 2018 June 30, 2017 Fixed Spread Fixed Spread terms, 21% terms, 20% $68,422 $65,588 Variable Spread Variable terms, 79% Spread terms, 80% Figure 22c. Loans Outstanding by Currency In millions of U.S. dollars, except for ratios June 30, 2018 June 30, 2017 Other, 2% Other, 2% Euro, 20% Euro, 19% U.S. Dollars, U.S. Dollars, 79% 78% 30 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section V: Other Development Activities Section V: Other Development Activities IBRD continues to deliver value to its client countries date, was $6.3 billion as of June 30, 2018 compared to through its knowledge services, convening power, and $5.7 billion as of June 30, 2017 (Table 12). capacity to implement solutions to address global IBRD offers project-based and policy-based issues where coordinated action is critical. guarantees for priority projects and programs in IBRD also assists clients with designing financial member countries to help mobilize private financing products and structuring transactions to help mobilize for development purposes. Project-based guarantees resources for development projects and mitigate the are provided to mobilize private financing for a project financial effects of market volatility and disasters. and/or mitigate payment and/or performance related risks of a project. Policy-based guarantees are Other financial products and services provided to provided to mobilize private financing for sovereign borrowing member countries, and to affiliated and or sub- sovereign projects. IBRD’s guarantees are non-affiliated organizations, include financial partial in nature as they cover risks only to the extent guarantees, grants, externally-funded activities, and necessary to obtain the required private financing, advisory services and analytics. taking into account country, market and, if appropriate, project circumstances. All guarantees Guarantees require a sovereign counter-guarantee and indemnity, IBRD’s exposure on its guarantees, measured by comparable to the requirement of a sovereign discounting each guaranteed amount from its next call guarantee for IBRD lending to sub-sovereign and non- sovereign borrowers (Box 4). Table 12: Guarantees Exposure In million U.S. dollars As of June 30, 2018 2017 Guarantees (project, policy and enclave) $ 2,540 $ 1,801 Advance Market Commitment 114 175 Exposure Exchange Agreements 3,671 3,682 Total $ 6,325 $ 5,658 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 government 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, 2018 31 Management’s Discussion and Analysis Section V: Other Development Activities Table 13: Pricing for IBRD Project-Based and Policy-Based Guarantees Charges Basis Points Front-end fee 25 Processing fee 50a Initiation fee 15b Standby fees 25 Guarantee fee 50-100c 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. In addition, IBRD has entered into the following exposure in exchange for IBRD's assumption of arrangements, which are treated as financial the principal and interest exposure of MIGA guarantees under U.S. GAAP: under its Non-Honoring of Sovereign Financial Obligation agreement. • Advance Market Commitment (AMC): AMC is a multilateral initiative to accelerate the • In December 2015, IBRD signed, together with creation of a market and sustainable production the AfDB and IADB, an MDB EEA. Under the capacity for pneumococcal vaccines for EEA, each MDB exchanged credit risk developing countries. IBRD provides a exposure of a reference portfolio supported by financial platform for AMC by holding donor- underlying loans to borrowing member pledged assets as an intermediary agent and countries. For each MDB, EEAs through passing them on to the Global Alliance for diversification benefits, help reduce credit risk Vaccines and Immunization (GAVI) when at the portfolio level; improve the risk-weighted appropriate conditions are met. Moreover, capital ratios especially by addressing exposure should a donor fail to pay, or delay paying any concentration concerns; and create lending amounts due, IBRD has committed to pay from headroom for individual borrowing countries its own funds any amounts due and payable by where MDBs may be constrained. The EEA the donor, to the extent there is a shortfall in involved the receipt of a guarantee and the total donor funds received. The amount of the provision of a guarantee for nonpayment in the exposure is discussed under the guarantee reference portfolio by each MDB to the other. program (see Notes to Financial Statements, The guarantee received and the guarantee Note I: Management of External Funds and provided are two separate transactions: (a) a Other Services). receipt of an asset for the right to be indemnified, and receive risk coverage • Exposure Exchange Agreements (EEA): IBRD (recoverable asset) and (b) the provision of a had an exposure exchange agreement financial guarantee, respectively (see Note D: outstanding with MIGA under which IBRD and Loans and Other Exposures to the in the Notes MIGA exchanged selected exposures, with to the Financial Statements). each divesting itself of exposure in countries where their lending capacities are limited, in • Other guarantee arrangements: During FY18, return for exposure in countries where they had guarantees received totaling $1,094 million excess lending capacity. Under the agreement, became effective ($944 million for FY17). IBRD and MIGA each exchanged $120 million These guarantees served as a credit of notional exposure as follows: MIGA enhancement to increase IBRD’s lending assumed IBRD's loan principal and interest capacity in certain countries. Table 14: Exposure Exchange Agreements In millions of U.S. dollars As of June 30, 2018 June 30, 2017 Guarantee Guarantee Guarantee Guarantee Received Provided Received Provided Exposure Exchange Agreement MIGA $ 63 $ 62 $ 74 $ 73 IADB 2,021 2,021 2,021 2,021 AfDB 1,588 1,588 1,588 1,588 Total notional $ 3,672 $ 3,671 $ 3,683 $ 3,682 32 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section V: Other Development Activities Grants work program. Grant-Making Facilities (GMFs) are complementary • Recipient-Executed Trust Funds (RETFs): to IBRD’s work. These activities are increasingly Funds are provided to a third party, normally in being integrated into IBRD's overall operations. In the form of project grant financing, and are FY18, IBRD deployed $18 million under this supervised by IBRD. program, compared with $22 million in FY17. These • Financial Intermediary Funds (FIFs): IBRD, amounts are reflected in contributions to special as trustee, administrator, or treasury manager, programs on IBRD’s Statement of Income. offers an agreed set of financial and administrative services, including managing Externally Funded Activities donor contributions. In FY17, IBRD introduced a new cost recovery These funds have become an integral part of IBRD’s framework for Trust Funds to strengthen the activities. Mobilization of external funds from third- institution’s financial sustainability. Key features of party partners includes Trust Funds. Additional the new framework include the following measures: external funds include reimbursable funds and fee based services from member countries, which are • Ensuring IBRD recovers overhead costs related to Reimbursable Advisory Services (RAS), incurred associated with trust fund activities. Externally Financed Outputs (EFO), and Reserves • Simplifying the fee structure and types of trust Advisory Management Program (RAMP). funds that can be created. Reimbursable Advisory Services (RAS) Table 15 below shows IBRD’s Trust Fund activity in FY18, (see Notes to Financial Statements, Note I: While most of IBRD’s advisory and analytical work is Management of External Funds and Other Services). financed by its own budget or donor contributions (e.g., Trust Funds), clients may also pay for services. Table 15: Trust Fund Activity In millions of U.S. dollars IBRD offers technical assistance and other advisory As of June 30, 2018 2017 services to its member countries, in connection with, Revenue Fees from Trust and independent of, lending operations. Available Fund Administration $ 48 $ 47 services include assigning qualified professionals to Trust Fund Disbursements survey developmental opportunities in member (as an executing agency) $ 595 $ 542 countries; analyzing member countries fiscal, economic, and developmental environments; helping members devise coordinated development programs; Externally Financed Outputs (EFOs) and improving their asset and liability management techniques. In FY18, IBRD had revenue of $52 IBRD offers donors the ability to contribute to specific million ($47 million in FY17) from RAS. projects and programs. Contributions for EFOs are recorded as restricted revenue when received because Trust Fund Activity they are for contractually specified purposes. The restriction is released once the funds are used for the Trust Funds are an integral part of IBRD’s resource purposes specified by donors. In FY18, IBRD had $22 envelope, providing IBRD with resources and added million of revenue, compared with $24 million in flexibility in providing development solutions that FY17. serve member recipients and donors alike. The partnerships funded by trust funds often serve as a Other Financial Products and Services platform from which IBRD and its partners can draw on the WBG’s diverse technical and financial IBRD plays an active role in designing financial resources to achieve development goals that cannot be products and structuring transactions to help clients addressed effectively by any single partner, given their mobilize resources for development projects and complexity, scale, and scope. IBRD’s roles and mitigate the financial effects of market volatility and responsibilities in managing trust funds depend on the disasters. type of fund, outlined as follows: Managing Financial Risks for Clients • IBRD-Executed Trust Funds (BETFs): IBRD, IBRD helps member countries build resilience to alone or jointly with one or more of its affiliated shocks by facilitating access to risk management organizations, manages the funds and solutions to mitigate the financial effects of currency, implements or supervises the activities interest rate, and commodity price volatility; disasters; financed. These trust funds support IBRD’s and extreme weather events. Box 5 below illustrates IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 33 Management’s Discussion and Analysis Section V: Other Development Activities the financial solutions and disaster risk financing Asset Management options: The Reserves Advisory and Management Program Box 5: Disaster Risk Financing Options (RAMP) provides capacity building to support the Hedging Transactions Disaster Risk Financing sound management of official sector assets. Clients Interest Rate Catastrophe Derivatives and include central banks, sovereign wealth funds, Bonds national pension funds, and supranational Currency Insurance & Reinsurance organizations. The main goal of RAMP is to help Commodity Price Regional Pooling Facilities clients upgrade their asset management capabilities, including portfolio and risk management, operational At the end of FY17, the Pandemic Emergency infrastructure, and human resources capacity. Under Financing Facility (PEF) was launched with the aim of most of these arrangements, IBRD is responsible for establishing a fast-disbursing mechanism that can managing a portion of the assets of these institutions provide funding for response efforts that help prevent and, in return, it receives a fee based on the average low-frequency, high-severity outbreaks from value of the portfolios. The fees are used to provide becoming pandemics. The PEF has been established as training and capacity-building services. In addition to a FIF. On behalf of this facility, IBRD entered into a RAMP, IBRD also invests and manages investments combination of specialized bonds and catastrophe on behalf of IDA, MIGA, and trust funds. These funds derivatives with the market with a combined notional are not included in the assets of IBRD. amount of $425 million. These instruments will provide funding to the PEF FIF for payouts, if and Table 16 summarizes the assets managed under when, a trigger event occurs. RAMP as of June 30, 2018, as well as the revenue earned from these asset management services during IBRD intermediates the following risk management FY18. transactions for clients: Table 16: RAMP • Affiliated Organization: To assist IDA with its In millions of U.S. dollars asset/liability management IBRD executes As of June 30, 2018 2017 currency forward contracts on its behalf. Assets managed under $ 22,091 $ 20,451 During FY18, IBRD did not execute any RAMP contracts on behalf of IDA. Revenue from RAMP $ 25 $ 24 • Unaffiliated Organization: To assist the International Finance Facility for Immunization As noted in the discussion of Trust Fund Activities (IFFIm) with its asset/liability management above, IBRD, alone or jointly with one or more of its strategy, IBRD executes currency and interest affiliated organizations, administers on behalf of rate swaps on its behalf. In addition, IBRD, as donors, including members, their agencies and other Treasury Manager, is IFFIm’s sole entities, funds restricted for specific uses, in counterparty and enters into offsetting swaps accordance with administration agreements with with market counterparties. During FY18, donors. These funds are held in trust and, except for IBRD did not execute any interest rate undisbursed third-party contributions made to IBRD- derivatives under this agreement. executed trust funds, are not included on IBRD’s (See Risk Management, Section IX, for a detailed Balance Sheet. The cash and investment assets held in discussion of IBRD’s risk mitigation of these trust by IBRD as administrator and trustee totaled derivative transactions). $27.7 billion in FY18, of which $68 million (compared to $77 million in FY17) relates to IBRD contributions to these trust funds (Table 17). Table 17: Cash and Investment Assets Held in Trust In millions of U.S dollars As of June 30, 2018 2017 IBRD-executed $ 292 $ 276 Jointly executed with affiliated organizations 810 819 Recipient-executed 2,796 2,634 Financial intermediary funds 19,497 19,766 Execution not yet assigned a 4,318 4,256 Total fiduciary assets $ 27,713 $ 27,751 a. These represent assets held in trust for which the determination as to the type of execution is yet to be finalized. 34 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section VI: Investment Activities Section VI: Investment Activities IBRD’s investment portfolio consists mainly of the Box 6: Liquid Asset Portfolio Instruments liquid asset portfolio. As of June 30, 2018, the net • Government & Agency Obligations investment portfolio totaled $73.5 billion with $71.6 • Time Deposits and Other unconditional obligations of banks and financial institutions billion representing the liquid asset portfolio. This compares with $71.7 billion a year earlier, of which • Asset Backed Securities (including Mortgage Backed Securities) $70.1 billion represented the liquid asset portfolio (see Note C: Investments in the Notes to the Financial • Currency and Interest Rate Derivatives Statements). The level of liquidity reflects the higher • Swaption Contracts Prudential Minimum, as well as the higher projected • Exchange-traded options and futures debt service and loan disbursements for the coming fiscal year. IBRD keeps liquidity volumes above a Prudential Liquid Asset Portfolio Minimum which is defined as 80% of the twelve- month Target Liquidity Level. The twelve- month Funds raised through IBRD’s borrowing activity Target Liquidity Level is calculated before the end of which have not yet been deployed for lending, are held each fiscal year based on Management’s estimates of in the liquid asset portfolio to provide liquidity for projected net loan disbursements approved at the time IBRD’s operations. This portfolio is managed with the of projection and twelve months of debt-service for the goal of prioritizing principal protection and thus upcoming fiscal year. This twelve-month estimate ensuring sufficient cash flow to meet all IBRD’s becomes the target for the upcoming fiscal year and financial commitments. While IBRD seeks a the Prudential Minimum will be 80% of this target (see reasonable return on this portfolio, IBRD restricts its Section IX for details of how IBRD manages liquidity liquid assets to high-quality investments as its risk). investment objective prioritizes principal protection over yield. Liquid assets are managed conservatively, The liquid asset portfolio is composed largely of assets and are primarily held for disruptions in IBRD’s denominated in, or swapped into, U.S. dollars, with net access to capital markets. exposure to short-term interest rates after derivatives. The portfolio has an average duration of less than three IBRD’s liquid assets, are held mainly in highly rated, months, and the debt funding these liquid assets has a fixed-income instruments (See Box 9: Eligibility similar currency and duration profile. This is a direct Criteria for IBRD's Investments) and include the result of IBRD’s exchange-rate and interest-rate-risk- following: management policies (Section IX), combined with appropriate investment guidelines (Box 9). Figure 23: Liquid Asset Portfolio by Asset Class In millions of U.S. dollars, except for ratios June 30, 2018 June 30, 2017 Asset-backed Asset-backed Securities Securities 8% 7% Government Government and agency $71,579 $ 70,061 and agency obligations obligations 41% 53% Time Time Deposits Deposits 39% 52% IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 35 Management’s Discussion and Analysis Section VI: Investment Activities Table 18: Liquid Asset Portfolio Composition In millions of U.S. dollars, except ratios which are in percentages As of June 30, 2018 % 2017 % Liquid asset portfolio: Stable $ 28,481 40% $ 27,942 40% Operational 14,451 20 20,915 30 Discretionary 28,647 40 21,204 30 $ 71,579 100% $ 70,061 100% The maturity profile of IBRD’s liquid asset portfolio In addition to monitoring gross investment returns reflects a high degree of liquidity. As of June 30, 2018, relative to their benchmarks, IBRD also monitors $59 billion (approximately 82% of total volume) is overall earnings from the investment portfolio, net of due to mature within six months, of which $27 billion funding costs. In FY18, IBRD earned $231 million of is expected to mature within one month. investment revenue, net of funding costs, as discussed The liquid asset portfolio is held in three sub- in Section III. portfolios: Stable, Operational, and Discretionary, Other Investments each may have different risk profiles and performance guidelines (Table 18). In addition to the liquid asset portfolio, the investment • Stable portfolio is mainly an investment portfolio also includes holdings related to AMC, portfolio holding all or a portion of the PCRF and PEBP. Table 19 below summarizes the net prudential minimum level of liquidity, set at the carrying value of other investments (Notes to start of each fiscal year. Financial Statements, Note I: Management of External Funds and Other Services for additional details on • Operational portfolio is used to meet IBRD’s AMC): day-to-day cash flow requirements. Table 19: Net Carrying Value of Other Investments • Discretionary portfolio gives IBRD the In millions of U.S. dollars flexibility to execute its borrowing program and As of June 30, 2018 2017 can be used to tap attractive market AMC $ 250 $ 232 opportunities. Additional portions of the PEBP 1,393 1,173 prudential minimum may also be held in this PCRF 270 201 portfolio. Total Other Investments $ 1,913 $ 1,606 During FY18, IBRD earned a return of 1.83% on its liquid asset portfolio, compared to 1.28% last year. The higher return in FY18 primarily reflects the increased volume and the impact of cross-currency PEBP assets are included in IBRD's investment management strategies. portfolio. These assets are invested mainly in fixed- income, equity instruments, and alternative investments. Table 20: Liquid Asset Portfolio - Average Balances and Returns In millions of U.S. dollars, except rates which are in percentages Average Balances Financial Returns % 2018 2017 2018 2017 Liquid asset portfolio Stable $ 28,201 $ 27,365 1.98% 1.61% Operational 21,191 24,324 1.59 0.82 Discretionary 23,485 10,070 1.89 1.43 $ 72,877 $ 61,759 1.83% 1.28% 36 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section VII: Borrowing Activities Section VII: Borrowing Activities IBRD has been issuing bonds in the international specific markets or investor types. Under its Articles, capital markets since 1947. The proceeds of these IBRD may borrow only with the approval of the bonds support IBRD’s lending operations which are member in whose market the funds are raised, and the aimed at promoting sustainable development for approval of the member in whose currency the IBRD’s borrowing member countries. IBRD also borrowing is denominated, and only if the member develops innovative, demand-driven investment agrees that the proceeds may be exchanged for the products to connect investors with the purpose of their currency of any other member without restriction. investments. These include products such as green As discussed in Section II, IBRD uses currency and bonds, for investors seeking investments that support interest rate derivatives in connection with its climate mitigation and adaptation projects. Since borrowings to diversify funding sources and offer a inception of the program in 2008, IBRD surpassed $10 wide range of debt products to investors. New billion in green bond issuances through 141 medium- and long-term funding is swapped into transactions in 19 currencies. variable-rate U.S. dollar instruments, with conversion IBRD borrows at attractive rates underpinned by its to other currencies carried out subsequently, in strong financial profile and shareholder support that accordance with loan funding requirements. IBRD together are the basis for its triple-A credit rating. As also uses derivatives to manage the re-pricing risks a result of its financial strength and triple-A credit between loans and borrowings. A further discussion rating, IBRD is recognized as a premier borrower and on how IBRD manages this risk is included in the Risk its bonds and notes are viewed as a high credit quality Management Section, Section IX. investment in the global capital markets. IBRD has In FY18, IBRD raised a total of $36 billion of medium offered bonds and notes in more than 34 currencies and long-term debt in 27 different currencies (Table and has opened up new markets for international 22). IBRD issues short-term debt (maturing in one investors by issuing in emerging-market currencies. year or less), and medium- and long-term debt (with a IBRD uses the proceeds to finance development maturity greater than one year). IBRD strategically activities in creditworthy middle-income and low- calls its debt to reduce the cost of borrowings; it may income countries eligible to borrow from IBRD at also repurchase its debt to meet such other operational market-based rates. Funding raised in any given year or strategic needs as providing liquidity to its investors is used for IBRD’s general operations, including loan (Table 22). disbursements, replacement of maturing debt, and As of June 30, 2018, the borrowing portfolio totaled prefunding for lending activities. IBRD determines its $214 billion, $6.5 billion above June 30, 2017 (see funding requirements based on a three-year rolling Note E: Borrowings in the Notes to the Financial horizon and funds about one-third of the projected Statements). This increase was mainly due to net new amount in the current fiscal year. borrowing issuances of $4.7 billion during the year. IBRD issues its securities both through global offerings and bond issues tailored to the needs of Figure 24: Effect of Derivatives on Currency Composition of the Borrowing Portfolio–June 30, 2018 Borrowings excluding derivatives Borrowings Including derivatives Others Euro 16% 13% Australian Dollars Others * 6% US Dollar 70% Euro 8% US Dollar 87% * Denotes percentage less than 0.5%. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 37 Management’s Discussion and Analysis Section VII: Borrowing Activities As of June 30, 2018, IBRD’s total borrowing portfolio, borrowings have a weighted average maturity of after the effects of derivatives, carried variable rates, approximately 90 days. As of June 30, 2018, the with a weighted average cost of 1.8% (1.2% as of June outstanding balance of discount notes was $10.4 30, 2017). The increase in the weighted average cost billion, relatively unchanged as compared with the from the prior year reflects the increase in the short- year earlier. term interest rates during the year. The latter also resulted in an increase in IBRD’s weighted average Securities Lent or Sold under Repurchase loan rates, which are also based on short-term interest Agreements rates. IBRD’s lending spread was therefore not These short-term borrowings are secured mainly by impacted negatively by the increase in short-term highly-rated collateral in the form of securities, interest rates. including government-issued debt, and have an Short-Term Borrowings average maturity of less than 30 days. Table 21 summarizes IBRD’s short-term borrowings, Other Short-Term Borrowings which include discount notes, securities lent or sold under securities lending and repurchase agreements, Other short-term borrowings have maturities of one and other short-term borrowings. year or less. The outstanding balance as of June 30, 2018 was $223 million, largely unchanged compared Discount Notes to last year ($269 million in FY17). IBRD’s short-term borrowings consist mainly of discount notes issued in U.S. dollars. These Table 21: Short-Term Borrowings In millions of U.S. dollars, except rates which are in percentages As of June 30, 2018 2017 2016 Discount notes a Balance at year-end $ 10,376 $ 10,599 $ 3,665 Average daily balance during the fiscal year $ 10,231 $ 5,265 $ 9,493 Maximum month-end balance $ 13,845 $ 11,758 $ 14,870 Weighted-average rate at the end of fiscal year 2.02% 1.02% 0.36% Weighted-average rate during the fiscal year 1.40% 0.63% 0.28% Securities lent or sold under repurchase agreements b Balance at year-end $ - $ - $ - Average monthly balance during the fiscal year $ 164 $ 17 $ 126 Maximum month-end balance $ 797 $ 204 $ 676 Weighted-average rate at the end of fiscal year - - - Weighted-average rate during the fiscal year 1.65% 0.07% 0.38% Other short-term borrowings a Balance at year-end $ 223 $ 269 $ 569 Average daily balance during the fiscal year $ 254 $ 280 $ 446 Maximum month-end balance $ 372 $ 377 $ 772 Weighted-average rate at the end of the fiscal year 2.16% 1.00% 0.45% Weighted-average rate during the fiscal year 1.50% 0.62% 0.28% a. After swaps. b. Excludes securities related to PEBP. 38 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section VII: Borrowing Activities Medium- and Long-Term Borrowings In FY18, medium- and long-term debt raised directly by IBRD in the capital markets amounted to $36 billion with an average maturity to first call of 4.6 years (Table 22). The decrease in medium-and-long-term debt issuances in FY18 is primarily due to the decrease in net loan disbursements, as well as lower debt servicing and refinancing requirements. Table 22: Funding Operations Indicators In millions of U.S. dollars, except rates which are in percentages For the fiscal year-ended June 30, 2018 2017 Issuances a Medium- and long-term funding raised (In millions of U.S.dollars) $ 36,006 $ 55,531 Average maturity to first call date (years) 4.6 4.4 Average maturity to contractual final maturity (years) 5.7 6.3 Maturities Medium- and long-term funding matured (In millions of U.S.dollars) $ 28,704 $ 30,689 Average maturity of debt matured (years) 3.7 5.3 Called/Repurchased Medium- and long-term funding called/repurchased (In millions of U.S.dollars) $ 1,489 $ 4,619 a. Expected life of IBRD’s bonds are generally between first call date and the contractual final maturity. Table 23: Maturity Profile of Medium and Long-Term Debt In millions of U.S. dollars As of June 30, 2018 Less than 1 to 2 2 to 3 3 to 4 years 4 to 5 Due After 5 Total 1 year years years years years Non-Structured borrowings $ 30,630 $ 34,292 $ 33,318 $ 23,301 $ 10,465 $ 28,441 $ 160,447 Structured borrowings 3,637 5,388 6,384 4,227 3,885 13,442 36,963 Total $ 34,267 $ 39,680 $ 39,702 $ 27,528 $ 14,350 $ 41,883 $ 197,410 As shown below, 64% of IBRD’s medium- and long-term borrowings issued during the year are in U.S. dollars: Figure 25: Medium- and Long-Term Borrowings Raised by Currency, Excluding Derivatives June 30, 2018 June 30, 2017 Others Pound Others Pound 22% Sterling 15% Sterling 4% 9% Euro 6% Euro US Dollar US Dollar 5% 64% 75% IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 39 Management’s Discussion and Analysis Section VIII: Capital Activities Section VIII: Capital Activities Capital Structure Countries (DTCs) in IBRD, shareholders agreed to two Selective Capital Increases (SCI), one of which Principal Shareholders and Voting Power was for allocating fully callable shares to certain As of June 30, 2018, IBRD had 189 member countries, DTCs. As a result of these capital increases, the voting with the top six accounting for 39% of the total voting power of DTCs increased to 46.9% as of June 30, power (Figure 26). The percentage of shares held by 2018. members with credit ratings of AA and above was Subscribed Capital 43% (Figure 27). Total subscribed Capital is comprised of paid-in The United States is IBRD’s largest shareholder, with Capital and Uncalled subscribed capital. See 15.98% of total voting power. Accordingly, it also has Statement of Subscriptions to Capital Stock and the largest share of IBRD’s uncalled capital, $43,521 Voting Power in IBRD’s Financial Statements for million, or 16.85% of total uncalled capital. balances by country. As part of the “Voice reforms” aimed at enhancing the voice and participation of Developing and Transitional Figure 26: Voting Power of Top Six Members as of June 30, 2018 Figure 27: Credit Ratings Composition of Member Countries, as of June 30, 2018 United States 15.98% Japan 6.89% China 4.45% Germany 4.03% France 3.78% United Kingdom Below AA & 3.78% AA Above 0% 5% 10% 15% 20% 25% 57% 43% Table 24: Breakdown of IBRD Subscribed Capital In millions of U.S. dollars, except ratios which are in percentages As of June 30, % 2018 2017 Variance Subscribed capital Uncalled Subscribed capital 94% $ 258,274 $ 252,828 $ 5,446 Paid-in capital 6 16,456 16,109 347 Total subscribed capital 100% $ 274,730 $ 268,937 $ 5,793 40 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section VIII: Capital Activities Uncalled Subscribed Capital available for use by IBRD. As of June 30, 2018, the total uncalled portion of • National Currency Paid- In Capital (NCPIC) subscriptions was $258,274 million. Of this amount, portion, usage of which is subject to certain $219,784 million may be called only when required to restrictions under IBRD’s Articles, and is also meet obligations of IBRD for funds borrowed or on subject to Maintenance-Of-Value (MOV) loans guaranteed by it. This amount is thus not requirements. For additional details see the available for use by IBRD in making loans. The Notes to the Financial Statements, Note A: remaining uncalled portion of subscriptions of Summary of Significant Accounting and $38,490 million is to be called only when required to Related Policies. meet obligations for funds borrowed or on loans Capital Increases guaranteed by IBRD, pursuant to resolutions of the Governors (though such conditions are not required by The subscription periods for the GCI and SCI agreed IBRD’s Articles). While these resolutions are not by shareholders in 2010 have both ended, resulting in legally binding on future Governors, they do record an a $4,952 million increase in paid-in capital. This understanding among members that this amount will increase has strengthened IBRD’s usable equity, not be called for use by IBRD in its lending activities enabling it to support additional lending. Table 25 or for administrative purposes. shows the status of subscriptions and paid-incapital as of June 30, 2018. No call has ever been made on IBRD’s capital. Any such calls are required to be uniform, but the During FY18, a total of $5,793 million was subscribed obligations of IBRD’s members to make payment on under the GCI, resulting in additional paid-in capital such calls are independent of one another. If the of $347 million. amount received on a call is insufficient to meet the At IBRD’s Spring Meetings in April 2018, the obligations of IBRD for which the call is made, IBRD Governors endorsed in principle, a package of policy has the right to make further calls until the amounts and financial measures designed to enhance IBRD’s received are sufficient to meet such obligations. On financial capacity on a sustainable basis. The package any such call or calls, however, no member is required includes a GCI and SCI that will provide IBRD with to pay more than the unpaid balance of its capital up to $7.5 billion in additional paid-in capital. subscription. Governors are currently voting on resolutions to Under the Bretton Woods Agreements Act and other implement these capital increases. U.S. legislation, the Secretary of the U.S. Treasury is Usable Paid-in Capital permitted to pay approximately $7,663 million of the uncalled portion of the subscription of the United Usable paid-in capital represents the portion of paid-in States, if called for use by IBRD, without need for capital that is available to support IBRD’s risk bearing further congressional action. capacity and includes all U.S. dollar paid-in capital, as well as NCPIC for which restrictions for use have been The balance of the uncalled portion of the U.S. lifted (referred to as released NCPIC). The subscription, $35,858 million, has been authorized but adjustments made to paid-in capital to arrive at usable not appropriated by the U.S. Congress. Further action paid-in capital are provided in Table 26. by the U.S. Congress is required to enable the Secretary of the Treasury to pay any portion of this The $396 million increase in usable paid-in capital balance. The General Counsel of the U.S. Treasury has between FY18 and FY17 was primarily due to the rendered an opinion that the entire uncalled portion of following: the U.S. subscription is an obligation backed by the Paid-in Capital: The increase of $347 million primary full faith and credit of the U.S., notwithstanding that reflects subscriptions by members in connection with congressional appropriations have not been obtained the GCI. with respect to certain portions of the subscription. Changes in released NCPIC: The movement in net Paid-In Capital deferred MOV of $47 million was mainly due to Paid-in capital has two components: exchange rate movements in euro and Japanese yen. • The U.S. dollar portion, which is freely IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 41 Management’s Discussion and Analysis Section VIII: Capital Activities Table 25: Capital Subscriptions In millions of U.S. dollars As of June 30, 2018 Subscribed Paid-in Expected Actual Expected Actual GCI $ 58,400 $ 56,742 $ 3,504 $ 3,404 SCI 28,609 27,771 1,585 1,548 Total $ 87,009 $ 84,513 $ 5,089 $ 4,952 Table 26: Usable Paid-In Capital In millions of U.S dollars As of June 30, 2018 2017 Variance Paid-in Capital $ 16,456 $ 16,109 $ 347 Adjustments for deferred MOV on released NCPIC Net deferred MOV (receivable) payable a 27 (20) 47 Adjustments for unreleased NCPIC : Restricted cash (83) (83) - Demand notes (361) (305) (56) MOV receivable (313) (369) 56 MOV payable 6 4 2 Total Adjustments for unreleased NCPIC (751) (753) 2 Usable paid-in capital $ 15,732 $ 15,336 $ 396 a. The MOV on released NCPIC is considered to be deferred. Usable Equity retained in IBRD’s equity. On August 9, 2018, the Board approved the addition of $913 million to the Usable equity represents the amount of equity that is General Reserve from FY18 net income; available to support IBRD’s lending operations. Usable equity forms the foundation of the three Cumulative Translation Adjustments: These frameworks used by IBRD to manage its capital adjustments comprise translation adjustments on adequacy, credit risk and equity earnings. These revaluing currency balances to U.S. dollars for frameworks, described in Section IX, are: reporting purposes. For usable equity purposes, these amounts exclude cumulative translation adjustments • Strategic Capital Adequacy Framework associated with unrealized mark-to-market • Credit Risk and Loan Loss Provisioning gains/losses on non-trading portfolios; Framework Underfunded Status of Pension Plans and Other • Equity Management Framework Adjustments: These adjustments relate to the net Usable equity consists of usable paid-in capital, and underfunded status of IBRD’s pension plans (See elements of retained earnings and reserves (See Table Table 37), and income earned on PEBP assets prior to 27). The components of retained earnings and reserves FY11. which are included in usable equity are as follows: The increase in usable equity in FY18, primarily Special Reserve: Amount set aside in pursuant of reflects the decrease in the underfunded status of IBRD’s Articles, held in liquid form and to be used IBRD’s pension plans, as discussed in Section XII, the only for the purpose of meeting liabilities of IBRD on increase in reserve retention out of the FY18 allocable its borrowings and guarantees; income, and the increase in usable paid-in capital, as General Reserve: Consists of earnings from prior discussed above. fiscal years which the Board has approved to be 42 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section VIII: Capital Activities Table 27: Usable Equity In millions of U.S. dollars Variance Due to Due to Translation As of June 30, 2018 2017 Total Activities Adjustment Usable paid-in capital $ 15,732 $ 15,336 $ 396 $ 347 $ 49 Special reserve 293 293 - - - General reserve a 28,606 27,693 913 913 - Cumulative translation adjustment (465) (567) 102 - 102 Other adjustments (648) (1,035) 387 386 1 Equity (usable equity) $ 43,518 $ 41,720 $ 1,798 $ 1,646 $ 152 a. Includes proposed transfer to the General Reserve of $913 million, which for FY18 (FY17- $672 million) was subsequently approved by IBRD's Executive Directors on August 9, 2018 (August 3, 2017). IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 43 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 28: Financial and Operational Risk Management Structure Risk Oversight and Coverage IFC, MIGA, and IDA’s Management, to review, measure, aggregate, and report on risks, and share best Financial and Operational Risk Management practices across the WBG. The CRO also helps The CRO has an overview of both financial and enhance cooperation between the entities and operational risks. These risks include (i) country credit facilitates knowledge sharing in the risk management risks in the core sovereign lending business, (ii) function. market and counterparty risks, including liquidity risk, The following three departments report directly to the and (iii) operational risks relating to people, processes CRO: and systems. In addition, the CRO works closely with 44 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section IX: Risk Management Credit Risk Department • Identifies, measures, monitors, and manages country credit risk faced by 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. The Market and Counterparty • Responsible for market, liquidity, and counterparty credit risk oversight, Risk Department 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. The Operational Risk • Provides direction and oversight for operational risk activities by business Department (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 in operations 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 and the Integrity Vice Presidency jointly address such issues. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 45 Management’s Discussion and Analysis Section IX: Risk Management Risk Committees Figure 29 depicts IBRD ’s management risk committee structure for financial and operational risks. Figure 29: 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 was created under the implementation of possible strategic changes. authority of the Managing Director and WBG Chief Financial Officer (MDCFO) to approve, clear, or Operational Risk Committees: discuss: (a) risk policy and procedure documents The Enterprise Risk Committee (ERC) is a related to financial integrity, income sustainability and corporate committee that has oversight over balance sheet strength, and (b) issues and new business operational and non-financial risks across IBRD. initiatives with policy implications related to IBRD’s Chaired by the Managing Director and Chief financial risks in the areas of finance, which include Administrative Officer (MDCAO), it consists of a country credit, market, counterparty, liquidity and Vice President level committee to review and discuss model risks. The FRC helps to integrate individual enterprise risk matters. Specifically, the Committee components of finance and risk management activities has a governance role over risk matters relating to by building on mechanisms and processes already in corporate security, business continuity and IT security. place, and provides a forum for discussing and The ERC also sponsors the further development of the communicating significant risk related issues. The enterprise risk management framework, including an FRC meets regularly to discuss the financial annual high-level survey of emerging top risks for performance, new products and services, and risk IBRD. 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 FY17 46 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section IX: Risk Management Box 7: 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 equity-to-loans ratio as a key indicator of IBRD’s Summary and Management of IBRD’s capital adequacy. The framework seeks to ensure that Specific Risks IBRD’s capital is aligned with the financial risk associated with its loan portfolio as well as other IBRD assumes financial risks in order to achieve its exposures over a medium-term capital-planning development and strategic objectives. IBRD’s horizon. Under this framework, IBRD evaluates its financial risk management framework is designed to capital adequacy as measured by stress tests and an enable and support the institution in achieving its goals appropriate minimum level for the long-term equity- in a financially sustainable manner. IBRD manages to-loans ratio. For FY18, the outcome of the stress credit, market and operational risks for its financial tests was satisfactory. activities which include lending, borrowing and investing (Box 7). The primary financial risk to IBRD At the beginning of the global financial crisis, the is the country credit risk inherent in its loan portfolio. equity-to-loans ratio stood at 38% as of June 30, 2008, IBRD is also exposed to risks in its liquid asset and significantly exceeding the then minimum of 23% derivative portfolios, where the major risks are interest equity-to-loans ratio. This allowed IBRD to respond rate, exchange rate, commercial counterparty, and effectively to the borrowing needs of its member liquidity risks. IBRD’s operational risk management countries, resulting in the higher leveraging of its framework is based upon a structured and uniform equity and a corresponding decline in the ratio. The approach to identify, assess and monitor key capital adequacy framework was reviewed in FY14 operational risks across business units. and the minimum equity-to-loans ratio was reduced to 20% to reflect the significant long-term improvement Capital Adequacy 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 responding to potential crises (Figure 30). This is part The Board monitors IBRD’s capital adequacy within a of the strategy to maximize the use of capital for Strategic Capital Adequacy Framework, using the lending operations. Figure 30: Equity-to-Loans Ratio 41% 38% 35% 32% 29% 26% 23% 20% 17% Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 47 Management’s Discussion and Analysis Section IX: Risk Management Table 28: Equity-to-Loans Ratio In millions of U.S. dollars, except for ratios Variance Due to Due to Translation As of June 30, 2018 2017 Total Activities Adjustment Usable paid-in capital $ 15,732 $ 15,336 $ 396 $ 347 $ 49 Special reserve 293 293 - - - General reserve a 28,606 27,693 913 913 - Cumulative translation adjustment b (465) (567) 102 - 102 Other adjustments c (648) (1,035) 387 386 1 Equity (usable equity) $ 43,518 $ 41,720 $ 1,798 $ 1,646 $ 152 Loans exposure $ 185,589 $ 179,259 $ 6,330 $ 5,835 $ 495 Present value of guarantees 2,540 1,801 739 511 228 Effective but undisbursed DDOs 4,548 4,422 126 126 - Relevant accumulated provisions (1,607) (1,631) 24 28 (4) Deferred loan income (448) (451) 3 3 - Other exposures (692) (516) (176) (249) 73 Loans (total exposure) $ 189,930 $ 182,884 $ 7,046 $ 6,254 $ 792 Equity-to-Loans Ratio 22.9% 22.8% a. Includes proposed transfer to the General Reserve, which for FY18 (FY17) was subsequently approved by IBRD's Executive Directors on August 9, 2018 (August 3, 2017). 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 remained broadly Country Credit Risk unchanged at 22.9% as of June 30, 2018, compared to 22.8% as of June 30, 2017, and remained above the IBRD’s mandate is to take only sovereign credit risk 20% minimum threshold level (Table 28), despite an in its lending activities. Within country credit risk, increase in loan exposures driven by the $5.6 billion three distinct types of risks can be identified: of net loan disbursements. Countering this impact was idiosyncratic risk, correlation risk, and concentration the increase in IBRD’s usable equity due to the risk. Idiosyncratic risk is the risk of an individual decrease in the underfunded status of the pension borrowing country’s exposure falling into nonaccrual plans, as discussed in Section VIII and XII, as well as status for country-specific reasons (such as policy the proposed retention of $913 million in the General slippage or political instability). Correlation risk is the Reserve. Exchange rate movements during the year risk that exposure to two or more borrowing countries did not have an impact on IBRD’s equity-to-loans will fall into non-accrual in response to common ratio. Under IBRD’s currency management policy, to global or regional economic, political, or financial minimize exchange rate risk in a multicurrency developments. Concentration risk is the risk resulting environment, IBRD matches its borrowing obligations from having a large portion of exposure outstanding in any one currency (after derivatives activities) with which, if the exposure fell into non-accrual, would assets in the same currency. In addition, IBRD’s result in IBRD’s financial health being excessively policy is to minimize the exchange rate sensitivity of impaired. Concentration risk needs to be evaluated its capital adequacy as measured by the equity-to- both on a stand-alone basis (exposure of one loans ratio. It implements this policy by periodically borrowing country) and when taking into account undertaking currency conversions to align the correlation when more than one borrowing country is currency composition of its equity with that of its affected by a common event, such that when outstanding loans, across major currencies. combined, IBRD’s exposure to a common risk is elevated. Credit Risk To estimate idiosyncratic risk and stand-alone IBRD faces two types of credit risk: country credit risk concentration risk, the Credit Risk Department looks and counterparty credit risk. Country credit risk is the at IBRD’s exposure to each borrowing country and risk of loss due to a country not meeting its contractual each borrowing country’s expected default to IBRD as obligations, and counterparty credit risk is the risk of captured in its credit rating. For correlation risk, the loss attributable to a counterparty not honoring its Credit Risk Department models the potential common contractual obligations. IBRD is exposed to factors that could impact borrowing countries commercial as well as non-commercial counterparty simultaneously. The existence of correlation increases credit risk. the likelihood of large non-accrual events, as most of 48 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section IX: Risk Management these nonaccrual events involve the joint default of Single Borrower Limit (SBL) two or more obligors in the portfolio. The SBL is established, in part, by assessing its impact IBRD manages country credit risk by using individual on overall portfolio risk relative to equity. The SBL country exposure limits, and takes into account factors caps the maximum exposure to IBRD’s most such as population size and the economic situation of creditworthy and largest borrowing countries in terms the country. In addition, IBRD conducts stress tests of of population and economic size. The Executive the effects of changes in market variables and of Directors approved a new SBL framework on June 28, potential geopolitical events on its portfolio to 2018, which is effective July 1, 2018. The new complement its capital adequacy framework. framework reflects a dual-SBL system, which differentiates between countries below the Graduation Portfolio Concentration Risk Discussion Income (GDI) threshold and those above Portfolio concentration risk, which arises when a small it. GDI is the level of GNI per capita of a member group of borrowing countries account for a large share country above which graduation from IBRD starts of loans outstanding, is a key concern for IBRD. It is being discussed. The GDI threshold was $6,795 as of carefully managed for each borrowing country, in part, July 1, 2018. Under the new system, the SBL is $21 through an exposure limit for the aggregate balance of billion for highly creditworthy countries below the loans outstanding, the present value of guarantees, and GDI and $19.5 billion for highly creditworthy the undisbursed portion of DDOs that have become countries above the GDI. In the event that a borrowing effective, among other potential exposures. Under country eligible for one of the limits set under the new current guidelines, IBRD’s exposure to a single SBL framework is downgraded to the high-risk borrowing country is restricted to the lower of an category, management may determine that the Equitable Access Limit (EAL) or the Single Borrower borrowing country continue to be eligible for Limit (SBL). borrowing at the currently applicable limit, but the borrowing country would not be eligible for any future Equitable Access Limit increases in the SBL approved by the Executive The EAL is equal to 10% of IBRD’s Statutory Lending Directors. Currently, there are two countries below- Limit (SLL). Under IBRD’s Articles, as applied, total GDI and two countries above-GDI, which have their IBRD loans outstanding, including participation in exposure limits set at the applicable SBLs. For all loans and callable guarantees, may not exceed the sum other countries, the individual country exposure limits of unimpaired subscribed capital, reserves and surplus, are set below the relevant SBL. referred to as the SLL. The SLL seeks to ensure that As of June 30, 2018, the ten countries with the highest sufficient resources are available to meet IBRD's exposures accounted for about 63% of IBRD’s total obligations to bondholders in the highly unlikely event exposure (Figure 31). IBRD’s largest exposure to a of substantial and historically unprecedented losses on single borrowing country was $16.2 billion on June IBRD's loans. At June 30, 2018, the SLL totaled 30, 2018. Monitoring these exposures relative to the $302.9 billion, of which the outstanding loans and limit, however, requires consideration of the callable guarantees totaled $188.1 billion, or 62.1% of repayment profiles of existing loans, as well as the SLL. The EAL was $30.3 billion, as of June 30, disbursement profiles and projected new loans and 2018. guarantees. Figure 31: Country Exposures as of June 30, 2018 In billions of U.S. dollars Top Ten Country Exposures Brazil 16.2 Indonesia 16.2 Mexico 14.3 China 13.9 India 12.9 Turkey 11.5 Colombia 11.0 Egypt 8.9 Poland 8.1 Argentina 6.7 0 2 4 6 8 10 12 14 16 18 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 49 Management’s Discussion and Analysis Section IX: Risk Management 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 8: 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 Overdue by waiver of interest charges in effect at that time for loans signed before May 16, 2007, and those loans signed 30 days between May 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 Overdue by borrowers in the country must pay not only all payments overdue by 30 days or more, but also all payments due 45 days regardless of 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 Overdue by on all loans to, or guaranteed by, the member country are suspended until all overdue amounts are paid. This 60 days 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 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 Overdue by on 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. When a borrower fails to make payments due to IBRD Zimbabwe is the only country in IBRD’s portfolio in on any principal, interest, or other charges, IBRD may non-accrual status. The value of exposures to suspend disbursements immediately on all loans to Zimbabwe remained unchanged as of June 30, 2018, that borrower. IBRD’s current practice is to exercise from $435 million as of June 30, 2017, as no payments this option using a graduated approach (Box 8). These were received from Zimbabwe (FY17: $9 million). practices also apply to member countries eligible to borrow from both IBRD and IDA, and whose Implications for Loan Loss Provisions and Other payments on IDA loans may become overdue. It is Exposures IBRD’s practice not to reschedule interest or principal In FY18, IBRD recorded a release of provision of $28 payments on its loans or participate in debt million for losses on loans and other exposures, rescheduling agreements with respect to its loans. As compared with a $14 million charge during the same of June 30, 2018, no IBRD borrowing countries in the period in FY17. The main driver of the decrease in the accrual portfolio had overdue payments beyond 30 provisioning requirement, despite the increase in days. IBRD’s lending exposures from $184.9 billion as of 50 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section IX: Risk Management June 30, 2017 to $190.9 billion as of June 30, 2018, transactions are conducted with other financial was the favorable impact of the annual update of the institutions and, by their nature, entail commercial inputs used for estimating the loan loss provisioning counterparty credit risk. methodology. The accumulated provision for losses on While the volume of derivative activity can be loans and other exposures of $1,645 million as of June measured by the contracted notional value of 30, 2018 was less than 1% of total exposures, largely derivatives, notional value is not an accurate measure unchanged compared with prior year ($1,671 million of credit or market risk. IBRD uses the estimated as of June 30, 2017 and less than 1% of total replacement cost of the derivative instrument, or exposures). See Notes to Financial Statements: Note D potential future exposure to measure counterparty -Loans and Other Exposures. credit risk with these trading partners. Counterparty Credit Risk Under IBRD’s mark-to-market collateral IBRD is exposed to commercial and non-commercial arrangements, IBRD receives collateral when mark- counterparty credit risk. to-market exposure is greater than the ratings based collateral threshold. As of June 30, 2018, IBRD had Commercial Counterparty Credit Risk received collateral of cash and securities totaling $1.5 This is the normal risk that counterparties fail to meet billion. 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 approval process, the use of collateral agreements and The Board-approved General Investment risk limits, and other monitoring procedures. The Authorization provides the basic authority for IBRD 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. The Investment determining the risk profile of specific transactions. Guidelines are approved by the MDCFO and Credit limits are set and monitored throughout the implemented by the Treasurer. These Investment year. Counterparty exposure is updated daily, taking Guidelines set out detailed trading and operational into account; current market values of assets held, rules, including which instruments are eligible for estimates of potential future movements of exposure investment, and establish risk parameters relative to for derivative instruments, and related counterparty benchmarks. These include an overall consultative collateral agreements, where collateral posting loss limit and duration deviation, specifying requirements are based on thresholds driven by public concentration limits on counterparties and instrument credit ratings. Collateral held includes cash and highly classes, as well as clear lines of responsibility for risk rated liquid investment securities. monitoring and compliance. Credit risk is controlled by applying eligibility criteria (Box 9). IBRD’s liquid asset investment portfolio consists mostly of sovereign government bonds, debt The overall market risk of the investment portfolio is instruments issued by sovereign government agencies, subject to a consultative loss limit to reflect a level of and bank time deposits. More than half of these tolerance for the risk of underperforming the investments are with issuers and counterparties rated benchmark in any fiscal year. IBRD has procedures in triple-A and AA (Table 29). place to monitor performance against this limit and potential risks, and it takes appropriate actions if the Derivative Instruments limit is reached. All investments are subject to In the normal course of its business, IBRD enters into additional conditions specified by the Chief Risk various derivative instruments to manage foreign Officer department, as deemed necessary. exchange and interest risks. These derivatives are IBRD’s exposure to futures and options and resale used mainly to meet the financial needs of IBRD agreements is marginal. For futures and options, IBRD borrowers and to manage the institution’s exposure to generally closes out open positions prior to expiration. fluctuations in interest and exchange rates. These Futures are settled on a daily basis. In addition, IBRD IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 51 Management’s Discussion and Analysis Section IX: Risk Management monitors the fair value of resale securities received IBRD’s overall commercial counterparty credit and, if necessary, closes out transactions and enters exposure, net of collateral held, remained broadly into new repriced transactions. unchanged and hovered around $72 billion as of June 30, 2018. As shown on Table 29, the credit quality of Management has broadened its universe of investment IBRD’s portfolio remains concentrated in the upper assets in an effort to achieve greater diversification in end of the credit spectrum, with 70% of the portfolio the portfolio and better risk-adjusted investment rated AA or above and the remaining portfolio performance. This exposure is monitored by the primarily rated A. The A rated counterparties Market and Counterparty Risk Department. primarily consisted of sovereigns and financial Commercial Counterparty Credit Risk Exposure institutions (limited to short-term deposits and swaps). As a result of IBRD’s use of mark-to-market collateral Non-Commercial Counterparty Credit Risk arrangements for swap transactions, its residual In addition to the derivative transactions with commercial counterparty credit risk is concentrated in commercial counterparties, IBRD also offers the investment portfolio, in instruments issued by derivative-intermediation services to borrowing sovereign governments and non-sovereign holdings member countries, as well as to affiliated and non- (including Agencies, Asset Backed Securities, affiliated organizations, to help meet their Corporates, and Time Deposits) (Table 29). development needs or to carry out their development mandates. Box 9: 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 depositsb 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. 52 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 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, 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% As of June 30, 2017 Investments Net Swap Total % of Counterparty Rating a Sovereigns Non-Sovereigns Exposure Exposure Total AAA $ 6,914 $ 12,671 $ - $ 19,585 27% AA 8,202 18,956 - 27,158 38 A 15,514 9,656 22 25,192 35 BBB 1 15 3 19 * BB or lower/unrated - 7 1 8 * Total $ 30,631 $ 41,305 $ 26 $ 71,962 100% 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 $2.7 billion and $0.6 billion, between IBRD and its borrowers under master respectively. IBRD has the right to call for derivative agreements. As of June 30, 2018, the collateral above an agreed specified threshold. notional amounts and net fair value exposures As of June 30, 2018, IBRD had not exercised under these agreements were $11.5 billion and this right, but it reserves the right under the $0.6 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, 2018, the notional amount under this financial assets. agreement was $5.6 billion. As of June 30, Credit and Debit Valuation Adjustments 2018, 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, 2018, IDA was not required to post exposure (net receivable position), IBRD calculates a any collateral with IBRD. Credit Value Adjustment (CVA) to reflect credit risk. • Non-Affiliated Organizations: IBRD has a (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, 2018, the notional IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 53 Management’s Discussion and Analysis Section IX: Risk Management derivative positions with commercial and non- Interest Rate Risk commercial counterparties where IBRD is in a net payable position, IBRD calculates a Debit Valuation Under its current interest rate risk management Adjustment (DVA) to reflect its own credit risk. strategy, IBRD seeks to match the interest rate sensitivity of its assets (loan and investment trading The CVA is calculated using the fair value of the portfolios) with those of its liabilities (borrowing derivative contracts, net of collateral received under portfolio) by using derivatives, such as interest rate credit support agreements, and the probability of swaps. These derivatives effectively convert IBRD’s counterparty default based on the Credit Default financial assets and liabilities into variable-rate Swaps (CDS) spread and, where applicable, proxy instruments. After considering the effects of these CDS spreads. IBRD does not currently hedge this derivatives, virtually the entire loan and borrowing exposure. The DVA calculation is generally consistent portfolios are carried at variable interest rates. (Figures with the CVA methodology and incorporates IBRD’s 32-33) own credit spread as observed through the CDS market. As of June 30, 2018, IBRD recorded a CVA IBRD faces three main sources of interest rate risk: the adjustment on its Balance Sheet of $12 million, and a interest rate sensitivity of the income earned in a low DVA of $57 million. interest rate environment, fixed-spread loans refinancing risk, and interest rate risk on the liquid Market Risk asset portfolio. IBRD is exposed to changes in interest and exchange rates, and it uses various strategies to minimize its exposure to market risk. Figure 32: Effect of Derivatives on Interest Rate Structure of the Borrowing Portfolio - June 30, 2018 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 33: Effect of Derivatives on Interest Rate Structure of the Loan Portfolio - June 30, 2018 In millions of U.S. dollars, except for ratios Loans Excluding Derivatives Loans Including Derivatives Fixed Fixed * 11% Variable Variable 89% 100% * Denotes percentage less than 0.5%. 54 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section IX: Risk Management Low Interest Rate Environment Fixed Spread Loan Refinancing Risk Loans to borrowing countries: Refinancing risk for funding fixed-spread loans relates to the potential impact of any future deterioration in Under IBRD’s loan agreements, interest is required to IBRD's funding spread. IBRD does not match the be paid by borrowers to IBRD, and not vice versa. As maturity of its funding with that of its fixed spread a result, in the event that an interest rate formula yields loans as this would result in significantly higher a negative rate, the interest rate is fixed at zero. financing costs for all loans. Instead, IBRD targets a Revenue from IBRD’s equity: shorter average funding maturity and manages the refinancing risk through two technical components of Revenue from loans funded by IBRD’s equity is the fixed spread loans pricing, both of which can be sensitive to changes in short-term interest rates, as changed at Management’s discretion (Table 11): IBRD’s loans, net of derivatives, predominantly earn variable interest linked to variable rate indices (e.g., • Projected funding cost: Management’s best LIBOR) as illustrated in Figure 33. estimate of average funding costs over the life of the loan. Approximately 23% of IBRD’s net loans and other • Risk premium: A charge for the risk that actual exposures are funded by equity, as indicated by the funding costs are higher than projected. equity-to-loans ratio of 22.9%. The interest revenue on the loans funded by equity, if left unmanaged, would Liquid Asset Portfolio Spread Exposure be highly sensitive to fluctuations in short-term The interest rate risk on IBRD’s liquid asset portfolio, interest rates. To manage this exposure, IBRD uses the including the risk that the value of assets in the EMF, which allows the flexibility of managing the portfolio will fluctuate in response to changes in duration of IBRD’s equity within a range of zero to market interest rates, is managed within specified five-years based on market and macroeconomic duration-mismatch limits. The liquid asset portfolio conditions. has spread exposure because IBRD holds instruments The EMF strategy was fully deployed in FY18, with other than the short-term bank deposits represented by equity invested in derivatives earning interest rates the portfolios’ London Interbank Bid Rate (LIBID) that are higher than if equity remained invested in benchmark. These investments generally yield short-term interest rates. As measured by duration, the positive returns over the benchmark, but can generate interest rate sensitivity of IBRD’s equity was 2.9 years mark-to-market losses if their spreads relative to as of June 30, 2018 (3.1 years as of June 30, 2017). LIBOR widen. The interest revenue from EMF in FY18 was $217 Other Interest Rate Risks million, compared to $383 million in FY17, as Interest rate risk also arises from other variables, discussed in Section III. The market value of the EMF including differences in timing between the position was a net liability position of $0.4 billion as contractual maturities or re-pricing of IBRD’s assets, of June 30, 2018 compared with a net asset position of liabilities, and derivative instruments. On variable-rate $0.4 billion as of June 30, 2017. The decrease was assets and liabilities, IBRD is exposed to timing primarily as a result of the unrealized mark-to-market mismatches between the re-set dates on its variable- losses of $0.8 billion due to the increase in U.S. dollar rate receivables and payables. To mitigate its exposure interest rates experienced during the year. (See Section to these timing mismatches, IBRD has executed some X) overlay interest rate swaps. Liquid Asset Portfolio: Interest rate risk on non-cost pass-through products, IBRD’s existing guidelines allow for the investment in which accounted for 27% of the loan portfolio as of a wide variety of credit spread products in both June 30, 2018 (28% as of June 30, 2017), is managed developed and emerging market economies (see by using interest rate swaps to closely align the rate investment eligibility criteria in (Box 9). Low and sensitivity characteristics of the loan portfolio with negative fixed interest rates present a challenge for the those of their underlying funding, except for the investment of the liquid asset portfolio. However, even component of the loan portfolio funded by equity and markets with negative rates can provide positive therefore subject to the EMF. spread returns once the investment is swapped back Exchange Rate Risk into a U.S. dollar floating basis. In FY18, despite the low interest rate environment, IBRD was able to IBRD holds its assets and liabilities mainly in U.S. generate a positive return, net of funding costs on its dollars and euro. However, the reported levels of its liquid asset portfolio (See Table 1). assets, liabilities, income, and expenses in the IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 55 Management’s Discussion and Analysis Section IX: Risk Management financial statements are affected by exchange rate To minimize exchange risk, IBRD matches its movements in all the currencies in which IBRD borrowing obligations in any one currency (after transacts, relative to its reporting currency, the U.S. derivative activities) with assets in the same currency dollar. These movements are shown as currency (Figure 34). In addition, IBRD undertakes periodic translation adjustments in other comprehensive currency conversions to align the currency income, in equity, given IBRD’s multifunctional composition of its equity with that of its outstanding currency paradigm (see Note A: Summary of loans across major currencies. Together, these polices Significant Accounting and Related Policies in the are designed to minimize the impact of exchange rate Notes to the Financial Statements). While IBRD’s fluctuations on the equity-to-loans ratio; thereby equity could be affected by exchange rate movements, preserving IBRD’s ability to better absorb unexpected IBRD’s risk management policies work to minimize losses from arrears on loan repayments, regardless of the exchange rate risk in its capital adequacy, by exchange movements. As a result, exchange rate immunizing the equity-to-loans ratio against exchange movements during the year generally do not have an rate movements. impact on the overall equity-to-loans ratio. Figure 34: Currency Composition of Loan and Borrowing Portfolios as of June 30, 2018 Loans outstanding (including Derivatives) Borrowings funding loans (including Derivatives) Others * Euro Others * Euro 20% 19% U.S. U.S. Dollars Dollars 81% 80% * Denotes percentage less than 0.5%. Liquidity Risk As of June 30, 2018, the liquid asset portfolio was 138% of the Target Liquidity Level. The increased Liquidity risk arises in the general funding of IBRD’s level of liquidity reflects the higher Prudential activities and in managing its financial position. It Minimum, as well as higher projected debt service and includes the risk of IBRD being unable to fund its loan disbursements for the coming fiscal year. The portfolio of assets at appropriate maturities and rates, FY19 Prudential Minimum liquidity level is set at and the risk of being unable to liquidate a position in a $44.8 billion. timely manner at a reasonable price. Under IBRD’s liquidity management guidelines, Operational Risk aggregate liquid asset holdings are kept at or above a Operational risk is defined as the risk of financial loss specified Prudential Minimum to safeguard against or damage to IBRD’s reputation resulting from cash flow interruptions. inadequate or failed internal processes, people and Historically, IBRD has operated at liquidity levels systems, or from external events. ranging between 100% and 150% of the Prudential IBRD recognizes the importance of operational risk Minimum. In FY15, the range was raised to about management activities, which are embedded in its 140% to 175%, reflecting Management’s desire to financial operations. As part of its business activities, hold sufficient liquidity to cover twelve-months of IBRD is exposed to a range of operational risks projected debt service obligations and net loan including physical security and safety, business disbursements. In June 2017, the Board approved a continuity, external vendor risks and cyber security. new Target Liquidity Level of twelve-months IBRD’s approach to managing operational risk coverage as calculated at the start of every fiscal year. includes assessing and prioritizing operational risks, The new Prudential Minimum is defined as 80% of the monitoring and reporting relevant key risk indicators, Target Liquidity Level. The 150 percent maximum aggregating and analyzing internal and external guideline applies to the portfolio and it continues to events, identifying emerging risks that may affect function as a guideline rather than a hard ceiling. The business units, and developing risk response and maximum guideline will be applied to the Target mitigating actions. Liquidity Level rather than to the new Prudential Minimum. 56 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section X: Fair Value Analysis Section X: Fair Value Analysis An important element in achieving IBRD’s financial which was mainly comprised of unrealized mark-to- goals is its ability to minimize the cost of borrowing market losses due to the tightening of IBRD’s credit from capital markets for lending to member countries spread relative to LIBOR, and change in fair value as by using financial instruments, including derivatives. the instruments approach maturity, partially offset by The fair value of these financial instruments is affected mark-to-market gains due to the increase in interest by changes in the market environment such as interest rates. IBRD’s credit spread is defined as its funding rates, exchange rates and credit risk. Fair value is used cost relative to LIBOR. mainly to assess the performance of the investment Loan Portfolio: For FY18, IBRD experienced a $247 trading portfolio, and to manage certain market risks, million increase in the fair value of its loans. This was including interest rate and commercial credit risk for mainly driven by the impact of the increase in interest derivative counterparties. rates on the loan related derivatives. For the loans, the Fair value adjustments are recorded on IBRD’s fair value increase in interest rates resulted in unrealized mark- income statement, and reflect the sensitivity of each to-market losses, which were partially offset by the portfolio to the effect of interest rates and credit movements ( change in fair value as the loans approach maturity. Table 30). Borrowing Portfolio: For FY18, IBRD experienced $375 million of unrealized mark-to-market losses, Table 30: Summary of Fair Value Adjustments on Non-Trading Portfolios a In millions of U.S. dollars For the fiscal year-ended June 30, 2018 2017 Borrowing portfolio $ (375) $ (246) Loan portfolio 247 315 EMF (799) (1,701) Total $ (927) $ (1,632) a. See Table 34 for reconciliation to the fair value comprehensive basis net income. Table 31: 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, 2018 on Fair Value Income on Fair Value Income Sensitivity a c Sensitivity b c Borrowing portfolio $ 5 $ 63 Loan portfolio (13) (29) EMF (11) * Investment portfolio (1) (2) Total (loss)/gains $ (20) $ 32 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. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 57 Management’s Discussion and Analysis Section X: Fair Value Analysis Figure 35: 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 Swaps Bonds Loans Swaps -58 63 -30 17 FY18 -11 FY18 -0.9 FY18 FY18 -64 69 FY17 -28 17 FY17 -12 FY17 -0.8 FY17 -60 -40 -20 0 20 40 60 -60 -40 -20 0 20 40 60 -20 -10 0 10 20 -20.0 -10.0 0.0 10.0 20.0 Effect of Interest Rates of net unrealized mark-to-market losses on the related swaps, resulting in net unrealized mark-to-market On a fair value basis, if interest rates increase by one gains of $5 million for the portfolio. basis point, IBRD would experience an unrealized mark-to-market loss of approximately $20 million as of June 30, 2018 (Table 31). Effect of Credit • Investment Trading Portfolio: After the effects • Investments. IBRD purchases investment-grade of derivatives, the duration of the investment securities for its liquid asset portfolio. Credit trading portfolio is less than three months. As a risk is controlled through appropriate eligibility result, the portfolio has a low sensitivity to criteria (Box 9). The overall risk of the changes in interest rates, resulting in small fair investment portfolio is also constrained by a value adjustments to income. consultative loss limit. In line with these risk • Loan and Borrowing Portfolios: In line with management strategies, the potential effect of IBRD’s financial risk management strategies, default risk on IBRD’s investment portfolio is the sensitivity of IBRD’s loan and borrowing therefore small. The effect of credit changes on portfolios to changes in interest rates is the market value of the investment portfolio is relatively small (Figure 35). As noted earlier, also relatively limited; a one-basis-point IBRD intends to maintain its positions for these change in the credit spreads of the investment portfolios and thus manages these instruments assets would have an estimated impact of about on a cash flow basis. The resulting net $2 million on the market value of the portfolio. unrealized mark-to-market gains and losses on • Borrowings. IBRD does not hedge its own these portfolios, associated with the small credit. The dollar value change corresponding sensitivity to interest rates, are therefore not to a one-basis-point upward parallel shift in expected to be realized. interest rates on IBRD’s own credit relative to • EMF: At the end of FY18, a one basis point LIBOR is about $63 million of unrealized increase in interest rates would result in mark-to-market gains. IBRD’s income is unrealized mark-to-market losses of $11 positively correlated with its credit spreads million on the EMF (unrealized mark-to-market (Figure 36). The tightening of IBRD’s own losses of $12 million at the end FY17). credit spreads has a negative effect on IBRD’s Figure 35 provides a further breakdown of how the Statement of Income. For FY18, the tightening use of derivatives affects the overall sensitivity of the of IBRD’s credit spreads resulted in unrealized borrowing, loan, EMF and investment portfolios. For mark-to-market losses of $652 million example, for the borrowing portfolio, a one basis point compared to unrealized mark-to-market losses increase in interest rates would result in net unrealized of $830 million in FY17 due to the tightening mark-to-market gains of $63 million on the bonds. of its credit spreads. These would be significantly offset by the $58 million 58 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section X: Fair Value Analysis Figure 36: Impact of IBRD’s Credit Spreads on Income USD funding spreads follows 5 & 10 year discount spreads 120 6 Billion U.S Dollars 10 - Year Credit Spread 100 5 80 5 - Years Credit Spread 4 60 Income Statement Impact 3 40 2 20 1 0 0 -20 -1 -40 -2 June-08 June-09 June-10 June-11 June-12 June-13 June-14 June-15 June-16 June-17 June-18 • Loans. IBRD’s fair value model represents a Changes in Accumulated Other hypothetical exit price of the loan portfolio. It Comprehensive Income incorporates CDS spreads as an indicator of the credit risk for each borrower, after adjusting In addition to fair value adjustments on the loan, recovery levels to incorporate IBRD’s borrowing, and asset/liability management portfolios, institutional experience and assumptions. These IBRD’s fair value adjustment on the income statement assumptions are reviewed annually. The dollar also reflects changes in Accumulated Other value change corresponding to a one-basis- Comprehensive Income (AOCI): point parallel rise in CDS rates on the loan • Currency Translation Adjustments mainly portfolio is about $29 million of unrealized represent the translation adjustment on the loan mark-to-market losses. IBRD does not hedge its and borrowing portfolios. The net positive sovereign credit exposure but Management currency translation adjustment in FY18 is assesses its credit risk through a proprietary mainly due to the 2.1% appreciation of the euro loan-loss provisioning model. Loan-loss against the U.S. dollar in FY18, compared to provision represents the probable losses the 2.3% appreciation of the euro last year inherent in its accrual and nonaccrual (Table 32). portfolios. As discussed earlier, IBRD’s country credit risk is managed by using • Unrecognized Pension Adjustments largely individual country exposure limits and by represent the unrecognized net actuarial gains monitoring its credit-risk-bearing capacity. and losses on benefit plans. Actuarial gains and losses occur when actual results differ from • Derivatives. IBRD uses derivatives to manage expected results in determining the funded exposures to currency and interest rate risks in status of the pension plans. Since the pension its investment, loan, and borrowing portfolios, plans are long term, changes in asset returns and and EMF. It is therefore exposed to commercial discount rates cause volatility in fair value counterparty credit risk on these instruments. income. There was a decrease in the This risk is managed through: underfunded status of the pension plans from o Stringent selection of commercial $2.1 billion as of June 30, 2017 to $1.3 billion derivative counterparties, as of June 30, 2018, net of PEBP assets, o Daily marking-to-market of derivative primarily reflecting the increase in plan assets positions, and due to higher asset returns. Given its long-term o Use of collateral and collateral thresholds planning horizon for pension plans, for all commercial counterparties. Management is focused mainly on ensuring that contributions to pension plans appropriately The fair value of IBRD’s commercial counterparty reflect long-term assumptions about asset credit risk is reflected in the CVA and IBRD’s own returns and discount rates. See Section XII for credit is reflected in the DVA. The net effect of the further discussion on the pension plans. CVA and DVA adjustments to IBRD’s Balance Sheet was positive $45 million on June 30, 2018, as As non-financial assets and liabilities are not reflected discussed in Section IX. at fair value, IBRD’s equity is not intended to reflect fair value. Under the fair value basis, in addition to the instruments in the investment and borrowing portfolios, and all other derivatives, loans are reported IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 59 Management’s Discussion and Analysis Section X: Fair Value Analysis at fair value and all changes in AOCI are also included Tables 33-35 provide a reconciliation from the in fair value net income. reported basis to the fair value basis for both the balance sheet and income statement; Table 35 provides a reconciliation of all fair value adjustments. Table 32: Summary of Changes to AOCI (Fair Value Basis) In millions U.S. dollars For the fiscal year-ended June 30, 2018 2017 Variance Unrecognized net actuarial gains (losses) on benefit plans, net $ 834 $ 2,543 $ (1,709) Unrecognized net prior service credit (cost) on benefit plans, net 24 24 - Derivatives and hedging transition adjustment a 6 2 4 Currency translation adjustments 98 188 (90) Of which: Loan portfolio 679 781 (102) Borrowing portfolio (508) (517) 9 Net other assets and liabilities (73) (76) 3 Total $ 962 $ 2,757 $ (1,795) a. Amount represents amortization of transition adjustment relating to the adoption of Financial Accounting Standards Board’s (FASB's) guidance on derivatives and hedging on July 1, 2000. Table 33: Condensed Balance Sheet on a Fair Value Basis In millions U.S. dollars As of June 30, 2018 As of June 30, 2017 Reported Adjustments Fair Value Reported Adjustments Fair Value Basis Basis Basis Basis Due from banks $ 619 $ - $ 619 $ 683 $ - $ 683 Investments 72,569 - 72,569 72,973 - 72,973 Net loans outstanding 183,588 3,062 186,650 177,422 3,727 181,149 Receivable from derivatives 141,716 - 141,716 150,112 - 150,112 Other assets 4,564 - 4,564 4,708 - 4,708 Total assets $ 403,056 $ 3,062 $ 406,118 $ 405,898 $ 3,727 $ 409,625 a a Borrowings $ 208,009 $ 10 $ 208,019 $ 205,942 $ 13 $ 205,955 Payable for derivatives 147,096 - 147,096 153,129 - 153,129 Other liabilities 6,107 - 6,107 7,029 - 7,029 Total liabilities 361,212 10 361,222 366,100 13 366,113 Paid-in capital stock 16,456 - 16,456 16,109 - 16,109 Retained earnings and other equity 25,388 3,052 28,440 23,689 3,714 27,403 Total equity 41,844 3,052 44,896 39,798 3,714 43,512 Total liabilities and equity $ 403,056 $ 3,062 $ 406,118 $ 405,898 $ 3,727 $ 409,625 a. Amount represents amortization of transition adjustment relating to the adoption of FASB’s guidance on derivatives and hedging on July 1, 2000. Table 34: Reconciliation from Net Income to Income on a Fair Value Comprehensive Basis In millions U.S. dollars For the fiscal year-ended June 30, 2018 2017 Variance Net income (loss) from Table 1 $ 698 $ (237) $ 935 Fair value adjustment on loans a (669) (1,214) 545 Changes to AOCI 962 2,757 (1,795) Net Income on fair value comprehensive basis $ 991 $ 1,306 $ (315) a. Amount has been adjusted to exclude the provision for losses on loans and other exposures: $28 million release – June 30, 2018, and $14 million release on June 30, 2017. 60 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section X: Fair Value Analysis Table 35: Fair Value Adjustments, net In millions of U.S. dollars For the fiscal year-ended June 30, 2018 Fair Value Unrealized gains Realized Other Total Adjustment from (losses) gains Adjustments (See Table 30) Table 34 Borrowing portfolio c $ (381) a $ * $ - $ 6b $ (375) Loan portfolio c 916 - (669) - 247 EMF d (799) - - - (799) Asset-liability management portfolio d (2) - 2 - - Client operations portfolio * - - * - Total $ (266) $ * $ (669) $ 8 $ (927) For the fiscal year-ended June 30, 2017 Fair Value Unrealized gains Realized Other Total Adjustment from (losses) gains Adjustments (See Table 30) Table 34 Borrowing portfolio c $ (254) $ 6 $ - $ 2 b $ (246) Loan portfolio c 1,529 - (1,214) - 315 EMF d (1,701) - - - (1,701) Asset-liability management portfolio d (5) - - 5 - Client operations portfolio 12 - - (12) - Total $ (419) $ 6 $ (1,214) $ (5) $ (1,632) a. Includes amounts reclassified to realized mark-to-market gains (losses). b. Amount represents amortization of transition adjustment relating to the adoption of FASB’s guidance on derivatives and hedging on July 1, 2000, included in AOCI. c. Includes related derivatives. d. Included in other derivatives on the condensed Balance Sheet. * Indicates amount less than $0.5 million. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 61 Management’s Discussion and Analysis Section XI: Contractual Obligations Section XI: Contractual Obligations In conducting its business, IBRD enters into various mainly for its capital expenditure and utilities. contractual obligations that may require future These commitments are designed to ensure payments. These include borrowings, operating leases, sources of supply, are not expected to be in contractual purchases and capital expenditures, and excess of normal requirements, and are in line other long-term liabilities. Table 36 shows IBRD’s with IBRD's budget. contractual obligations for the next five years and • Other Long-Term Liabilities: IBRD provides a thereafter; it excludes the following obligations number of benefits to its employees. As some reflected on IBRD’s balance sheet: undisbursed loans, of these benefits are of a long-term nature, payable for currency and interest rate swaps, payable IBRD records the associated liability on its for investment securities purchased, guarantees, and balance sheet. The obligations payable cash received under agency arrangements. represent expected benefit payments including • Borrowings: IBRD issues debt in the form of contributions to the pension plans, these include securities to retail and institutional investors. future service and pay accruals for current staff but exclude future hires. • Operating Leases: IBRD leases real estate and equipment under lease agreements for varying Operating leases, contractual purchases and capital periods. Operating lease expenditures expenditures, and other long-term obligations, include represents future cash payments for real-estate- obligations shared with IDA, IFC, and MIGA under related obligations and equipment, based on cost-sharing and service arrangements. These contractual amounts. arrangements reflect the WBG strategy of maximizing synergies, to best leverage resources for development • Contractual Purchases and Capital (See Notes to Financial Statements, Note H for Expenditures: IBRD is a party to various Transactions with Affiliated Organizations). obligations to purchase products and services Table 36: Contractual Obligations In millions of U.S. dollars As of June 30, 2018 Due after 1 Due after 3 Due in 1 Year through 3 Years through 5 Due After year or Less Years Years 5 years Total Borrowings (at fair value) $ 44,867 $ 79,382 $ 41,878 $ 41,882 $ 208,009 Operating leases 78 124 65 126 393 Contractual purchases and 37 44 - - 81 Other long-term liabilities 581 131 90 185 987 Total $ 45,563 $ 79,681 $ 42,033 $ 42,193 $ 209,470 62 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 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 of their employees, retirees and avoiding excessive volatility in WBG contributions. beneficiaries. All 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 amount on sharing ratio. (See Notes to Financial Statements, Note the basis of actuarial valuations. IBRD is required to J: Pension and Other Post-Retirement Benefits). make the contribution determined by the PFC. In The benefits of the Plans at retirement are determined FY18, the WBG’s contribution rate to the Plans was pursuant to the Plan Documents adopted by the Board 30.15% of net salaries. (Plan Document). The World Bank has a contractual The Projected Benefit Obligation (PBO) is derived obligation to make benefit payments to the Plans’ from AA-rated corporate bonds, as required by U.S. beneficiaries. The governance mechanism of the Plans, GAAP. The selection of this rate as the basis for the including the funding and investment policies described discount rate is to establish a liability equivalent to an here, are 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 from 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 FY99. If the return on the pension assets is 3.5% in real terms and contributions are made at the Contributions to the SRP and RSBP are irrevocable, actuarially required rates (that reflect the long- term and assets are held in separate trusts, and the PEBP cost of the plan benefit), the plan benefits will be funded assets are included in IBRD's investment portfolio. over time. IBRD acts as trustee for the Plans and the assets are used for the exclusive benefit of the participants and The assets of the Plans are diversified across a variety their beneficiaries. The objective of the Plans is to of asset classes, with the objective of achieving returns accumulate sufficient assets to meet future pension consistent with the LTRRO over the long term without benefit obligations. As of June 30, 2018, IBRD and taking undue risks. The returns on investments for the IDA’s share of the assets amounted to $21.8 billion plans have met or exceeded the LTRRO on a consistent (See Table 37). This represents the accumulated basis in the long term as well as in recent years. The contributions paid into the plans net of benefit PFC periodically reviews the realism and payments, together with the accumulated value of appropriateness for the LTRRO. See Notes to Financial investment earnings, net of related expenses. Statements, Note J: Pension and Other Post-Retirement Benefits for asset allocation, expected return on plan Funding and Investment Policies assets and assumptions used to determine the PBO. The key policies underpinning the financial management of the Plans, including the determination of WBG contributions and the investment of Plan IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 63 Management’s Discussion and Analysis Section XII: Pension and Other Post-Retirement Benefits Environmental, Social and including projected salary increases to retirement. Governance (ESG) Policies Therefore, the PBO measure is an appropriate metric for assessing the ability of the Plans to cover expected The Plan has a long-standing ESG policy that has been benefits as of a certain date. The underlying actuarial updated to reflect the latest developments in and assumptions used to determine the PBO, accumulated understanding of responsible investments and ESG benefit obligations, and funded status associated with integration. The ESG policy is based on a principled the Plans are based on financial market interest rates, and pragmatic approach in accordance with and past experience, and Management's best estimate of subject to the fiduciary standard applicable to the future benefit changes, economic conditions and administration and investment of Plan assets. The earnings from plan assets. Plan’s ESG policy states that consideration of ESG factors, including but not limited to environmental The discount rate used to convert future obligations practices, worker safety and health standards, and into today’s dollars is derived from high-grade, AA- corporate governance, can add value to the investment rated corporate bond yields as required by U.S. GAAP. process and affect assessment of the risk and return The decrease in the underfunded status of the pension characteristics of investments. plans for the World Bank from $2.1 billion as of June 30, 2017 to $1.3 billion as of June 30, 2018, net of PEBP assets, primarily reflects the increase in the Plan Projected Benefit Obligation Assets due to better asset returns. The impact of the Given that pension plan liabilities can be defined and increase in AA-rated corporate bond yields was measured in a number of different ways, it is possible significantly offset by the increase in inflation, to have different funded status measures for the same resulting in a marginal increase in the AA interest rates plans. The most widely used and publicly disclosed used to discount the plan liability (real discount rate). measure of pension plan liabilities is the PBO measure As the Plans are managed with a long-term horizon, required under U.S. GAAP. It reflects the present results over shorter time periods may be impacted value of all retirement benefits earned by participants positively or negatively by market fluctuations. (adjusted for assumed inflation) as of a given date, Table 37: Funded Status of the Plans In millions U.S. dollars As of June 30, 2018 Total Plan SRP RSBP PEBP Total PBO $ (18,429) $ (2,937) $ (1,778) $ (23,144) Plan assets $ 17,969 $ 2,837 $ 1,028 $ 21,834 Funded Status $ (460) $ (100) $ (750) $ (1,310) IBRD's share (600) As of June 30, 2017 Total Plan SRP RSBP PEBP Total PBO $ (17,741) $ (2,939) $ (1,592) $ (22,272) Plan assets $ 16,756 $ 2,593 $ 873 $ 20,222 Funded Status $ (985) $ (346) $ (719) $ (2,050) IBRD's share (986) 64 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 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 provision for losses on loans and guarantees taking estimates made by Management, are integral to its into account, among other factors, any changes in financial reporting. While all of these policies require exposure, risk ratings of borrowing member countries, a certain level of judgment and estimates, significant or movements between the accrual and non-accrual policies require Management to make highly difficult, portfolios. complex, and subjective judgments as these relate to The accumulated provision for loan losses is reported matters inherently uncertain and susceptible to change. separately in the balance sheet as a deduction from Note A to the financial statements contains a summary IBRD’s total loans outstanding. The accumulated of IBRD’s significant accounting policies including a provision for losses on other exposures is included in discussion of recently issued accounting accounts payable and miscellaneous liabilities. pronouncements. Increases or decreases in the accumulated provision Provision for Losses on Loans and for losses on loans and other exposures are reported in Other Exposures the Statement of Income as a provision for losses on loans and other exposures (see Notes to Financial IBRD’s accumulated provision for losses on loans and Statements: Note A: Summary of Significant other exposures reflects probable losses inherent in its Accounting and Related Policies and Note D: Loans accrual and nonaccrual portfolios. Determining the and Other Exposures). appropriate level of provision for each portfolio requires several steps: Fair Value of Financial Instruments • The loan portfolio is separated into the accrual In FY18, all fair value adjustments were recognized and nonaccrual portfolios. In both portfolios, through the Statement of Income. Under new guidance the loans and other exposures for each country published by the Financial Accounting Standards are then assigned a credit-risk rating. Loans in Board (FASB), effective July 1, 2018, fair value the accrual portfolio are grouped according to adjustments relating to changes in IBRD’s own credit the assigned risk rating, while loans in the non- will be reported in OCI (see Notes to Financial accrual portfolio are generally individually Statements: Note A-Summary of Significant assigned the highest risk rating. Accounting and Related Policies, and Note D-Loans and Other Exposures). • Each risk rating is mapped to an expected default frequency using IBRD’s credit The fair values of financial instruments are based on a migration matrix. three-level hierarchy. For financial instruments • The required provision is calculated by classified as Level 1 or 2, less judgment is applied in multiplying the outstanding exposure by the arriving at fair value measures as the inputs are based expected default frequency (the probability of on observable market data. For financial instruments default to IBRD) and by the estimated severity classified as Level 3, unobservable inputs are used. of the loss in the event of default. For loans These require Management to make important carried at fair value, the credit risk assessment assumptions and judgments in determining fair value is a determinant of fair value. measures. Investments measured at net asset value per share (or its equivalent) are not classified in the fair The determination of a borrower's risk rating is based value hierarchy. on such variables as: political risk, external debt and liquidity, fiscal policy and the public debt burden, Most of IBRD’s financial instruments which are balance of payments risks, economic structure and recorded at fair value are classified as Levels 1 and 2. growth prospects, monetary and exchange rate policy, Table 38 presents the summary of the fair value of and financial sector risks and corporate sector debt and financial instruments recorded at fair value on a other vulnerabilities. recurring basis, and the amounts measured using significant Level 3 inputs. IBRD’s level 3 instruments IBRD periodically reviews such variables and are mainly structured bonds and related swaps held in reassesses the adequacy of the accumulated provision the borrowing portfolio; they use market observable accordingly. Actual losses may differ from expected inputs and such unobservable inputs as correlations losses owing to unforeseen changes in any of the and interest rate volatilities. There were no Level 3 variables affecting the creditworthiness of borrowers. instruments in IBRD’s investment or loan portfolios as The Credit Risk Committee monitors aspects of of June 30, 2018. As of June 30, 2018, all of IBRD’s country credit risk, in particular, reviewing the loans were carried at amortized cost. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 65 Management’s Discussion and Analysis Section XIII: Critical Accounting Policies and The Use of Estimates Table 38: Fair Value Level 3 Summary In millions U.S. dollars For the fiscal year-ended June 30, 2018 2017 Total Total Level 3 Balance Level 3 Balance Total Assets at fair value $ 1,640 $ 214,285 $ 1,504 $ 223,085 As a percentage of total assets at fair value 0.77% 0.67% Total Liabilities at fair value $ 6,350 $ 355,115 $ 3,857 $ 359,130 As a percentage of total assets at fair value 1.79% 1.07% IBRD reviews the methodology, inputs, and The financial models used for input to IBRD’s assumptions on a quarterly basis to assess the financial statements are subject to both internal and appropriateness of the fair value hierarchy periodic external verification and review by qualified classification of each financial instrument. personnel. Some financial instruments are valued using pricing In cases where Management relies on instrument models. The Valuation Group, which is independent valuations supplied by external pricing vendors, of treasury and risk management functions, reviews all procedures are in place to validate the appropriateness financial instrument models affecting financial of the models used, as well as the inputs applied in reporting through fair value and assesses model determining those values. appropriateness and consistency. The review looks at whether the models accurately reflect the Pension and Other Post-Retirement characteristics of the transaction and its risks, the Benefits suitability and convergence properties of numerical The underlying actuarial assumptions used to algorithms, the reliability of data sources, the determine the PBO, accumulated benefit consistency of the treatment with models for similar obligations, and funded status associated with products, and sensitivity to input parameters and IBRD pension and other post-retirement benefit assumptions that cannot be priced from the market. plans are based on financial market interest rates, Reviews are conducted of new and/or changed past experience, and Management's best estimate models, as well as previously validated models, to of future benefit changes and economic conditions assess whether any changes in the product or market (see Notes to Financial Statements, Note J: Pension may have affected the model’s continued validity and and Other Post-Retirement Benefits). whether any theoretical or competitive developments may require reassessment of the model’s adequacy. 66 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section XIV: Governance and Controls Section XIV: Governance and Controls Figure 37: 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 8 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 Board Membership 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. Board of Governors, at the Annual Meetings, audited • Human Resources Committee - strengthens the accounts, an administrative budget, and an annual efficiency and effectiveness of the Board in report on 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 session at the main World Bank offices in Washington policies and practices, and their alignment with DC, as business requires. Each committee's terms of the business needs of the organization. reference establishes its respective roles and responsibilities. As committees do not vote on issues, IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 67 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 will come 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. 68 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Section XIV: Governance and Controls Communication between the external auditor and the fiscal year materially affect, or would be reasonably Audit Committee is ongoing and carried out as often likely to materially affect, IBRD’s internal control as deemed necessary by either party. The Audit over external financial reporting. The internal control Committee meets periodically with the external framework promulgated by the Committee of auditor and individual committee members have Sponsoring Organizations of the Treadway independent access to the external auditor. IBRD’s Commission (COSO), “Internal Control - Integrated external auditors also follow the communication Framework (2013)” provides guidance for designing, requirements, with the Audit Committees set out under implementing and conducting internal control and generally accepted auditing standards in the United assessing its effectiveness. Since FY16, IBRD has States and in the International Standards on Auditing. been using the 2013 COSO framework to assess the effectiveness of the internal control over external External Auditors financial reporting. As of June 30, 2018, these controls were determined to be effective. See “Management’s The external auditor is appointed to a five-year term, report regarding effectiveness of Internal Control over with a limit of two consecutive terms, and is subject to External Financial Reporting” on page 76. annual reappointment based on the recommendation of the Audit Committee and approval of a resolution Concurrently, IBRD’s external auditor provides a by the Board. FY18 is the final year of KPMG LLP’s report stating IBRD maintained, in all material second term as IBRD’s external auditor. respects, effective internal control over external financial reporting. See Independent Auditor’ Report Following a mandatory rebidding of the external audit on page 80. contract, IBRD’s Executive Directors approved the Disclosure Controls and Procedures appointment of Deloitte as IBRD’s external auditor for a five-year term commencing FY19. Disclosure controls and procedures are designed to ensure that information required to be disclosed is Internal Control gathered and communicated to Management as Internal Control Over External Financial appropriate, to allow timely decisions regarding required disclosure by IBRD. Management conducted Reporting an evaluation of the effectiveness of such controls and Each fiscal year, Management evaluates the internal procedures and the President and the MDCFO have controls over external financial reporting to determine concluded that these controls and procedures were whether any changes made in these controls during the effective as of June 30, 2018. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 69 Management’s Discussion and Analysis Appendix Appendix Glossary of Terms Articles: IBRD’s Articles of Agreement Below GDI Country: means a 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 Board of Executive Directors Budget Anchor: Measure established to monitor net administrative expenses against loan spread revenue (loan interest margin, commitment and guarantee fees). 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): The DVA represents the market value of IBRD’s own credit risk for uncollateralized derivative instruments and is reflected in the fair value of derivative instruments. 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. 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. 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. 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. 70 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Appendix Abbreviations and Acronyms AFDB: African Development Bank IFFIm: International Finance Facility for Immunisation 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 COSO: Committee of Sponsoring Organizations of the Treadway Commission LLP: Loan Loss Provision CCSAs: Cross-Cutting Solution Areas LTRRO: Long-Term Real Return Objective CDS: Credit Default Swaps MDB: Multilateral Development Bank MDCAO: Managing Director and World Bank Group Chief CVA: Credit Value Adjustment Administrative Officer CRO: Vice President and WBG Chief Risk Officer MDCFO: Managing Director and World Bank Group Chief DDO: Deferred Drawdown Option Financial Officer DPF: Development Project Financing MDCOO: Managing Director and Chief Operating Officer DTCs: Developing and Transitional Countries MIGA: Multilateral Investment Guarantee Agency DVA: Debit Valuation Adjustment MOV: Maintenance-Of-Value EAL: Equitable Access Limit NBC: New Business Committee EDF: Expected default frequency NCPIC: National Currency Paid-in Capital EEA: Exposure Exchange Agreement ORC: Operational Risk Committee EFOs: Externally Financed Outputs PAF: Pilot Auction Facility for Methane and Climate Change Mitigation EMF: Equity Management Framework ESG: Environmental, Social and Governance PEF: Pandemic Emergency Financing Facility FASB: Financial Accounting Standards Board PBAC: Pension Benefits Administration Committee FIFs: Financial Intermediary Funds PBO: Pension Benefit Obligation FRC: Finance and Risk Committee PCRF: Post Retirement Contribution Reserve Fund GAVI: Global Alliance for Vaccines and Immunization PEBP: Post-Employment Benefit Plan GCI: General Capital Increase PFC: Pension Finance Committee GDI: Graduation Discussion Income PforR: Program-for-Results GNI: Gross National Income RAS: Reimbursable Advisory Services GMFs: Grant-Making Facilities RAMP: Reserves Advisory Management Program GPs: Global Practices RETF: Recipient-Executed Trust Funds IADB: Inter‐American Development Bank RSBP: Retired Staff Benefits Plan 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, 2018 71 Management’s Discussion and Analysis Appendix Eligible Borrowing Member Countries by Regiona 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, former Yugoslav Republic of 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 a. A commitment has been made to Cote D’ Ivoire, an IDA only country, based on Special Approval from the Board. See Summary Statement of Loans in IBRD’s Financial Statements for balances by country. List of Tables, Figures and Boxes Tables Table 1: Condensed Statement of Income 13 Table 2: Condensed Balance Sheet 13 Table 3: Net Other Revenue 16 Table 4: Net Non-Interest Expenses 17 Table 5: Budget Anchor Ratio 17 Table 6: Unrealized Mark-to-Market gains/losses, net 18 Table 7: Allocable Income 22 Table 8: Commitments by Region 26 Table 9: Gross Disbursements by Region 26 Table 10: Commitments by Maturity 28 Table 11: Loan Terms Available Through June 30, 2018 29 Table 12: Guarantees Exposure 31 Table 13: Pricing for IBRD Project-Based and Policy-Based Guarantees 32 Table 14: Exposure Exchange Agreements 32 Table 15: Trust Fund Activity 33 Table 16: RAMP 34 Table 17: Cash and Investment Assets Held in Trust 34 Table 18: Liquid Asset Portfolio Composition 36 Table 19: Net Carrying Value of Other Investments 36 Table 20: Liquid Asset Portfolio - Average Balances and Returns 36 Table 21: Short-Term Borrowings 38 Table 22: Funding Operations Indicators 39 Table 23: Maturity Profile of Medium and Long-Term Debt 39 Table 24: Breakdown of IBRD Subscribed Capital 40 Table 25: Capital Subscriptions 42 Table 26: Usable Paid-In Capital 42 Table 27: Usable Equity 43 Table 28: Equity-to-Loans Ratio 48 Table 29: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating 53 Table 30: Summary of Fair Value Adjustments on Non-Trading Portfolios 57 Table 31: Effect of Interest Rates and Credit on IBRD’s Fair Value Income 57 Table 32: Summary of Changes to AOCI (Fair Value Basis) 60 Table 33: Condensed Balance Sheet on a Fair Value Basis 60 Table 34: Reconciliation from Net Income to Income on a Fair Value Comprehensive Basis 60 Table 35: Fair Value Adjustments, net 61 Table 36: Contractual Obligations 62 Table 37: Funded Status of the Plans 64 Table 38: Fair Value Level 3 Summary 66 72 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 Management’s Discussion and Analysis Appendix Figures Figure 1: WBG Goals and 2030 Development Agenda 3 Figure 2: How IBRD Creates Value 7 Figure 3: IBRD’s Financial Business Model 8 Figure 4:Use of Derivatives for Loans and Borrowings 9 Figure 5: Use of Derivatives for Investments 9 Figure 6: Use of Derivatives for EMF 9 Figure 7: Sources and Uses of Revenue 11 Figure 8: Net Income and Unrealized gains / (losses) 14 Figure 9: Net Interest Margin 14 Figure 10: Derived Spread 14 Figure 11: Net Investment Portfolio 15 Figure 12: Borrowing Portfolio 15 Figure 13: Equity Contribution 15 Figure 14: Net Non-Interest Expenses 16 Figure 15: Budget Anchor 17 Figure 16: FY18 Allocable Income and Income Allocation 23 Figure 17: Global practices composition 25 Figure 18: Project Life Cycle 25 Figure 19: Commitments and Disbursements Trend 25 Figure 20: Commitments by Global Practice Cluster 25 Figure 21: Commitments by Instrument 27 Figure 22: Loan Portfolio 30 Figure 23: Liquid Asset Portfolio by Asset Class 35 Figure 24: Effect of Derivatives on Currency Composition of the Borrowing Portfolio–June 30, 2018 37 Figure 25: Medium- and Long-Term Borrowings Raised by Currency, Excluding Derivatives 39 Figure 26: Voting Power of Top Six Members as of June 30, 2018 40 Figure 27: Credit Ratings Composition of Member Countries, as of June 30, 2018 40 Figure 28: Financial and Operational Risk Management Structure 44 Figure 29: Risk Committee Structure for Financial and Operational Risks 46 Figure 30: Equity-to-Loans Ratio 47 Figure 31: Country Exposures as of June 30, 2018 49 Figure 32: Effect of Derivatives on Interest Rate Structure of the Borrowing Portfolio - June 30, 2018 54 Figure 33: Effect of Derivatives on Interest Rate Structure of the Loan Portfolio - June 30, 2018 54 Figure 34: Currency Composition of Loan and Borrowing Portfolios as of June 30, 2018 56 Figure 35: Sensitivity to Interest Rates 58 Figure 36: Impact of IBRD’s Credit Spreads on Income 59 Figure 37: Governance Structure 67 Boxes Box 1: Selected Financial Data 2 Box 2: Determination of Spreads for IFLs 27 Box 3: Other Lending Products Currently Available 28 Box 4: Types of Guarantees Provided by IBRD 31 Box 5: Disaster Risk Financing Options 34 Box 6: Liquid Asset Portfolio Instruments 35 Box 7: Summary of IBRD's Specific Risk Categories 47 Box 8: Treatment of Overdue Payments 50 Box 9: Eligibility Criteria for IBRD's Investments 52 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 73 Management’s Discussion and Analysis This page intentionally left blank 74 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2018 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT FINANCIAL STATEMENTS AND INTERNAL CONTROL REPORTS JUNE 30, 2018 Management’s Report Regarding Effectiveness of Internal Control Over External Financial Reporting 76 Independent Auditors’ Report on Management’s Assertion Regarding Effectiveness of Internal Control Over Financial Reporting 78 Independent Auditors’ Report 80 Balance Sheet 82 Statement of Income 84 Statement of Comprehensive Income 85 Statement of Changes in Retained Earnings 85 Statement of Cash Flows 86 Summary Statement of Loans 88 Statement of Subscriptions to Capital Stock and Voting Power 90 Notes to Financial Statements 94 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 75 MANAGEMENT’S REPORT REGARDING EFFECTIVENESS OF INTERNAL CONTROL OVER EXTERNAL FINANCIAL REPORTING 76 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 77 INDEPENDENT AUDITORS’ REPORT ON MANAGEMENT’S ASSERTION REGARDING EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING 78 79 INDEPENDENT AUDITORS’ REPORT 80 81 BALANCE SHEET June 30, 2018 and June 30, 2017 Expressed in millions of U.S. dollars 2018 2017 Assets Due from banks—Notes C and L Unrestricted cash $ 542 $ 613 Restricted cash 77 70 619 683 Investments-Trading (including securities transferred under repurchase or securities lending agreements of $29 million—June 30, 2018; $20 million—June 30, 2017)—Notes C and L 72,352 72,752 Securities purchased under resale agreements—Notes C and L 217 221 Derivative assets Investments—Notes C, F and L 38,015 42,630 Loans—Notes D, F and L 4,999 4,603 Client operations—Notes D, F, H and L 17,042 22,842 Borrowings—Notes E, F and L 80,518 78,824 Others—Notes F and L 1,142 1,213 141,716 150,112 Other receivables Receivable from investment securities traded—Note C 83 45 Accrued income on loans 1,539 1,227 1,622 1,272 Loans outstanding (Summary Statement of Loans, Notes D, H and L) Total loans 254,011 245,043 Less undisbursed balance (68,422) (65,588) Loans outstanding 185,589 179,455 Less: Accumulated provision for loan losses (1,553) (1,582) Deferred loan income (448) (451) Net loans outstanding 183,588 177,422 Other assets Premises and equipment, net 1,158 1,114 Miscellaneous—Notes E, H and I 1,784 2,322 2,942 3,436 Total assets $ 403,056 $ 405,898 82 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 2018 2017 Liabilities Borrowings—Notes E and L $ 208,009 $ 205,942 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received—Notes C and L 122 373 Derivative liabilities Investments—Notes C, F and L 37,298 43,713 Loans—Notes D, F and L 5,007 5,712 Client operations—Notes D, F, H and L 17,069 22,866 Borrowings—Notes E, F and L 86,161 80,026 Others—Notes F and L 1,561 812 147,096 153,129 Payable to maintain value of currency holdings on account of subscribed capital 6 4 Other liabilities Payable for investment securities purchased—Note C 82 205 Liabilities under retirement benefits plans—Notes J and K 2,338 2,923 Accounts payable and miscellaneous liabilities—Notes D, H and I 3,559 3,524 5,979 6,652 Total liabilities 361,212 366,100 Equity Capital stock (Statement of Subscriptions to Capital Stock and Voting Power, Note B) Authorized capital (2,307,600 shares—June 30, 2018, and June 30, 2017) Subscribed capital (2,277,364 shares—June 30, 2018, and 2,229,344 shares—June 30, 2017) 274,730 268,937 Less uncalled portion of subscriptions (258,274) (252,828) Paid-in capital 16,456 16,109 Nonnegotiable, noninterest-bearing demand obligations on account of subscribed capital (361) (305) Receivable amounts to maintain value of currency holdings—Note B (313) (369) Deferred amounts to maintain value of currency holdings—Note B 27 (20) Retained earnings (Statement of Changes in Retained Earnings; Note G) 28,457 27,759 Accumulated other comprehensive loss—Note K (2,422) (3,376) Total equity 41,844 39,798 Total liabilities and equity $ 403,056 $ 405,898 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 83 STATEMENT OF INCOME For the fiscal years ended June 30, 2018 and June 30, 2017 and June 30, 2016 Expressed in millions of U.S. dollars 2018 2017 2016 Interest revenue Loans, net—Note D $ 3,515 $ 2,579 $ 1,605 Equity management, net 217 383 672 Investments - Trading, net 878 545 329 Other, net 25 5 8 Borrowings, net—Note E (2,919) (1,845) (786) Interest revenue, net of borrowing expenses 1,716 1,667 1,828 Provision for losses on loans and other exposures, release (charge) —Note D 31 (11) (57) Non interest revenue Revenue from externally funded activities—Notes H and I 882 820 801 Commitment charges—Note D 87 70 34 Other, net—Note I 33 24 58 Total 1,002 914 893 Non interest expenses Administrative—Notes H and I (1,777) (1,751) (1,822) Pension—Note J (272) (394) (231) Contributions to special programs (18) (22) (67) Other (22) (21) (11) Total (2,089) (2,188) (2,131) Board of Governors-approved and other transfers—Note G (178) (497) (705) Unrealized mark-to-market gains (losses) on Investments- Trading portfolio, net—Notes F and L 482 291 (31) Unrealized mark-to-market (losses) gains on non-trading portfolios, net Loans, net—Notes D, F and L 916 1,529 (1,234) Equity management, net—Notes F and L (799) (1,701) 1,457 Borrowings, net—Notes E, F and L (381) (248) 507 Other, net—Note L (2) 7 (32) Total (266) (413) 698 Net income (loss) $ 698 $ (237) $ 495 The Notes to Financial Statements are an integral part of these Statements. 84 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 STATEMENT OF COMPREHENSIVE INCOME For the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016 Expressed in millions of U.S. dollars 2018 2017 2016 Net income (loss) $ 698 $ (237) $ 495 Other comprehensive income—Note K Reclassification to net income: Derivatives and hedging transition adjustment 3 2 2 Net actuarial gains (losses) on benefit plans 834 2,543 (2,778) Prior service credit (cost) on benefit plans, net 24 24 (2) Currency translation adjustment 93 181 (135) Total other comprehensive income (loss) 954 2,750 (2,913) Comprehensive income (loss) $ 1,652 $ 2,513 $ (2,418) STATEMENT OF CHANGES IN RETAINED EARNINGS For the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016 Expressed in millions of U.S. dollars 2018 2017 2016 Retained earnings at beginning of the fiscal year $ 27,759 $ 27,996 $ 27,501 Net income (loss) for the fiscal year 698 (237) 495 Retained earnings at end of the fiscal year $ 28,457 $ 27,759 $ 27,996 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 85 STATEMENT OF CASH FLOWS For the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016 Expressed in millions of U.S. dollars 2018 2017 2016 Cash flows from investing activities Loans Disbursements $ (17,353) $ (17,819) $ (22,490) Principal repayments 10,411 9,130 9,335 Principal prepayments 1,340 - - Loan origination fees received 13 11 27 Net derivatives-loans 41 35 21 Other investing activities, net (181) (146) (153) Net cash used in investing activities (5,729) (8,789) (13,260) Cash flows from financing activities Medium and long-term borrowings New issues 36,378 55,145 62,998 Retirements (29,587) (34,605) (42,536) Short-term borrowings New issues 10,287 6,002 3,944 Retirements (10,104) (4,252) (4,462) Net short-term borrowings (595) 5,150 (611) Net derivatives-borrowings (1,158) 66 (512) Capital subscriptions 347 304 613 Other capital transactions, net (7) 5 27 Net cash provided by financing activities 5,561 27,815 19,461 Cash flows from operating activities Net income (loss) 698 (237) 495 Adjustments to reconcile net income (loss) to net cash used in operating activities: Unrealized mark-to-market losses (gains) on non-trading portfolios, net 266 413 (698) Depreciation and amortization 803 660 668 Provision for losses on loans and other exposures, (release) charge (31) 11 57 Changes in: Investments-Trading, net 579 (21,453) (2,702) Net investment securities purchased/traded (186) (393) (1,528) Net derivatives-investments (1,990) 883 (10) Net securities purchased/sold under resale/repurchase agreements and payable for cash collateral received (253) 153 (1,450) Accrued income on loans (305) (105) (710) Miscellaneous assets (11) 80 (20) Accrued interest on borrowings 226 (166) 221 Accounts payable and miscellaneous liabilities 301 515 403 Net cash provided by (used in) operating activities 97 (19,639) (5,274) Effect of exchange rate changes on unrestricted cash - 4 (16) Net (decrease) increase in unrestricted cash (71) (609) 911 Unrestricted cash at beginning of the fiscal year 613 1,222 311 Unrestricted cash at end of the fiscal year $ 542 $ 613 $ 1,222 86 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 Expressed in millions of U.S. dollars 2018 2017 2016 Supplemental disclosure Increase (decrease) in ending balances resulting from exchange rate fluctuations Loans outstanding $ 495 $ 1,070 $ (566) Investment portfolio (34) (126) 60 Borrowing portfolio 497 525 24 Capitalized loan origination fees included in total loans 36 42 42 Interest paid on borrowings portfolio 2,492 1,865 436 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 87 SUMMARY STATEMENT OF LOANS June 30, 2018 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 $ 1,039 $ 102 $ 329 $ 608 0.33 % Angola c 1,235 453 311 471 0.25 Antigua and Barbuda 3 - - 3 * Argentina 9,346 800 2,324 6,222 3.35 Armenia d 953 - 260 693 0.37 Azerbaijan 2,395 - 265 2,130 1.15 Barbados 29 - - 29 0.02 Belarus 1,301 14 424 863 0.47 Belize 43 - 25 18 0.01 Bolivia,Plurinational State of c 818 252 453 113 0.06 Bosnia and Herzegovina d 785 125 124 536 0.29 Botswana c 426 - 270 156 0.08 Brazil d 18,893 698 1,888 16,307 8.79 Bulgaria 931 - 33 898 0.48 Cabo Verde, Republic of 44 - - 44 0.02 Cameroon 740 - 485 255 0.14 c Chile 281 80 50 151 0.08 China d 22,320 1,418 6,847 14,055 7.57 Colombia c 11,499 202 911 10,386 5.60 Congo, Republic of 172 47 105 20 0.01 Costa Rica c 1,143 - 347 796 0.43 Cote d'Ivoire 191 191 - - - Croatia 1,512 - 180 1,332 0.72 c Dominican Republic 1,253 150 201 902 0.49 Ecuador c 1,497 463 608 426 0.23 Egypt, Arab Republic of 12,129 1,030 2,006 9,093 4.90 El Salvador 903 - 4 899 0.48 Eswatini 41 - 3 38 0.02 Fiji 121 - 49 72 0.04 Gabon c 695 - 355 340 0.18 Georgia d 1,207 - 337 870 0.47 Grenada 17 - 8 9 0.01 Guatemala 1,962 450 - 1,512 0.82 d India 25,879 1,226 11,256 13,397 7.22 Indonesia d 20,754 1,500 2,054 17,200 9.27 Iran, Islamic Republic of 239 - - 239 0.13 Iraq 4,655 1,110 448 3,097 1.67 Jamaica 1,002 - 132 870 0.47 Jordan d 2,373 389 206 1,778 0.96 Kazakhstan 5,355 67 1,214 4,074 2.20 Kosovo 178 - - 178 0.10 Latvia 163 - - 163 0.09 Lebanon 1,868 938 477 453 0.24 d Macedonia, former Yugoslav Republic of 557 - 161 396 0.21 Mauritius 243 - - 243 0.13 Mexico 15,587 180 1,114 14,293 7.70 Moldova 137 13 36 88 0.05 Montenegro d 339 7 109 223 0.12 Morocco 6,731 100 1,111 5,520 2.97 Nigeria c 500 - 376 124 0.07 Pakistan d 2,864 425 1,030 1,409 0.76 Panama c 1,563 180 180 1,203 0.65 Papua New Guinea 39 - - 39 0.02 Paraguay 766 - 151 615 0.33 Peru 4,348 - 3,227 1,121 0.60 Philippines 7,032 140 1,792 5,100 2.75 Poland 8,548 - 488 8,060 4.34 Romania d 5,944 466 668 4,810 2.59 88 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 SUMMARY STATEMENT OF LOANS (CONTINUED) June 30, 2018ent of Cash Flows 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 Oustanding outstanding e Russian Federation $ 591 $ - $ 107 $ 484 0.26 % Serbia d 3,265 263 509 2,493 1.34 Seychelles 57 - 11 46 0.02 South Africa c 3,203 - 799 2,404 1.30 Sri Lanka 566 200 159 207 0.11 St. Kitts and Nevis * - - * * St. Lucia 5 - - 5 * St. Vincent and the Grenadines 2 - - 2 * Thailand 1,021 - - 1,021 0.55 Timor-Leste 15 - 13 2 * Trinidad and Tobago c - - - - - Tunisia 4,440 833 513 3,094 1.67 Turkey d 13,772 485 1,272 12,015 6.47 Ukraine 7,070 - 1,765 5,305 2.86 Uruguay 1,237 42 386 809 0.44 Uzbekistan 1,288 200 783 305 0.16 Vietnam 3,456 - 1,434 2,022 1.09 Zimbabwe 435 - - 435 0.23 Total-June 30, 2018 $ 254,011 $ 15,239 $ 53,183 $ 185,589 100 % Total-June 30, 2017 $ 245,043 $ 11,321 $ 54,267 $ 179,455 * Indicates amount less than $0.5 million or 0.005 percent Notes a. Loans totaling $11,188 million ($9,039 million—June 30, 2017) have been approved, but the related agreements have not been signed. Loan agreements totaling $4,051 million ($2,282 million—June 30, 2017) 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 $60 million ($96 million—June 30, 2017). c. Guarantee provided under Exposure Exchange Agreement with a multilateral development organization (see Note D Loans and Other Exposures). d. Guarantee received under EEA with a multilateral development organization (see Note D—Loans and Other Exposures). e. May differ from the sum of individual figures due to rounding. The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 89 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER June 30, 2018 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 1,214 0.05 % Albania 1187 0.05 143.2 5.4 137.8 1,895 0.08 Algeria 11,724 0.51 1,414.3 85.0 1,329.3 12,432 0.52 Angola 3,708 0.16 447.3 23.1 424.2 4,416 0.18 Antigua and Barbuda 659 0.03 79.5 2.3 77.2 1,367 0.06 Argentina 26,387 1.16 3,183.2 191.6 2,991.5 27,095 1.12 Armenia 1,646 0.07 198.6 8.4 190.1 2,354 0.10 Australia c 31,592 1.39 3,811.1 233.4 3,577.7 32,300 1.34 Austria c 14,611 0.64 1,762.6 106.4 1,656.2 15,319 0.64 Azerbaijan 2,371 0.10 286.0 13.3 272.7 3,079 0.13 Bahamas, The 1,357 0.06 163.7 7.5 156.2 2,065 0.09 Bahrain 1,398 0.06 168.6 7.8 160.9 2,106 0.09 Bangladesh 6,468 0.28 780.3 43.8 736.5 7,176 0.30 Barbados 948 0.04 114.4 4.5 109.9 1,656 0.07 Belarus 4,211 0.18 508.0 28.8 479.2 4,919 0.20 Belgium c 37,413 1.64 4,513.3 276.8 4,236.5 38,121 1.58 Belize 586 0.03 70.7 1.8 68.9 1,294 0.05 Benin 1260 0.06 152.0 5.8 146.2 1,968 0.08 Bhutan 680 0.03 82.0 2.0 80.0 1,388 0.06 Bolivia, Plurinational State of 2,565 0.11 309.4 14.7 294.7 3,273 0.14 Bosnia and Herzegovina 827 0.04 99.8 7.8 91.9 1,535 0.06 Botswana 779 0.03 94.0 3.2 90.8 1,487 0.06 Brazil 53,509 2.35 6,455.1 386.8 6,068.3 54,217 2.25 Brunei Darussalam 2,373 0.10 286.3 15.2 271.1 3,081 0.13 Bulgaria 6,608 0.29 797.2 46.6 750.5 7,316 0.30 Burkina Faso 1,260 0.06 152.0 5.8 146.2 1,968 0.08 Burundi 1,043 0.05 125.8 4.6 121.3 1,751 0.07 Cabo Verde, Republic of 729 0.03 87.9 2.3 85.7 1,437 0.06 Cambodia 493 0.02 59.5 4.6 54.9 1,201 0.05 Cameroon 2,202 0.10 265.6 12.4 253.3 2,910 0.12 Canada c 58,354 2.56 7,039.5 433.1 6,606.5 59,062 2.45 Central African Republic 975 0.04 117.6 3.9 113.8 1,683 0.07 Chad 975 0.04 117.6 3.9 113.8 1,683 0.07 Chile c 10,013 0.44 1,207.9 71.9 1,136.0 10,721 0.44 China 106,594 4.68 12,859.0 774.8 12,084.1 107,302 4.45 Colombia 9,730 0.43 1,173.8 69.7 1,104.1 10,438 0.43 Comoros 369 0.02 44.5 1.0 43.5 1,077 0.04 Congo, Democratic Republic of 3,416 0.15 412.1 31.0 381.1 4,124 0.17 Congo, Republic of 1,051 0.05 126.8 4.3 122.4 1,759 0.07 Costa Rica 1,123 0.05 135.5 8.4 127.1 1,831 0.08 Cote d'Ivoire 3,505 0.15 422.8 21.8 401.1 4,213 0.17 Croatia 2,906 0.13 350.6 21.7 328.8 3,614 0.15 Cyprus 1,851 0.08 223.3 11.2 212.1 2,559 0.11 Czech Republic c 7,993 0.35 964.2 58.1 906.1 8,701 0.36 Denmark c 17,796 0.78 2,146.8 129.2 2,017.6 18,504 0.77 Djibouti 801 0.04 96.6 2.8 93.8 1,509 0.06 Dominica 639 0.03 77.1 2.1 75.0 1,347 0.06 Dominican Republic 2,651 0.12 319.8 17.2 302.6 3,359 0.14 Ecuador 3,828 0.17 461.8 24.1 437.7 4,536 0.19 Egypt, Arab Republic of 10,682 0.47 1,288.6 76.8 1,211.8 11,390 0.47 90 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER (continued) June 30, 2018 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 1,038 0.04 % Equatorial Guinea 715 0.03 86.3 2.7 83.5 1,423 0.06 Eritrea 593 0.03 71.5 1.8 69.7 1,301 0.05 Estonia c 1,170 0.05 141.1 6.1 135.1 1,878 0.08 Eswatini 499 0.02 60.2 2.0 58.2 1,207 0.05 Ethiopia 1,470 0.06 177.3 8.3 169.1 2,178 0.09 Fiji 1,251 0.05 150.9 6.7 144.2 1,959 0.08 Finland c 11,439 0.50 1,379.9 82.7 1,297.2 12,147 0.50 France c 90,404 3.97 10,905.9 672.4 10,233.5 91,112 3.78 Gabon 987 0.04 119.1 5.1 113.9 1,695 0.07 Gambia, The 777 0.03 93.7 2.7 91.0 1,485 0.06 Georgia 2,275 0.10 274.4 12.7 261.7 2,983 0.12 Germany c 96,574 4.24 11,650.2 717.9 10,932.3 97,282 4.03 Ghana 2,202 0.10 265.6 16.1 249.5 2,910 0.12 Greece c 3,405 0.15 410.8 26.5 384.2 4,113 0.17 Grenada 673 0.03 81.2 2.4 78.8 1,381 0.06 Guatemala 2,001 0.09 241.4 12.4 229.0 2,709 0.11 Guinea 1,864 0.08 224.9 9.9 214.9 2,572 0.11 Guinea-Bissau 613 0.03 73.9 1.4 72.5 1,321 0.05 Guyana 1,526 0.07 184.1 7.7 176.4 2,234 0.09 Haiti 1,550 0.07 187.0 7.8 179.2 2,258 0.09 Honduras 641 0.03 77.3 2.3 75.0 1,349 0.06 Hungary c 10,793 0.47 1,302.0 77.9 1,224.1 11,501 0.48 Iceland c 1,742 0.08 210.1 10.3 199.8 2,450 0.10 India 69,923 3.07 8,435.2 508.1 7,927.1 70,631 2.93 Indonesia 23,031 1.01 2,778.3 167.2 2,611.1 23,739 0.98 Iran, Islamic Republic of 34,963 1.54 4,217.8 254.3 3,963.4 35,671 1.48 Iraq 3,875 0.17 467.5 33.0 434.5 4,583 0.19 Ireland c 7,787 0.34 939.4 55.3 884.1 8,495 0.35 Israel c 6,019 0.26 726.1 42.4 683.7 6,727 0.28 Italy c 63,372 2.78 7,644.9 469.3 7,175.6 64,080 2.66 Jamaica 3,267 0.14 394.1 21.8 372.3 3,975 0.16 Japan c 165,444 7.26 19,958.3 1,222.2 18,736.1 166,152 6.89 Jordan 2,009 0.09 242.4 10.9 231.5 2,717 0.11 Kazakhstan 4,573 0.20 551.7 31.3 520.4 5,281 0.22 Kenya 3,435 0.15 414.4 21.1 393.2 4,143 0.17 Kiribati 680 0.03 82.0 1.9 80.1 1,388 0.06 Korea, Republic of c 37,524 1.65 4,526.7 270.2 4,256.6 38,232 1.59 Kosovo, Republic of 1,262 0.06 152.2 7.3 144.9 1,970 0.08 Kuwait 19,432 0.85 2,344.2 141.0 2,203.2 20,140 0.84 Kyrgyz Republic 1,107 0.05 133.5 5.7 127.9 1,815 0.08 Lao People's Democratic Republic 272 0.01 32.8 2.2 30.6 980 0.04 Latvia 1,754 0.08 211.6 10.4 201.2 2,462 0.10 Lebanon 1,062 0.05 128.1 6.3 121.8 1,770 0.07 Lesotho 945 0.04 114.0 3.8 110.2 1,653 0.07 Liberia 606 0.03 73.1 3.6 69.5 1,314 0.05 Libya 9,935 0.44 1,198.5 72.1 1,126.4 10,643 0.44 Lithuania 1,910 0.08 230.4 11.6 218.8 2,618 0.11 Luxembourg c 2,289 0.10 276.1 14.4 261.7 2,997 0.12 Macedonia, Former Yugoslav 541 0.02 65.3 4.0 61.2 1,249 0.05 Republic of IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 91 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER (continued) June 30, 2018 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 Madagascar 2,057 0.09 % $ 248.1 $ 11.2 $ 236.9 2,765 0.11 % Malawi 1,574 0.07 189.9 8.0 181.9 2,282 0.09 Malaysia 10,447 0.46 1,260.3 75.4 1,184.8 11,155 0.46 Maldives 469 0.02 56.6 0.9 55.7 1,177 0.05 Mali 1,670 0.07 201.5 8.7 192.8 2,378 0.10 Malta 1,361 0.06 164.2 7.5 156.7 2,069 0.09 Marshall Islands 469 0.02 56.6 0.9 55.7 1,177 0.05 Mauritania 1,308 0.06 157.8 6.1 151.7 2,016 0.08 Mauritius 1,574 0.07 189.9 9.1 180.8 2,282 0.09 Mexico c 40,119 1.76 4,839.8 291.1 4,548.6 40,827 1.69 Micronesia, Federated States of 479 0.02 57.8 1.0 56.8 1,187 0.05 Moldova 1,984 0.09 239.3 10.7 228.7 2,692 0.11 Mongolia 680 0.03 82.0 3.3 78.7 1,388 0.06 Montenegro 872 0.04 105.2 4.5 100.7 1,580 0.07 Morocco 6,619 0.29 798.5 44.9 753.5 7,327 0.30 Mozambique 1,332 0.06 160.7 6.8 153.9 2,040 0.08 Myanmar 3,465 0.15 418.0 21.4 396.6 4,173 0.17 Namibia 1,930 0.08 232.8 11.7 221.1 2,638 0.11 Nauru 586 0.03 70.7 2.4 68.3 1,294 0.05 Nepal 1,405 0.06 169.5 6.8 162.7 2,113 0.09 Netherlands c 45,829 2.01 5,528.6 339.5 5,189.0 46,537 1.93 New Zealand c 9,761 0.43 1,177.5 70.2 1,107.3 10,469 0.43 Nicaragua 873 0.04 105.3 3.4 101.9 1,581 0.07 Niger 1,233 0.05 148.7 5.6 143.1 1,941 0.08 Nigeria 16,187 0.71 1,952.7 117.4 1,835.3 16,895 0.70 Norway c 13,418 0.59 1,618.7 97.4 1,521.2 14,126 0.59 Oman 1,978 0.09 238.6 12.1 226.5 2,686 0.11 Pakistan 11,834 0.52 1,427.6 85.8 1,341.8 12,542 0.52 Palau 16 * 1.9 0.2 1.8 724 0.03 Panama 891 0.04 107.5 6.9 100.6 1,599 0.07 Papua New Guinea 1,864 0.08 224.9 9.9 214.9 2,572 0.11 Paraguay 1,766 0.08 213.0 9.3 203.7 2,474 0.10 Peru 7,691 0.34 927.8 54.6 873.2 8,399 0.35 Philippines 9,903 0.43 1,194.6 71.0 1,123.6 10,611 0.44 Poland c 17,129 0.75 2,066.4 124.1 1,942.2 17,837 0.74 Portugal c 7,511 0.33 906.1 53.3 852.7 8,219 0.34 Qatar 1,389 0.06 167.6 11.1 156.5 2,097 0.09 Romania 6,866 0.30 828.3 51.2 777.1 7,574 0.31 Russian Federation 66,505 2.92 8,022.8 483.5 7,539.3 67,213 2.79 Rwanda 1,502 0.07 181.2 7.5 173.7 2,210 0.09 St. Kitts and Nevis 275 0.01 33.2 0.3 32.9 983 0.04 St. Lucia 699 0.03 84.3 2.6 81.7 1,407 0.06 St. Vincent and the Grenadines 352 0.02 42.5 0.8 41.6 1,060 0.04 Samoa 777 0.03 93.7 2.5 91.2 1,485 0.06 San Marino 595 0.03 71.8 2.5 69.3 1,303 0.05 Sao Tome and Principe 705 0.03 85.0 2.2 82.9 1,413 0.06 Saudi Arabia 66,505 2.92 8,022.8 484.6 7,538.2 67,213 2.79 Senegal 2,942 0.13 354.9 17.5 337.4 3,650 0.15 Serbia 3,606 0.16 435.0 27.0 408.1 4,314 0.18 Seychelles 263 0.01 31.7 0.2 31.6 971 0.04 92 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER (continued) June 30, 2018 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 0.05 % $ 125.8 $ 4.6 $ 121.2 1,751 0.07 % Singapore 5,569 0.24 671.8 41.9 630.0 6,277 0.26 Slovak Republic c 4,075 0.18 491.6 29.2 462.4 4,783 0.20 Slovenia c 1,709 0.08 206.2 12.8 193.4 2,417 0.10 Solomon Islands 729 0.03 87.9 2.3 85.6 1,437 0.06 Somalia 632 0.03 76.2 3.3 72.9 1,340 0.06 South Africa 17,831 0.78 2,151.0 129.4 2,021.6 18,539 0.77 South Sudan 1,437 0.06 173.4 8.6 164.8 2,145 0.09 Spain c 44,159 1.94 5,327.1 323.8 5,003.3 44,867 1.86 Sri Lanka 5,154 0.23 621.8 34.0 587.8 5,862 0.24 Sudan 1,989 0.09 239.9 15.5 224.5 2,697 0.11 Suriname 412 0.02 49.7 2.0 47.7 1,120 0.05 Sweden c 19,833 0.87 2,392.6 145.4 2,247.2 20,541 0.85 Switzerland c 34,660 1.52 4,181.2 255.5 3,925.7 35,368 1.47 Syrian Arab Republic 2,452 0.11 295.8 14.0 281.8 3,160 0.13 Tajikistan 1,204 0.05 145.2 5.3 139.9 1,912 0.08 Tanzania 1,295 0.06 156.2 10.0 146.2 2,003 0.08 Thailand 11,108 0.49 1,340.0 79.6 1,260.4 11,816 0.49 Timor-Leste 753 0.03 90.8 3.1 87.8 1,461 0.06 Togo 1,598 0.07 192.8 8.1 184.7 2,306 0.10 Tonga 705 0.03 85.0 2.2 82.9 1,413 0.06 Trinidad and Tobago 3,376 0.15 407.3 22.8 384.5 4,084 0.17 Tunisia 1,693 0.07 204.2 12.7 191.5 2,401 0.10 Turkey c 25,643 1.13 3,093.4 185.1 2,908.3 26,351 1.09 Turkmenistan 627 0.03 75.6 3.6 72.0 1,335 0.06 Tuvalu 461 0.02 55.6 1.5 54.1 1,169 0.05 Uganda 928 0.04 111.9 6.6 105.3 1,636 0.07 Ukraine 13,910 0.61 1,678.0 100.5 1,577.5 14,618 0.61 United Arab Emirates 5,342 0.23 644.4 44.0 600.4 6,050 0.25 United Kingdom c 90,404 3.97 10,905.9 691.6 10,214.3 91,112 3.78 United States c 384,502 16.88 46,384.4 2,863.6 43,520.8 385,210 15.98 Uruguay 3,563 0.16 429.8 24.0 405.8 4,271 0.18 Uzbekistan 3,476 0.15 419.3 21.4 397.9 4,184 0.17 Vanuatu 765 0.03 92.3 3.1 89.2 1,473 0.06 Venezuela, Republica Bolivariana de 20,361 0.89 2,456.2 150.8 2,305.5 21,069 0.87 Vietnam 4,173 0.18 503.4 31.3 472.1 4,881 0.20 Yemen, Republic of 2,212 0.10 266.8 14.0 252.8 2,920 0.12 Zambia 3,878 0.17 467.8 25.9 441.9 4,586 0.19 Zimbabwe 3,575 0.16 431.3 22.4 408.9 4,283 0.18 Total - June 30, 2018 2,277,364 100 % $ 274,730 $ 16,456 $ 258,274 2,411,176 100 % Total - June 30, 2017 2,229,344 $ 268,937 $ 16,109 $ 252,828 2,360,321 * 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, 2018 93 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, development credits, 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 (deferred drawdown options-DDOs, irrevocable commitments, exposures to member countries’ derivatives and guarantees), the determination of net periodic cost from pension and other postretirement benefits plans, and the present value of projected benefit obligations. Certain reclassifications of the prior year’s information have been made to conform with the current year’s presentation. On August 9, 2018, the Executive Directors approved these financial statements for issue. 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, for the convenience of its members and other users. IBRD is an international organization which, conducts its operations in the currencies of all of its members and considers each of its member’s currencies to be a functional currency. IBRD’s resources are derived from its capital, borrowings, and accumulated earnings in those various currencies. IBRD has a number of general policies aimed at minimizing exchange rate risk in a multicurrency environment. Under these policies, IBRD endeavors to match its borrowing obligations in any one currency (after swaps) with assets in the same currency, as prescribed by its Articles of Agreement. In addition, IBRD periodically undertakes currency conversions to more closely match the currencies underlying its equity with those of the net loans outstanding. 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 on which they are recognized or at an average of the market exchange rates in effect during each month. Translation adjustments are reflected in Accumulated Other Comprehensive Income. 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 94 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 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 demand 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. 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 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 95 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 does not currently 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. For disclosure purposes, the fair value of these loans is calculated using a discounted cash flow method. This method incorporates Credit Default Swaps (CDS) spreads for each borrower. Basis adjustments are applied to market recovery levels to reflect IBRD’s recovery experience. IBRD has elected to measure at fair value loans which contain embedded derivatives that require bifurcation, if any. 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 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. Other exposures include: DDOs, irrevocable commitments, exposures to member countries’ derivatives, and guarantees. 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 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 that has provided the counter-guarantee to IBRD on demand, or as IBRD may otherwise direct. IBRD records the fair value of the obligation to stand ready, and a corresponding asset in the financial statements. 96 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 Upfront guarantee fees received are deferred and amortized over the life of the guarantee. 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: 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. 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. Management determines the appropriate level of accumulated provisions for losses on exposures, which reflects the probable losses inherent in IBRD’s exposures. 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, 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. For loans that are reported at fair value, the determination of the fair value takes credit risk into consideration. Statement of Cash Flows: For the purpose of IBRD's Statement of Cash Flows, cash is defined as the amount of Unrestricted cash Due from banks. 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. 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. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 97 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. These securities are carried and reported at fair value, or at face value or net asset value per share (NAV), which approximates 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. Unrealized gains and losses for investment securities and related financial instruments held in the trading portfolio are included in the Statement of Income. Derivative instruments used in liquidity management are not designated as hedging instruments. As of June 30, 2018, all of the financial instruments in IBRD’s investment portfolio were classified as trading. Dividends and interest revenue, including amortization of the premium and discount arising at acquisition, are included in net income. Unrealized gains and losses for investment securities and related financial instruments held in the trading portfolio are included in Unrealized mark-to-market gains (losses) on Investments-Trading portfolio, net 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 records the cash 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. IBRD does not offset the fair value amounts recognized for derivative instruments that have been executed with the same counterparty under master netting agreements; as a result, the fair value amounts recognized for the obligation to return cash collateral received from counterparties are not offset with the fair value amounts recognized for the related derivative instruments. 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 on 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 98 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 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. 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 with all changes in fair value recognized in the related Unrealized mark-to-market gains and losses on non-trading portfolios, net, line in the Statement of Income up through June 30, 2018. 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, will be reported in Other Comprehensive Income (OCI) (see Accounting and Reporting Developments for additional details). 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 or commodities. The fair value of the structured bonds is 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. For the purpose of the Statement of Cash Flows, the short-term borrowings, if any, which have maturities less than 90 days, are presented on a net basis. By contrast, short-term borrowings with 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. The presentation of derivative instruments is consistent with the manner in which these instruments are settled. Interest rate swaps are settled on a net basis, while currency swaps are settled on a gross basis. 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 in the Statement of Income. IBRD 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 Interest revenue/expenses 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 and borrowings, in a manner consistent with the presentation of the loan and borrowing-related 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 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 99 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 Debit Valuation Adjustment (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. 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. In instances where management relies on 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. As of June 30, 2018 and June 30, 2017, 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’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 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. 100 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 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 upon receipt as revenue, 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, 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) and subsequent amendments in 2015 and 2016. 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. The core principle of the guidance is that an entity recognizes revenue when it transfers control of promised goods and services to customers in an amount that reflects consideration to which the entity expects to be entitled. The ASUs also require additional quantitative and qualitative disclosures to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. For IBRD, the revenue streams within the scope of the ASUs largely relate to the provision of technical assistance, knowledge, asset management, and trustee services to clients and donors. IBRD adopted the ASUs on July 1, 2018, using a modified retrospective approach, as permitted by the FASB. Under this approach, all changes in revenue recognition will be reflected in the period of adoption of the ASUs. Based on IBRD’s assessment, less than 1% of revenue is affected by the new standard, and on the date of adoption no transition adjustment was recorded due to immateriality. In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 825). 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 OCI. For IBRD the ASU became effective on July 1, 2018. The transition adjustment to reclassify the amounts previously included in retained earnings to AOCI, is approximately $156 million. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 101 Starting with the fiscal year beginning July 1, 2018, changes in the fair value of IBRD’s financial liabilities that relate to IBRD’s own credit risk will be recognized in OCI as a Debit Valuation Adjustment (DVA) on Fair Value Option Elected Liabilities. The DVA on Fair Value Option Elected Liabilities will be 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. 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 current U.S. GAAP does not provide guidance. For IBRD, the ASU will be effective from the quarter ending September 30, 2018. IBRD has evaluated the ASU and its impact will be limited to the reclassification of certain items on the statement of cash flows, with no net impact on the financial statements. 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 IBRD, the ASU will be effective from the quarter ending September 30, 2018. IBRD has evaluated the ASU and determined that there will be no material impact on its financial statements. 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. For IBRD, this ASU will be effective from the quarter ending September 30, 2018. Implementation will result in a modification in the presentation of IBRD’s Statement of Income, with no impact on net income, as well as additional disclosures in the notes to the financial statements. Accounting Standards Under Evaluation: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU requires 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 ASU will be effective from the quarter ending September 30, 2019, with early adoption permitted. IBRD has identified the inventory of leases within the scope of this standard, and continues to evaluate the impact of the ASU on its financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU introduces 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 losses (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 ASU requires enhanced disclosures about credit quality and significant estimates and judgments used in estimating credit losses. For IBRD, the ASU will be effective beginning from the quarter ending September 30, 2020, with early adoption permitted. IBRD is currently evaluating the impact of this standard on its accumulated provision for losses on loans. 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 IBRD, the ASU will be effective from the quarter ending September 30, 2018, for contributions received and from the quarter ending September 30, 2019 for contributions made. IBRD is currently evaluating the impact of the ASU on its financial statements. 102 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 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 during the fiscal years ended June 30, 2018 and June 30, 2017: Authorized shares Subscribed shares As of June 30, 2016 2,307,600 2,182,854 General and Selective Capital Increase (GCI/SCI) - 46,490 As of June 30, 2017 2,307,600 2,229,344 GCI - 48,020 As of June 30, 2018 2,307,600 2,277,364 The following table provides a summary of the changes in subscribed capital, uncalled portion of subscriptions, and paid-in capital during the fiscal years ended June 30, 2018 and June 30, 2017: In millions of U.S. dollars Uncalled portion Subscribed capital of subscriptions Paid-in capital As of June 30, 2016 $ 263,329 (247,524) 15,805 GCI/SCI 5,608 (5,304) 304 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 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. The subscription period for the General Capital Increase agreed by shareholders in 2010 ended on March 16, 2018. Amounts to Maintain the Value of Currency Holdings The following table summarizes the amounts to maintain the value of currency holdings classified as components of equity at June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 MOV receivable $ (313) $ (369) Net Deferred MOV payable 157 110 Deferred demand obligations (130) (130) Deferred MOV payable (receivable) $ 27 $ (20) IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 103 NOTE C—INVESTMENTS As of June 30, 2018, IBRD’s investments include the liquid asset portfolio and, holdings relating to the PEBP, Advanced Market Commitment for Pneumococcal Vaccines Initiative (AMC), and PCRF. The composition of IBRD’s net investment portfolio as of June 30, 2018 and June 30, 2017 was as follows: In millions of U.S. dollars June 30, 2018 June 30, 2017 Net investment portfolio Liquid asset portfolio $ 71,579 $ 70,061 PEBP holdings 1,393 1,173 AMC holdings 250 232 PCRF holdings 270 201 Total $ 73,492 $ 71,667 Investments held by IBRD are designated as trading and are carried and reported at fair value, or at face value, which approximate fair value. As of June 30, 2018, the majority of Investments-Trading was comprised of government and agency obligations, and time deposits (41% and 52%, respectively), with all the instruments being classified as Level 1 or Level 2 within the fair value hierarchy. As of June 30, 2018, Japanese instruments represented the largest holding of a single counterparty, and amounted to 16% of Investments-Trading. Over 99% of IBRD’s investments were rated A and above, as of June 30, 2018. The majority of instruments in Investments-Trading are denominated in U.S. dollars, Japanese yen and Euro (48%, 16% and 12%, 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 0.16 years, and is predominantly denominated in US dollars (99%). A summary of IBRD’s Investments-Trading at June 30, 2018 and June 30, 2017, is as follows: In millions of U.S. dollars June 30, 2018 June 30, 2017 a Equity securities $ 672 $ 662 Government and agency obligations 29,610 38,820 Time deposits 37,763 28,639 ABS 3,962 4,398 Alternative investments b 345 233 Total $ 72,352 $ 72,752 a. Includes $295 million of investments in commingled funds at NAV, related to PEBP holdings ($235 million—June 30, 2017). b. Includes investments in hedge funds, private equity funds and real estate funds, related to PEBP holdings, at NAV. The following table summarizes the currency composition of IBRD’s Investments-Trading, at June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Carrying Average repricing Carrying Average repricing Currency Value (years) a Value (years) a Euro $ 9,026 0.29 $ 14,844 0.34 Japanese yen 11,902 0.16 15,134 0.18 U.S. dollar 34,775 0.22 28,508 0.26 Others 16,649 0.39 14,266 0.46 Total $ 72,352 0.26 $ 72,752 0.30 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. 104 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 IBRD manages its investments on a net portfolio basis. The following table summarizes IBRD’s net portfolio position as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Investments - Trading $ 72,352 $ 72,752 Securities purchased under resale agreements 217 221 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received (122) (373) Derivative assets Currency forward contracts 18,647 18,555 Currency swaps 19,308 24,004 Interest rate swaps 60 69 Swaptions, exchange traded options and futures contracts * 2 Other a - - Total 38,015 42,630 Derivative liabilities Currency forward contracts (18,358) (18,835) Currency swaps (18,894) (24,791) Interest rate swaps (43) (84) Swaptions, exchange traded options and futures contracts (3) (3) Other a - (*) Total (37,298) (43,713) Cash held in investment portfolio b 407 366 Receivable from investment securities traded 83 45 Payable for investment securities purchased c (162) (261) Net investment portfolio $ 73,492 $ 71,667 a. These relate to TBA securities. b. This amount is included in Unrestricted cash under Due from banks on the Balance Sheet. c. This amount includes $80 million of liabilities related to PCRF payable, which is included in Accounts payable and miscellaneous liabilities on the Balance Sheet ($56 million—June 30, 2017). * Indicates amount less than $0.5 million. The following table summarizes the currency composition of IBRD’s net investment portfolio at June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Carrying Average repricing Carrying Average repricing Currency Value (years) a Value (years) a U.S. dollar $ 72,664 0.16 $ 70,795 0.16 Others 828 1.36 872 0.19 Total $ 73,492 0.16 $ 71,667 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. As of June 30, 2018, there were $37 million of short sales included in Payable for investment securities purchased on the Balance Sheet ($38 million—June 30, 2017). These are reported at fair value on a recurring basis. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 105 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 as of June 30, 2018 and June 30, 2017. 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. 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 Equity securities $ 377 $ - $ - $ 672 a Government and agency obligations 14,403 15,207 - 29,610 Time deposits 2,147 35,616 - 37,763 ABS - 3,962 - 3,962 Alternative investments b - - - 345 Total Investments – Trading $ 16,927 $ 54,785 $ - $ 72,352 Securities purchased under resale agreements 41 176 217 Derivative assets-Investments Currency forward contracts - 18,647 - 18,647 Currency swaps - 19,308 - 19,308 Interest rate swaps - 60 - 60 Swaptions, exchange traded options and futures contracts * * - * Other c - - - - Total Derivative assets-Investments * 38,015 - 38,015 Total $ 16,968 $ 92,976 $ - $ 110,584 Liabilities: Securities sold under repurchase agreements and securities lent under securities lending agreements d $ - $ 30 $ - $ 30 Derivative liabilities-Investments Currency forward contracts - 18,358 - 18,358 Currency swaps - 18,894 - 18,894 Interest rate swaps - 43 - 43 Swaptions, exchange traded options and futures contracts 3 - - 3 Other c - - - - Total Derivative liabilities-Investments 3 37,295 - 37,298 Payable for investments securities purchased e 37 - - 37 Total $ 40 $ 37,325 $ - $ 37,365 a. Includes $295 million of commingled funds at NAV, related to PEBP holdings and not included in the fair value hierarchy. b. Investments at NAV related to PEBP holdings, not included in the fair value hierarchy. c. These relate to TBA securities. d. Excludes $92 million relating to payable for cash collateral received. e. This relates to short sales of investments securities. * Indicates amount less than $0.5 million. 106 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 In millions of U.S. dollars Fair Value Measurements on a Recurring Basis June 30, 2017 Level 1 Level 2 Level 3 Total Assets: Investments – Trading Equity securities $ 427 $ - $ - $ 662 a Government and agency obligations 24,236 14,584 - 38,820 Time deposits 2,290 26,349 - 28,639 ABS - 4,398 - 4,398 Alternative investments b - - - 233 Total Investments – Trading $ 26,953 $ 45,331 $ - $ 72,752 Securities purchased under resale agreements 21 200 221 Derivative assets-Investments Currency forward contracts - 18,555 - 18,555 Currency swaps - 24,004 - 24,004 Interest rate swaps - 69 - 69 Swaptions, exchange traded options and futures contracts * 2 - 2 Other c - - - - Total Derivative assets-Investments * 42,630 - 42,630 Total $ 26,974 $ 88,161 $ - $ 115,603 Liabilities: Securities sold under repurchase agreements and securities lent under securities lending agreements d $ - $ 21 $ - $ 21 Derivative liabilities-Investments Currency forward contracts - 18,835 - 18,835 Currency swaps - 24,791 - 24,791 Interest rate swaps - 84 - 84 Swaptions, exchange traded options and futures contracts 1 2 - 3 Other c - * - * Total Derivative liabilities-Investments 1 43,712 - 43,713 Payable for investments securities purchased e 38 - - 38 Total $ 39 $ 43,733 $ - $ 43,772 a. Includes $235 million of commingled funds at NAV, related to PEBP holdings and not included in the fair value hierarchy. b. Investments at NAV related to PEBP holdings, not included in the fair value hierarchy. c. These relate to TBA securities. d. Excludes $352 million relating to payable for cash collateral received. e. This relates to short sales of investments securities. * Indicates amount less than $0.5 million. As of June 30, 2018, and June 30, 2017, there were no transfers within 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 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 107 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. The following is a summary of the collateral received by IBRD in relation to swap transactions as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Collateral received Cash $ 92 $ 352 Securities 1,365 1,456 Total collateral received $ 1,457 $ 1,808 Collateral permitted to be repledged $ 1,457 $ 1,808 Amount of collateral repledged - - As of June 30, 2018, IBRD received total cash collateral of $92 million ($352 million—June 30, 2017), of which $31 million ($124 million—June 30, 2017) was invested in highly liquid instruments. 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, 2018, and June 30, 2017, 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: In millions of U.S. dollars June 30, 2018 June 30, 2017 Financial Statement Presentation Securities transferred under Included under Investments-Trading on the repurchase or securities lending $ 29 $ 20 Balance Sheet. agreements Included under Securities sold under Liabilities relating to securities repurchase agreements, securities lent transferred under repurchase or $ 30 $ 21 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, 2018, and June 30, 2017 there were no liabilities relating to securities transferred under repurchase or securities lending agreements that had not settled at that date. 108 IBRD FINANCIAL STATEMENTS: 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 or securities lending agreements that are accounted for as secured borrowings as of June 30, 2018 and June 30, 2017: 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 millions of U.S. dollars June 30, 2017 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 7 - 7 Total liabilities relating to securities transferred under $ 21 $ - $ 21 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, 2018 and June 30, 2017, there were no unsettled trades pertaining to securities purchased under resale agreements. For resale agreements, IBRD received securities with a fair value of $218 million ($220 million—June 30, 2017). As of June 30, 2018, and June 30, 2017, 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, 2018, 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, 2018, only loans with variable spread terms and fixed spread terms (including special development policy loans), were available for new commitments. As of June 30, 2018, 89% of IBRD’s loans carried variable interest rates. IBRD uses derivative contracts to manage the currency risk as well as repricing risk between its loans and borrowings. These derivatives are included under loan derivatives on the Balance Sheet. After considering the effects of these derivatives, the loan portfolio carried variable interest rates, with a weighted average interest rate of 2.55% as of June 30, 2018 (1.82%—June 30, 2017). 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 (20%). IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 109 As of June 30, 2018, only 0.2% of IBRD’s loans were in nonaccrual status and all were related to one borrower. The total provision for losses on accrual and nonaccrual loans accounted for 0.8% 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. A summary of IBRD’s loans outstanding by currency and by interest rate characteristics (fixed or variable) at June 30, 2018 and June 30, 2017 is as follows: In millions of U.S. dollars June 30, 2018 Euro Japanese yen U.S. dollars Others Loans Outstanding Total Fixed Variable Fixed Variable Fixed Variable Fixed Variable Fixed Variable Multicurrency terms a Amount $ 31 $ 7 $ 30 $ 5 $ 46 $ 405 $ - $ - $ 107 $ 417 $ 524 Weighted average rate (%) c 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 (%) c 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 (%) c 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 (%) c 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 In millions of U.S. dollars June 30, 2017 Euro Japanese yen U.S. dollars Others Loans Outstanding Total Fixed Variable Fixed Variable Fixed Variable Fixed Variable Fixed Variable Multicurrency terms a Amount $ 36 $ 7 $ 35 $ 5 $ 46 $ 405 $ - $ - $ 117 $ 417 $ 534 Weighted average rate (%) c 2.78 8.24 2.78 8.24 6.09 7.90 - - 4.09 7.91 7.07 Average Maturity (years) 4.62 - 4.62 - 2.84 - - - 3.92 - 0.86 Variable-spread terms Amount $ - $ 21,856 $ - $ 55 $ - $ 104,194 $ - $ 2,436 $ - $ 128,541 $ 128,541 Weighted average rate (%) c - 0.30 - 0.71 - 1.96 - 8.98 - 1.81 1.81 Average Maturity (years) - 10.63 - 4.33 - 9.83 - 10.34 - 9.97 9.97 Fixed-spread terms Amount $ 4,773 $ 7,706 $ 9 $ 199 $ 15,392 $ 21,165 b $ 576 $ 560 $ 20,750 $ 29,630 $ 50,380 Weighted average rate (%) c 3.59 0.57 2.28 0.53 4.07 2.09 7.96 6.46 4.07 1.77 2.72 Average maturity (years) 9.10 9.51 2.78 4.08 6.82 8.60 10.38 9.82 7.44 8.83 8.26 Loans Outstanding Amount $ 4,809 $ 29,569 $ 44 $ 259 $ 15,438 $ 125,764 $ 576 $ 2,996 $ 20,867 $ 158,588 $ 179,455 Weighted average rate (%) c 3.58 0.38 2.68 0.70 4.08 2.00 7.96 8.51 4.07 1.82 2.08 Average Maturity (years) 9.07 10.33 4.25 4.06 6.80 9.59 10.38 10.25 7.42 9.73 9.46 Loans Outstanding $ 179,455 Less accumulated provision for loan losses and deferred loan income 2,033 Net loans outstanding $ 177,422 a. Variable rates for multilateral loans are based on the weighted average cost of allocated debt. b. Includes loans to IFC. c. Excludes effects of any waivers of loan interest. 110 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 The maturity structure of IBRD’s loans at June 30, 2018 and June 30, 2017 is as follows: 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 In millions of U.S. dollars June 30, 2017 July 1, 2017 through July 1, 2018 through July 1, 2022 through Terms/Rate Type June 30, 2018 June 30, 2022 June 30, 2027 Thereafter Total Multicurrency terms Fixed $ 29 $ 44 $ 44 $ - $ 117 Variable 417 - - - 417 Variable-spread terms Fixed - - - - - Variable 5,083 25,764 37,183 60,511 128,541 Fixed-spread terms Fixed 2,926 5,823 5,267 6,734 20,750 Variable 2,274 7,389 8,543 11,424 29,630 All Loans Fixed 2,955 5,867 5,311 6,734 20,867 Variable 7,774 33,153 45,726 71,935 158,588 Total loans outstanding $ 10,729 $ 39,020 $ 51,037 $ 78,669 $ 179,455 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. 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. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 111 The following table provides an aging analysis of the loan portfolio as of June 30, 2018 and June 30, 2017: 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 a - - - - - - 185,154 185,154 Loans in nonaccrual status a - - - - 435 435 - 435 Total $ - $ - $ - $ - $ 435 $ 435 $ 185,154 $ 185,589 In millions of U.S. dollars June 30, 2017 Days past due Up to 45 46-60 61-90 91-180 Over 180 Total Past Due Current Total Risk Class Low $ - $ - $ - $ - $ - $ - $ 22,266 $ 22,266 Medium - - - - - - 76,008 76,008 High * - - - - * 80,746 80,746 Loans in accrual status a * - - - - * 179,020 179,020 Loans in nonaccrual status a - - - - 435 435 - 435 Total $ * $ - $ - $ - $ 435 $ 435 $ 179,020 $ 179,455 a. At amortized cost. * Indicates amount less than $0.5 million. 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. Probable losses comprise estimates of potential losses arising from default and nonpayment of principal amounts due, as well as present value losses. Delays in receiving loan payments result in present value losses to IBRD since it does not charge fees or additional interest on any overdue interest or 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 instrument’s contractual terms and the present value of its expected future cash flows. It is IBRD’s practice not to write off its 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. Notwithstanding IBRD’s historical experience, the risk of losses associated with nonpayment of principal amounts due is included in the accumulated provision for losses on loans and other exposures. 112 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 Changes to the Accumulated provision for losses on loans and other exposures for the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016 are summarized below: In millions of U.S. dollars June 30, 2018 June 30, 2017 June 30, 2016 Loans Other a Total Loans Other a Total Loans Other a Total Accumulated provision, beginning of the fiscal year $ 1,582 $ 89 $ 1,671 $ 1,571 $ 79 $ 1,650 $ 1,554 $ 39 $ 1,593 Provision - (release) charge (34) 3 (31) 2 9 11 17 40 57 Translation adjustment 5 * 5 9 1 10 * * * Accumulated provision, end of the fiscal year $ 1,553 $ 92 $ 1,645 $ 1,582 $ 89 $ 1,671 $ 1,571 $ 79 $ 1,650 Composed of accumulated provision for losses on: Loans in accrual status $ 1,336 $ 1,365 $ 1,349 Loans in nonaccrual status 217 217 222 Total $ 1,553 $ 1,582 $ 1,571 Loans, end of the fiscal year: Loans at amortized cost in accrual status $ 185,154 $ 179,020 $ 169,088 Loans at amortized cost in nonaccrual status 435 435 444 Loan at fair value in accrual status - - 123 Total $ 185,589 $ 179,455 $ 169,655 a. Provision does not include 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 – Client Operations Unrealized mark-to-market gains/losses derivatives on non-trading portfolios - Other, net At June 30, 2018, there were no principal or interest amounts on loans in accrual status that were overdue by more than three months. The following tables provide a summary of selected financial information related to loans in nonaccrual status as of and for the fiscal years ended June 30, 2018, and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Recorded investment in nonaccrual loans a $ 435 $ 435 Accumulated provision for loan losses on nonaccrual loans 217 217 Average recorded investment in nonaccrual loans for the fiscal year b 435 440 Overdue amounts of nonaccrual loans: 954 919 Principal 435 435 Interest and charges 519 484 a. A loan loss provision has been recorded against each of the loans in nonaccrual status. b. For the fiscal year ended June 30, 2016: $449 million. In millions of U.S. dollars 2018 2017 2016 Interest revenue not recognized as a result of loans being in nonaccrual status $ 35 $ 35 $ 35 During the fiscal years ended June 30, 2018 and June 30, 2017, no loans were placed into nonaccrual status or restored to accrual status. In addition, during the fiscal year ended June 30, 2018, no interest revenue was recognized on loans in nonaccrual status ($4 million—June 30, 2017 and $4 million—June 30, 2016). IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 113 Information relating to the sole borrowing member with loans or guarantees in nonaccrual status at June 30, 2018 follows: In millions of U.S. dollars Principal Principal, Interest and Nonaccrual Borrower Outstanding Charges Overdue Since Zimbabwe $ 435 $ 954 October 2000 Guarantees Guarantees of $6,357 million were outstanding at June 30, 2018 ($5,687 million—June 30, 2017). 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 2037. At June 30, 2018, liabilities related to IBRD's obligations under guarantees of $427 million ($402 million—June 30, 2017), have been included in Accounts payable and miscellaneous liabilities on the Balance Sheet. These include the accumulated provision for guarantee losses of $86 million ($80 million—June 30, 2017). During the fiscal years ended June 30, 2018 and June 30, 2017, 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 as of and for the fiscal years ended June 30, 2018 and June 30, 2017, is presented in the following table: In millions of U.S. dollars June 30, 2018 June 30, 2017 (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 $ 3,671 $ (251) $ (36) $ 3,682 $ (271) $ (40) Other liabilities Guarantee received b (3,672) 251 37 (3,683) 271 40 Other assets $ (1) $ - $ 1 $ (1) $ - $ * a. For the fiscal year ended June 30, 2018, Provisions for losses on loans and other exposures, line on the Statement of Income includes $4 million of release in provision relating to Guarantee provided ($1 million of release in provision —June 30,2017). b. For the fiscal year ended June 30, 2018, Other, net, line on the Statement of Income includes $3 million of reduction in recoverable asset relating to Guarantee received ($3 million of reduction in recoverable asset —June 30,2017). c. Notional amount, Stand ready obligation and Provision for the guarantee provided are included in guarantees outstanding of $6,357 million, obligations under guarantees of $427 million and accumulated provision for guarantee losses of $86 million, respectively ($5,687 million, $402 million and $80 million, respectively—June 30, 2017). * Indicates amount less than $0.5 million. 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. The reduction in net income for the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016 resulting from waivers of loan charges, is summarized in the following table: In millions of U.S. dollars 2018 2017 2016 Interest waivers $ 55 $ 67 $ 83 Commitment charge waivers * 1 2 Front-end fee waivers 10 12 15 Total $ 65 $ 80 $ 100 * Indicates amount less than $0.5 million. 114 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 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. Loan revenue comprises interest, commitment fees, loan origination fees and prepayment premia, net of waivers. For the fiscal year ended June 30, 2018, loans to one country individually generated in excess of 10 percent of loan revenue; this amounted to $460 million. The following table presents IBRD’s loan revenue and associated outstanding loan balances, by geographic region, as of and for the fiscal years ended June 30, 2018 and June 30, 2017: In millions of U.S. dollars 2018 2017 Region Loans Outstanding Loan Revenue b Loans Outstanding Loan Revenue b Africa $ 4,577 $ 269 $ 4,129 $ 227 East Asia and Pacific 39,511 977 37,792 750 Europe and Central Asia 46,522 658 44,888 523 Latin America and the Caribbean 56,693 1,576 57,325 1,342 Middle East and North Africa 23,272 449 20,621 290 South Asia 15,014 329 14,504 240 Other a - * 196 2 Total $ 185,589 $ 4,258 $ 179,455 $ 3,374 a. Represents loans to IFC, an affiliated organization. b. Does not include interest expenses, net of $656 million from loan related derivatives ($725 million—June 30, 2017). Includes commitment charges of $87 million ($70 million—June 30, 2017). * Indicates amount less than $0.5 million. Fair Value Disclosures There were no loans carried at fair value during the fiscal year ended June 30, 2018. During the fiscal year ended June 30, 2017 the loan carried at fair value was repaid. As IBRD’s loans are not traded, the yield that was used as a key input to determine the fair value of this loan was not observable. An increase (decrease) in the yield would have resulted in a decrease (increase) in the fair value of the loan. The following table provides a summary of changes in the fair value of IBRD’s Level 3 loan during the fiscal year ended June 30, 2018 and June 30, 2017. In millions of U.S. dollars 2018 2017 Beginning of the fiscal year $ - $ 123 Total realized/unrealized mark-to-market gains (losses) in: Net income - 7 Other comprehensive income - 10 Repayments - (140) End of the fiscal year $ - $ - Information on unrealized mark-to-market gains or losses, relating to IBRD’s Level 3 loan, included in revenue, for the fiscal years ended June 30, 2018, June 30, 2017, and June 30, 2016, as well as where those amounts are included in Statement of Income, is presented in the following table: In millions of U.S. dollars Unrealized mark-to-market gains 2018 2017 2016 Statement of Income line Unrealized mark-to-market (losses) gains on non-trading portfolios, net $ - $ 1 $ 1 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 115 The table below presents the fair value of all IBRD’s loans, along with their respective carrying amounts as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Carrying Value Fair Value Carrying Value Fair Value Net loans outstanding $ 183,588 $ 186,650 $ 177,422 $ 181,149 Valuation Methods and Assumptions 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 does not currently sell its loans. As of June 30, 2018 and June 30, 2017, all loans are carried at amortized cost. For disclosure, the fair value of these loans is calculated using a discounted cash flow method. This method incorporates CDS spreads for each borrower, and basis adjustments are applied to market recovery levels to reflect IBRD’s recovery experience. Under IBRD’s loan agreements borrowers are required to pay interest but in the event that an interest rate formula yields a negative rate, the interest rate is fixed at zero. IBRD’s loans would be classified as Level 3 within the fair value hierarchy. 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, 2018, 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 US dollars, Euro, Australian dollars and pounds sterling (70%, 8%, 6% and 4%, 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 1.82% as of June 30, 2018 (1.15% as of June 30, 2017). The following table summarizes IBRD’s borrowing portfolio after derivatives as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Borrowings a $ 208,009 $ 205,942 Currency swaps, net 3,737 1,915 Interest rate swaps, net 1,906 (713) $ 213,652 $ 207,144 a. Includes $126 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 ($671 million—June 30, 2017). 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 at June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 WAC a (%) June 30, 2017 WAC a (%) Fixed $ 165,051 2.24 $ 168,858 2.09 Variable 44,490 2.45 35,729 1.78 Borrowings b $ 209,541 2.29 % $ 204,587 2.04 % Fair Value Adjustment (1,532) 1,355 Borrowings at fair value $ 208,009 $ 205,942 a. WAC refers to weighted average cost. b. At amortized cost. 116 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 At June 30, 2018 and June 30, 2017, the currency composition of debt in IBRD’s borrowings portfolio before derivatives was as follows: June 30, 2018 June 30, 2017 U.S. Dollar 69.5 % 70.5 % Euro 7.9 7.8 Australian dollar 6.0 6.3 Pound Sterling 3.9 3.2 New Zealand dollar 2.6 2.9 Japanese yen 1.6 1.6 Others 8.5 7.7 100.0 % 100.0 % The maturity structure of IBRD’s borrowings outstanding at June 30, 2018 and June 30, 2017 was as follows: In millions of U.S. dollars June 30, 2018 June 30, 2017 Less than 1 year $ 44,867 $ 38,936 Between 1-2 years 39,680 31,272 2-3 years 39,702 36,702 3-4 years 27,528 32,288 4-5 years 14,350 25,221 Thereafter 41,882 41,523 $ 208,009 $ 205,942 IBRD’s borrowings have original maturities ranging from 5 days to 50 years, with the final maturity in 2068. Fair Value Disclosures IBRD’s fair value hierarchy for borrowings measured at fair value on a recurring basis as of June 30, 2018 and June 30, 2017 is as follows: In millions of U.S. dollars June 30, 2018 June 30, 2017 Level 1 $ - $ - Level 2 203,603 203,664 Level 3 4,406 2,278 $ 208,009 $ 205,942 The following table provides a summary of changes in the fair value of IBRD’s Level 3 borrowings during the fiscal years ended June 30, 2018 and June 30, 2017: In millions of U.S. dollars 2018 2017 Beginning of the fiscal year $ 2,278 $ 2,791 Total realized/unrealized mark-to-market (gains) losses in: Net income (189) 139 Other comprehensive income 2 (46) Issuances 2,481 326 Settlements (407) (277) Transfers into (out of), net 241 (655) End of the fiscal year $ 4,406 $ 2,278 The following table provides information on the unrealized mark-to-market gains or losses included in the statement of income for the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016, relating to IBRD’s Level 3 borrowings still held at June 30, 2018, June 30, 2017 and June 30, 2016, as well as where those amounts are included in the Statement of Income. In millions of U.S. dollars Unrealized mark-to-market gains (losses) 2018 2017 2016 Statement of Income Unrealized mark-to-market (losses) gains on non-trading portfolios, net $ 473 $ (71) $ 123 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 117 The following table provides information on the unrealized mark-to-market gains or losses included in the Statement of Income for the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016 relating to IBRD’s borrowings held at June 30, 2018, June 30, 2017 and June 30, 2016, as well as where those amounts are included in the Statement of Income. In millions of U.S. dollars Unrealized mark-to-market gains (losses) 2018 2017 2016 Statement of Income Unrealized mark-to-market (losses) gains on non-trading portfolios, net $ 3,070 $ 4,558 $ (1,735) During the fiscal years ended June 30, 2018, and June 30, 2017, IBRD’s credit spreads tightened. The estimated financial effects on the fair value of the debt issued and outstanding were unrealized mark-to-market losses of $652 million and $830 million respectively. These amounts were determined using observable changes in IBRD’s credit spreads. IBRD’s Level 3 borrowings primarily relate to structured bonds. The fair value of these bonds 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 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 change 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, 2018, and June 30, 2017 the interest rate volatilities for certain currencies were extrapolated for certain tenors and, thus, are considered an unobservable input. 118 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 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. Level 3 instruments represent 2% of IBRD’s borrowings as of June 30, 2018. In millions of U.S. dollars Fair Value at Fair Value at Valuation Range (average), Range (average), Portfolio Unobservable input June 30, 2018 June 30, 2017 technique June 30, 2018 June 30, 2017 Discounted Correlations -34% to 73% (10%) -43% to 77% (10%) Borrowings $4,406 $2,278 Cash Flow Interest rate volatilities 18% to 34% (29%) 15% to 36% (29%) The table below provides the details of all inter-level transfers for the fiscal years ended June 30, 2018 and June 30, 2017. Transfers between Level 2 and Level 3 are due to changes in price transparency. In millions of U.S. dollars June 30, 2018 June 30, 2017 Level 2 Level 3 Level 2 Level 3 Borrowings Transfer into (out of) $ 84 $ (84) $ 655 $ (655) Transfer (out of) into (325) 325 - - $ (241) $ 241 $ 655 $ (655) Presented below is the difference between the aggregate fair value and aggregate contractual principal balance of borrowings: In millions of U.S. dollars Principal Amount Due Fair Value Upon Maturity Difference June 30, 2018 $ 208,009 $ 216,458 $ (8,449) June 30, 2017 $ 205,942 $ 211,364 $ (5,422) 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 swaps, interest rate swaps, currency forward contracts, 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 the duration of IBRD’s Other assets/liabilities Currency swaps, and interest rate swaps equity (equity management) Other purposes: Client operations Currency swaps, currency forward Assist clients in managing risks contracts, and interest rate swaps IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 119 IBRD engages in an equity management strategy, which employs interest rate swaps to manage the duration of its equity. As of June 30, 2018, the duration of IBRD’s equity was 2.9 years (3.1 years—June 30, 2017). 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. The guidance in FAS 133, Accounting for Derivative Instruments and Hedging Activities requires that derivative instruments be recorded on the balance sheet at fair value. IBRD has elected not to designate any qualifying hedging relationships for accounting purposes. Rather, all derivative instruments are marked to fair value, with the changes in fair value recognized in net income. While IBRD believes that its hedging strategies achieve its objectives, the application of qualifying hedging criteria for accounting purposes would not appropriately reflect IBRD’s risk management strategies. The presentation of IBRD’s derivatives is based on the manner in which they are settled. Interest rate swaps are settled on a net basis and are, therefore, presented on a net basis. Currency swaps are settled on a gross basis and are, therefore, presented on a gross basis. The following table provides information on the fair value amounts and the location of the derivative instruments on the Balance Sheet as of June 30, 2018 and June 30, 2017. Fair value of derivative instruments on the Balance Sheet: In millions of U.S. dollars Location on the Balance Sheet Derivative Assets Derivative Liabilities June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 Derivatives not designated as hedging instruments Swaptions, exchange traded options and futures contracts – Investment-Trading $ * $ 2 $ 3 $ 3 Interest rate swaps 4,691 5,216 7,852 5,846 Currency swaps a 137,025 144,894 139,241 147,280 Other b - - - * Total derivatives $ 141,716 $ 150,112 $ 147,096 $ 153,129 a. Includes currency forward contracts and structured swaps. b. These relate to TBA securities. * Indicates amount less than $0.5 million 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. 120 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 The following table summarizes information on derivative assets and liabilities (before and after netting adjustments) that are reflected on IBRD’s Balance Sheet as of June 30, 2018 and June 30, 2017. 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. In millions of U.S. dollars June 30, 2018 Location on the Balance Sheet Derivative Assets Derivative Liabilities Gross Amounts Gross Amounts Net Amounts Gross Amounts Gross Amounts Net Amounts Recognized Offset Presented Recognized Offset Presented Interest rate swaps $ 18,665 $ (13,974) $ 4,691 $ 37,482 $ (29,630) $ 7,852 Currency swaps a 137,025 - 137,025 139,241 - 139,241 Other b * - * 3 - 3 Total $ 155,690 $ (13,974) $ 141,716 $ 176,726 $ (29,630) $ 147,096 Amounts subject to legally enforceable (139,164) (139,164) master netting agreements c Net derivative positions at 2,552 7,932 counterparty level before collateral Less: Cash collateral received d 92 Securities collateral 1,006 received d Net derivative exposure after $ 1,454 collateral a. Includes currency forward contracts and structured swaps. b. These relate to swaptions, exchange traded options, futures contracts and TBA securities. c. Not offset on the Balance Sheet. d. Does not include excess collateral received. * Indicates amount less than $0.5 million. In millions of U.S. dollars June 30, 2017 Location on the Balance Sheet Derivative Assets Derivative Liabilities Gross Amounts Gross Amounts Net Amounts Gross Amounts Gross Amounts Net Amounts Recognized Offset Presented Recognized Offset Presented Interest rate swaps $ 21,061 $ (15,845) $ 5,216 $ 29,511 $ (23,665) $ 5,846 Currency swaps a 144,894 - 144,894 147,280 - 147,280 Other b 2 - 2 5 (2) 3 Total $ 165,957 $ (15,845) $ 150,112 $ 176,796 $ (23,667) $ 153,129 Amounts subject to legally enforceable master netting agreements c (146,946) (146,946) Net derivative positions at counterparty level before collateral 3,166 6,183 Less: Cash collateral received d 304 Securities collateral received d 1,015 Net derivative exposure after collateral $ 1,847 a. Includes currency forward contracts and structured swaps. b. These relate to swaptions, exchange traded options, futures contracts and TBA securities. c. Not offset on the Balance Sheet. d. Does not include excess collateral received. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 121 The following table provides information about the notional amounts and credit risk exposures, of IBRD’s derivative instruments as of June 30, 2018 and June 30, 2017: Notional amounts and credit risk exposure of the derivative instruments: In millions of U.S. dollars June 30, 2018 June 30, 2017 Type of contract Investments - Trading Interest rate swaps Notional principal $ 3,723 $ 7,395 Credit exposure 60 69 Currency swaps (including currency forward contracts) Credit exposure 823 203 Swaptions, exchange traded options and futures contracts a Notional long position 998 2,728 Notional short position 42 5,276 Credit exposure * 2 Other derivatives b Notional long position - 28 Notional short position - - Credit exposure - - Loans Interest rate swaps Notional principal 23,410 24,865 Credit exposure 305 95 Currency swaps Credit exposure 837 687 Client operations Interest rate swaps Notional principal 19,029 20,053 Credit exposure 673 1,155 Currency swaps Credit exposure 1,065 1,186 Borrowings Interest rate swaps Notional principal 237,174 240,336 Credit exposure 2,511 3,207 Currency swaps Credit exposure 4,002 5,199 Other derivatives Interest rate swaps Notional principal 157,234 153,870 Credit exposure 1,142 690 Currency swaps Credit exposure - 9 Total credit exposure Interest rate swaps 4,691 5,216 Currency swaps (including currency forward contracts) 6,727 7,284 Swaptions, exchange traded options and futures contracts a * 2 Other derivatives b - - Total exposure 11,418 12,502 a. 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. b. These relate to TBA securities. * Indicates amount less than $0.5 million. 122 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 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, 2018 was $7,791 million ($6,083 million—June 30, 2017). 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, 2018, the amount of collateral that would need to be posted would be $3,986 million ($2,463 million—June 30, 2017). Subsequent triggers of contingent features would require posting of additional collateral, up to a maximum of $7,791 million as of June 30, 2018 ($6,083 million—June 30, 2017). In contrast, IBRD received collateral totaling $1,457 million as of June 30, 2018 ($1,808 million—June 30, 2017) 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 during the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016, and their location on the Statement of Income: In millions of U.S. dollars Derivatives not designated as hedging Statement of Income line Unrealized mark-to-market (losses) gains instruments, and not held in a trading portfolio a 2018 2017 2016 Interest rate swaps Loans, Equity management, $ (2,482) $ (4,116) $ 1,974 Currency swaps (including currency Borrowings, and Other, net forward contracts and structured swaps) (854) (856) 458 Total $ (3,336) $ (4,972) $ 2,432 a. For alternative disclosures about trading derivatives, see the following table. 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 during the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016: In millions of U.S. dollars Statement of Income line Unrealized mark-to-market gains (losses) on Investments-Trading portfolio a 2018 2017 2016 Type of instrument Fixed income (including associated derivatives) $ 449 $ 241 $ (20) Equity 33 50 (11) $ 482 $ 291 $ (31) a. Amounts associated with each type of instrument include gains and losses on both derivative instruments and non-derivative instruments. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 123 Fair Value Disclosures IBRD’s fair value hierarchy for derivative assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 and June 30, 2017 is as follows: 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: Investments Currency forward contracts $ - $ 18,647 $ - $ 18,647 Currency swaps - 19,308 - 19,308 Interest rate swaps - 60 - 60 Swaptions, exchange traded options and futures contracts * * - * Other a - - - - * 38,015 - 38,015 Loans Currency swaps - 4,461 233 4,694 Interest rate swaps - 305 - 305 - 4,766 233 4,999 Client operations Currency swaps - 16,369 - 16,369 Interest rate swaps - 672 1 673 - 17,041 1 17,042 Borrowings Currency swaps - 76,643 1,364 78,007 Interest rate swaps - 2,469 42 2,511 - 79,112 1,406 80,518 Others Currency swaps - - - - Interest rate swaps - 1,142 - 1,142 - 1,142 - 1,142 Total derivative assets $ * $ 140,076 $ 1,640 $ 141,716 Derivative Liabilities: Investments Currency forward contracts $ - $ 18,358 $ - $ 18,358 Currency swaps - 18,894 - 18,894 Interest rate swaps - 43 - 43 Swaptions, exchange traded options and futures contracts 3 - - 3 Other a - - - - 3 37,295 - 37,298 Loans Currency swaps - 3,642 239 3,881 Interest rate swaps - 1,126 - 1,126 - 4,768 239 5,007 Client operations Currency swaps - 16,364 - 16,364 Interest rate swaps - 674 31 705 - 17,038 31 17,069 Borrowings Currency swaps - 80,280 1,464 81,744 Interest rate swaps - 4,207 210 4,417 - 84,487 1,674 86,161 Others Currency swaps - - - - Interest rate swaps - 1,561 - 1,561 - 1,561 - 1,561 Total derivative liabilities $ 3 $ 145,149 $ 1,944 $ 147,096 a.These relate to TBA securities. * Indicates amount less than $0.5 million. 124 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 In millions of U.S. dollars Fair Value Measurements on a Recurring Basis June 30, 2017 Level 1 Level 2 Level 3 Total Derivative Assets: Investments Currency forward contracts $ - $ 18,555 $ - $ 18,555 Currency swaps - 24,004 - 24,004 Interest rate swaps - 69 - 69 Swaptions, exchange traded options and futures contracts * 2 - 2 Other a - - - - * 42,630 - 42,630 Loans Currency swaps - 4,272 236 4,508 Interest rate swaps - 95 - 95 - 4,367 236 4,603 Client operations Currency swaps - 21,687 - 21,687 Interest rate swaps - 1,155 - 1,155 - 22,842 - 22,842 Borrowings Currency swaps - 74,387 1,230 75,617 Interest rate swaps - 3,169 38 3,207 - 77,556 1,268 78,824 Others Currency swaps - 523 - 523 Interest rate swaps - 690 - 690 - 1,213 - 1,213 Total derivative assets $ * $ 148,608 $ 1,504 $ 150,112 Derivative Liabilities: Investments Currency forward contracts $ - $ 18,835 $ - $ 18,835 Currency swaps - 24,791 - 24,791 Interest rate swaps - 84 - 84 Swaptions, exchange traded options and futures contracts 1 2 - 3 Other a - * - * 1 43,712 - 43,713 Loans Currency swaps - 3,657 238 3,895 Interest rate swaps - 1,817 - 1,817 - 5,474 238 5,712 Client operations Currency swaps - 21,679 - 21,679 Interest rate swaps - 1,161 26 1,187 - 22,840 26 22,866 Borrowings Currency swaps - 76,337 1,195 77,532 Interest rate swaps - 2,374 120 2,494 - 78,711 1,315 80,026 Others Currency swaps - 548 - 548 Interest rate swaps - 264 - 264 - 812 - 812 Total derivative liabilities $ 1 $ 151,549 $ 1,579 $ 153,129 a.These relate to TBA securities. * Indicates amount less than $0.5 million. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 125 The following tables provide a summary of changes in the fair value of IBRD’s Level 3 derivatives, net during the fiscal years ended June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Currency Interest rate Currency Interest rate swaps swaps Total swaps swaps Total Beginning of the fiscal year $ 33 $ (108) $ (75) $ 165 $ (97) $ 68 Total realized/unrealized mark-to-market (losses) gains in: Net income (137) (123) (260) (11) 44 33 Other comprehensive income (9) 1 (8) (60) (2) (62) Issuances (12) (145) (157) (1) (2) (3) Settlements 1 178 179 (17) 3 (14) Transfers, net 18 (1) 17 (43) (54) (97) End of the fiscal year $ (106) $ (198) $ (304) $ 33 $ (108) $ (75) Unrealized mark-to-market gains or losses included in revenue for the fiscal years ended June 30, 2018, June 30, 2017, and June 30, 2016 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: In millions of U.S. dollars Unrealized mark-to-market gains (losses) 2018 2017 2016 Statement of Income Location Unrealized mark-to-market (losses) gains on non-trading portfolios, net $ (460) $ 8 $ (89) The table below provides the details of all inter-level transfers during the fiscal years ended June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Level 2 Level 3 Level 2 Level 3 Derivative assets, net Transfer into (out of) $ 154 $ (154) $ 292 $ (292) Transfer (out of) into (5) 5 - - 149 (149) 292 (292) Derivative liabilities, net Transfer (into) out of $ (172) $ 172 $ (195) $ 195 Transfer out of (into) 6 (6) - - (166) 166 (195) 195 Transfers, net $ (17) $ 17 $ 97 $ (97) Transfers between Level 2 to Level 3 are due to changes in price transparency. 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. See Note E—Borrowings for details on these unobservable inputs. 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. In millions of U.S. dollars Fair Value at Fair Value at Valuation Range (average), Range (average), Portfolio June 30, 2018 June 30, 2017 Technique Unobservable input June 30, 2018 June 30, 2017 Currency swaps, Correlations -34% to 73% (10%) -43% to 77% (10%) Discounted interest rate $ (304) $ (75) Cash Flow Interest rate swaps 18% to 34% (29%) 15% to 36% (29%) volatilities 126 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 NOTE G—RETAINED EARNINGS, ALLOCATIONS AND TRANSFERS The changes in the components of Retained Earnings for each of the fiscal years from June 30, 2015 to June 30, 2018, are summarized below: In millions of US dollars Cumulative Unallocated Restricted Special General Pension Fair Value Net Income Retained Reserve Reserve c Reserve Surplus Adjustments (Loss) a Earnings c Total As of June 30, 2015 $ 293 26,889 1,017 326 (977) (71) 24 $ 27,501 Net income allocation a - 36 (55) - (702) 721 (*) - Board of Governors- approved transfers funded from Surplus and other transfers b - - - (55) - 55 - - Net income for the year - - - - - 495 - 495 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 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 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 3, 2017, IBRD’s Executive Directors approved the following adjustments and allocations relating to the net income earned in the fiscal year ended June 30, 2017, to arrive at allocable income for that fiscal year: • $419 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 $497 million related to Board of Governors-approved transfers approved in the fiscal year ended June 30, 2017, to reported Net Income to arrive at allocable income. These transfers relate to income earned in prior fiscal years. • $672 million increase in the General Reserve. • $128 million decrease in the Pension Reserve. On September 8, 2017, IBRD’s Board of Governors approved a transfer of $55 million from Surplus to the Trust Fund for Gaza and West Bank. The transfer was made on October 9, 2017. On October 13, 2017, IBRD’s Board of Governors approved a transfer to IDA of $123 million out of the net income earned in the fiscal year ended June 30, 2017. The transfer to IDA was made on October 24, 2017. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 127 Transfers approved during the fiscal years ended June 30, 2018, June 30, 2017, and June 30, 2016, are included in the following table. In millions of U.S. dollars Transfers funded from: 2018 2017 2016 Unallocated Net Income: IDA $ 123 $ 497 $ 650 Surplus: Trust fund for Gaza and West Bank 55 - 55 Total $ 178 $ 497 $ 705 There were no amounts payable for the transfers approved by the Board of Governors at June 30, 2018, and at June 30, 2017. 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). At June 30, 2018 and June 30, 2017, IBRD had the following receivables from (payables to) its affiliated organizations. In millions of U.S. dollars June 30, 2018 June 30, 2017 IDA IFC MIGA Total IDA IFC MIGA Total Loans $ - $ - $ - $ - $ - $ 196 $ - $ 196 Administrative Services 339 41 12 392 368 53 12 433 Derivative Transactions a Receivable 4,284 - - 4,284 6,559 - - 6,559 Payable (4,531) - - (4,531) (6,717) - - (6,717) Pension and Other Postretirement Benefits (676) (352) (13) (1,041) (695) (289) (11) (995) Investments - (80) - (80) - (56) - (56) $ (584) $ (391) $ (1) $ (976) $ (485) $ (96) $ 1 $ (580) a. For details on derivative transactions relating to swap intermediation services provided by IBRD to IDA see Note F—Derivative Instruments. 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 Receivables (payables) for derivative transactions Derivative assets/liabilities – Client operations 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 On July 5, 2012, the Executive Directors approved for IBRD to lend up to $197 million to IFC. This loan was repaid in August 2017. In addition, IBRD has a Local Currency Loan Facility Agreement with IFC, which is capped at $300 million. As of June 30, 2018, there were no loans outstanding under this facility. 128 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 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, 2018, assets related to IBRD’s right to be indemnified under this agreement amounted to $2 million ($2 million—June 30, 2017), while liabilities related to IBRD’s obligation under this agreement amounted to $2 million ($2 million—June 30, 2017). These include an accumulated provision for guarantee losses of $1 million ($1 million—June 30, 2017). 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, 2018, IBRD’s administrative expenses are net of the share of expenses allocated to IDA of $1,745 million ($1,746 million—fiscal year ended June 30, 2017, and $1,425 million—fiscal year ended June 30, 2016). Other 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, 2018, IBRD’s other revenue is net of revenue allocated to IDA of $281 million ($247 million—fiscal year ended June 30, 2017, and $229 million—fiscal year ended June 30, 2016). For the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016, 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: In millions of U.S. dollars 2018 2017 2016 Fees charged to IFC $ 66 $ 68 $ 72 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. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 129 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. The following table summarizes the expenses pertaining to IBRD-executed trust funds during the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016: In millions of U.S. dollars 2018 2017 2016 IBRD-executed trust fund expenses $ 595 $ 542 $ 515 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 as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars 2018 2017 IBRD-executed trust funds $ 598 $ 608 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 During the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016, IBRD’s revenues for the administration of trust fund operations were as follows: In millions of U.S. dollars 2018 2017 2016 Revenues $ 48 $ 47 $ 51 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 $63 million at June 30, 2018 ($64 million—June 30, 2017) 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, 2018, fee revenue from investment management activities totaling $28 million ($27 million—June 30, 2017 and $27 million—June 30, 2016) is included in Revenue from externally funded activities on the Statement of Income. Other Services Donors to AMC have provided IBRD with commitments to give $1.5 billion over a 10-year period, 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. 130 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 As of June 30, 2018, investments and receivables from donors relating to AMC had a net carrying value of $346 million ($309 million—June 30, 2017). Amounts relating to investments totaled $250 million ($232 million—as of June 30, 2017) 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 $1 million ($1 million—June 30, 2017 and $2 million—June 30, 2016) is included in Other noninterest 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). NOTE J—PENSION AND OTHER POSTRETIREMENT BENEFITS IBRD, IFC and MIGA participate in an SRP, a Retired Staff Benefits Plan and Trust (RSBP) and a 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, 2018, the SRP and RSBP were underfunded by $460 million and $100 million, respectively. The PEBP, after reflecting IBRD and IDA’s share of assets which are included in the IBRD’s investment portfolio ($1,028 million), was underfunded by $750 million. The following table summarizes the benefit costs associated with the SRP, RSBP, and PEBP for IBRD and IDA for the fiscal years ended June 30, 2018, June 30, 2017, and June 30, 2016: In millions of U.S. dollars SRP RSBP PEBP 2018 2017 2016 2018 2017 2016 2018 2017 2016 Benefit Cost Service cost $ 456 $ 472 $ 393 $ 123 $ 130 $ 105 $ 79 $ 74 $ 59 Interest cost 649 604 662 113 108 112 59 51 49 Expected return on plan assets (901) (857) (933) (142) (131) (139) - - - Amortization of unrecognized prior service costs a 4 4 4 17 17 16 3 3 3 Amortization of unrecognized net actuarial losses a 76 260 75 - 24 - 58 61 40 Net periodic pension cost b $ 284 $ 483 $ 201 $ 111 $ 148 $ 94 $ 199 $ 189 $ 151 of which: IBRD’s share b $ 130 $ 232 $ 104 $ 51 $ 71 $ 49 $ 91 $ 91 $ 78 IDA’s share $ 154 $ 251 $ 97 $ 60 $ 77 $ 45 $ 108 $ 98 $ 73 2018 2017 2016 Net periodic pension cost (all three plans combined) IBRD’s share $ 272 $ 394 $ 231 IDA’s share $ 322 $ 426 $ 215 a. Included in Amounts reclassified into net income in Note K—Comprehensive Income. b. Included in Pension expenses in the Statement of Income. 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). IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 131 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 for the fiscal years ended June 30, 2018, and June 30, 2017. 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. In millions of U.S. dollars SRP RSBP PEBP 2018 2017 2018 2017 2018 2017 Projected Benefit Obligations Beginning of year $ 17,741 $ 18,036 $ 2,939 $ 3,009 $ 1,592 $ 1,474 Service cost 456 472 123 130 79 74 Interest cost 649 604 113 108 59 51 Participant contributions 156 147 25 24 10 13 Federal subsidy received n.a. n.a. - * n.a. n.a. Plan amendments - - - - - - Benefits paid (671) (637) (87) (87) (39) (37) Actuarial loss (gain) 98 (881) (176) (245) 77 17 End of year 18,429 17,741 2,937 2,939 1,778 1,592 Fair value of plan assets Beginning of year 16,756 15,235 2,593 2,297 Participant contributions 156 147 25 24 Actual return on assets 1,507 1,795 236 282 Employer contributions 221 216 70 77 Benefits paid (671) (637) (87) (87) End of year 17,969 16,756 2,837 2,593 Funded Status a $ (460) $ (985) $ (100) $ (346) $ (1,778) $ (1,592) Accumulated Benefit Obligations $ 17,110 $ 16,404 $ 2,937 $ 2,939 $ 1,541 $ 1,369 a. Negative funded status is included in Liabilities under retirement benefits plans, on the Balance Sheet. * Indicates amount less than $0.5 million. During the fiscal years ended June 30, 2018 and June 30, 2017, there were no amendments made to the retirement benefit plans. The following tables present the amounts included in Accumulated Other Comprehensive Income (Loss) relating to Pension and Other Postretirement Benefits. Amounts included in Accumulated Other Comprehensive Loss (Income) 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 Amounts included in Accumulated Other Comprehensive Loss at June 30, 2017 In millions of U.S. dollars SRP RSBP PEBP Total Net actuarial loss $ 2,460 $ 147 $ 650 $ 3,257 Prior service cost 24 112 24 160 Net amount recognized in Accumulated Other Comprehensive Loss $ 2,484 $ 259 $ 674 $ 3,417 The estimated amounts that will be amortized from Accumulated Other Comprehensive Loss into net periodic benefit cost in the fiscal year ending June 30, 2019 are as follows: In millions of U.S. dollars SRP RSBP PEBP Total Net actuarial loss $ 21 $ - $ 65 $ 86 Prior service cost 3 17 3 23 Net amount recognized in Accumulated Other Comprehensive Loss $ 24 $ 17 $ 68 $ 109 132 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 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, 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. The following tables present the weighted-average assumptions used in determining the projected benefit obligations and the net periodic pension costs for the fiscal years ended June 30, 2018, June 30, 2017, and June 30, 2016: Weighted average assumptions used to determine projected benefit obligations In percent, except years SRP RSBP PEBP 2018 2017 2016 2018 2017 2016 2018 2017 2016 Discount rate 4.10 3.70 3.40 4.10 3.90 3.60 4.10 3.80 3.50 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 Weighted average assumptions used to determine net periodic pension cost In percent, except years SRP RSBP PEBP 2018 2017 2016 2018 2017 2016 2018 2017 2016 Discount rate 3.70 3.40 4.30 3.90 3.60 4.50 3.80 3.50 4.40 Expected return on plan assets 5.50 5.70 6.20 5.50 5.70 6.20 Rate of compensation increase 5.20 5.30 5.40 5.20 5.30 5.40 Health care growth rates -at end of fiscal year 5.50 5.30 4.90 Ultimate health care growth rate 4.00 4.00 4.10 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: In millions of U.S. dollars One percentage point increase One percentage point decrease Effect on total service and interest cost $ 81 $ (55) Effect on postretirement benefit obligation $ 624 $ (482) 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 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 133 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. The following table presents the policy asset allocation at June 30, 2018 and the actual asset allocation at June 30, 2018 and June 30, 2017 by asset category for the SRP and RSBP: In percent SRP RSBP Policy allocation Actual Allocation (%) Policy allocation Actual Allocation (%) Asset class 2018 (%) 2018 2017 2018 (%) 2018 2017 Fixed income and Cash 26 19 19 26 20 21 Public equity 33 31 35 33 30 34 Private equity 20 19 17 20 21 19 Market neutral hedge funds 8 11 11 8 10 10 Real assets a 13 14 14 13 13 12 Other b - 6 4 - 6 4 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. More recently, 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, 2018, the largest exposure to a single counterparty was 7% and 5% 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 and consideration of the characteristics of the liabilities are central to the overall investment strategy and risk management approach for the SRP. 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 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, is 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. 134 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 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 as of June 30, 2018 and June 30, 2017: 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 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 - - - 4,238 - - - 729 Real estate (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. In millions of U.S. dollars June 30, 2017 SRP RSBP Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Debt securities Time deposits $ 11 $ - $ - $ 11 $ 11 $ - $ - $ 11 Securities purchased under resale agreements 144 - - 144 37 - - 37 Government and agency securities 1,901 463 - 2,364 335 103 - 438 Corporate and convertible bonds - 337 - 337 - 53 - 53 ABS - 178 - 178 - 27 - 27 Mortgage backed securities - 230 - 230 - 34 - 34 Total debt securities 2,056 1,208 - 3,264 383 217 - 600 Equity securities Stocks 3,671 - - 3,671 504 - - 504 Mutual funds 93 - - 93 16 - - 16 Real estate investment trusts (REITs) 379 - - 379 52 - - 52 Total equity securities 4,143 - - 4,143 572 - - 572 Other funds at NAV a Commingled funds - - - 2,045 - - - 325 Private equity - - - 3,491 - - - 588 Real estate (including infrastructure and timber) - - - 1,903 - - - 265 Hedge funds - - - 1,890 - - - 263 Total other funds - - - 9,329 - - - 1,441 Derivative assets/liabilities 1 (7) - (6) * (1) - (1) Other assets/liabilities, net b - - - 26 - - - (19) Total assets $ 6,200 $ 1,201 $ - $ 16,756 $ 955 $ 216 $ - $ 2,593 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, 2018 135 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 preceding table may be different from the asset category allocation shown in the Investment Strategy section of the note. Asset classes in the preceding table 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 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. 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 Private equity includes 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. The underlying investments are valued using inputs such as cost, operating results, discounted future cash flows and trading multiples of comparable public securities. Real estate 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. The valuations of underlying investments are based on income and/or cost approaches or comparable sales approach, and taking into account discount and capitalization rates, financial conditions, local market conditions among others. Hedge fund investments 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. 136 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 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 Benefits 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 at June 30, 2018: In millions of U.S. dollars SRP RSBP PEBP July 1, 2018 - June 30, 2019 $ 866 $ 69 $ 63 July 1, 2019 - June 30, 2020 895 76 67 July 1, 2020 - June 30, 2021 922 83 70 July 1, 2021 - June 30, 2022 953 90 74 July 1, 2022 - June 30, 2023 988 97 79 July 1, 2023 - June 30, 2028 5,467 595 475 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, 2018 is $217 million and $54 million, respectively. NOTE K—COMPREHENSIVE INCOME 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 FASB’s derivatives and hedging guidance, pension-related items, and net income. These items are presented in the Statement of Comprehensive Income. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 137 The following tables present the changes in Accumulated Other Comprehensive Loss (AOCL) for the fiscal years ended June 30, 2018, June 30, 2017, and June 30, 2016: In millions of U.S. dollars 2018 Balance, Changes Amounts Net Changes beginning of in fair value reclassified into during the Balance, end of the fiscal year in AOCL net income period the period Cumulative Translation Adjustment $ 46 $ 93 $ - $ 93 $ 139 Cumulative Effect of Change in 500 - - - 500 Accounting Principle a Reclassification a (505) - 3b 3 (502) Unrecognized Net Actuarial (Losses) (3,257) 700 134 c 834 (2,423) Gains on Benefit Plans Unrecognized Prior Service (Costs) (160) - 24 c 24 (136) Credits on Benefit Plans Total Accumulated Other $ (3,376) $ 793 $ 161 $ 954 $ (2,422) Comprehensive Loss In millions of U.S. dollars 2017 Balance, Changes Amounts Net Changes beginning of in fair value reclassified into during the Balance, end of the fiscal year in AOCL net income period the period Cumulative Translation Adjustment $ (135) $ 181 $ - $ 181 $ 46 Cumulative Effect of Change in 500 - - - 500 Accounting Principle a b Reclassification a (507) - 2 2 (505) Unrecognized Net Actuarial (Losses) (5,800) 2,198 345 c 2,543 (3,257) Gains on Benefit Plans Unrecognized Prior Service (Costs) (184) - 24 c 24 (160) Credits on Benefit Plans Total Accumulated Other $ (6,126) $ 2,379 $ 371 $ 2,750 $ (3,376) Comprehensive Loss In millions of U.S. dollars 2016 Balance, Changes Amounts Net Changes beginning of in fair value reclassified into during the Balance, end of the fiscal year in AOCL net income period the period Cumulative Translation Adjustment $ * $ (135) $ - $ (135) $ (135) Cumulative Effect of Change in 500 - - - 500 Accounting Principle a b Reclassification a (509) - 2 2 (507) Unrecognized Net Actuarial (Losses) c (3,022) (2,893) 115 (2,778) (5,800) Gains on Benefit Plans Unrecognized Prior Service (Costs) (182) (25) 23 c (2) (184) Credits on Benefit Plans Total Accumulated Other $ (3,213) $ (3,053) $ 140 $ (2,913) $ (6,126) Comprehensive Loss a. The Cumulative effect of change in accounting principle and the subsequent reclassification of this amount to net income, relate to the adoption of FASB’s guidance on derivatives and hedging on July 1, 2000. b. Reclassified into Borrowings, net in the Statement of Income. c. See Note J—Pension and Other Post Retirement Benefits. * Indicates amount less than $0.5 million. 138 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 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 as of June 30, 2018 and June 30, 2017. In millions of U.S. dollars June 30, 2018 June 30, 2017 Carrying Value Fair Value Carrying Value Fair Value Assets Due from banks $ 619 $ 619 $ 683 $ 683 Investments-Trading (including Securities purchased under resale agreements) 72,569 72,569 72,973 72,973 Net loans outstanding 183,588 186,650 177,422 181,149 Derivative assets Investments 38,015 38,015 42,630 42,630 Loans 4,999 4,999 4,603 4,603 Client operations 17,042 17,042 22,842 22,842 Borrowings 80,518 80,518 78,824 78,824 Others 1,142 1,142 1,213 1,213 Liabilities a a Borrowings 208,009 208,019 205,942 205,955 Securities sold/lent under repurchase agreements/securities lending agreements and payable for cash collateral received 122 122 373 373 Derivative liabilities Investments 37,298 37,298 43,713 43,713 Loans 5,007 5,007 5,712 5,712 Client operations 17,069 17,069 22,866 22,866 Borrowings 86,161 86,161 80,026 80,026 Others 1,561 1,561 812 812 a. Includes $10 million ($13 million—June 30, 2017) relating to the transition adjustment on adoption of FASB's guidance on derivatives and hedging on July 1, 2000. Valuation Methods and Assumptions As of June 30, 2018 and June 30, 2017, IBRD had no assets or liabilities measured at fair value on a non-recurring basis. For valuation methods and assumptions of the Investments, Loans, Borrowings, and Derivative assets and liabilities, refer to Note A—Summary of Significant Accounting and Related Policies. For additional fair value disclosures regarding Investments, Loans, Borrowings, and Derivative assets and liabilities, refer to Note C—Investments, Note D—Loans, 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. IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 139 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, for the fiscal years ended June 30, 2018, June 30, 2017, and June 30, 2016. In millions of U.S. dollars Fiscal Year Ended June 30, 2018 Unrealized gains (losses) Realized gains Unrealized gains excluding realized (losses) a (losses) amounts Investments-Trading $ 40 $ 442 $ 482 Non trading portfolios, net Loan derivatives—Note F - 916 916 Equity management, net - (799) (799) Borrowings, including derivatives—Notes E and F * (381) (381) c Other assets/liabilities derivatives - (2) (2) Client operations derivatives - * * Total $ * $ (266) $ (266) In millions of U.S. dollars Fiscal Year Ended June 30, 2017 Unrealized gains (losses) Realized gains Unrealized gains excluding realized (losses) (losses) amounts a Investments-Trading $ 152 $ 139 $ 291 Non trading portfolios, net Loans, including derivatives—Notes D and F - 1,529 1,529 b Equity management, net - (1,701) (1,701) Borrowings, including derivatives—Notes E and F 6 (254) (248) c Other assets/liabilities derivatives - (5) (5) Client operations derivatives - 12 12 Total $ 6 $ (419) $ (413) In millions of U.S. dollars Fiscal Year Ended June 30, 2016 Unrealized gains (losses) Realized gains Unrealized gains excluding realized (losses) (losses) amounts a Investments-Trading $ 122 $ (153) $ (31) Non trading portfolios, net Loans, including derivatives—Notes D and F - (1,234) (1,234) b Equity management, net 39 1,418 1,457 Borrowings, including derivatives—Notes E and F 28 479 507 c Other assets/liabilities derivatives - (4) (4) Client operations derivatives - (28) (28) Total $ 67 $ 631 $ 698 a. Adjusted to exclude amounts reclassfied to realized gains (losses). b. Includes unrealized mark-to-market gains (losses) related to derivatives associated with loans (unrealized mark-to-market gains of $1,528 million—June 30, 2017; unrealized mark-to-market losses of $1,235 million—June 30, 2016). c. Includes $3,451 million of unrealized mark-to-market losses related to derivatives associated with borrowings (unrealized mark- to-market losses of $4,806 million—June 30, 2017 and unrealized mark-to-market gains of $2,242 million—June 30, 2016). * 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, 2018, is not expected to have a material adverse effect on IBRD's financial position, results of operations or cash flows. 140 IBRD FINANCIAL STATEMENTS: JUNE 30, 2018 International Development Association Management’s Discussion & Analysis and Financial Statements June 30, 2018 International Development Association (IDA) Management’s Discussion and Analysis June 30, 2018 Contents Section I: Executive Summary Goals and the 2030 Development Agenda 3 Financial Results and Portfolio Performance 5 Key Performance Indicators 6 Section II: Overview Presentation 7 Introduction 7 Financial Business Model 8 Governance and Risk Management 8 Basis of Reporting 9 Section III: IDA’s Financial Resources IDA18 Funding 10 Allocation of IDA18 Resources 10 Section IV: Financial Results Summary of Financial Results 13 Section V: Development Activities, Products and Lending Framework 19 Programs Financial Terms 20 Loans, Grants and Guarantee Activity 22 Section VI: Other Development Activities and Guarantees 24 Programs Assisting Borrowing Members Manage Risk 24 Crisis Response Window 25 Debt Relief 25 Trust Funds Administration 25 Buy-down of Loans – Partnership for Polio 26 Section VII: Investment Activities Liquid Asset Portfolio 27 Non-Trading Portfolio 28 Section VIII: Borrowing Activities Concessional Loans from Members 29 Market Debt 29 Short Term Borrowings 29 Section IX: Risk Management Risk Governance 30 Risk Oversight and Coverage 30 Summary and Management of IDA’s Specific Risks 32 Section X: Fair Value Analysis Loan Portfolio 39 Borrowings from Members 39 Section XI: Critical Accounting Policies and the Use Fair Value of Financial Instruments 40 of Estimates Provision for Losses on Loans and Other Exposures 40 Provision for HIPC Debt Initiative and MDRI 41 Provision for Losses on Buy-Down of Loans 41 Section XII: Governance and Internal Controls General Governance 42 Audit Committee 43 Business Conduct 43 Auditor Independence 43 External Auditors 44 Internal Controls 44 Appendix Glossary of Terms 45 List of Tables, Figures and Boxes 45 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, 2018 (FY18). For more detailed information relating to IDA’s development operations results and corporate performance, refer to the World Bank Corporate Scorecard and Sustainability Review (http://www.worldbank.org/en/results). In millions of U.S. dollars , except ratio in percentage As of and for Fiscal Year ended June 30, 2018 2017 2016 2015 2014 Lending Highlights (Sections IV & V) Commitments of loans, grants and guarantees $ 24,010 $ 19,513 $ 16,171 $ 18,966 $ 22,239 Gross disbursements of loans and grants 14,383 12,718 13,191 12,905 13,432 Net disbursements of loans and grants 9,290 8,154 8,806 8,820 9,878 Balance Sheet (Section IV) Total assets $ 206,330 $ 197,041 $ 180,475 $ 178,685 $ 183,445 Net investment portfolio 33,735 29,673 29,908 28,418 28,300 Net loans outstanding 145,656 138,351 132,825 126,760 132,010 Borrowings 7,305 3,660 2,906 2,150 - Total Equity 163,945 158,476 154,700 147,149 153,749 Income Statement (Section IV) Interest revenue, net of borrowing expenses $ 1,647 $ 1,521 $ 1,453 $ 1,435 $ 1,468 Transfers from affiliated organizations and others 203 599 990 993 881 Development Grants (4,969) (2,577) (1,232) (2,319) (2,645) Net (Loss) Income (5,231) (2,296) 371 (731) (1,612) Capital Adequacy (Section IX) Deployable Strategic Capital Ratio 37.4% 37.2% NA NA NA 2 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section I: Executive Summary Section I: Executive Summary Goals and the 2030 Development Agenda With its many years of experience and its depth of knowledge in the international development arena, IDA plays a key role in achieving the WBG’s 1 overarching goals of ending extreme poverty by 2030 and promoting shared prosperity in a sustainable manner2, and its three priorities of sustainable and inclusive growth, investment in human capital, and strengthening resilience. These goals and priorities reflect and support the international community’s development agenda set for 2030, which include the Sustainable Development Goals (SDGs). The Forward Look: A Vision for the World Bank Group in 2030, describes how the WBG will deliver on its twin goals and its three priorities. The Forward Look rests on four pillars: serving all clients; mobilizing resources for development; leading on global issues; and improving the business model. See Figure 1. Figure 1: WBG Goals and 2030 Development Agenda WBG Goals: Eradicating Extreme Poverty and Boosting Shared Prosperity Three Priorities Sustainable & Human Capital Resilience Inclusive Growth Forward Look Mobilization for Leading Global Improving Business Serving All Clients Development Agenda Model The fiscal year ended June 30, 2018 was the first year of the Eighteenth Replenishment of IDA’s resources (IDA18). IDA18 represents an innovative policy and financing package for FY18 through FY20. The IDA18 financing framework represents a fundamental shift in IDA’s approach to mobilizing finance since it combines contributions from members and internal resources, with market debt, thereby allowing IDA to provide US$75 billion3 in financing for its clients. In April 2018, in line with the expansion of IDA’s business model, IDA raised $1.5 billion in debt in its first debt issuance in the international capital markets. IDA18 is integral to the progress IDA is making toward implementing the Forward Look strategy. 1 The institutions of the WBG are: the International Bank for Reconstruction and Development (IBRD), 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). Each of these institutions is legally and financially independent. 2 Specifically, by decreasing the percentage of people living on less than $1.90 a day to no more than 3% by 2030 and improving the income growth of the bottom 40% in each country. 3 U.S.dollar amounts are based on an IDA18 reference rate of USD/SDR 1.40207. The USD 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, 2018 3 Management’s Discussion and Analysis Section I: Executive Summary Serving All Clients $24 billion IDA18 implementation has been robust, with a strong focus on countries affected Total Commitments by fragility, conflict and violence (FCV), and increased resources and enhanced terms for small states. IDA18 introduced the new Refugee Window to address the development needs of both refugees and their host communities. $4.5 billion FCV Commitments $0.4 billion Small State Commitments Leading on Global Issues 28 % IDA is bringing knowledge, convening power, and capacity to address some of the Climate Co-Benefit toughest global issues. The five special themes of IDA18 bring additional global Commitments attention to priority issues for IDA partners and clients: fragility, climate, gender, jobs, and governance. It is increasing financing for projects with climate co- 55 % benefits as part of a broad climate action plan; expanding financing and integrating Gender Commitments tools for crisis response to help countries recover from conflict, natural disasters, or pandemics; and helping to level the playing field for women in business. $3 billion Crisis Response Window Improving the Business Model IDA, along with other WBG entities, is implementing ways to serve its clients more effectively and efficiently. Various administrative reforms and agile programs are underway to simplify procedures, create operating efficiencies and improve operational delivery. Procurement policies are being modernized, to promote internationally recognized core principles of value for money, and create more opportunities and value for IDA’s borrowers. In line with these various initiatives, IDA has been able to contain the increase in its administrative expenses, despite the significant increase in its lending activities. Driving the improved business model is ensuring that IDA has the long-term financial capacity necessary to support its lending operations. 4 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section I: Executive Summary Financial Results and Portfolio Performance Equity and Capital Adequacy As of June 30, 2018, IDA’s reported equity was $164 billion, an increase of $5.5 billion from June 30, 2017 ($158.5 billion). The main drivers of the increase were the receipt of $164 billion contributions from members. See Section IV: Financial Results. Total Equity IDA’s deployable strategic capital (DSC) ratio was 37.4% as of June 30, 2018, above the zero percent minimum. IDA’s capital continues to be adequate to support IDA’s 37.4% operations. See Section IX: Risk Management. DSC Lending Operations Consistent with the IDA18 agreement to scale-up the volume of IDA’s financing to its clients, IDA had $24 billion of commitments in FY18, the highest amount for a full year $145.7 billion in IDA’s history, of which $19 billion were loan and guarantee commitments and $5 Net Loans Outstanding billion were grant commitments. Grants are recorded as an expense in IDA’s Statement of Income and are fully compensated by contributions from members that are recorded as equity. $5 billion Grant Expense The $6.4 billion in loan disbursements was the key driver in the $7.3 billion increase in IDA’s net loans outstanding, from $138.4 billion at the end of the fiscal year ended June 30, 2017 to $145.7 billion at the end of the fiscal year ended June 30, 2018. See Section V: Development Activities, Products and Programs. Net Investment Portfolio As of June 30, 2018, the net investment portfolio stood at $33.7 billion, an increase of $4 billion compared to June 30, 2017 ($29.7 billion). IDA’s investments remain concentrated in the upper end of the credit spectrum, with 59% rated AA or above, $33.7 billion reflecting IDA’s objective of principal protection and resulting preference for high Net Investment Portfolio quality investments. See Section VII: Investment Activities. Borrowing Portfolio IDA raised $1.5 billion in fixed-rate market debt in April, 2018, in its first issuance in the international capital markets. The issuance was denominated in USD and has a five- year maturity. $1.5 billion Market Borrowings As of June 30, 2018, total borrowings from members - Concessional Partner Loans, (CPLs) - were $5.8 billion. Under IDA17 and IDA18, certain members agreed to provide concessional loans, where the borrowing terms aim to follow the terms of IDA’s $5.8 billion concessional loans. Concessional Partner Loans Net Income IDA had a net loss of $5.2 billion on a reported basis for the fiscal year ended June 30, 2018, compared with a net loss of $2.3 billion in the fiscal year ended June 30, 2017. In both fiscal years, the results were primarily driven by the impact of grants provided to $5.2 billion IDA’s eligible members, $5 billion in FY18 and $2.6 billion in FY17. The increase in Net Loss grants is consistent with the increase in the size of the IDA18 replenishment and increased grant allocations (IDA18-23%, IDA17-13%). Grants are financed by contributions from members, which are recorded as equity and not reflected in the Statement of Income. In addition, the FY18 net loss reflects a $548 million loan loss provisioning charge, as compared to a $56 million release of provision in FY17. The FY18 charge is primarily driven by a refinement of the loan loss provisioning methodology. See Notes to Financial Statements – Note F – Loans and Other Exposures. IDA Management’s Discussion and Analysis: June 30, 2018 5 Management’s Discussion and Analysis Section I: Executive Summary Key Performance Indicators In billions of U.S. dollars LENDING – During FY18, IDA committed $24 billion to help its 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 USD. 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 160 20 30 120 15 24 18 80 10 12 40 5 6 0 0 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 0 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 EQUITY, LIQUIDITY & BORROWINGS – Each successive replenishment has increased the amount of equity available to finance IDA’s operations. Since IDA’s resources are primarily in SDR, the reported balance of IDA’s equity is affected by the appreciation /depreciation of the SDR against the USD. 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. The FY18 borrowings balance reflects both borrowings from members and capital market debt. Equity Investment Portfolio Borrowings 200 40 20 150 30 15 100 20 10 50 10 5 0 0 0 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 Jun 15 Jun 16 Jun 17 Jun 18 FINANCIAL RESULTS & 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 can also be affected by unrealized gains and losses due to movements in the relevant yield curves. IDA’s main measure for capital adequacy, the DSC was introduced in FY17. It measures the amount of capital available to support future commitments over and above the current loan portfolio, and has remained stable. Reported Income / (Loss) Deployable Strategic Capital Ratio 4 45% Excluding Grants 37.2% 37.4% 2 30% 0 15% (2) Including Grants 0% (4) Minimum Ratio (6) -15% Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 Jun 17 Jun 18 6 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section II: Overview Section II: Overview Presentation This document provides Management’s Discussion and Analysis (MD&A) of the financial condition and results of operations for IDA for the fiscal year ended June 30, 2018. A Glossary of Terms is provided at the end of this document. IDA undertakes no obligation to update any forward-looking statements. Certain reclassifications of prior years’ information have been made to conform with the current year’s presentation. For further details see Note A: Summary of Significant Accounting and Related Policies in the Notes to the Financial Statements for the year ended June 30, 2018. Introduction Owned by its 173 members, IDA, a triple-A rated entity and one of the five institutions of the WBG, has been providing financing and knowledge services to many of the world’s developing countries for more than 57 years. IDA was created to supplement the activities and objectives of the International Bank for Reconstruction and Development, by providing development financing to lower income countries on more flexible terms. IDA currently has lending, grant, and guarantee activities in over 107 countries. In addition to loans, grants, and guarantees provided to countries to help meet their development needs, IDA leverages its experience and expertise to provide technical assistance and policy advice. It also supports countries with disaster risk financing and insurance against natural disasters and health- related crises, and facilitates financing through trust fund partnerships. While its main business activity is extending loans to its eligible member countries, by operating across a full range of country clients IDA maintains a depth of development knowledge, uses its convening power to advance the global public goods agenda, and coordinates responses to regional and global challenges. Figure 2 illustrates how IDA creates value. Figure 2: How IDA Creates Value Every three years, representatives of IDA’s members4 meet to assess IDA’s financial capacity and the medium-term demand for new IDA financing. Members decide the policy framework, agree upon the amount of financing to be made available for the replenishment period, and commit to additional contributions of equity that are required to meet these goals. The meetings culminate in a replenishment agreement that determines the size, sources (both internal and external), and uses of funds for the following three years. 4 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, 2018 7 Management’s Discussion and Analysis Section II: Overview Financial Business Model support the escalating demand for its resources to deliver on the following priorities: IDA has financed its operations over the years with its own equity, including periodic additions to equity  Retain IDA’s mandate to provide concessional provided by member countries as part of the financing on terms that respond to clients’ needs replenishment process. As a result of the strong and ensure debt sustainability for IDA’s support of member countries, IDA has built up a borrowers; and substantial equity base, amounting to $164 billion as  Ensure long-term financial sustainability of of June 30, 2018. IDA first introduced debt into its IDA’s financial model through a prudent risk business model in IDA17 through concessional management framework. partner loans (CPLs) received from some of its members. CPLs are also part of the IDA18 Concessional lending, including grants, is primarily framework. In order to make the most efficient use of financed by IDA’s equity. Non-concessional lending the strong equity base that has been built up over the will primarily be financed by market debt. To the decades, IDA has included market debt in its business extent that market debt will be used to finance model in FY18. By prudently leveraging its equity and concessional lending, it will be blended with member blending market debt with additional equity contributions, which will provide an interest subsidy. contributions from members, IDA has increased its See financial efficiency, and scaled up its financing to Figure 3. Figure 3: IDA's Financial Business Model Reflows and Operating Results Borrowings Non – Concessional Lending Investments Equity Concessional Lending and Grants 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. Table 1 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). 8 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section II: Overview Table 1: IDA’s Risk Management Framework 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 management-level committee chaired by the World Bank Group Managing Director and Chief Financial Officer, provides a governance structure for decisions that have credit, financial or operational risk implications.  World Bank departments and staff are responsible for both IDA and IBRD financial and risk management design, implementation and oversight. 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 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 is being transitioned from a core liquidity approach toward a three sub-portfolio structure: Operational, Stable and Discretionary. Basis of Reporting Fair Value Results IDA prepares its financial statements in conformity IDA reflects all financial instruments at fair value in with accounting principles generally accepted in the Section X: Fair Value Analysis of the MD&A. The fair United States of America (U.S. GAAP), referred to in value of these instruments is affected by changes in this document as the “reported basis”. IDA’s market variables such as interest rates, exchange rates, functional currencies are the SDR and its component and credit risk. Management uses fair value to assess currencies of U.S. dollar, Euro, Japanese Yen, Pound the performance of the investment-trading portfolio, Sterling and Chinese Renminbi. For the convenience and to manage various market risks, including interest of its members and other users, IDA’s financial rate risk and commercial counterparty credit risk. statements are reported in U.S.dollars. IDA Management’s Discussion and Analysis: June 30, 2018 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 borrowers, market conditions, and capital adequacy million for the initial replenishment to $75 billion in requirements. For the three-year funding cycle of IDA18. Since its inception, IDA has provided $369 IDA18, the agreed resource envelope totals $75 billion billion of loans and grants. For FY18, IDA’s primarily supported by $27 billion of member commitments reached $24 billion spread over 206 new contributions, including $6 billion of member operations. compensation for HIPC and MDRI and, $21 billion of loan reflows and investment income. IDA18 Funding Allocation of IDA18 Resources IDA’s Commitment Authority, the resource envelope available for financing lending and grant Eligibility for IDA’s resources is determined primarily commitments made during the three-year by a member’s relative poverty. Relative poverty is replenishment period, is based on the long-term defined as Gross National Income (GNI) per capita outlook of IDA’s financial sustainability. This takes below an established threshold and is updated into account the amount of member contributions and annually. For FY19, the threshold is $1,145 (FY18: the concessionality of the proposed financing to $1,165). As of July 1, 2018, 75 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 4 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” 14 countries (including 5 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 Under the PBA, the main factor that determines the (PBA) System allocation of IDA’s core concessional resources among eligible countries is the performance in the IDA’s resources are allocated to eligible members, Country Policy and Institutional Assessment (CPIA). using its Performance Based Allocation (PBA) system The CPIA reflects the results of an exercise that rates and the allocation framework agreed during each eligible countries against a set of criteria including: replenishment. These allocations depend on several economic management; structural policies; policies factors: the overall availability of IDA’s resources, for social inclusion and equity; and public-sector individual country’s needs, their policy performance management and institutions. The CPIA and portfolio and institutional capacity, and each country’s performance together constitute the IDA Country performance relative to others. The PBA system is Performance Rating (CPR). In addition to the CPR, designed to provide resources where they are likely to population and per capita income factor into a be most helpful in reducing poverty. country’s final allocation, which can also reflect remedies under the Non-Concessional Borrowing Policy (NCBP) options, if applicable. 10 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section III: IDA’s Financial Resources Following a review of IDA’s resource allocation $9 billion of resources have been allocated to non- framework under IDA18, the base allocation per concessional financing, of which $6.2 billion relates to country was increased to SDR 45 million (SDR 12 the Scale-up Facility and $2.8 billion relates to million in IDA17) per replenishment or SDR 15 transitional support for graduating countries. million annually. Scale-up Facility: The Scale-up Facility is a window In recognition of the change in IDA’s business model, of resources established to enhance support for high- and to ensure that its lending decisions are compatible quality, transformational projects with strong with the capital adequacy requirements of a triple-A development impact. Allocation of Scale-up Facility rating, the allocation framework for IDA18 is aligned resources to the regions will broadly conform to the with the SBL and capital adequacy requirements under allocations under the PBA, excluding countries at a the DSC Framework, see Section IX: Risk high risk of debt distress. Allocations are balanced Management. between IDA-only and blend countries, and to avoid countries from having a concentration of Scale-up Concessional Financing Facility resources. Implementation arrangements will Concessional financing is provided in the form of prioritize a country’s ability to absorb resources and loans, grants and guarantees. Eligibility and the proposed projects’ alignment with IDA18 policy percentage of allocation for grants for IDA-only priorities and WBG goals. countries is based on an assessment of the country’s Transitional Support for Graduating Countries: A risk of debt distress, where the higher the risk member country that was once eligible for IDA assessment, the greater the proportion of grant financing may no longer be eligible, and be deemed to financing. Gap and Blend countries are only eligible have “graduated” from IDA to IBRD as a result of an for grant financing via the Refugee sub-window, if improvement in growth, poverty reduction and applicable. creditworthiness. While graduation from IDA Core Financing, represents $52.4 billion of the represents an important milestone of progress in a IDA18 resource envelope, which is allocated based on country’s development, in some cases it could the PBA. The amount available for each country is a adversely impact a country’s capacity to maintain function of the country’s CPR rating and per capita development momentum, if it leads to a significant income. decline in available financing for that country. During the IDA18 replenishment discussions, it was agreed Non-Core Financing, allows IDA to respond to that IDA would provide transitional support to these specific needs of its members. In IDA18, $11.1 billion members in order to ensure a smooth transition from of the IDA18 resource envelope will be used to fund IDA to IBRD. Accordingly, it was agreed that the following windows: transitional support would be given at non- concessional terms to new graduates. Bolivia, Sri IDA’s Regional Program To support the regional Lanka and Vietnam graduated from IDA on June 30, approaches to development 2017, and may receive up to $2.8 billion in exceptional $7 billion including for infrastructure; transitional support for the IDA18 period only. includes a new $2 billion Refugee sub-window to help As of June 30, 2018, $2.3 billion of Scale-up Facility IDA countries that host resources and $0.2 billion of transitional support have refugees. been committed. IDA’s Crisis Response To support IDA members’ Window (CRW) response and preparedness Private Sector Window (PSW) against severe natural $3 billion disasters, economic crises, In line with the Forward Look, a $2.5 billion IFC- and health emergencies. MIGA Private Sector Window was created and made Re-engagement Set To support applicable operational under IDA18. Its goal is to mobilize Aside members to re-engage with private sector investment in the IDA-only and IDA- $1.1 billion IDA. eligible FCV countries, with particular emphasis on FCV countries. The PSW is deployed through four As of June 30, 2018, $21.6 billion of concessional facilities. These facilities have been designed to target resources have been committed. critical challenges faced by the private sector in these difficult markets and will leverage IFC and MIGA’s Non-Concessional Financing business platforms and instruments. The facilities are as follows: Non-Concessional financing comprises loans and guarantees whose terms are aligned with those of IBRD’s flexible loans and guarantees. Under IDA18, IDA Management’s Discussion and Analysis: June 30, 2018 11 Management’s Discussion and Analysis Section III: IDA’s Financial Resources  Risk Mitigation Facility: Involves both MIGA and  Blended Finance Facility: Administered by IFC, this IFC, and is designed to provide project-based facility blends PSW financing support with IFC guarantees to encourage/mobilize private sector investments to support small and medium investment in infrastructure projects and public- enterprises (SMEs), agribusiness and other private partnerships. pioneering investments.  Local Currency Facility: Administered by IFC, this  MIGA Guarantee Facility: Administered by MIGA, facility is designed to provide local currency this facility is designed to expand the coverage of denominated loans, investments or hedges to private MIGA Political Risk Insurance (PRI) products sector clients who operate in markets where there through shared first-loss or risk participation similar are limited currency hedging capabilities.  In the to reinsurance. absence of currency hedging instruments and As of June 30, 2018, $185 million of instruments creditworthy counterparties, IDA would enter into under the PSW had been approved, to which IDA has swaps or indemnity agreement with IFC. $45 million of exposure ($36 million for guarantees and $9 million for derivatives). 12 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section IV: Financial Results Section IV: Financial Results Summary of Financial Results ii) a $548 million loan loss provisioning charge, of which $409 million was due to a refinement of the loan IDA had a net loss of $5,231 million in FY18 loss provision methodology. See Notes to Financial compared with a net loss of $2,296 million in FY17. Statements – Note F – Loans and Other Exposures. The net loss in FY18 was largely driven by i) $4,969 million of grant activity, primarily in the Africa region, for which IDA is compensated by member contributions that are recorded in equity and, Table 2: Condensed Statement of Income In millions of U.S.dollars For the fiscal year ended June 30, 2018 2017 Variance Interest Revenue Loans $ 1,376 $ 1,232 $ 144 Investments, net 420 391 29 Borrowings, net (149) (102) (47) Interest Revenue, net of borrowing expenses 1,647 1,521 126 Provision for losses on loans and other exposures, (charge) release (548) 56 (604) Other expenses, net (Table 10) (23) (2) (21) Net non-interest expenses (Table 9) (1,464) (1,499) 35 Transfers from affiliated organizations and others 203 599 (396) Non-functional currency translation adjustment gains (losses), net 89 (49) 138 Unrealized mark-to-market losses on investments-trading portfolio, net (128) (367) 239 Unrealized mark-to-market (losses) gains on non-trading portfolios, net (38) 22 (60) Development grants (4,969) (2,577) (2,392) Net Loss $ (5,231) $ (2,296) $ (2,935) Table 3: Condensed Balance Sheet In millions of U.S.dollars As of June 30, 2018 2017 Variance Assets Due from Banks $ 523 $ 483 $ 40 Investments 36,075 32,033 4,042 Net loans outstanding 145,656 138,351 7,305 Receivable from derivatives 21,914 23,843 (1,929) Other assets 2,162 2,331 (169) Total assets $ 206,330 $ 197,041 $ 9,289 Liabilities Borrowings $ 7,305 $ 3,660 $ 3,645 Payable for derivatives 21,958 24,073 (2,115) Other liabilities 13,122 10,832 2,290 Equity 163,945 158,476 5,469 Total liabilities and equity $ 206,330 $ 197,041 $ 9,289 IDA Management’s Discussion and Analysis: June 30, 2018 13 Management’s Discussion and Analysis Section IV: Financial Results Total Assets $3,872 million that was explicitly linked to a review and possible change by the new Administration. The As of June 30, 2018, total assets were $206.3 billion, new Administration confirmed its participation in an increase of $9.3 billion from June 30, 2017 ($197 IDA18 with a pledge of $3,291 million, which was billion). The asset growth was primarily driven by an authorized in the recent omnibus appropriations bill increase in net loans outstanding and investments, and for which Congress appropriated $1,097 million which were primarily funded by a $5.5 billion increase this fiscal year. Both the pledge, in the form of an in Equity and $3.6 billion in Borrowings. While the Instrument of Commitment (IoC), and the funds were receivable and payable from derivatives were $21.9 received by IDA in June 2018. billion as of June 30, 2018, IDA’s net derivative exposure after master-netting agreements and Demand obligations – Demand obligations are collateral was $250 million as of June 30, 2018, a $91 nonnegotiable and noninterest-bearing instruments of million increase as compared with June 30, 2017. payment. Payments on these instruments are due to Refer to Note E: Derivative Instruments in the Notes IDA upon demand and the instruments are typically to the Financial Statements for the year ended June held in central bank accounts in IDA’s name. During 30, 2018. FY18, the receipt of new notes amounting to $5.2 billion was offset by the encashment of notes of $4.5 Equity billion. IDA’s equity increased by $5.5 billion as compared to Accumulated deficit - Primarily represents the impact the prior year, primarily due to a $10.1 billion increase of IDA’s grant activity and the HIPC and MDRI in subscriptions and contributions paid-in in the form programs, which are compensated for by member of cash and demand obligations, and $1.4 billion contributions which are recorded as subscriptions and decrease in accumulated other comprehensive loss due contributions. The $5.2 billion increase is primarily to positive translation adjustments on functional due to grant activity as discussed earlier. currencies, as the SDR appreciated against the USD. This was offset by $5.2 billion of net losses incurred Loan Portfolio and Grant Activity during the year. As of June 30, 2018, IDA’s net loans outstanding were Table 4: Changes in Equity $145.7 billion, $7.3 billion higher compared with June 30, 2017 ($138.4 billion). The increase was mainly In millions of U.S.dollars due to $6.4 billion in net positive loan disbursements, Equity balance as of June 30, 2017 $ 158,476 complemented by currency translation gains of $1.4 Subscriptions and contributions paid-in 10,058 Nonnegotiable, noninterest-bearing demand billion, consistent with the 1.1% appreciation of the (722) SDR against the U.S. dollar during the year. obligations Accumulated deficit (5,231) As of June 30, 2018, 96% of IDA’s gross loans Accumulated other comprehensive income 1,364 outstanding were SDR denominated loans, 3% U.S. Deferred amounts to maintain value of currency holdings - dollar denominated loans and 1% were EUR Total activity $ 5,469 denominated loans. Equity balance as of June 30, 2018 $ 163,945 Loans Outstanding Loans outstanding as of June 30, 2018 were $150 At the time of its IDA18 pledge in December 2016, the billion. Table 5 shows loans outstanding by region. United States (the member country with the largest voting power), announced an indicative pledge of Table 5: Loans Outstanding by Region In millions of U.S. dollars % of % of As of June 30, 2018 Total 2017 Total Variance Africa $ 59,220 39 % $ 52,991 37 % $ 6,229 East Asia and Pacific 19,638 13 19,460 14 178 Europe and Central Asia 7,389 5 7,462 5 (73) Latin America and the Caribbean 2,605 2 2,518 2 87 Middle East and North Africa 2,891 2 3,025 2 (134) South Asia 58,285 39 56,728 40 1,557 Total $ 150,028 100 % $ 142,184 100 % $ 7,844 14 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section IV: Financial Results Table 6 shows gross disbursements of loans and grants by region. IDA’s loans generally disburse within five to ten years for investment project financing and one to three years for development policy financing, therefore, FY18 and FY17 disbursements also include amounts relating to commitments made in earlier years. Principal repayments and prepayments increased by $0.5 billion in FY18, from $4.6 billion in FY17 to $5.1 billion in FY18. Table 6: Gross Disbursements of Loans and Grants by Region In millions of U.S. dollars 2018 2017 For the fiscal year ended June 30, Loans Grantsa Total Loans Grantsa,b Total Africa $ 6,341 1,865 8,206 $ 5,260 1,363 6,623 East Asia and Pacific 1,176 76 1,252 1,047 98 1,145 Europe and Central Asia 249 49 298 254 56 310 Latin America and the Caribbean 125 98 223 133 96 229 Middle East and North Africa 47 522 569 58 333 391 South Asia 3,602 233 3,835 3,861 109 3,970 Total $ 11,540 2,843 14,383 $ 10,613 2,055 12,668 a. Excludes Project Preparation Advances (PPA). b. Excludes $50 million grant for the Pandemic Emergency Financing Facility. Table 7 shows the breakdown by term. For FY18, 62% are on regular terms and the remaining are interest bearing loans. Table 7: Revenue by Category In millions of U.S. dollars Interest Revenue from Loans Outstanding balance as of June 30, Interest Service charges Category 2018 2017 FY18 FY17 FY18 FY17 Loans Concessional Regular $ 93,179 $ 87,183 $ 15 $ 14 $ 665 $ 606 Blend 54,546 53,346 220 174 411 388 Hard 1,313 1,276 38 36 10 9 Non-concessional Transitional support 468 222 8 3 - - Scale-up Facilitya 522 157 9 2 - - Total $ 150,028 $ 142,184 $ 290 $ 229 $ 1,086 $ 1,003 a. In addition, $8 million of commitment charges were earned in FY18 under the Scale-up Facility ($1 million in FY17) Table 7 shows the breakdown by term. For FY18, Africa region and $0.5 billion to the Middle East and 62% are on regular terms and the remaining are North Africa region. interest bearing loans. Investment Portfolio Table 7 shows IDA’s interest and service charge revenue by loan type. The $61 million increase in The net investment portfolio increased by $4 billion interest is primarily driven by the increase in interest from $29.7 billion as of June 30, 2017 to $33.7 billion on blend term loans, reflecting the increased volume as of June 30, 2018. The key drivers are: of disbursements under interest-bearing blend term  The receipt of $9.3 billion relating to member lending. contributions, $2.1 billion in concessional loans from members, and $1.5 billion in capital market As of June 30, 2018, IDA’s payable for development borrowings. grants was $8.7 billion, $2.1 billion higher than as of June 30, 2017 ($6.6 billion). This increase reflects  The inflow of $5.1 billion in the form of loan grant expenses of $5 billion in FY18 which, consistent repayments and prepayments, included in with the larger IDA18 envelope, were $2.4 billion internal resources. higher compared to FY17 ($2.6 billion), partially  The payment of $14.4 billion in loan and grant offset by grant disbursements of $2.8 billion. The disbursements. FY18 grant disbursements included $1.9 billion to the IDA Management’s Discussion and Analysis: June 30, 2018 15 Management’s Discussion and Analysis Section IV: Financial Results Table 8: Change in Net Asset Value of IDA’s Investment Portfolio In millions of U.S. dollars For the fiscal year ended June 30, 2018 2017 Net Asset Value of Investment Portfolio, at beginning of fiscal year $ 29,673 $ 29,908 Sources of Funds Member resources 11,449 7,679 Capital market borrowings 1,489 - Transfers from affiliated organizations 203 598 Internal resources 5,474 4,936 Total Sources of Funds 18,615 13,213 Application of Funds Loans disbursements (11,540) (10,613) Grants disbursements (including PPA grant activity) (2,847) (2,105) Borrowing expenses (110) (82) Total Application of Funds (14,497) (12,800) Operating Activities Net non-interest expenses (see Table 9) (1,464) (1,499) Interest revenue from loans 1,394 1,240 Total Operating Activities (70) (259) Effects of exchange rates 92 (208) Unrealized mark-to-market losses on the investment portfolio (149) (399) Net movement in non-operating activities 71 218 Net Asset Value of Investment Portfolio, at end of fiscal year $ 33,735 $ 29,673 Borrowing Portfolio On October 13, 2017, IBRD’s Board of Governors approved a transfer of $123 million to IDA bringing As part of IDA18, five members have agreed to the cumulative transfers to $15,249 million. The provide IDA with concessional loans totaling $5.2 transfer was received on October 24, 2017. billion. During FY18, IDA has signed concessional loan agreements totaling $5 billion with all five On June 22, 2018, IDA received a grant from IFC of members, of which $2.1 billion was received as loan $80 million bringing the cumulative transfers to proceeds. As of June 30, 2018, total borrowings from $3,672 million. members under IDA17 and IDA18 were $5.8 billion. Net Non-Interest Expense For more details, see Notes to Financial Statements - Note D – Borrowings. As shown in Table 9, IDA’s net non-interest expenses primarily comprise administrative expenses, net of In April 2018, for the first time, IDA issued $1.5 revenue from externally funded activities. IBRD and billion of debt in the international capital markets. This IDA's administrative budget is a single resource debt was denominated in USD and has a maturity of envelope that funds the combined work programs of five years. As part of IDA’s asset-liability IBRD and IDA. The allocation of administrative management strategy, IDA also entered into expenses and revenue between IBRD and IDA is derivatives to convert the fixed rate bond into a based on an agreed cost and revenue sharing floating rate instrument. For more details, see Notes to methodology, approved by their Boards, which is Financial Statements - Note D – Borrowings. primarily driven by the relative level of activities Transfers from Affiliated Organizations relating to lending, knowledge services and other services between these two institutions. The staff costs In FY17, IBRD introduced a formula-based approach and consultant and contractual services shown in the for determining transfers to IDA, which links such table below include costs related to IDA-executed trust transfers to IBRD’s allocable income levels. funds, which are recovered through revenue from externally funded activities. 16 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section IV: Financial Results IDA’s net non-interest expenses were $1,464 million iii) the increase in costs allocated to IDA under the cost for FY18 as compared to $1,499 million in FY17. sharing methodology, due to the increase in client engagement activities associated with IDA18. See The key drivers during the year were i) lower pension costs as a result of lower amortization of unrecognized Table 9 for a comparison of the main sources of actuarial losses during FY18 and, ii) the increase in Administrative expenses and revenue from externally revenue from externally funded activities, offset by funded activities between FY18 and FY17. Table 9: Net Non-Interest Expenses In millions of U.S. dollars FY18 Vs FY17 Vs For the fiscal year ended June 30, 2018 2017 2016 FY17 FY16 Administrative expenses: Staff costs $ 990 $ 879 $ 776 $ 111 $ 103 Travel 183 165 149 18 16 Consultant and contractual services 450 436 417 14 19 Pension and other post-retirement benefits 322 426 215 (104) 211 Communications and technology 62 56 52 6 4 Equipment and buildings 148 138 129 10 9 Other expenses 29 21 27 8 (6) Total administrative expenses $ 2,184 $ 2,121 $ 1,765 $ 63 $ 356 Contributions to special programs 21 25 - (4) 25 Revenue from externally funded activities: Reimbursable advisory services (51) (42) (41) (9) (1) Reimbursable revenue - IDA-executed trust funds (460) (400) (340) (60) (60) Revenue – trust funds administration (48) (42) (42) (6) - Restricted revenue (21) (22) (17) 1 (5) Other revenue (161) (141) (129) (20) (12) Total revenue from externally funded activities $ (741) $ (647) $ (569) $ (94) $ (78) Total Net Non-Interest Expenses (Table 2) $ 1,464 $ 1,499 $ 1,196 $ (35) $ 303 Table 10: Other expenses, net In millions of U.S. dollars FY18 Vs FY17 Vs For the fiscal year ended June 30, 2018 2017 2016 FY17 FY16 Other (primarily PPA grants) $ (41) $ (10) $ 14 $ (31) $ (24) Guarantee fees 10 7 5 3 2 Commitment charges 8 1 - 7 1 Other expenses, net (Table 2) $ (23) $ (2) $ 19 $ (21) $ (21) IDA Management’s Discussion and Analysis: June 30, 2018 17 Management’s Discussion and Analysis Section IV: Financial Results Efficiency Measures 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 FY18, IDA’s budget anchor was 102%. See Table 11. Table 11: Budget Anchor In millions of U.S.dollars For the fiscal year fiscal year ended June 30, 2018 Total net Non-interest Expenses (From Table 9) $ 1,464 Pension and Externally Financed Outputs (EFO) adjustmentsa (64) Net administrative expenses for Budget Anchor $ 1,400 Interest Revenue from Loans (From Table 2) $ 1,376 Commitment fee and Guarantee income (From Table 10) 18 Mark-to-market losses on revenue-related forward currency contracts (28) Total revenue for Budget Anchor $ 1,366 Budget Anchor 102% a. These amounts are excluded from the definition of net Non-interest expenses to reflect the way in which IDA is managed. 18 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Section V: Development Activities, Products and Programs Lending Framework Directors on July 21, 2017, Executive Directors may approve an overall program framework, its financing IDA has a common framework which extends across envelope and the first appraised phase, and then all its development activities. The main elements of authorize Management to appraise and commit this framework are: financing principles, financing financing for later program phases. Disbursements are cycles and financing categories. subject to the fulfillment of conditions set out in the Financing Principles loan or grant agreement. IDA’s operations are required to conform to the During implementation of IDA-supported operations, general principles derived from its Articles of staff review progress, monitor compliance with IDA’s Agreement. These principles are described in Box 2. policies, and assist in resolving any problems that may Within the scope permitted by the Articles of arise. An independent unit, the Independent Agreement, application of these financing principles Evaluations Group, also assesses the extent to which must be developed and adjusted in light of experience operations have met their major objectives, and these and changing conditions. evaluations are reported directly to the Executive Directors. Financing Cycles Financing Categories The process of identifying and appraising a project and approving and disbursing the funds often extends over Most of IDA’s lending is of three types: investment several years. However, in response to emergency project financing, development policy financing, and situations, such as natural disasters and financial program-for-results. Figure 4 shows the percentage of crises, IDA is able to accelerate the preparation and loans approved for investment lending, development approval cycle. In most cases, IDA’s Executive policy operations and Program-for-Results over the Directors approve each loan, grant and guarantee after past five years. appraisal of a project by staff. Under a new Multiphase Programmatic Approach approved by the Executive 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. IDA Management’s Discussion and Analysis: June 30, 2018 19 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Figure 4: Share of Financing Categories Percentage Share a Investment Development Policy Program-for-Results FY18 62% 9% 29% FY17 78% 10% 12% FY16 76% 12% 12% FY15 79% 14% 7% FY14 83% 11% 6% 0% 20% 40% 60% 80% 100% a. May differ from the sum of individual figures shown due to rounding Investment Project Financing (IPF) with government, development partners and other stakeholders by providing a platform to collaborate in IPF is used in all sectors, it supports a wide range of larger country programs. PforR disburses when agreed activities including capital-intensive investments, results are achieved and verified. Results are identified agricultural development, service delivery, credit and and agreed upon during the preparation stage. grant delivery, community-based development, and institution building. IPF is usually disbursed over the FY18 commitments under PforR totaled $7 billion, long-term (5 to 10 year horizon). compared with $2.4 billion in FY17, reflecting an increase in commitments in countries in Africa and FY18 commitments under IPF amounted to $14.8 South Asia. billion, compared with $15.1 billion in FY17. These three complementary categories support the Development Policy Financing (DPF) policy and institutional changes needed to create an DPF provides rapidly-disbursing financing (1 to 3 environment conducive to sustained and equitable years) to help a borrower address actual or anticipated growth. development financing requirements. DPF aims to support the borrower in achieving sustainable Financial Terms development through a program of policy and Commitment Currency institutional actions, for example, strengthening public financial management, improving the investment The currency of commitment for IDA grants and climate, addressing bottlenecks to improve service concessional loans is predominantly the SDR. delivery, and diversifying the economy. DPF supports However, in response to client needs to reduce such reforms through non-earmarked general budget currency exposure and simplify debt management, financing that is subject to the borrower's own IDA offers a Single Currency Lending option that implementation processes and systems. Commitments allows IDA recipients to denominate new IDA loans under DPF for FY18 were $2.1 billion (FY17 - $1.9 in USD, EUR, GBP and JPY. Further, non- billion). concessional loans provided under IDA18 from the Scale-up Facility and for transitional support, may Program-for-Results (PforR) only be denominated in either USD, EUR, GBP and PforR helps countries improve the design and JPY. As of June 30, 2018, $8.3 billion of U.S. dollar implementation of their development programs and denominated loans and U.S. dollar equivalent $7.1 achieve specific results by strengthening institutions billion in EUR denominated loans had been approved and building capacity. It helps strengthen partnerships under the Single Currency lending program, of which $2.4 billion in U.S. dollar equivalent were outstanding. 20 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Table 12: Summary of Financial Terms for IDA Lending Products, effective July 1, 2018 Maturity/Grace Instrument typea Currencies Current Charges Interest rates Period Grant SDR Not applicable None Not applicable SDR, USD, EUR, 75bps SDR equivalent Regular-Term loan 38/6 years Not applicable GBP, JPY 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 Blend-Term loan 30/5 years 1.25% GBP, JPY service charge Non-concessional loans 20 years maximum Market-based floating 25 bps one-time front- a) Transitional support loan USD, EUR, GBP, weighted average reference rate (6-month) end fee b) Loans under Scale-up JPY maturity with 35 plus a spread (variable 25 bps commitment fee Facility 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 Undisbursed balances option. Draw Down Option (CAT SDR, USD, EUR, After Drawdown: DDO) GBP, JPY - Under PBA or Undisbursed balances option - IDA concessional rates (New in IDA18) 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. Charges on Loans and Grants years. In recent replenishments, differentiation in IDA’s lending terms has been introduced to recognize Service Charge. A service charge is levied on the the variation in economic development of broad principal amount disbursed and outstanding on all categories of IDA recipients. Regular, Small Economy, and Blend term loans, regardless of repayment terms, at 0.75% per annum. Since 1987, IDA has included an accelerated repayment clause in the legal agreements of regular, Commitment Charge. A commitment charge, which blend and hard-term loans that allows IDA to double is payable on any undisbursed loan or grant amount, is the principal repayments of the loan, if the borrower’s set by the Executive Directors at the beginning of each GNI per capita exceeds a specific threshold and the fiscal year. Commitment charges are set at a level to borrower is eligible for IBRD financing. ensure that net loan revenue covers administrative Implementation is subject to approval by IDA’s expenses over the medium term. From FY09 to FY18, Executive Directors after considering a borrower’s the commitment charge on undisbursed concessional economic development. The borrower would have a loans had been set at nil, and for grants it had been set choice to either (a) shorten the loan’s maturity at nil from FY03 to FY18. For FY18, the commitment (principal option), (b) pay interest at a rate that would charge on transitional support loans and Scale-up result in the same net present value (interest option), Facility loans was set at 0.25%. For FY19, or a combination of the two options. commitment charges have been set at the same levels as those set for FY18. As of June 30, 2018, the acceleration clause has been implemented for the qualifying IDA loans of 16 Interest. Interest is charged on all loans subject to borrowers that have graduated from IDA since the blend terms approved under IDA16, IDA17 and introduction of the accelerated repayment clause. Of IDA18, all hard-term loans, transitional support loans these 16 borrowers, 11 borrowers selected the and loans provided under the Scale-up Facility. principal option, 4 borrowers selected the interest Further, new loans offered under transitional support option, and one borrower selected a combination of the and the Scale-up Facility are available at floating two options. As part of IDA18, it was agreed that the interest rates on IBRD terms. All other rates are fixed. implementation of the acceleration clause for new Table 12 provides a summary of the financial terms of eligible borrowers would be temporarily suspended IDA’s lending products based on eligibility, effective until the IDA18 mid-term review discussions. July 1, 2018. Repayment Terms Loans approved through June 30, 1987 have a final maturity of 50 years, including a grace period of 10 IDA Management’s Discussion and Analysis: June 30, 2018 21 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Loans, Grants and Guarantee Activity million). In terms of regional focus, Africa accounted for all of the FY18 commitments. See Section VI: Commitments Other Development Activities and Programs. (see Commitments of loans in FY18 were $18,544 million, Table 13). an increase of $2,301 million (14%) over FY17 ($16,243 million). In terms of regional focus, Africa Commitments of grants in FY18 were $5,003 million, accounted for $11,111 million of the increase. Africa an increase of $1,833 million (58%) over FY17 and South Asia together accounted for 91% of the ($3,170 million). In terms of regional focus, Africa FY18 commitments. accounted for 85% of the total FY18 commitments (see Table 14) Commitments of guarantees in FY18 were $463 million, an increase of $413 million over FY17 ($50 Table 13: Commitments of Loans and Guarantees by Region In millions of U.S. dollars For the fiscal year ended June 30, 2018 2017 Variance Africa $ 11,574 $ 9,144 $ 2,430 East Asia and Pacific 530 2,617 (2,087) Europe and Central Asia 861 643 218 Latin America and the Caribbean 273 317 (44) Middle East and North Africa 30 228 (198) South Asia 5,739 3,344 2,395 Total $ 19,007 $ 16,293 $ 2,714 Table 14: Commitments of Grants by Region In millions of U.S. dollars For the fiscal year ended June 30, 2018 2017a Variance Africa $ 3,837 $ 1,535 $ 2,302 East Asia and Pacific 101 86 15 Europe and Central Asia 96 96 - Latin America and the Caribbean 155 186 (31) Middle East and North Africa 400 783 (383) South Asia 414 484 (70) Total $ 5,003 $ 3,170 $ 1,833 a. Excludes $50 million grant for the Pandemic Emergency Financing Facility Table 15 provides details of the top five borrowers with the largest loan outstanding balances as of June 30, 2018. These borrowers represented 49% of total loans outstanding as of that date. Table 15: Top Five Borrowers with the Largest Loan Outstanding Balance as of June 30, 2018 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 $ 150,028 $ 23,963 $ 14,219 $ 14,033 $ 12,838 $ 8,217 $ 76,758 % of Total Loans Outstanding 100% 16% 10% 9% 9% 5% 51% Weighted Average Maturity (Years) 12.3 5.9 14.0 12.0 13.4 14.8 13.6 Loans outstanding by terms Concessional Regular 93,179 4,818 14,216 914 7,728 5,237 60,266 Blend 54,546 18,208 - 12,467 4,858 2,980 16,033 Hard 1,313 469 - 465 252 - 127 Non-concessional Scale Up Facility 522 - 3 187 - - 332 Transitional support 468 468 - - - - - Undisbursed balance $ 61,243 $ 4,680 $ 6,955 $ 3,671 $ 4,831 $ 6,700 $ 34,406 22 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Figure 5 shows the concentration of IDA’s outstanding loan portfolio amongst its largest borrowers for the average of FY13 through FY17 and for FY18. Figure 5: Exposure of Largest IDA Borrowing Countries 67% 67% 50% 49% 37% 35% 19% 16% Average FY18 (FY13-FY17) Top 1 Top 3 Top 5 Top 10 IDA Management’s Discussion and Analysis: June 30, 2018 23 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 risks only to the extent necessary to obtain the required lending, that it offers to its borrowing member private financing, taking into account country, market countries to help them meet their development goals. and, if appropriate, project circumstances. IDA’s These include guarantees, debt relief, trust fund guarantees require a sovereign counter-guarantee and administration, and externally funded reimbursable indemnity, comparable to the requirement of a advisory services. sovereign guarantee for IDA lending to sub-sovereign and non-sovereign borrowers. These guarantees are Guarantees separate and distinct from those offered under the IDA offers both Project-based and Policy-based Private Sector Window, see Section III: IDA’s Guarantees. These guarantees are available for Financial Resources. See Table 16 for the types of projects and programs in member countries to help guarantees that IDA provides. mobilize private financing for development purposes. IDA’s guarantees are partial in nature as they cover Table 16: 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 sovereign or sub-sovereign projects. Policy-based They cover debt service default, irrespective of the cause of such default, on a specific portion of commercial guarantees debt owed by government and associated with the supported government’s program of policy and institutional actions. Table 17: Pricing for IDA’s Project-Based and Policy-Based Guarantees, effective July 1, 2018 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 a Initiation fee 15 bps N.A. 15 bps N.A. Processing fee b 50 bps N.A. 50 bps N.A. Standby fee 0 bps 0 bps 25 bps 25 bps Guarantee fee 75 bps 75 bps 50-165 bps c 50-165 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 Section III: IDA’s Financial Resources. For additional IDA’s exposure on its project and policy based information, see the Notes F and G to IDA’s Financial guarantees (measured by discounting each guaranteed Statements. amount from its next call date), was $1,741 million as Assisting Borrowing Members of June 30, 2018 ($1,152 million—June 30, 2017). Manage Risk The $589 million increase in guarantee exposure is primarily due to a $613 million guarantee that became IDA facilitates access to risk management solutions to effective in June 2018. The maximum potential mitigate the financial effects of natural disasters for undiscounted future payments that IDA could be borrowing members. Financial solutions can include required to make under these guarantees is $1,808 disaster risk financing through catastrophe swaps, million as of June 30, 2018 ($1,177 million—June 30, insurance and reinsurance contracts, and regional 2017). In addition, IDA had $36 million of exposure pooling facilities. under PSW guarantees as of June 30, 2018. See 24 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section VI: Other Development Activities and Programs In order to promote countries’ resilience to disasters the inception of the initiative and is adjusted to reflect and expand the range of IDA’s crisis instruments, the impact of any changes in the decision and members endorsed the introduction of the Catastrophe completion point dates of the related countries. Deferred Draw-Down Option (CAT-DDO) for During FY18, there was no cancellation of eligible IDA18. The CAT-DDO is a contingent credit line that loans under the MDRI (Nil - FY17). On a cumulative provides immediate liquidity to countries in the basis, debt relief has been provided on $40.2 billion of aftermath of a catastrophe and serves as early loans under the MDRI as of June 30, 2018. The financing while funds from other sources such as provision for the debt relief was recorded at the bilateral aid or reconstruction loans are being beginning of the MDRI Initiative. mobilized. CAT-DDOs are intended to enhance IDA countries’ capacity to plan for and manage crises. In Trust Funds Administration June 2018, IDA’s Board approved the first CAT-DDO of a $200 million. Trust Funds are an integral part of the WBG’s development activities, providing resources and added Crisis Response Window flexibility in providing development solutions that serve member recipients and donors alike. The The primary objective of the CRW is to provide IDA partnerships funded by trust funds often serve as a countries with additional resources that will help them platform from which IDA and its members can draw to respond to severe economic crises, major natural on the WBG’s diverse technical and financial disasters, or health emergencies and pandemics, and resources to achieve development goals that cannot be return to their long-term development paths. An addressed effectively by any single member, given allocation is made to the CRW under each their complexity, scale, and scope. IDA’s roles and replenishment. The CRW was allocated $3 billion responsibilities in managing trust funds depend on the under IDA18, with $340 million utilized in FY18. 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. performance. The initiatives aim to reduce the external debt of eligible countries as part of a broader poverty Recipient-Executed Trust Funds (RETFs) are reduction strategy, whilst safeguarding the long-term provided to a third party, normally in the form of financial capacity of IDA and other participating project financing, and are supervised by IDA. multilateral institutions; and encouraging the best use Financial Intermediary Funds (FIFs): IDA, as a of additional member resources for development, by trustee, provides financial management services such allocating these resources to low-income countries on as receiving, holding and transferring funds to the basis of policy performance. multiple implementing entities. In order to receive irrevocable debt relief, eligible countries are required to maintain macroeconomic stability, carry out key structural and social reforms, and implement a Poverty Reduction Strategy, in addition to being in good standing with respect to all eligible debt repayments. To ensure IDA’s financial capacity was not eroded, members agreed to compensate IDA with additional contributions to offset the impact of the forgone reflows, resulting from the provision of debt relief. During FY18, HIPC debt relief was provided on $10 million of loans ($9 million in FY17). There was no HIPC debt relief on service charges for FY18 ($1 million in FY17). On a cumulative basis, debt relief has been given on $2.1 billion of loans and $335 million of service charges as of June 30, 2018. The accumulated provision for debt relief was recorded at IDA Management’s Discussion and Analysis: June 30, 2018 25 Management’s Discussion and Analysis Section VI: Other Development Activities and Programs Table 18 shows IDA’s Trust Fund Activity during of, lending operations. There is a growing demand FY18 and FY17. For additional information, see from borrowers for strategic advice, knowledge Notes to Financial Statements-Note H-Trust Funds transfer, and capacity building. Such assistance Administration. includes assigning qualified professionals to survey Table 18: Trust Fund Activity developmental opportunities in member countries, analyzing their fiscal, economic and developmental In millions of U.S. dollars environment, assisting member countries in devising coordinated development programs, appraising For the fiscal year ended projects suitable for investment, and assisting member June 30, 2018 2017 countries in improving their asset and liability Revenue Fees from Trust management techniques. While most of IDA’s Fund Administration $ 48 $ 42 advisory services and analytical work is financed by Trust Fund its own budget or donor contributions (Trust Funds), Disbursements (as an executing agency) 460 400 clients may also pay for such services. RAS allow IDA to provide advisory services that clients demand, but that IDA cannot fund in full within the existing budget The cash and investment assets held in trust by IDA as envelope. In FY18, income relating to reimbursable administrator and trustee as of June 30, 2018 and June advisory services was $51 million (FY17 - $42 30, 2017 are summarized in Table 19. IDA’s million). contribution to these trust funds for the year ended June 30, 2018 was nil ($50 million in June 30, 2017). Buy-down of Loans – Partnership for Table 19: Cash and Investment Assets Held in Trust by Polio IDA The Partnership for Polio program to fund the immunization of children in high-risk polio countries In millions of U.S. dollars has a funding mechanism that allows the purchase of Total fiduciary assets oral vaccines from the proceeds of loans. As of June 30, 2018 2017 Under this program, IDA enters into an arrangement IDA-executed $ 44 $ 40 with third party donors who make payments on the Jointly administered with affiliated organization 810 817 borrower’s service and commitment charges through a Recipient-executed 2,040 1,949 trust fund until the borrower reaches agreed Financial intermediary performance goals. The trust fund then buys down the funds 220 270 related loans for an amount equivalent to the present Execution not yet value of the remaining cash flows of the related loans, assigned a 2,664 3,086 Total $ ensuring IDA incurs no economic loss. The trust fund 5,778 $ 6,162 subsequently cancels the purchased loans, converting a.These represent assets held in trust for which the determination as them to grant terms. During FY18 and FY17, there to the type of execution is yet to be finalized were no loans purchased under the buy-down mechanism. Externally funded Reimbursable Advisory Services (RAS) IDA provides technical assistance to its member countries, both in connection with, and independent 26 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section VII: Investment Activities Section VII: Investment Activities As of June 30, 2018, IDA’s net investment portfolio disbursements for loans, grants, debt service, and totaled $33.7 billion (Figure 6), of which $32.9 billion administrative expenses. represents the liquid asset portfolio, and $0.8 billion Table 20: Liquid Asset Portfolio Composition represents the non-trading portfolio. In millions of U.S. dollars Figure 6: Net Investment Portfolio In billions of U.S. dollars As of June 30, 2018 40 Liquid Asset Portfolio 33.7 35 Tranche 1 $ 15,998 29.9 29.7 30 Stable 5,958 25 Operational 9,461 20 Discretionary 1,506 15 Total $ 32,923 10 5 - FY16 FY17 FY18 Table 21: Liquid Asset Portfolio by Tranche In millions of U.S. dollars Liquid Asset Portfolio As of June 30, 2017 Investments by Tranche IDA’s liquid asset portfolio will undergo a Tranche 1 $ 17,233 realignment during the three years of IDA18, as market debt will be introduced gradually when Tranche 2 3,910 needed. The majority of IDA’s liquid assets will Tranche 3 7,574 continue to be funded by equity over this period. In Total $ 28,717 addition, IDA’s liquid asset portfolio has transitioned from a tranche structure to a sub-portfolio structure as follows: During FY18 and FY17, the liquid asset portfolio had a relatively long duration, as a result of IDA’s interest Tranche 3 (Short-term Investment Tranche) has immunization strategy, implemented through Tranche become the Operational Sub-Portfolio and holds 1. Under this strategy, the duration of IDA’s liquidity to meet daily cash requirements. investments is aligned with that of its liabilities. The Tranche 2 (Medium Term Investment Tranche) has longer duration of the portfolio leads to higher become the Stable Sub-Portfolio and is sized initially sensitivity to market rates, and relatively large to hold the prudential minimum level of liquid assets unrealized mark-to market gains/losses depending on less the eligible amount of Tranche 1 assets which the magnitude of the changes in interest rates. IDA’s covers net liabilities maturing over the next 24 months. return for FY18 was 0.65% primarily due to unrealized mark-to-market losses reflecting the increase in yield Tranche 1 remains as a separate “Tranche 1” Sub- curves across major currencies. Table 22 and Table Portfolio and is managed as an asset-liability 23 provide a breakdown of the average balances and management (ALM) Sub-Portfolio, as defined in the returns of IDA’s liquid asset portfolio. For details on IDA17 Investment Strategy, until the associated returns of the total portfolio, refer to Section IV: liabilities expire. Financial Results. A Discretionary Sub-Portfolio has been created to Table 22: Average Balances and Returns by Sub Portfolio invest additional liquidity beyond what is required for the Operational and Stable sub-portfolios. In millions of U.S. dollars, except rates in percentages FY18 The primary objective of IDA’s liquid asset portfolio Sub Portfolios Average Balance Return strategy continues to be preservation of capital within Tranche 1 $ 16,915 0.70% Stable 5,022 0.65% institutional constraints. Consistent with this primary Operational 8,155 0.74% objective, IDA restricts its investments to high quality Discretionarya 1,503 0.40% instruments. IDA aims to earn reasonable investment Total $ 30,468 0.65% returns, while ensuring timely availability of funds for future cash flow requirements, including a. Since its creation in April 2018. IDA Management’s Discussion and Analysis: June 30, 2018 27 Management’s Discussion and Analysis Section VII: Investment Activities Table 23: Average Balances and Returns by Tranche IDA’s prudential minimum liquidity policy, ensures that it holds sufficient liquidity. The prudential In millions of U.S. dollars, except rates in percentages minimum liquidity level is set at 80% of 24 months of FY17 projected net outflows. For FY18, the prudential Tranches Average Balance Return minimum was $10.7 billion. The prudential minimum 1 $ 17,057 (0.66%) for FY19 has been set at $15.9 billion. See Section IX 2 3,680 0.10% – Risk Management for details on how IDA manages 3 8,472 0.42% liquidity risk. Total $ 29,209 (0.30%) Non-Trading Portfolio During FY15, with the proceeds of a concessional loan IDA’s liquid assets are held mainly in highly rated, from a member, IDA purchased a debt security issued fixed-income instruments. See Box 3 for types of by the IFC. IDA elected to measure the security at fair fixed-income instruments, and Table 28 for eligibility value, so that the measurement method (fair value) criteria for IDA’s investments. could be consistently applied to all its investments. The changes in fair value for this security are reflected Box 3: Fixed-Income instruments in the Statement of Income. As of June 30, 2018, the  Government and Agency Obligations. non-trading portfolio had a fair value of $812 million  Time deposits, and other unconditional obligations (FY17-$960 million). See Notes to Financial of banks and financial institutions. Statements–Note C–Investments.  Asset-backed securities (including mortgage- backed securities).  Currency and interest rate derivatives (including currency forward contracts).  Exchange-traded options and futures. 28 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section VIII: Borrowing Activities Section VIII: Borrowing Activities Concessional Loans from Members received during the current fiscal year. Interest expense associated with these loans was $103 million Introduced in IDA17, Concessional Partner Loans in FY18 (FY17 - $83 million). (CPLs) will continue as a source of funding in IDA18. The terms in IDA18 are similar to IDA17, where the Market Debt borrowing terms of the concessional loans from On April 17, 2018, for the first time, IDA issued $1.5 members aim to follow the concessional features of billion of debt in the international capital markets. This IDA’s loans. debt was denominated in USD and has a maturity of The maturities of the loans are either 25 or 40 years to five years. As part of IDA’s asset-liability match the terms of IDA’s loans, with a grace period of management strategy, IDA also entered into derivative 5 years for a 25-year loan and 10 years for a 40-year transactions to convert the fixed-rate bond into a loan. The loans have an all-in SDR equivalent coupon floating-rate instrument. of up to one percent. Short Term Borrowings Voting rights are allocated to members who provide concessional loans following the drawdowns by IDA, Under its Investment Guidelines, IDA is allowed to and are based on the cash paid, computed as the enter into transactions involving securities sold under derived grant element of the loan. The grant element, repurchase agreements and securities lent under which is paid in and recorded as equity, is a function securities lending agreements. These transactions are of the terms of the loan and the discount rate agreed accounted for as short-term borrowings. The upon during the replenishment discussions - 2.35% agreements are secured predominantly by high quality SDR equivalent for 25-year maturity and 2.70% for collateral, including government issued debt, and are 40-year maturity in IDA18. In IDA17 the discount rate used both to enhance returns and for liquidity was a single rate of 2.65% SDR equivalent. management purposes. As of June 30, 2018, the borrowings outstanding As of June 30, 2018, securities lent or sold under balance relating to concessional loans from members repurchase agreements totaled $2,541 million, a was $5,811 million, an increase of $2,151 million as decrease of $19 million over June 30, 2017. Table 24 compared to June 30, 2017 ($3,660 million). The provides details on short-term borrowing activities. increase is primarily due to additional loan proceeds Table 24: Short-Term Borrowings In millions of U.S.dollars, except rates in percentages As of June 30, 2018 2017 2016 Securities sold under repurchase agreements and securities lent under securities lending agreements, Balance at year-end $ 2,541 $ 2,560 $ 1,968 Average monthly balance during the year $ 2,767 $ 2,576 $ 3,636 Maximum month-end balance $ 4,090 $ 3,261 $ 4,985 Weighted-average rate at end of fiscal year 1.84% 0.74% 0.51% Weighted-average rate during the fiscal year 0.98% 0.58% 0.26% IDA Management’s Discussion and Analysis: June 30, 2018 29 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 7: 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 in Operations in IDA’s lending activities is risks in the core sovereign lending business, (ii) monitored at the corporate level by Operations Policy market and counterparty risks including liquidity risk, and Country Services (OPCS). Where fraud and and (iii) operational risks relating to people, processes corruption risks may impact IDA-financed projects, and systems. In addition, the CRO works closely with OPCS and the Integrity Vice Presidency jointly IBRD, IFC, and MIGA’s Management to review, address such issues. measure, aggregate, and report on risks and share best 30 IDA Management’s Discussion and Analysis: June 30, 2018 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.  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 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 8 depicts IDA’s management risk committee structure for financial and operational risks: Figure 8: Management Risk Committee Structure for Financial and Operational Risks IDA Management’s Discussion and Analysis: June 30, 2018 31 Management’s Discussion and Analysis Section IX: Risk Management Financial Risk Committees: taken, and reviewing and concluding on IDA’s overall operational risk profile. The ORC is chaired by the The Finance and Risk Committee (FRC), a Vice CRO and escalates significant risks/decisions to the President level committee, provides a high-level FRC and ERC. governance structure for decisions that may have financial risks. The FRC, was created under the Summary and Management of IDA’s authority of the Managing Director and WBG Chief Specific Risks Financial Officer (MDCFO) to approve, clear, or discuss: (a) risk policy and procedure documents IDA assumes financial risks in order to achieve its related to financial integrity, income sustainability and development and strategic objectives. IDA’s financial balance sheet strength, and (b) issues and new business risk management framework is designed to enable and initiatives with policy implications related to IDA’s support the institution in achieving its goals in a financial risks in the areas of finance, which include financially sustainable manner. IDA manages credit, country credit, market, counterparty, liquidity and market and operational risks for its financial activities model risks. The FRC helps to integrate individual which include lending, borrowing and investing components of finance and risk management activities (Table 25). The primary financial risk to IDA is the by building on mechanisms and processes already in country credit risk inherent in its loan and guarantee place, and provides a forum for discussing and portfolio. IDA is also exposed to risks in its liquid communicating significant risk related issues. The asset and derivative portfolios, where the major risks FRC meets regularly to discuss the financial are interest rate, exchange rate, commercial performance, new products and services, and risk counterparty, and liquidity risks. IDA’s operational management of IDA. risk management framework is based upon a structured and uniform approach to identify, assess The New Business Committee (NBC) is a standing and monitor key operational risks across business committee of the FRC under the authority of the units. The Board, particularly the Audit Committee, MDCFO. The NBC provides advice, guidance and periodically reviews trends in IDA’s risk profiles and recommendations to the FRC, by performing due performance, as well as any major developments in diligence over new financial products or services to risk management policies and controls. ensure that Management has a full understanding of the rationale, costs, risks and rewards of the product or Table 25: Summary of IDA's Specific Risk Categories service being considered. Types of Financial How the risk is managed Risk Operational Risk Committees: Credit Risk The Enterprise Risk Committee (ERC) is a Country Credit Risk IDA’s credit-risk-bearing capacity corporate committee that has oversight over and individual country exposure limits. operational and non-financial risks across IDA. Chaired by IDA’s Managing Director and Chief Counterparty Credit Counterparty credit limits and Administrative Officer (MDCAO), it consists of a Risk collateral. Vice President level committee to review and discuss enterprise risk matters. Specifically, the Committee Market Risk has a governance role over risk matters relating to Interest Rate Risk Interest rate derivatives to match corporate security, business continuity and IT security. the sensitivity of assets and The ERC also sponsors the further development of the liabilities. enterprise risk management framework including an Exchange Rate Risk Currency derivatives to match the annual high-level survey of emerging top risks for currency composition of assets IDA. and liabilities. Operational Risk Committee (ORC) is the main Liquidity Risk Minimum liquidity target levels. governance committee for operational risk and provides a mechanism for an integrated review and Operational Risk Risk assessment and monitoring of response across IDA units on operational risks key risk indicators and events associated with people, processes, and systems including the risk of loss from inadequate internal processes, including business continuity, and recognizing that people and systems, or from business units remain responsible for managing external events. operational risks. The Committee’s key responsibilities include monitoring significant operational risk matters and events on a quarterly basis to ensure that appropriate risk-response measures are 32 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section IX: Risk Management Capital Adequacy Available (TRA) exceed Total Resources Required (TRR), plus a Conservation Buffer (CB). The TRA In support of its new financing model, IDA developed consists of IDA’s existing equity plus its outstanding a new capital adequacy framework. On July 1, 2017, loan loss reserve. The TRR is the minimum capital IDA began using a solvency-based capital adequacy required to cover expected and unexpected losses in model, which mandates that IDA holds capital for connection with all of IDA’s currently existing credit risk, market risk and operational risk covering operations and assets. It also includes a capital all activities and assets on its books. The main measure allowance to reflect losses that result from valuing of capital adequacy is Deployable Strategic Capital IDA’s concessional loan portfolio in present value (DSC), which is the capital available to support future terms using market interest rates. The CB is an extra commitments, over and above the current portfolio. buffer in the amount of 10 percent of TRA. As of June IDA is required, by the Board, to keep the DSC at 30, 2018, the DSC was 37.4%, marginally higher levels greater than or equal to zero percent. The DSC compared with June 30, 2017 (37.2%). See Table 26 is calculated as the amount by which Total Resources below. Table 26: Deployable Strategic Capital Ratio In billions of U.S.dollars except ratios in percentages As of June 30, 2018 2017 Total Resources Available (TRA) $ 168.3 $ 162.3 Total Resources Required (TRR)a 88.5 85.7 Conservation Buffer (CB) 16.8 16.2 Deployable Strategic Capital (DSC = TRA - TRR - CB) $ 63.0 $ 60.4 Deployable Strategic Capital as a percentage of Total Resources Available 37.4% 37.2% a. TRR will be increased for the $2.5 billion allocated to the Private Sector Window as it is utilized. As of June 30,2018, $45 million had been utilized. Asset Coverage Principles loss attributable to a counterparty not honoring its contractual obligations. IDA is exposed to commercial In addition to the DSC framework, IDA has policies in as well as noncommercial counterparty credit risk. place to ensure alignment of its lending and borrowing activities. Specifically, the Board approved the Country Credit Risk following asset coverage principles: IDA’s lending management framework encompasses  Management will monitor the level of assets the long-standing PBA mechanism and allocation available to satisfy all of IDA’s borrowings and framework agreed at each replenishment, shall adjust future lending and grant complemented by additional considerations required commitments should the level of asset coverage when accessing debt markets to ensure adherence to fall below the level expected for a triple-A entity. risk management (capital adequacy) requirements.  Management will monitor IDA’s liquidity to While the PBA framework was not originally intended ensure its ability to satisfy its borrowing and as a credit quality metric, it incorporates factors related commitment obligations even under stressed to country credit risk. The PBA determines the volume conditions taking into account the level expected of concessional IDA resources allocated to each for a triple-A entity without callable capital. country, based on performance in implementing  If IDA’s access to the capital markets or policies that promote economic growth and poverty alternative sources of cash funding is impaired, reduction, as assessed under the Country Policy and then no additional loan, credit or grant Institutional Assessment (CPIA). The CPIA includes commitments will be approved until access to economic management criteria, such as fiscal policy cash funding, has resumed or all market debt is and debt policy and management. repaid. In addition to these considerations in the PBA, IDA Credit Risk assesses the country credit risk of all its borrowers. Based on these risk ratings, to manage overall IDA faces two types of credit risk: country credit risk portfolio risk, the allocation outcomes of the PBA and and counterparty credit risk. Country credit risk is the other mechanisms are reviewed to ensure that they are risk of loss due to a country not meeting its contractual compatible with the Deployable Strategic Capital obligations, and counterparty credit risk is the risk of Framework and Single Borrower Limit. IDA Management’s Discussion and Analysis: June 30, 2018 33 Management’s Discussion and Analysis Section IX: Risk Management Single Borrower Limit Debt Relief Portfolio concentration risk, which arises when a small IDA has participated in two comprehensive debt relief group of borrowing countries account for a large share initiatives, HIPC and MDRI, adopted by the global of loans outstanding, is a key consideration for IDA. development community to reduce the debt burdens of Concentration risk is managed through the SBL, developing countries. In each case, IDA agreed to which caps exposure to any single borrowing country provide debt relief in return for future compensation at 25 percent of equity, in line with the Basel-based from members for forgone reflows, ensuring that maximum exposure limit. IDA’s financial capacity would not be reduced. For a borrower to be eligible for debt relief on its loans with For FY19 the SBL has been set at $41 billion (25 IDA, they are required to maintain macroeconomic percent of $164 billion of equity as of June 30, 2018), stability, carry out key structural and social reforms, compared with $40 billion for FY18. Currently, the and maintain all loans in accrual status. maximum country exposure levels compatible with IDA’s overall capital adequacy target are lower than Probable Losses, Overdue Payments and Non- the SBL for all IDA-borrowing countries. As a Performing Loans consequence, the SBL is not currently a constraining When a borrower fails to make payments on any factor. principal, interest or other charges due to IDA, IDA As of June 30, 2018, the ten countries with the highest may suspend disbursements immediately on all loans exposures accounted for 67% of IDA’s total exposure and grants to that borrower. IDA’s current practice is ( to exercise this option using a graduated approach (Table 27). These practices also apply to member Figure 5). IDA’s largest exposure to a single countries eligible to borrow from both IDA and IBRD, borrowing country, India, was $24 billion as of June and whose payments on IBRD loans may become 30, 2018 (Table 15). Monitoring these exposures overdue. It is IDA’s practice not to reschedule interest relative to the SBL, however, requires consideration of or principal payments on its loans, or participate in the repayment profiles of existing loans, as well as debt rescheduling agreements with respect to its loans. disbursement profiles and projected new loans and As of June 30, 2018, no IDA borrowing countries in guarantees. the accrual portfolio had overdue payments beyond 45 days. Table 27: 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. The loan-loss provision is calculated using IDA’s A key determinant in the provision for losses on loans exposure, the expected default frequency (EDF), or and other exposures is IDA’s borrowing country credit probability of default, and the estimated loss in the risk ratings. These ratings are IDA’s own assessment event of default. Probable losses inherent in the loan of borrowers’ ability and willingness to repay IDA on portfolio attributable to country credit risk are covered time and in full. by the accumulated provision for losses on loans and Countries are rated using IDA’s internal other exposures, including PSW exposures, while comprehensive credit risk rating methodology. This unexpected losses owing to country credit risk are rating methodology was reviewed and refined during covered by equity. the fiscal year. The net impact of this refinement on 34 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section IX: Risk Management IDA’s accumulated provision at June 30, 2018, was Derivative Instruments $409 million, 0.28% of IDA net loans outstanding. For In the normal course of its business, IDA enters into additional information see Notes to Financial various derivative instruments to manage foreign Statements–Note F–Loans and Other Exposures. exchange and interest rate risks. These instruments are In FY18, IDA had a $548 million loan loss also used to help borrowers to manage their financial provisioning charge, compared with a $56 million risks. Derivative transactions are conducted with other release of provision in FY17. The main driver of the financial institutions and, by their nature, entail increase in the provisioning requirement was the commercial counterparty credit risk. refinement in the rating methodology. As of June 30, While the volume of derivative activity can be 2018, IDA had $150 billion of loans outstanding, of measured by the contracted notional value of which loans in non-accrual status represent 1.7%. derivatives, notional value is not an accurate measure IDA’s total provision for losses on loans was $2.4 of credit or market risk. IDA uses the estimated billion (excluding accumulated provision for losses on replacement cost of the derivative instruments, or debt relief) which represents a provisioning rate of potential future exposure (PFE), to measure credit risk 1.6%. IDA’s provisioning rate on loans for FY14 with counterparties.  through FY18 has been between 1.0% to 1.6%. For a summary of countries with loans or guarantees in Under IDA’s mark-to-market collateral arrangements, nonaccrual status at June 30, 2018, see Notes to IDA receives collateral when mark-to-market Financial Statements–Note F–Loans and Other exposure is greater than the ratings-based collateral Exposures. threshold. As of June 30, 2018, IDA had received $2 million of cash collateral for its derivative transactions Commercial Counterparty Credit Risk (June 30, 2017 – less than $0.1 million). IDA is exposed to commercial counterparty credit Since becoming a rated entity, IDA has started to risk. This is the normal risk that counterparties fail to expand the number of derivative agreements that it has meet their payment obligations under the terms of the with commercial counterparties. In these agreements, contract or other financial instruments. Effective IDA is not required to post collateral as long as it management of counterparty credit risk is vital to the maintains a triple-A credit rating. See Notes to success of IDA’s funding, investment, and Financial Statements - Note E–Derivative Instruments asset/liability management activities. The monitoring for more details. and management of these risks is continuous as the market environment evolves. Investment Securities IDA mitigates the counterparty credit risk from its IDA’s Board-approved General Investment investment and derivative holdings through the credit Authorization provides the basic authority for IDA to approval process, the use of collateral agreements and invest its liquid assets. Furthermore, all investment risk limits, and other monitoring procedures. The activities are conducted in accordance with a more credit approval process involves evaluating detailed set of Investment Guidelines set by counterparty and product specific creditworthiness, management. The Investment Guidelines are approved assigning internal credit ratings and limits, and by the MDCFO and implemented by the Treasurer. determining the risk profile of specific transactions. The most recent update was in FY18, to incorporate Credit limits are set and monitored throughout the the changes required under the IDA18 hybrid year. Counterparty exposure is updated daily, taking financing model. Issuer and product investment into account; current market values of assets held, eligibility and risk parameters relative to benchmarks estimates of potential future movements of exposure are core components of these Guidelines. The for derivative instruments, and related counterparty Guidelines also include a consultative loss limit to collateral agreements. Collateral posting requirements reflect a level of tolerance for the risk of are based on thresholds driven by public credit ratings. underperforming the benchmark in any fiscal year and Collateral held includes cash and highly rated liquid a duration deviation metric. Clear lines of investment securities. responsibility for risk monitoring and compliance are highlighted in the Guidelines. Credit risk appetite is IDA’s liquid asset portfolio consists mostly of conveyed through specific eligibility criteria (Table sovereign government bonds, debt instruments issued 28). IDA has procedures in place to monitor by sovereign government agencies, and time deposits performance against this limit and potential risks, and with banks. More than half of these investments are it takes appropriate actions if the limit is reached. All with issuers and counterparties rated triple-A or investments are subject to additional conditions double-A. (Table 29) specified by the Chief Risk Officer department, as deemed necessary. IDA Management’s Discussion and Analysis: June 30, 2018 35 Management’s Discussion and Analysis Section IX: Risk Management Table 28: 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 59% of the portfolio rated AA or above arrangements for swap transactions, its residual as of June 30, 2018, 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 $35,677 million backed securities, Corporates, and Time Deposits). as of June 30, 2018. (Table 29). Table 29: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating In millions of U.S. dollars, except rates in percentages As of June 30, 2018 June 30, 2017 Counterparty Non- Total % of Non- Total % of Sovereigns Sovereigns Rating Sovereigns Exposure Total Sovereigns Exposure Total AAA $ 6,586 $ 5,003 $ 11,589 32 $ 8,065 $ 5,088 $ 13,153 42 AA 2,659 6,861 9,520 27 3,919 5,194 9,113 29 A 9,752 4,783 14,535 41 6,860 2,017 8,877 29 BBB or below 30 3 33 * - 4 4 * Total $ 19,027 $ 16,650 $ 35,677 100 $ 18,844 $ 12,303 $ 31,147 100 * denotes less than $0.5 million For the contractual value, notional amounts and commercial counterparties where IDA has a net related credit risk exposure amounts by instrument see exposure (net receivable position), IDA calculates a Notes to Financial Statements - Note E- Derivative Credit Value Adjustment (CVA) to reflect credit risk. Instruments. For net derivative positions with commercial and non- commercial counterparties where IDA is in a net Credit and Debit Valuation Adjustments  payable position, IDA calculates a Debit Valuation Most outstanding derivative positions are transacted Adjustment (DVA) to reflect its own credit risk. over-the-counter and therefore valued using internally developed valuation models. For commercial and non- 36 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section IX: Risk Management The CVA is calculated using the fair value of the  Matching interest rates between assets and related derivative contracts, net of collateral received under funding to minimize open interest rate positions. credit support agreements, and the probability of counterparty default based on the Credit Default  The funding risk related to the mismatch between Swaps (CDS) spread and, where applicable, proxy the maturity profile of the debt funding and the CDS spreads. IDA does not currently hedge this related assets is monitored through duration exposure. The DVA calculation is generally measurements and adjustments to capital consistent with the CVA methodology and requirements to cover this risk. incorporates IDA’s own credit spread as observed Exchange Rate Risk through the CDS market. As of June 30, 2018, IDA recorded a CVA adjustment on its balance sheet of IDA faces foreign exchange rate risk exposure as a $0.3 million, and a DVA of $2 million. result of the currency mismatch between its commitments for loans and grants, which are mainly Market Risk denominated in SDRs; equity contributions from members, which are typically denominated in national IDA is exposed to changes in interest and exchange currencies; and the portion of IDA’s internal resources rates. The introduction of market debt financing into and expenditures that is denominated in U.S. dollars. IDA’s business model from IDA18 presents additional exposures. Accordingly, IDA has updated its ALM Changes in exchange rates affect the capital adequacy Framework in order to minimize its exposure to of IDA when the currency of the equity funding the market risk associated with this new debt issuance. loan portfolio is different from that of the loan exposure. Accordingly, the aim of IDA’s exchange Interest Rate Risk rate risk management is the protection of IDA’s IDA is exposed to interest rate risk due to mismatches financial capacity, as measured by the capital between its assets (loan and investment portfolios) and adequacy framework. its liabilities (borrowing portfolio) both in terms of The key components of IDA’s foreign exchange risk maturity and instrument type. Given IDA’s lengthy mitigation framework include: disbursement profile, the duration of IDA’s assets are relatively long. This long duration, combined with  Aligning the currency composition of the funding volatility in market interest rates, would result in sources with the currency composition of IDA’s significant year-on-year variability in the fair value of assets. IDA’s equity. However, since the loan portfolio is not  Non-SDR sources of funding will be hedged to reported at fair value under U.S. GAAP the impact of SDRs, where required, to lock-in the SDR value. this variability on IDA’s reported Balance Sheet is not Adjusting the currency of funding sources when fully evident. Table 30 provides a fair value estimate single currency credits are approved, in order to of IDA’s financial assets and liabilities. maintain the alignment of currency composition of As of June 30, 2018, IDA’s investment-trading loans to sources of funding. portfolio (liquid asset portfolio) had a duration of  Aligning the currency composition of its equity to slightly below two years. During FY18, this portfolio that of the currency composition of required capital experienced unrealized mark-to-market losses of $128 (“Total Resources Required” measure in capital million as compared to unrealized mark-to-market adequacy framework). losses of $367 million in FY17, as a result of the increase in the yield curves of major currencies in The reported levels of its assets, liabilities, income, FY18. and expenses in the financial statements are affected by exchange rate movements in all the currencies in Under IDA18, the investment-trading portfolio was which IDA transacts, relative to its reporting currency, adjusted to reflect the new financing model. The the U.S. dollar. These movements are shown as portfolio is transitioning from the previous tranche currency translation adjustments. Translation structure to a sub-portfolio structure which is adjustments relating to the revaluation of assets and comprised of a Stable portfolio, Discretionary liabilities denominated in SDR and SDR component portfolio and an Operational portfolio. See Section currencies, (IDA’s functional currencies), are reflected VII: Investment Activities. in Accumulated Other Comprehensive Income, in Under the new integrated financing model, IDA equity. Translation adjustments relating to non- employs the following strategies to continue to functional currencies are reported in IDA’s Statement enhance its management of interest rate risk: of Income (see Note A: Summary of Significant Accounting and Related Policies in the Notes to the  The capital adequacy policies factor in the Financial Statements). sensitivity to interest rates. IDA Management’s Discussion and Analysis: June 30, 2018 37 Management’s Discussion and Analysis Section IX: Risk Management IDA uses currency forward contracts to convert methodology under the overall currency management members’ encashments provided in national framework. currencies into the five currencies of the SDR basket. As of June 30, 2018, IDA had entered into $13.2 Liquidity Risk billion in notional foreign exchange forwards directly Liquidity risk arises in the general funding of IDA’s with market counterparts in order to manage exchange activities and in managing its financial position. It rate risk. IDA’s economic hedges have been regularly includes the risk of IDA being unable to fund its rebalanced during FY18. For further details, see Notes portfolio of assets at appropriate maturities and rates, to Financial Statements–Note E–Derivative and the risk of being unable to liquidate a position in a Instruments. timely manner at a reasonable price. The payable leg of the currency forward contracts IDA’s liquidity management guidelines were revised economically hedging member equity contribution in FY18 to reflect the integrated financing model pledges is denominated in non-functional currencies. under IDA18. IDA’s aggregate liquid asset holdings Accordingly, appreciation (depreciation) of these are now kept above a specified prudential minimum to currencies against the U.S. dollar results in exchange safeguard against cash flow interruptions. The rate losses (gains), which are reported in the Statement Prudential Minimum is equal to 80% of 24 months of of Income. The translation adjustment on future projected net outflows. For FY18 the prudential inflows from members is the economic offset to the minimum was $10.7 billion . For FY19, the prudential translation adjustment on non-functional currencies of minimum has been set at $15.9 billion. currency forward contracts. IDA will hold liquidity above the prudential minimum The translation adjustment gain on non-functional to ensure sufficient liquidity under a wide range of currencies of $89 million in FY18 was due to the shock scenarios as well as to give it flexibility in depreciation of majority of the non-functional timing its borrowing transactions and to meet working currencies against the U.S. dollar. This was offset by capital needs. the effect of foreign exchange on the future inflows from members, which was a loss of $185 million in Operational Risk FY18. In contrast, the translation adjustment loss on Operational risk is defined as the risk of loss resulting non-functional currencies of $49 million in FY17 was from inadequate or failed internal processes, people due to the appreciation of the non-functional and systems, or from external events. currencies against the U.S. dollar. This was offset by the effect of foreign exchange movements on the IDA recognizes the importance of operational risk future inflows from members, which was a gain of management activities, which are embedded in its $102 million in FY17. financial operations. As part of its business activities, IDA is exposed to a range of operational risks The difference between the reported translation including physical security and safety, business adjustments and the effect of foreign exchange continuity, external vendor risks and cyber security. movements on the economic offsets, primarily IDA’s approach to managing operational risk includes represent the effect of foreign exchange movements on assessing and prioritizing operational risks, the member equity contributions in non-functional monitoring and reporting relevant key risk indicators, currencies that are not economically hedged through aggregating and analyzing internal and external forward contracts due to their relatively small events, and identifying emerging risks that may affect contribution amount or the unpredictability of the business units and developing risk response and expected payment date. These residual equity mitigating actions.   contributions are hedged using a currency correlation 38 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section X: Fair Value Analysis Section X: Fair Value Analysis Fair value reflects the most current and complete The fair value of loans is calculated using market- expectation and estimation of the value of assets and based methodologies - see Notes to Financial liabilities. It aids comparability, and can be useful in Statements–Note F– Loans and Other Exposures. For decision-making. On a reported basis, IDA’s loans and details on valuation methods and assumptions relating borrowings, in the form of concessional loans from to other fair value disclosures, see Notes to Financial members, are carried at amortized cost, while all Statements–Note L–Other Fair Value Disclosures. As instruments in its investment portfolio (trading and non-financial assets and liabilities are not reflected at non-trading) and existing market debt are carried at fair value, IDA’s equity, as shown in Table 30, is not fair value. Whilst IDA intends to hold its loans and intended to reflect full fair value. borrowings to maturity, a fair value estimate of IDA’s financial assets and liabilities along with their Loan Portfolio respective carrying values is presented in Table 30. As of June 30, 2018, there was a $27.1 billion negative The fair value of these instruments is affected by fair value adjustment on IDA’s net loans outstanding changes in market variables such as interest rates, bringing the fair value to $118.5 billion. This exchange rates, and credit risk. Management uses fair compares with a $26.8 billion adjustment as of June value to assess the performance of the investment- 30, 2017, bringing the fair value to $111.5 billion. The trading portfolio, and to manage various market risks, $0.3 billion variance in the adjustment is due to including interest rate risk and commercial changes in the interest rate risk of the portfolio. counterparty credit risk. Table 30 shows that IDA’s equity on a fair value basis ($136 billion) is less than Borrowings from Members on a carrying value basis ($164 billion) primarily due The fair value of borrowings from members increased to the $27.1 billion negative fair value adjustment on from $4.2 billion as of June 30, 2017 to $6.7 billion as IDA’s net loans outstanding. This negative fair value of June 30, 2018. The increase was primarily driven adjustment arises due to the concessional nature of by the $2.1 billion in new borrowings during the year. IDA’s loans; IDA’s interest rates are below market rates for the given maturity of its loans and risk profile of the borrowers (concessional). Table 30: Fair Value Estimates and their Carrying Value In millions of U.S.dollars As of June 30, 2018 2017 Carrying Value Fair Value Carrying Value Fair Value Assets Due from Banks $ 523 $ 523 $ 483 $ 483 Investments (including securities purchased under resale agreements) 36,075 36,075 32,033 32,033 Net Loans Outstanding 145,656 118,508 138,351 111,539 Derivative Assets Investments 6,198 6,198 4,318 4,318 Other Asset-Liability Management 15,715 15,715 19,525 19,525 Borrowings 1 1 - - Receivable from affiliated organization 816 816 798 798 Other assets 1,346 1,346 1,533 1,533 Total Assets $ 206,330 $ 179,182 $ 197,041 $ 170,229 Liabilities Borrowings Concessional partner loans $ 5,811 $ 6,660 $ 3,660 $ 4,175 Market Borrowings 1,494 1,494 - - Securities sold/lent under repurchase agreements/securities lending agreements, and payable for cash collateral received 2,543 2,543 2,560 2,560 Derivate Liabilities - - Investments 6,198 6,198 4,523 4,523 Other Asset-Liability Management 15,745 15,745 19,550 19,550 Borrowings 15 15 - - Payable for grants 8,743 8,743 6,583 6,583 Payable to affiliated organization 479 479 471 471 Other liabilities 1,357 1,357 1,218 1,218 Total Liabilities $ 42,385 $ 43,234 $ 38,565 $ 39,080 Equity $ 163,945 $ 135,948 $ 158,476 $ 131,149 Total Liabilities and Equity $ 206,330 $ 179,182 $ 197,041 $ 170,229 IDA Management’s Discussion and Analysis: June 30, 2018 39 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 appropriateness of the fair value hierarchy estimates made by Management, are integral to its classification of each financial instrument. All the financial reporting. While all of these policies require financial models used for input to IDA’s financial a certain level of judgment and estimates, significant statements are subject to both internal and periodic policies require Management to make highly difficult, external verification and review by qualified complex, and subjective judgments as these relate to personnel. matters inherently uncertain and susceptible to change. Note A to the financial statements contains a summary Provision for Losses on Loans and of IDA’s significant accounting policies including a Other Exposures discussion of recently issued accounting IDA’s accumulated provision for losses on loans and pronouncements. other exposures reflects the probable losses inherent in Fair Value of Financial Instruments its nonaccrual and accrual portfolios after taking into consideration the expected relief under the HIPC Debt All fair value adjustments are recognized through the Initiative and MDRI and any provision for losses on income statement. Since IDA has elected the fair value the buy-down of loans. The provision required is a option for existing market debt instruments in its function of the expected default frequency and the borrowing portfolio, starting July 1, 2018, upon assumed severity of the loss given default for each of adoption of ASU 2016-01, IDA will reflect the portion the borrowers. of the change in fair value of these instruments that results from a change in IDA’s own credit in Other The expected default frequency is based on the Comprehensive Income. borrower’s assigned risk rating. The determination of a borrower’s risk rating is based on a quantitative The fair values of financial instruments are based on a framework which relies primarily on considerations of three-level hierarchy. political risk, external debt and liquidity, fiscal policy 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. Investments measured at net asset value per share (or Adjustments to the accumulated provision are its equivalent) are not classified in the fair value recorded as a charge or a release of provision in the hierarchy. Statement of Income. Actual losses may differ from 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 structured swaps are valued using the standard The Credit Risk Committee monitors aspects of discounted cash flow methods using market country credit risk, in particular, reviewing the observable inputs such as yield curves, foreign provision for losses on loans and guarantees taking exchange rates and basis spreads. into account, among other factors, any changes in 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 of the models used as well as the inputs applied in Additional information on IDA’s provisioning policy determining those values. and the status of nonaccrual loans can be found in the 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, 2018, 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 40 IDA Management’s Discussion and Analysis: June 30, 2018 Management’s Discussion and Analysis Section XI: Critical Accounting Policies and the Use of Estimates Provision for HIPC Debt Initiative and Provision for Losses on Buy-Down of MDRI Loans The adequacy of the accumulated provision for the IDA records a provision for losses on loans when all HIPC Debt Initiative and MDRI is based on both performance goals as well as conditions necessary to quantitative and qualitative analyses of various affect the buy-down under the Partnership for Polio factors, including estimates of Decision and program have been completed. The provision is Completion Point dates. IDA periodically reviews equivalent to the difference between the carrying these factors and reassesses the adequacy of the amount of the loans to be bought down and the accumulated provision for the HIPC Debt Initiative estimated amount to be received. The estimated and MDRI. Adjustments to the accumulated provision amount to be received is based on quantitative factors are recorded as a charge against or addition to income. including the discount rate. IDA Management’s Discussion and Analysis: June 30, 2018 41 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 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 8 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 to exercise any of its powers, except for explanation below). certain powers enumerated in the IDA Articles. IDA has its own policies and frameworks that are carried • Budget Committee - assists the Boards in out by staff that share responsibilities for both IDA and approving the World Bank’s budget and in IBRD. overseeing the preparation and execution of the IDA’s business plans. The committee provides Board Membership 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 session at the main World Bank offices in Washington and practices, and their alignment with the DC, as business requires. Each committee's terms of business needs of the organization. reference establishes its respective roles and responsibilities. As committees do not vote on issues, 42 IDA Management’s Discussion and Analysis: June 30, 2018 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 will come into effect for the FY19 audit period. The Under the Audit Committee's terms of reference, it primary amendments now permit the external auditor may convene an executive session at any time, without to provide non-prohibited, non-audit related services Management’s presence. The Audit Committee meets subject to monetary limits. separately in executive session with the external and internal auditors. Broadly, the list of prohibited non-audit services include those that would put the external auditor in the Access to Resources and to Management roles typically performed by management and in a Throughout the year, the Audit Committee receives a position of auditing their own work, such as large volume of information to enable it to carry out accounting services, internal audit services, and its duties, and meets both formally and informally provision of investment advice. The total non-audit throughout the year to discuss relevant matters. It has services fees over the term of the relevant external complete access to Management, and reviews and audit contract shall not exceed 70 percent of the audit discusses with Management topics considered in its fees over the same period. terms of reference. IDA Management’s Discussion and Analysis: June 30, 2018 43 Management’s Discussion and Analysis Section XII: Governance and Internal Controls Communication between the external auditor and the fiscal year materially affect, or would be reasonably Audit Committee is ongoing and carried out as often likely to materially affect, IDA’s internal control over as deemed necessary by either party. The Audit external financial reporting. The internal control Committee meets periodically with the external framework promulgated by the Committee of auditor and individual committee members have Sponsoring Organizations of the Treadway independent access to the external auditor. IDA’s Commission (COSO), “Internal Control - Integrated external auditors also follow the communication Framework (2013)” provides guidance for designing, requirements with the Audit Committee set out under implementing and conducting internal control and generally accepted auditing standards in the United assessing its effectiveness. IDA uses the 2013 COSO States and in the International Standards on Auditing. framework to assess the effectiveness of the internal control over external financial reporting. As of June External Auditors 30, 2018, these controls were determined to be The external auditor is appointed to a five-year term effective. See “Management’s report regarding and is subject to annual reappointment based on the effectiveness of Internal Control over External recommendation of the Audit Committee and approval Financial Reporting” on page [ ]. of a resolution by the Board. In FY14, KPMG LLP Concurrently, IDA’s external auditor provides a report began a second five-year term as IDA’s external stating IDA maintained, in all material respects, auditor. FY18 is the final year of KPMG LLP’s second effective internal control over external financial term as IDA’s external auditor. reporting. See Independent Auditor’ Report on page [ Following a mandatory rebidding of the external audit ]. contract, IDA’s Executive Directors approved the Disclosure Controls and Procedures appointment of Deloitte as IDA’s external auditor for an initial five-year term commencing FY19. Disclosure controls and procedures are designed to ensure that information required to be disclosed is Internal Controls gathered and communicated to Management as Internal Control over External Financial appropriate, to allow timely decisions regarding required disclosure by IDA. Management conducted Reporting an evaluation of the effectiveness of such controls and Each fiscal year, Management evaluates the internal procedures and the President and the MDCFO have controls over external financial reporting to determine concluded that these controls and procedures were whether any changes made in these controls during the effective as of June 30, 2018. 44 IDA Management’s Discussion and Analysis: June 30, 2018 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 Board of Executive Directors 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 periodic 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. IDA Management’s Discussion and Analysis: June 30, 2018 45 Management’s Discussion and Analysis Appendix List of Tables, Figures and Boxes Tables Table 1: IDA’s Risk Management Framework 9 Table 2: Condensed Statement of Income 13 Table 3: Condensed Balance Sheet 13 Table 4: Changes in Equity 14 Table 5: Loans Outstanding by Region 14 Table 6: Gross Disbursements of Loans and Grants by Region 15 Table 7: Revenue by Category 15 Table 8: Change in Net Asset Value of IDA’s Investment Portfolio 16 Table 9: Net Non-Interest Expenses 17 Table 10: Other expenses, net 17 Table 11: Budget Anchor 18 Table 12: Summary of Financial Terms for IDA Lending Products, effective July 1, 2018 21 Table 13: Commitments of Loans and Guarantees by Region 22 Table 14: Commitments of Grants by Region 22 Table 15: Top Five Borrowers with the Largest Loan Outstanding Balance as of June 30, 2018 22 Table 16: Types of Guarantees 24 Table 17: Pricing for IDA’s Project-Based and Policy-Based Guarantees, effective July 1, 2018 24 Table 18: Trust Fund Activity 26 Table 19: Cash and Investment Assets Held in Trust by IDA 26 Table 20: Liquid Asset Portfolio Composition 27 Table 21: Liquid Asset Portfolio by Tranche 27 Table 22: Average Balances and Returns by Sub Portfolio 27 Table 23: Average Balances and Returns by Tranche 28 Table 24: Short-Term Borrowings 29 Table 25: Summary of IDA's Specific Risk Categories 32 Table 26: Deployable Strategic Capital Ratio 33 Table 27: Treatment of Overdue Payments 34 Table 28: Eligibility Criteria for IDA’s Investments 36 Table 29: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating 36 Table 30: Fair Value Estimates and their Carrying Value 39 Figures Figure 1: WBG Goals and 2030 Development Agenda 3 Figure 2: How IDA Creates Value 7 Figure 3: IDA's Financial Business Model 8 Figure 4: Share of Financing Categories 20 Figure 5: Exposure of Largest IDA Borrowing Countries 23 Figure 6: Net Investment Portfolio 27 Figure 7: Financial and Operational Risk Management Structure 30 Figure 8: Management Risk Committee Structure for Financial and Operational Risks 31 Figure 9: Governance Structure 42 Boxes Box 1: Selected Financial Data 2 Box 2: Financing Principles 19 Box 3: Fixed-Income instruments 28 46 IDA Management’s Discussion and Analysis: June 30, 2018 INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA) FINANCIAL STATEMENTS AND INTERNAL CONTROL REPORTS TABLE OF CONTENTS June 30, 2018 FINANCIAL STATEMENTS Management’s Report Regarding Effectiveness of Internal Control Over External Financial Reporting 48 Independent Auditors’ Report on Effectiveness of Internal Control Over Financial Reporting 50 Independent Auditors’ Report 52 Balance Sheet 54 Statement of Income 56 Statement of Comprehensive Income 57 Statement of Changes in Accumulated Deficit 57 Statement of Cash Flows 58 Summary Statement of Loans 60 Statement of Voting Power and Subscriptions and Contributions 63 Notes to Financial Statements 67 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 47 MANAGEMENT’S REPORT REGARDING EFFECTIVENESS OF INTERNAL CONTROL OVER EXTERNAL FINANCIAL REPORTING 48 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 49 INDEPENDENT AUDITORS’ REPORT ON EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING 50 51 INDEPENDENT AUDITORS’ REPORT 52 53 BALANCE SHEET June 30, 2018 and June 30, 2017 Expressed in millions of U.S. dollars 2018 2017 Assets Due from Banks—Notes C and L Unrestricted cash $ 495 $ 455 Restricted cash 28 28 523 483 Investments (including securities transferred under repurchase or securities lending agreements of $2,321 million—June 30, 2018; $2,150 million—June 30, 2017) —Notes C, G and L 36,056 31,789 Securities Purchased Under Resale Agreements—Notes C and L 19 244 Derivative Assets Asset-liability management—Notes E, G and L 15,715 19,525 Borrowings—Notes D, E and L 1 - Investments—Notes C, E and L 6,198 4,318 21,914 23,843 Receivable from Affiliated Organization—Note G 816 798 Other Receivables Receivable from investment securities traded—Note C 277 527 Accrued interest and commitment charges 392 358 669 885 Loans Outstanding (Summary Statement of Loans, Notes F and L) Total Loans 211,271 196,363 Less: Undisbursed balance (61,243) (54,179) Loans outstanding 150,028 142,184 Less: Accumulated provision for losses on loans (4,383) (3,853) Add: Deferred loans origination costs 11 20 Net loans outstanding 145,656 138,351 Other Assets—Note H 677 648 Total Assets $ 206,330 $ 197,041 54 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 2018 2017 Liabilities Borrowings—Notes D and L $ $ Concessional partner loans (at amortized cost) 5,811 3,660 Market borrowings (at fair value) 1,494 - 7,305 3,660 Securities Sold Under Repurchase Agreements, Securities Lent Under Securities Lending Agreements, and Payable for Cash Collateral Received—Note C and L 2,543 2,560 Derivative Liabilities Asset-liability management—Notes E, G and L 15,745 19,550 Borrowings—Notes D, E and L 15 - Investments—Notes C, E and L 6,198 4,523 21,958 24,073 Payable for Development Grants—Note I 8,743 6,583 Payable to Affiliated Organization—Note G 479 471 Other Liabilities Payable for investment securities purchased—Note C 556 543 Accounts payable and miscellaneous liabilities—Notes F and H 801 675 1,357 1,218 Total Liabilities 42,385 38,565 Equity Members' Subscriptions and Contributions (Statement of Voting Power and Subscriptions and Contributions and Note B) Unrestricted 268,382 245,603 Restricted 328 327 Subscriptions and contributions committed 268,710 245,930 Less: Subscriptions and contributions receivable (39,596) (27,113) Cumulative discounts/ acceleration credits on subscriptions and contributions (3,653) (3,414) Subscriptions and contributions paid-in 225,461 215,403 Nonnegotiable, Noninterest-bearing Demand Obligations on Account of Members' Subscriptions and Contributions Unrestricted (9,989) (9,267) Restricted (51) (51) (10,040) (9,318) Deferred Amounts to Maintain Value of Currency Holdings (244) (244) Accumulated Deficit (Statement of Changes in Accumulated Deficit) (50,557) (45,326) Accumulated Other Comprehensive Income—Note J (675) (2,039) Total Equity 163,945 158,476 Total Liabilities and Equity $ 206,330 $ 197,041 The Notes to Financial Statements are an integral part of these Statements. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 55 STATEMENT OF INCOME For the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016 Expressed in millions of U.S. dollars 2018 2017 2016 Interest revenue Loans, net—Note F $ 1,376 $ 1,232 $ 1,149 Investments, net—Notes C, E, G and L 420 391 384 Borrowings, net—Notes C and D (149) (102) (80) Interest revenue, net of borrowing expenses 1,647 1,521 1,453 Provision for losses on loans and other exposures, (charge) release —Note F (548) 56 (380) Non-interest revenue Revenue from externally funded activities—Notes G and H 741 647 569 Other 18 8 5 Total 759 655 574 Non-interest expenses Administrative—Notes G, H and K (2,184) (2,121) (1,765) Contributions to special programs—Note G (21) (25) - Other (41) (10) 14 Total (2,246) (2,156) (1,751) Transfers from affiliated organizations and others—Notes G and H 203 599 990 Development grants—Note I (4,969) (2,577) (1,232) Non-functional currency translation adjustment gains (losses), net 89 (49) 208 Unrealized mark-to-market (losses) gains on Investments-Trading portfolio, net—Notes E and L (128) (367) 509 Unrealized mark-to-market (losses) gains on Non-Trading portfolios, net Asset-liability management—Notes E and L (17) 54 (35) Investments—Note L (21) (32) 35 Total (38) 22 - Net (Loss) Income $ (5,231) $ (2,296) $ 371 The Notes to Financial Statements are an integral part of these Statements. 56 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 STATEMENT OF COMPREHENSIVE INCOME For the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016 Expressed in millions of U.S. dollars 2018 2017 2016 Net (Loss) Income $ (5,231) $ (2,296) $ 371 Other Comprehensive Income (Loss)—Note J Currency translation adjustments on functional currencies 1,364 (820) (344) Comprehensive (Loss) Income $ (3,867) $ (3,116) $ 27 STATEMENT OF CHANGES IN ACCUMULATED DEFICIT For the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016 Expressed in millions of U.S. dollars 2018 2017 2016 Accumulated Deficit at beginning of the fiscal year $ (45,326) $ (43,030) $ (43,401) Net (loss) income for the year (5,231) (2,296) 371 Accumulated Deficit at end of the fiscal year $ (50,557) $ (45,326) $ (43,030) The Notes to Financial Statements are an integral part of these Statements. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 57 STATEMENT OF CASH FLOWS For the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016 Expressed in millions of U.S. dollars 2018 2017 2016 Cash flows from investing activities Loans Disbursements $ (11,540) $ (10,613) $ (11,461) Principal repayments 5,042 4,513 4,276 Principal prepayments 51 51 51 Proceeds from buy-down of loans - - 58 Non-trading securities—Investments Principal payments received 126 113 72 Net cash used in investing activities (6,321) (5,936) (7,004) Cash flows from financing activities Members' subscriptions and contributions 9,335 6,893 7,525 Medium and long-term borrowings (new issues) 3,603 786 653 Net derivatives-borrowings 11 - - Net cash provided by financing activities 12,949 7,679 8,178 Cash flows from operating activities Net (loss) income (5,231) (2,296) 371 Adjustments to reconcile net loss to net cash used in operating activities Provision for losses on loans and other exposures, net— charge (release) 548 (56) 380 Non-functional currency translation adjustment (gains) losses, net (89) 49 (208) Unrealized mark-to-market losses (gains) on non-trading portfolios, net 38 (22) - Other non-interest expenses 41 10 (14) Amortization of discount on borrowings 53 35 25 Changes in: Investments—Trading, net (4,208) (708) 1,483 Net investment securities traded/purchased 286 (123) (10) Net derivatives—Investments (329) 42 (45) Net derivatives—Asset-liability management (4) 210 66 Net securities purchased/sold under resale/repurchase agreements and payable for cash collateral received 188 430 (2,408) Net receivable from affiliated organizations (11) 104 45 Payable for development grants 2,117 522 (499) Accrued interest and commitment charges (28) (33) (36) Other assets (466) (144) (35) Accounts payable and miscellaneous liabilities 504 27 34 Net cash used in operating activities (6,591) (1,953) (851) Effect of exchange rate changes on unrestricted cash 3 20 (6) Net increase (decrease) in unrestricted cash 40 (190) 317 Unrestricted cash at beginning of the fiscal year 455 645 328 Unrestricted cash at end of the fiscal year $ 495 $ 455 $ 645 58 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 STATEMENT OF CASH FLOWS For the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016 Expressed in millions of U.S. dollars 2018 2017 2016 Supplemental disclosure Increase (Decrease) in ending balances resulting from exchange rate fluctuations: Loans outstanding $ 1,410 $ (588) $ (655) Investment portfolio 92 (208) 141 Derivatives—Asset-liability management 5 (139) 421 Borrowings (16) (67) 78 Principal repayments written off under Heavily Indebted Poor Countries (HIPC) Debt Initiative 10 9 10 Loans written off under Multilateral Debt Relief Initiative (MDRI) - - 524 Loans prepaid—carrying value 54 54 54 Buy-down of loans—carrying value - - 85 Interest paid on borrowings 49 46 42 The Notes to Financial Statements are an integral part of these Statements. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 59 SUMMARY STATEMENT OF LOANS June 30, 2018 Amounts expressed in millions of U.S. dollars Percentage of Undisbursed Loans Borrower or guarantor Total loans loans loans a outstanding outstanding c Afghanistan $ 356 $ - $ 356 $ 0.24 % Albania 678 1 677 0.45 Angola 610 57 553 0.37 Armenia 1,137 34 1,103 0.74 Azerbaijan 478 * 478 0.32 Bangladesh 21,174 6,955 14,219 9.48 Benin 1,431 508 923 0.62 Bhutan 255 6 249 0.17 Bolivia 984 261 723 0.48 Bosnia and Herzegovina 1,144 68 1,076 0.72 Botswana 1 - 1 * Burkina Faso 2,194 754 1,440 0.96 Burundi 145 - 145 0.10 Cabo Verde, Republic of 376 64 312 0.21 Cambodia 968 424 544 0.36 Cameroon 1,994 839 1,155 0.77 Central African Republic 167 77 90 0.06 Chad 185 - 185 0.12 China 2,051 - 2,051 1.37 Comoros 13 - 13 0.01 Congo, Democratic Republic of 1,737 726 1,011 0.67 Congo, Republic of 355 201 154 0.10 Côte d'Ivoire 2,032 1,202 830 0.55 Djibouti 232 84 148 0.10 Dominica 52 17 35 0.02 Dominican Republic 2 - 2 * Ecuador 2 - 2 * Egypt, Arab Republic of 662 - 662 0.44 El Salvador 3 - 3 * Equatorial Guinea 25 - 25 0.02 Eritrea 439 - 439 0.29 Eswatini 1 - 1 * Ethiopia 12,376 4,632 7,744 5.16 Gambia, The 162 53 109 0.07 Georgia 1,147 26 1,121 0.75 Ghana 4,498 545 3,953 2.64 Grenada 132 40 92 0.06 Guinea 434 172 262 0.17 Guinea-Bissau 228 157 71 0.05 Guyana 98 58 40 0.03 Honduras 1,001 41 960 0.64 India 28,642 4,680 23,962 15.97 Indonesia 1,271 - 1,271 0.84 Iraq 323 - 323 0.22 Jordan 114 43 71 0.05 Kenya 9,902 4,377 5,525 3.68 Kosovo 165 114 51 0.03 Kyrgyz Republic 849 194 655 0.44 Lao People's Democratic Republic 799 212 587 0.39 Lebanon 101 76 25 0.02 Lesotho 438 105 333 0.22 60 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 SUMMARY STATEMENT OF LOANS June 30, 2018 Amounts expressed in millions of U.S. dollars Percentage Undisbursed Loans Borrower or guarantor Total loans of loans loans a outstanding outstanding c Liberia $ 591 $ 261 $ 330 0.22 % Macedonia, former Yugoslav Republic of 244 - 244 0.16 Madagascar 2,102 469 1,633 1.09 Malawi 1,421 532 889 0.59 Maldives 94 6 88 0.06 Mali 2,013 386 1,627 1.08 Mauritania 450 62 388 0.26 Mauritius 3 - 3 * Moldova 767 166 601 0.40 Mongolia 738 161 577 0.39 Montenegro 48 - 48 0.03 Morocco 4 - 4 * Mozambique 3,360 502 2,858 1.91 Myanmar 2,665 1,482 1,183 0.79 Nepal 3,624 1,314 2,310 1.54 Nicaragua 930 314 616 0.41 Niger 1,579 559 1,020 0.68 Nigeria 14,917 6,700 8,217 5.48 Pakistan 17,704 3,671 14,033 9.34 Papua New Guinea 496 244 252 0.17 Paraguay 5 - 5 * Philippines 75 - 75 0.05 Rwanda 2,055 589 1,466 0.98 Samoa 120 13 107 0.07 São Tomé and Príncipe 12 - 12 0.01 Senegal 3,383 1,330 2,053 1.37 Serbia 357 - 357 0.24 Sierra Leone 447 162 285 0.19 Solomon Islands 69 33 36 0.02 Somalia 416 - 416 0.28 South Sudan 156 89 67 0.04 Sri Lanka 4,040 970 3,070 2.05 St. Kitts and Nevis 1 - 1 * St. Lucia 126 44 82 0.06 St. Vincent and the Grenadines 89 58 31 0.02 Sudan 1,215 - 1,215 0.81 Syrian Arab Republic 14 - 14 0.01 Tajikistan 582 249 333 0.22 Tanzania 10,035 3,317 6,718 4.48 Timor-Leste 61 35 26 0.02 Togo 219 161 58 0.04 Tonga 51 12 39 0.03 Tunisia 4 - 4 * Turkey 10 - 10 0.01 Uganda 5,134 2,064 3,070 2.05 Uzbekistan 2,323 1,688 635 0.42 Vanuatu 105 55 50 0.03 Vietnam 17,670 4,831 12,839 8.56 Yemen, Republic of 1,666 26 1,640 1.09 Zambia 1,717 747 970 0.64 Zimbabwe 467 - 467 0.31 Subtotal—Members c $ 210,937 $ 61,105 $ 149,832 99.87 % IDA FINANCIAL STATEMENTS: JUNE 30, 2018 61 SUMMARY STATEMENT OF LOANS June 30, 2018 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 $ 9 $ - $ 9 0.01 % b Bank Of The States Of Central Africa 61 24 37 0.02 Caribbean Development Bank b 13 - 13 0.01 West African Development Bank b 251 114 137 0.09 Subtotal—Regional development banks $ 334 $ 138 $ 196 0.13 % Total—June 30, 2018 c $ 211,271 $ 61,243 $ 150,028 100.00 % Total—June 30, 2017 $ 196,363 $ 54,179 $ 142,184 * Indicates amount less than $0.5 million or 0.005 percent NOTES a. Of the undisbursed balance at June 30, 2018, IDA has entered into irrevocable commitments to disburse $446 million ($466 million—June 30, 2017). 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. 62 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2018 Amounts expressed in millions of U.S. dollars Subscriptions and Percentage of contributions Member a Number of votes total votes committed b Part I Members Australia 346,373 1.24 % $ 5,079.54 Austria 243,084 0.87 3,627.84 Belgium 306,464 1.10 4,944.38 Canada 736,369 2.64 12,237.27 Denmark 257,916 0.92 3,968.73 Estonia 51,697 0.19 17.32 Finland 178,851 0.64 2,103.81 France 1,058,451 3.79 19,020.69 Germany 1,497,064 5.37 27,526.47 Greece 56,665 0.20 213.55 Iceland 62,756 0.22 95.01 Ireland 103,035 0.37 817.26 Italy 635,865 2.28 10,636.58 Japan 2,323,331 8.33 46,829.05 Kuwait 118,016 0.42 1,056.86 Latvia 58,224 0.21 16.28 Lithuania 51,564 0.18 14.50 Luxembourg 77,771 0.27 398.38 Netherlands 548,781 1.97 9,743.17 New Zealand 77,786 0.28 382.50 Norway 289,696 1.04 4,351.78 Portugal 70,524 0.25 319.58 Russian Federation 90,647 0.32 750.85 Slovenia 60,233 0.22 46.35 South Africa 74,260 0.27 237.29 Spain 301,949 1.08 4,661.17 Sweden 563,335 2.02 8,860.19 Switzerland 354,248 1.27 5,776.69 United Arab Emirates 1,367 0.00 5.58 United Kingdom 1,807,008 6.48 32,197.50 United States 2,846,457 10.20 53,242.92 Subtotal—Part I Members b 15,249,787 54.64 % $ 259,179.09 Part II Members Afghanistan 59,204 0.21 % $ 1.50 Albania 61,859 0.22 0.37 Algeria 114,480 0.41 30.57 Angola 153,438 0.55 8.51 Argentina 348,213 1.25 141.09 Armenia 65,146 0.23 0.69 Azerbaijan 69,886 0.25 1.14 Bahamas, The 59,379 0.21 8.54 Bangladesh 145,391 0.52 8.09 Barbados 62,860 0.23 2.36 Belize 19,834 0.07 0.27 Benin 60,820 0.22 0.78 Bhutan 58,732 0.20 0.08 Bolivia, Plurinational State of 75,994 0.27 1.65 Bosnia and Herzegovina 52,455 0.19 2.49 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 63 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2018 Amounts expressed in millions of U.S. dollars Subscriptions and Percentage of contributions Member a Number of votes total votes committed b Botswana 51,149 0.18 % $ 1.63 Brazil 477,996 1.71 842.55 Burkina Faso 63,810 0.23 0.80 Burundi 55,801 0.20 1.10 Cabo Verde, Republic of 43,840 0.16 0.13 Cambodia 70,149 0.25 1.60 Cameroon 60,782 0.22 1.61 Central African Republic 48,910 0.18 0.77 Chad 52,210 0.19 0.78 Chile 58,505 0.21 39.12 China 617,607 2.21 1,132.59 Colombia 94,824 0.34 24.91 Comoros 47,140 0.17 0.13 Congo, Democratic Republic of 82,699 0.30 4.61 Congo, Republic of 52,210 0.19 0.75 Costa Rica 27,985 0.10 0.28 Côte d’Ivoire 66,456 0.24 1.56 Croatia 88,373 0.32 5.95 Cyprus 71,251 0.26 25.29 Czech Republic 124,095 0.44 139.58 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 129,439 0.46 18.62 El Salvador 46,516 0.17 0.49 Equatorial Guinea 6,167 0.02 0.41 Eswatini 22,322 0.08 0.42 Eritrea 44,036 0.16 0.14 Ethiopia 49,232 0.18 0.70 Fiji 19,809 0.07 0.76 Gabon 2,093 0.01 0.63 Gambia, The 55,208 0.20 0.42 Georgia 62,770 0.23 0.99 Ghana 86,677 0.31 3.16 Grenada 26,427 0.09 0.13 Guatemala 40,696 0.15 0.56 Guinea 37,287 0.13 1.33 Guinea-Bissau 44,500 0.16 0.22 Guyana 71,323 0.26 1.26 Haiti 52,038 0.19 1.10 Honduras 52,855 0.19 0.43 Hungary 192,902 0.69 155.75 India 801,260 2.87 438.14 Indonesia 244,438 0.88 110.37 Iran, Islamic Republic of 115,867 0.42 24.21 Iraq 70,212 0.25 1.13 Israel 82,585 0.30 120.92 Jordan 24,865 0.09 0.41 Kazakhstan 23,297 0.08 8.50 64 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2018 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 0.28 % $ 2.43 Kiribati 43,592 0.16 0.10 Korea, Republic of 256,977 0.92 2,366.13 Kosovo, Republic of 48,357 0.17 0.85 Kyrgyz Republic 64,522 0.23 0.58 Lao People's Democratic Republic 48,910 0.18 0.73 Lebanon 8,562 0.03 0.56 Lesotho 54,340 0.19 0.23 Liberia 52,038 0.19 1.12 Libya 44,771 0.16 1.41 Macedonia, former Yugoslav Republic of 47,095 0.17 1.09 Madagascar 66,456 0.24 1.40 Malawi 56,040 0.20 0.98 Malaysia 101,921 0.37 59.82 Maldives 55,046 0.20 0.05 Mali 62,445 0.22 1.37 Marshall Islands 4,902 0.02 0.01 Mauritania 52,210 0.19 0.78 Mauritius 72,736 0.26 1.36 Mexico 142,236 0.51 168.34 Micronesia, Federated States of 18,424 0.07 0.03 Moldova 56,582 0.20 0.88 Mongolia 45,818 0.16 0.31 Montenegro 56,819 0.20 0.75 Morocco 103,422 0.37 5.57 Mozambique 62,670 0.22 2.06 Myanmar 82,096 0.29 2.57 Nepal 54,710 0.20 0.73 Nicaragua 62,982 0.23 0.44 Niger 52,210 0.19 0.76 Nigeria 100,835 0.36 19.45 Oman 56,788 0.20 1.42 Pakistan 231,608 0.83 51.19 Palau 3,804 0.01 0.03 Panama 10,185 0.04 0.03 Papua New Guinea 67,754 0.24 1.28 Paraguay 30,157 0.11 0.42 Peru 89,473 0.32 18.10 Philippines 142,821 0.51 28.74 Poland 552,712 1.98 128.06 Romania 96,010 0.34 5.23 Rwanda 52,038 0.19 1.12 St. Kitts and Nevis 13,868 0.05 0.17 St. Lucia 30,532 0.11 0.23 St. Vincent and the Grenadines 49,846 0.18 0.12 Samoa 43,901 0.16 0.14 São Tomé and Principe 49,519 0.18 0.12 Saudi Arabia 911,234 3.27 2,765.60 Senegal 72,243 0.26 2.65 Serbia 86,096 0.31 7.11 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 65 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2018 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 0.23 % $ 1.05 Singapore 49,422 0.18 253.65 Slovak Republic 89,958 0.32 34.03 Solomon Islands 43,901 0.16 0.13 Somalia 10,506 0.04 0.95 South Sudan 52,447 0.19 0.45 Sri Lanka 104,139 0.37 4.42 Sudan 64,082 0.23 1.52 Syrian Arab Republic 11,027 0.04 1.19 Tajikistan 53,918 0.19 0.54 Tanzania 68,943 0.25 2.32 Thailand 108,402 0.39 13.81 Timor-Leste 45,123 0.16 0.44 Togo 61,840 0.22 1.19 Tonga 49,514 0.18 0.11 Trinidad and Tobago 81,067 0.29 2.13 Tunisia 2,793 0.01 1.89 Turkey 167,396 0.60 201.83 Tuvalu 6,338 0.02 0.02 Uganda 50,392 0.18 2.30 Ukraine 115,569 0.41 8.06 Uzbekistan 73,936 0.27 1.93 Vanuatu 50,952 0.18 0.31 Vietnam 61,168 0.22 2.23 Yemen, Republic of 68,976 0.25 2.20 Zambia 84,527 0.30 3.70 Zimbabwe 105,982 0.38 6.41 Subtotal—Part II Members b 12,647,472 45.36 % $ 9,530.45 Total—June 30, 2018 b 27,897,259 100.00 % $ 268,710 Total—June 30, 2017 26,930,740 $ 245,930 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. 66 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 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 and repaying project preparation facilities). Certain reclassifications of the prior year’s information have been made to conform with the current year’s presentation. On August 9, 2018, the Executive Directors approved these financial statements for issue, which was also the date through which IDA’s Management evaluated subsequent events. Translation of Currencies IDA’s financial statements are expressed in terms of U.S. dollars (USD) 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 (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Chinese Renminbi (RMB). 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. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 67 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 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. 68 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 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. 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. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 69 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 ($1,165 for the fiscal year ended June 30, 2018 and $1,185 for the fiscal year ended June 30, 2017) 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 accrued. 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. 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. 70 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 Development Grants Development grants are recorded as an expense, and a liability is recognized, upon approval of the development grant by the Executive Directors. 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. Guarantees Financial guarantees are commitments issued by IDA to guarantee payment performance by a borrowing member country to a third party in the event that a member government (or government-owned entity) fails to perform its contractual obligations with respect to a private project. 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 asset, included in Accounts payable and miscellaneous liabilities and Other Assets, respectively, on the Balance Sheet. In the event that a sovereign guarantee is called, IDA has the contractual right to require payment from the member country that has provided the counter guarantee to IDA, on demand, or as IDA may otherwise direct. Up-front guarantee fees received are deferred and amortized over the life of the guarantee. 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 subscriptions and contributions because they carry voting rights. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 71 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. 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. Notwithstanding IDA’s historical experience, the risk of losses associated with nonpayment of principal amounts due is included in the accumulated provision for losses on loans and other exposures. Other exposures include irrevocable commitments, guarantees and repaying project preparation facilities. 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 72 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 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 annually, 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 a 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. 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 Due from Banks. 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. 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. Interest revenue, including amortization of the premium and discount arising at acquisition, 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 records the cash 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. IDA does not offset the fair value amounts recognized for derivative instruments that have been executed with the same counterparty under master netting agreements; as a result, the fair value amounts recognized for the obligation to return cash collateral received from counterparties are not offset with the fair value amounts recognized for the related derivative instruments. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 73 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 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 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) (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 maturities of less than 90 days, are presented on a net basis. In contrast, short term borrowings which have maturities 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 Borrowings, net in the Statement of Income. For presentation purposes, amortization of discounts and premiums is also included in Borrowings, net 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. The presentation of derivative instruments is consistent with the manner in which these instruments are settled. Currency swaps are settled on a gross basis, while interest rate swaps are settled on a net basis. 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 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 borrowing portfolio, interest rate swaps are being used to modify the interest rate characteristics of this portfolio. 74 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 The interest component of these derivatives is recognized as an adjustment to the borrowing costs over the life of the derivative contracts and is included in Borrowings, net 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 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, in a manner consistent with the presentation of the borrowing-related 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 forward contracts and 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 Valuation 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 Debit Valuation Adjustment (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 IDA’s own credit spread as observed through the CDS market. Valuation of Financial Instruments Derivative financial instruments and investment securities are recorded in the financial statements at fair value. 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, 2018 and June 30, 2017, 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. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 75 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. Accounting for Contributions to Special Programs IDA recognizes an expense for Contributions to Special Programs, when 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 amendments in 2015 and 2016. 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. The core principle of the guidance is that an entity recognizes revenue when it transfers control of promised goods and services to customers in an amount that reflects consideration to which the entity expects to be entitled. For IDA, the ASU became effective on July 1, 2018. IDA primarily earns revenue from financial instruments that are not within the scope of the ASU. In addition, IDA does not have contractual arrangements which result in revenue sources that would ordinarily be within the scope of this ASU since it has a revenue sharing arrangement with IBRD. 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 OCI. IDA adopted 76 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 the ASU on July 1, 2018. Starting July 1, 2018, changes in the fair value of IDA’s financial liabilities that relate to IDA’s own credit risk will be recognized in OCI as a Debit Valuation Adjustment (DVA) on Fair Value Option Elected Liabilities. The DVA on Fair Value Option Elected Liabilities will be 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. IDA estimates that on July 1, 2018, the transition adjustment reclassifying the amounts previously included in retained earnings to AOCI would be immaterial. 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 current U.S. GAAP does not provide guidance. For IDA, the ASU is expected to be effective from the quarter ending September 30, 2018. IDA has evaluated the ASU and its impact will be limited to the reclassification of certain items on the Statement of Cash Flows, with no net impact on the financial statements. 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 will be effective from the quarter ending September 30, 2018. IDA has evaluated the ASU and determined that there will be no material impact on its financial statements. 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 introduces 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 losses (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 ASU requires enhanced disclosures about credit quality and significant estimates and judgments used in estimating credit losses. For IDA, the ASU is expected to be effective beginning from the quarter ending September 30, 2020, with early adoption permitted. IDA is currently evaluating the impact of the ASU on its accumulated provision for losses on loans. 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. The ASU will be effective from the quarter ending September 30, 2018 for contributions received and from the quarter ending September 30, 2019 for contributions made. IDA is currently evaluating the impact of the ASU on its financial statements. NOTE B—MEMBERS’ SUBSCRIPTIONS AND CONTRIBUTIONS, AND MEMBERSHIP Subscriptions and Contributions Paid-In: The movement in subscriptions and contributions paid-in during the fiscal years ended June 30, 2018 and June 30, 2017, is summarized below: In millions of U.S. dollars June 30, 2018 June 30, 2017 Beginning of the fiscal year $ 215,403 $ 208,430 Cash contributions received a 4,849 2,963 Demand obligations received 5,171 4,014 Translation adjustment 38 (4) End of the fiscal year $ 225,461 $ 215,403 a. Includes any restricted cash subscriptions. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 77 During the fiscal year ended June 30, 2018, IDA encashed demand obligations totaling $4,486 million ($3,930 million—fiscal year ended June 30, 2017). 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, 2018, the majority of IDA’s Investments comprised government and agency obligations (77%), with all the instruments being classified as either Level 1 or Level 2 within the fair value hierarchy. Japanese instruments represented the largest holding of a single counterparty, and amounted to 20% of Investments-Trading. In addition, as of June 30, 2018, the majority of the instruments were denominated in USD (36%), EUR (24%), JPY (20%), RMB (7%) and GBP (8%). 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 2.65 years and the following currency composition: USD (40%), EUR (26%), JPY (14%), RMB (11%) and GBP (9%). The credit quality of IDA’s investment portfolio remains concentrated in the upper end of the credit spectrum with 59% of the portfolio rated AA and above as of June 30, 2018, reflecting IDA’s continued preference for highly rated securities and counterparties across all categories of financial instruments. Investments A summary of IDA’s Investments and the currency composition as of June 30, 2018 and June 30, 2017, is as follows: In millions of U.S. dollars June 30, 2018 June 30, 2017 Trading Government and agency obligations $ 27,702 $ 25,341 Time deposits 6,875 4,783 Asset-backed securities (ABS) 667 705 $ 35,244 $ 30,829 Non-trading (at fair value) Debt securities 812 960 Total $ 36,056 $ 31,789 The following table summarizes the currency composition of IDA’s Investment as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Average Repricing Average Repricing Carrying Value (years) a Carrying Value (years) a Chinese Renminbi $ 2,455 $ 2.92 $ 2,866 $ 2.97 Euro 8,614 2.01 9,190 2.35 Japanese yen 7,137 0.71 4,135 1.38 Pound sterling 2,899 1.63 1,786 3.01 U.S. dollar 13,130 4.26 12,101 5.50 Other 1,821 0.53 1,711 0.64 Total $ 36,056 $ 2.51 $ 31,789 $ 3.40 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. 78 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 Net Investment Portfolio IDA manages its investments on a net portfolio basis. The following table summarizes IDA’s net portfolio position as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Investments Trading $ 35,244 $ 30,829 Non-trading (at fair value) 812 960 Total 36,056 31,789 Securities purchased under resale agreements 19 244 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received (2,543) (2,560) Derivative assets Currency forward contracts 3,789 803 Currency swaps 2,401 3,513 Interest rate swaps 6 * Swaptions, exchange traded options and futures contracts * 1 Other a 2 1 Total 6,198 4,318 Derivative liabilities Currency forward contracts (3,771) (819) Currency swaps (2,417) (3,689) Interest rate swaps (10) (8) Swaptions, exchange traded options and futures contracts (*) (5) Other a (*) (2) Total (6,198) (4,523) Cash held in investment portfolio b 482 421 Receivable from investment securities traded 277 527 Payable for investment securities purchased (556) (543) Net Investment Portfolio $ 33,735 $ 29,673 a. These relate to To-Be-Announced (TBA) Securities. b. 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 as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Average Repricing Average Repricing Carrying Value (years) a Carrying Value (years) a Chinese Renminbi $ 3,632 2.02 $ 3,077 2.86 Euro 8,624 2.04 7,270 2.95 Japanese yen 4,809 0.89 3,522 1.44 Pound sterling 3,071 1.53 1,967 2.71 U.S. dollar 13,593 4.10 13,792 4.81 Other 6 (0.94) 45 0.15 Total $ 33,735 2.65 $ 29,673 3.61 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, 2018 79 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, 2018, there were short sales totaling $19 million ($77 million—June 30, 2017) 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 as of June 30, 2018 and June 30, 2017: 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 Derivative assets Currency forward contracts - 3,789 - 3,789 Currency swaps - 2,401 - 2,401 Interest rate swaps - 6 - 6 Swaptions, exchange traded options and futures contracts - * - * Other a - 2 - 2 Total Derivative assets—Investments - 6,198 - 6,198 Total $ 12,840 $ 29,433 $ - $ 42,273 Liabilities: Securities sold under repurchase agreements and securities lent under security lending agreements b $ - $ 2,541 $ - $ 2,541 Derivative liabilities Currency forward contracts - 3,771 - 3,771 Currency swaps - 2,417 - 2,417 Interest rate swaps - 10 - 10 Swaptions, exchange traded options and futures contracts - * - * Other a - * - * Total Derivative liabilities—Investments - 6,198 - 6,198 Payable for investment securities purchased c 19 - - 19 Total $ 19 $ 8,739 $ - $ 8,758 a. These relate to TBA securities. b. Excludes amount payable for cash collateral received relating to TBA securities ($2 million). c. These relate to short sales of investment securities. * Indicates amount less than $0.5 million. 80 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2017 Level 1 Level 2 Level 3 Total Assets: Investments—Trading Government and agency obligations $ 12,271 $ 13,070 $ - $ 25,341 Time deposits 165 4,618 - 4,783 ABS - 705 - 705 Total Investments—Trading 12,436 18,393 - 30,829 Investments—Non-trading (at fair value) - 960 - 960 Securities purchased under resale agreements 225 19 - 244 Derivative assets Currency forward contracts - 803 - 803 Currency swaps - 3,513 - 3,513 Interest rate swaps - * - * Swaptions, exchange traded options and futures contracts - 1 - 1 Other a - 1 - 1 Total Derivative assets—Investments - 4,318 - 4,318 Total $ 12,661 $ 23,690 $ - $ 36,351 Liabilities: Securities sold under repurchase agreements and securities lent under security lending agreements b $ - $ 2,560 $ - $ 2,560 Derivative liabilities Currency forward contracts - 819 - 819 Currency swaps - 3,689 - 3,689 Interest rate swaps - 8 - 8 Swaptions, exchange traded options and futures contracts 4 1 - 5 Other a - 2 - 2 Total Derivative liabilities—Investments 4 4,519 - 4,523 Payable for investment securities purchased c 19 58 - 77 Total $ 23 $ 7,137 $ - $ 7,160 a. These relate to TBA securities. b. Excludes amount payable for cash collateral received relating to TBA securities (less than $0.5 million). c. These relate to short sales of investment securities. * Indicates amount less than $0.5 million. As of June 30, 2018 and June 30, 2017, there were no securities transferred between Level 1 and Level 2 within 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: In millions of U.S. dollars Principal Fair value amount due Difference June 30, 2018 $ 812 $ 843 $ (31) June 30, 2017 $ 960 $ 969 $ (9) IDA FINANCIAL STATEMENTS: JUNE 30, 2018 81 The maturity structure of IDA’s non-trading investment portfolio as of June 30, 2018 and June 30, 2017 was as follows: In millions of U.S. dollars Period June 30, 2018 June 30, 2017 Less than 1 year $ 122 $ 126 Between 1 - 2 years 124 122 2 - 3 years 125 124 3 - 4 years 113 125 4 - 5 years 96 113 Thereafter 263 359 $ 843 $ 969 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, 2018 and June 30, 2017, IDA had not received any cash or other collateral related to swap agreements. 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. 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, 2018, amounts which could potentially be offset as a result of legally enforceable master netting arrangements were $19 million ($225 million—June 30, 2017). 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. 82 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 The following is a summary of the carrying amount of the securities transferred under repurchase or securities lending agreements, and the related liabilities: In millions of U.S. dollars June 30, 2018 June 30, 2017 Financial Statement Presentation Securities transferred under Included under Investments - Trading on repurchase or securities lending $ 2,321 $ 2,150 the Balance Sheet agreements Included under Securities Sold under Liabilities relating to securities Repurchase Agreements, Securities Lent transferred under repurchase or $ 2,541 $ 2,560 under Securities Lending Agreements, and securities lending agreements Payable for Cash Collateral Received on the Balance Sheet. As of June 30, 2018, the liabilities relating to securities transferred under repurchase or securities lending agreements included $226 million ($388 million—June 30, 2017) of repurchase agreement trades that had not settled at that date. Of this amount, $202 million represented replacement trades entered into in anticipation of maturing trades of a similar amount ($368 million—June 30, 2017). 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: 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 millions of U.S. dollars As of June 30, 2017 Remaining contractual maturity of the agreements Overnight and continuous Up to 30 days Total Repurchase or Securities Lending agreements Government and agency obligations $ 1,699 $ 861 $ 2,560 Total liabilities for Securities sold under repurchase agreements and Securities Lent under Securities Lending Agreements $ 1,699 $ 861 $ 2,560 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, 2018 and June 30, 2017, none of the securities purchased under resale agreements remained unsettled on that date. For the securities purchased under resale agreements, IDA received securities with a fair value of $19 million ($244 million—June 30, 2017). Out of this amount, no securities had been transferred under repurchase or securities lending agreements (Nil—June 30, 2017). IDA FINANCIAL STATEMENTS: JUNE 30, 2018 83 NOTE D—BORROWINGS Until the fiscal year ended June 30, 2017, IDA’s borrowings comprised only concessional partner loans made by IDA members. These borrowings 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 and 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. In millions of U.S dollars Concessional Partner Loans outstanding Net unamortized Principal at face value premium (discount) Total June 30, 2018 $ 7,461 $ (1,650) $ 5,811 June 30, 2017 $ 4,392 $ (732) $ 3,660 On April 17, 2018, for the first time, IDA issued a 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 USD and has a tenor of 5 years maturing in 2023. IDA has elected the fair value option for this instrument. As part of IDA’s asset-liability management strategy, IDA also entered into derivative transactions to convert the fixed-rate bond into a floating-rate instrument. As of June 30, 2018, 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 USD, JPY, GBP and EUR (36%, 31%, 19% and 14% 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 at June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 WAC a (%) June 30, 2017 WAC a (%) Fixed $ 7,308 2.31 % $ 3,660 2.46 % Variable - - - Borrowings b $ 7,308 2.31 % $ 3,660 2.46 % Fair Value Adjustment (3) - Total Borrowings $ 7,305 $ 3,660 a. WAC refers to weighted average cost. b. At amortized cost. At June 30, 2018 and June 30, 2017, the currency composition of debt in IDA’s borrowing portfolio before derivatives was as follows: June 30, 2018 June 30, 2017 Euro 14 % 10 % Japanese Yen 31 39 Pound Sterling 19 21 U.S. Dollar 36 30 100 % 100 % 84 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 The maturity structure of IDA’s borrowings outstanding as of June 30, 2018 and June 30, 2017 was as follows: In millions of U.S. dollars Period June 30, 2018 June 30, 2017 Between 1 - 2 years $ 44 $ - 2 - 3 years 113 44 3 - 4 years 124 112 4 - 5 years 1,630 123 Thereafter 7,044 4,113 Total a $ 8,955 $ 4,392 a. For June 30, 2018, total includes net unamortized discount of $1,650 million ($732 million—June 30, 2017) for Concessional Partner Loans. Fair Value Disclosures The table below presents the fair value of IDA’s borrowings for disclosure purposes, along with their respective carrying amounts as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Carrying Value Fair Value Carrying Value Fair Value Concessional partner loans $ 5,811 $ 6,660 $ 3,660 $ 4,175 Market borrowings 1,494 1,494 - - $ 7,305 $ 8,154 $ 3,660 $ 4,175 The following table provides information on the unrealized mark-to-market gains or losses included in the Statement of Income for the fiscal years ended June 30, 2018, June 30, 2017, and June 30, 2016 relating to IDA’s borrowings held at June 30, 2018, June 30, 2017 and June 30, 2016 as well as where those amounts are included in the Statement of Income: In millions of U.S. dollars Unrealized mark-to-market gains (losses) 2018 2017 2016 Statement of Income Unrealized mark-to-market gains (losses) on non-trading portfolios, net $ 3 $ - $ - Presented below is the difference between the aggregate fair value and aggregate contractual principal balance of borrowings: In millions of U.S. dollars Principal Due Upon Fair Value Maturity Difference June 30, 2018 $ 8,154 $ 8,961 $ (807) June 30, 2017 $ 4,175 $ 4,392 $ (217) IDA FINANCIAL STATEMENTS: JUNE 30, 2018 85 NOTE E—DERIVATIVE INSTRUMENTS IDA uses derivative instruments in its investment portfolio to manage currency and interest rate risks, 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 Currency forward contracts, currency swaps and Manage foreign exchange and interest rate Other assets/liabilities interest rate swaps risks. Borrowings Interest rate swaps Manage interest rate risk in the portfolio. Other purposes: Client operations Structured swaps Assist clients in managing risks. The presentation of IDA’s derivatives is based on the manner in which they are settled. Interest rate swaps are settled on a net basis and are therefore presented on a net basis. Currency swaps are settled on a gross basis and are therefore presented on a gross basis. The following table provides information on the fair value amounts and the location of the derivative instruments on the Balance Sheet as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars Balance Sheet Location Derivative assets Derivative liabilities June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 Derivatives not designated as hedging instruments Currency forward contracts $ 19,496 $ 20,328 $ 19,506 $ 20,369 Currency swaps 2,409 3,513 2,426 3,689 Swaptions, exchange traded options and futures contracts * 1 * 5 Interest rate swaps 7 * 26 8 Other a 2 1 * 2 Total Derivatives $ 21,914 $ 23,843 $ 21,958 $ 24,073 a. These relate to TBA securities. * Indicates amount less than $0.5 million. 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, 2018 and June 30, 2017. 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. 86 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 In millions of U.S. dollars June 30, 2018 Located on the Balance Sheet Derivative Assets Derivative Liabilities Gross Gross Net Gross Gross Net Amounts Amounts Amounts Amounts Amounts Amounts Recognized Offset Presented Recognized Offset Presented Interest rate swaps $ 236 $ (229) $ 7 $ 396 $ (370) $ 26 Currency swaps a 21,905 - 21,905 21,932 - 21,932 Other b 2 - 2 * - * Total $ 22,143 $ (229) $ 21,914 $ 22,328 $ (370) $ 21,958 Amounts subject to legally enforceable master netting agreements c $ 21,662 $ 21,662 Net derivative positions at counterparty level before collateral 252 296 Less: Cash collateral received d 2 Securities collateral received - Net derivative exposure after collateral $ 250 a. Includes currency forward contracts. b. These include swaptions, exchange traded options, futures contracts and TBA securities. c. Not offset on the Balance Sheet. d. Does not include excess collateral received. * Indicates amount less than $0.5 million. In millions of U.S. dollars June 30, 2017 Located on the Balance Sheet Derivative Assets Derivative Liabilities Gross Gross Net Gross Gross Net Amounts Amounts Amounts Amounts Amounts Amounts Recognized Offset Presented Recognized Offset Presented Interest rate swaps $ 1 $ (1) $ * $ 251 $ (243) $ 8 Currency swaps a 23,841 - 23,841 24,059 (1) 24,058 Other b 2 - 2 28 (21) 7 Total $ 23,844 $ (1) $ 23,843 $ 24,338 $ (265) $ 24,073 Amounts subject to legally enforceable master netting agreements c $ (23,684) $ (23,684) Net derivative positions at counterparty level before collateral 159 389 Less: Cash collateral received d - Securities collateral received - Net derivative exposure after collateral $ 159 a. Includes currency forward contracts. b. These include swaptions, exchange traded options, futures contracts and TBA securities. c. Not offset on the Balance Sheet. d. Does not include excess collateral received. * Indicates amount less than $0.5 million. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 87 The following table provides information about the notional amounts and credit risk exposures, of IDA’s derivative instruments as of June 30, 2018 and June 30, 2017. Notional amounts and credit risk exposure of the derivative instruments: In millions of U.S. dollars Type of contract June 30, 2018 June 30, 2017 Investments - Trading Interest rate swaps Notional principal $ 978 $ 760 Credit exposure 6 * Currency swaps (including currency forward contracts) Credit exposure 68 14 Swaptions, exchange traded options, and futures contracts a Notional long position 4,442 37,967 Notional short position 5,201 39,264 Credit exposure * 1 Other derivatives b Notional long position 518 412 Notional short position 8 147 Credit exposure 2 1 Asset-liability management Currency forward contracts (including currency swaps) Credit exposure 388 305 Interest rate swaps Notional principal 21 - Credit exposure - - Borrowings Interest rate swaps Notional principal 3,000 - Credit exposure 1 - Client Operations Structured swaps Notional principal - 68 Credit exposure - - Total credit exposure Interest rate swaps 7 * Currency swaps (including currency forward contracts) 456 319 Swaptions, exchange traded options, and futures contracts a * 1 Other derivatives b 2 1 Total 465 321 a. 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. These relate to TBA securities. * 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, 2018 is $298 million ($366 million —June 30, 2017). As of June 30, 2018, 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, 2018, the amount of collateral that would need to be posted 88 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 would be $62 million ($82 million—June 30, 2017). Subsequent triggers of contingent features would require posting of additional collateral, up to a maximum of $298 million as of June 30, 2018 ($366 million—June 30, 2017). Amounts of gains and losses on the Asset-liability management derivative instruments and their location on the Statement of Income for the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016 are as follows: In millions of U.S. dollars Gains (Losses) Fiscal Year Ended June 30, Statement of Income Location 2018 2017 2016 Derivatives not designated as hedging instruments and not held in a trading portfolio a Interest rate swaps Unrealized mark-to-market (3) - - gains (losses) on Non-Trading Currency forward contracts and currency swaps portfolios, net (17) 54 (35) Total $ (20) $ 54 $ (35) a. For alternative disclosures about trading derivatives, see the following table. 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 the IDA’s investment trading portfolio (derivative and non-derivative instruments), and their location on the Statement of Income for the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016: In millions of U.S. dollars Gains (Losses) Fiscal Year Ended June 30, Statement of Income Location 2018 2017 2016 Type of instrument Unrealized mark-to-market (losses) gains on Investment- Fixed income (including related derivatives) Trading portfolios, net $ (128) $ (367) $ 509 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 89 Fair Value Disclosures IDA’s fair value hierarchy for derivative assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 and June 30, 2017 is as follows: 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: Investments Currency forward contracts $ - $ 3,789 $ - $ 3,789 Currency swaps - 2,401 - 2,401 Interest rate swaps - 6 - 6 Swaptions, exchange traded options and futures contracts - * - * Other a - 2 - 2 - 6,198 - 6,198 Asset-liability management Currency forward contracts - 15,707 - 15,707 Currency swaps - 8 - 8 Interest rate swaps - - - - - 15,715 - 15,715 Borrowings Interest rate swaps - 1 - 1 Total derivative assets $ - $ 21,914 $ - $ 21,914 Derivative liabilities: Investments Currency forward contracts $ - $ 3,771 $ - $ 3,771 Currency swaps - 2,417 - 2,417 Interest rate swaps - 10 - 10 Swaptions, exchange traded options and futures contracts - * - * Other a - * - * - 6,198 - 6,198 Asset-liability management Currency forward contracts - 15,735 - 15,735 Currency swaps - 9 - 9 Interest rate swaps - 1 - 1 - 15,745 - 15,745 Borrowings Interest rate swaps - 15 - 15 Total derivative liabilities $ - $ 21,958 $ - $ 21,958 a. These relate to TBA securities. * Indicates amount less than $0.5 million. 90 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2017 Level 1 Level 2 Level 3 Total Derivative assets: Investments Currency forward contracts $ - $ 803 $ - $ 803 Currency swaps - 3,513 - 3,513 Interest rate swaps - * - * Swaptions, exchange traded options and futures contracts - 1 - 1 Other a - 1 - 1 - 4,318 - 4,318 Asset-liability management Currency forward contracts - 19,525 - 19,525 Total derivative assets $ - $ 23,843 $ - $ 23,843 Derivative liabilities: Investments Currency forward contracts $ - $ 819 $ - $ 819 Currency swaps - 3,689 - 3,689 Interest rate swaps - 8 - 8 Swaptions, exchange traded options and futures contracts 4 1 - 5 Other a - 2 - 2 4 4,519 - 4,523 Asset-liability management Currency forward contracts - 19,550 - 19,550 Total derivative liabilities $ 4 $ 24,069 $ - $ 24,073 a. These relate to TBA securities. * Indicates amount less than $0.5 million. Inter-level transfers During the fiscal years ended June 30, 2018 and June 30, 2017, there were no inter-level transfers in the derivatives portfolio. Valuation Methods and Assumptions Derivative contracts include currency forward contracts, TBA securities, swaptions, exchange traded options and future contracts, currency swaps and interest rate swaps. These are valued using the standard discounted cash flow methods using market observable inputs such as yield curves, foreign exchange rates and basis spreads and funding spreads. NOTE F—LOANS AND OTHER EXPOSURES Loans and other exposures are generally made directly to member countries of IDA. Other exposures include irrevocable commitments, guarantees and repaying project preparation facilities. Loans are carried and reported at amortized cost. Of the total loans outstanding as of June 30, 2018, 91% were to the South Asia, Africa, and East Asia and Pacific regions combined. 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, 2018, loans outstanding totaling $2,551million (representing about 2% of the portfolio) from five borrowers, were in nonaccrual status. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 91 Maturity Structure The maturity structure of loans outstanding as of June 30, 2018 and June 30, 2017 was as follows: In millions of U.S. dollars June 30, 2018 June 30, 2017 July 1, 2018 through June 30, 2019 $ 6,718 July 1, 2017 through June 30, 2018 $ 6,217 July 1, 2019 through June 30, 2023 27,126 July 1, 2018 through June 30, 2022 24,513 July 1, 2023 through June 30, 2028 36,471 July 1, 2022 through June 30, 2027 34,007 Thereafter 79,713 Thereafter 77,447 Total $ 150,028 Total $ 142,184 Currency Composition Loans outstanding had the following currency composition as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 EUR $ 1,327 $ 659 USD 4,996 4,878 SDR 143,705 136,647 $ 150,028 $ 142,184 Credit Quality of Sovereign Loans Based on an evaluation of IDA’s loans, Management has determined that IDA has one portfolio segment — Sovereign Exposures. Loans constitute the majority of sovereign exposures. 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 factors. For the purpose of analyzing the risk characteristics of IDA’s exposures, 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’s borrowers’ country risk ratings are key determinants in the provisions for loan losses. IDA considers a loan to be past due when a borrower fails to make payment on any principal, service, interest or other charges due to IDA, on the dates provided in the contractual loan agreements. 92 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 The following tables provide an aging analysis of loans outstanding as of June 30, 2018 and June 30, 2017: 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 In millions of U.S. dollars June 30, 2017 Total Past Days past due Up to 45 46-60 61-90 91-180 Over 180 Due Current Total Risk Class Low $ - $ - $ - $ - $ - $ - $ 2,762 $ 2,762 Medium - - - - - - 26,385 26,385 High 7 - - - - 7 110,501 110,508 Loans in accrual status 7 - - - - 7 139,648 139,655 Loans in nonaccrual status 12 1 5 22 1,146 1,186 1,343 2,529 Total $ 19 $ 1 $ 5 $ 22 $ 1,146 $ 1,193 $ 140,991 $ 142,184 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 that 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. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 93 Changes to the accumulated provision for losses on loans and other exposures for the fiscal years ended June 30, 2018 and June 30, 2017 are summarized below: In millions of U.S. dollars June 30, 2018 June 30, 2017 Debt relief Debt relief under under Loans HIPC/MDRI Other Total Loans HIPC/MDRI Other Total Accumulated provision, beginning of the fiscal year $ 1,913 $ 1,940 $ 25 $ 3,878 $ 1,932 $ 2,000 $ 25 $ 3,957 Provision, net - charge (release) a 510 7 31 548 (10) (46) * (56) Loans written off under: Prepayments (3) - - (3) (3) - - (3) HIPC/MDRI - (10) - (10) - (9) - (9) Translation adjustment 19 7 * 26 (6) (5) * (11) Accumulated provision, end of the period $ 2,439 $ 1,944 $ 56 $ 4,439 $ 1,913 $ 1,940 $ 25 $ 3,878 Composed of accumulated provision for losses on: Loans in accrual status $ 2,160 $ 117 $ 2,277 $ 1,644 $ 126 $ 1,770 Loans in nonaccrual status 279 1,827 2,106 269 1,814 2,083 Total $ 2,439 $ 1,944 $ 4,383 $ 1,913 $ 1,940 $ 3,853 Loans: Loans in accrual status $ 147,477 $ 139,655 Loans in nonaccrual status 2,551 2,529 Total $ 150,028 $ 142,184 a. For the fiscal year ended June, 2018, the provision includes: $3 million for the discount on prepayment of loans from one IDA graduate country ($3 million - June 30, 2017). * 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, 2018 and June 30, 2017, there were no loans written off under the MDRI. Overdue Amounts As of June 30, 2018, there were no principal or charges under loans in accrual status which were overdue by more than three months. 94 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 The following tables provide a summary of selected financial information related to loans in nonaccrual status as of and for the fiscal years ended June 30, 2018 and June 30, 2017: 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 $ 439 $ 445 $ 439 $ 304 $ 24 $ 64 $ 23 Somalia July 1991 416 420 416 403 3 248 86 Sudan January 1994 1,215 1,225 1,215 1,120 17 728 217 Syrian Arab Republic June 2012 14 14 14 - 2 8 1 Zimbabwe October 2000 467 472 467 - 233 234 56 Total - June 30, 2018 $ 2,551 $ 2,576 $ 2,551 $ 1,827 $ 279 $ 1,282 $ 383 Total - June 30, 2017 $ 2,529 $ 2,503 $ 2,529 $ 1,814 $ 269 $ 1,186 $ 361 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, 2016: $2,537 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, 2018 2017 2016 Service charge revenue not recognized as a result of loans being in nonaccrual status $ 19 $ 19 $ 19 During the fiscal years ended June 30, 2018 and June 30, 2017, no loans were placed into nonaccrual status. During the fiscal year ended June 30, 2018, no service charge revenue was recognized on loans in nonaccrual status ($3 million—fiscal year ended June 30, 2017 and $3 million—fiscal year ended June 30, 2016). Guarantees Guarantees of $1,808 million were outstanding as of June 30, 2018 ($1,177 million – June 30, 2017). This amount 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 6 and 22 years, and expire in decreasing amounts through 2036. As of June 30, 2018, liabilities related to IDA’s obligations under guarantees of $123 million ($96 million— June 30, 2017), have been included in Other liabilities on the Balance Sheet. These include the accumulated provision for guarantee losses of $47 million ($19 million— June 30, 2017). During the fiscal years ended June 30, 2018 and June 30, 2017, 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. Loan revenue comprises service charges and interest charges on outstanding loan balances. For the fiscal year ended June 30, 2018, loan revenue from three countries of $244 million, $178 million and $142 million, respectively were in excess of ten percent of total loan revenue. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 95 The following table presents IDA’s loans outstanding and associated loan revenue as of June 30, 2018 and June 30, 2017, by geographic region: In millions of U.S. dollars June 30, 2018 June 30, 2017 Loans Service and Loans Service and Region Outstanding Interest Charges Outstanding Interest Charges Africa $ 59,220 $ 438 $ 52,991 $ 374 East Asia and Pacific 19,638 197 19,460 181 Europe and Central Asia 7,389 111 7,462 106 Latin America and the Caribbean 2,605 28 2,518 25 Middle East and North Africa 2,891 23 3,025 23 South Asia 58,285 579 56,728 523 Total $ 150,028 $ 1,376 $ 142,184 $ 1,232 Buy-down of Loans During the fiscal years ended June 30, 2018 and June 30, 2017, 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 out and reported at amortized cost. The table below presents the fair value of loans for disclosure purposes, along with their respective carrying amounts as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 Carrying Value Fair Value Carrying Value Fair Value Net Loans Outstanding $ 145,656 $ 118,508 $ 138,351 $ 111,539 As of June 30, 2018, IDA’s loans are classified as Level 3 within the fair value hierarchy. Valuation Methods and Assumptions The fair value of loans is calculated using market-based methodologies which incorporate the respective borrowers’ Credit Default Swap (CDS) spreads and, where applicable, proxy CDS spreads. Basis adjustments are applied to market recovery levels to reflect IDA’s recovery experience. 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 plans. Transfers and Grants Cumulative transfers and grants made to IDA as of June 30, 2018 were $19,148 million ($18,945 million—June 30, 2017). Details by transferor are as follows: In millions of U.S. dollars Beginning of the Transfers during End of the fiscal Transfers from fiscal year the fiscal year year Total $ 18,945 $ 203 $ 19,148 Of which from: IBRD 15,126 123 15,249 IFC 3,592 80 3,672 96 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 Receivables and Payables As of June 30, 2018, and June 30, 2017, the total amounts receivable from or (payable to) affiliated organizations comprised: In millions of U.S. dollars June 30, 2018 June 30, 2017 IBRD IFC Total IBRD IFC Total Administrative Services a $ (339) $ - $ (339) $ (368) $ - $ (368) Derivative Transactions Receivable 4,531 8 4,539 6,717 - 6,717 Payable (4,284) (9) (4,293) (6,559) - (6,559) Pension and Other Postretirement Benefits 676 - 676 695 - 695 Investments - 812 812 - 960 960 $ 584 $ 811 $ 1,395 $ 485 $ 960 $ 1,445 a. Includes $140 million for the fiscal year ended June 30, 2018 ($103 million-June 30, 2017) 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 Receivables (payables) for derivative transactions Derivative assets/liabilities – Asset-liability management 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, 2018, IDA’s share of joint administrative expenses and contributions to special programs totaled $1,745 million ($1,746 million—fiscal year ended June 30, 2017 and $1,425 million—fiscal year ended June 30, 2016). This amount excludes IDA-executed trust fund expenses of $460 million ($400 million— fiscal year ended June 30, 2017 and $340 million—fiscal year ended June 30, 2016). Other revenue: Includes IDA’s share of other revenue jointly earned with IBRD during the fiscal year ended June 30, 2018 totaling $281 million ($247 million—fiscal year ended June 30, 2017 and $229 million—fiscal year ended June 30, 2016). This amount excludes IDA-executed trust fund revenue of $460 million ($400 million—fiscal year ended June 30, 2017 and $340 million—fiscal year ended June 30, 2016). The allocation of revenue is based upon an agreed revenue sharing formula, and amounts are settled quarterly. For the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016, 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: In millions of U.S. dollars Fiscal Year Ended June 30, 2018 2017 2016 Fees charged to IFC $ 66 $ 61 $ 59 Fees charged to MIGA 5 5 4 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 97 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. On December 22, 2017, as part of the local currency facility under Private Sector Window, IDA entered into a currency swap agreement with IFC for a period of 12 years. IDA will pay IFC a fixed rate of 2.49% annually on a U.S. dollar notional of 9 million and will receive 3.27% annually on a West African CFA franc (XOF) notional of 5,000 million. As of June 30, 2018, the derivative had a fair value of less than $1 million. In June 2018, as part of the MIGA guarantee facility under the Private Sector Window, IDA entered into three risk sharing contracts totaling $36 million with MIGA. Under these contracts, IDA has agreed to accept certain exposures with respect to losses arising under specific guarantee contracts issued by MIGA against risk of transfer restriction, expropriation and war and civil disturbance. These transactions are recognized as financial guarantees in IDA’s financial statements and included in the amount of guarantees disclosed in Note F – Loans and other exposures. As of June 30, 2018, $4 million is included in the accumulated provision for guarantee losses for these transactions (Nil — June 30, 2017). Investments 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, 2018, the principal amount due on the debt security was $843 million ($969 million—fiscal year ended June 30, 2017), and it had a fair value of $812 million ($960 million— fiscal year ended June 30, 2017). The investment is reported under Investments in the Balance Sheet. During the fiscal year ended June 30, 2018, IDA recognized interest income of $17 million ($19 million—fiscal year ended June 30, 2017 and $21 million—fiscal year ended June 30, 2016). 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-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 during the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016: In millions of U.S. dollars Fiscal Year Ended June 30, 2018 2017 2016 IDA-executed trust funds expenses $ 460 $ 400 $ 340 98 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 These amounts are included in Administrative expenses and the corresponding revenue is included in Other non- interest revenue 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 as of June 30, 2018 and June 30, 2017: In millions of U.S. dollars June 30, 2018 June 30, 2017 IDA-executed trust funds $ 476 $ 461 These amounts are included in Other Assets and the corresponding liabilities are included in Accounts payable and miscellaneous liabilities on the Balance Sheet. Revenues During the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016, IDA’s revenues for the administration of trust fund operations were as follows: In millions of U.S. dollars Fiscal Year Ended June 30, 2018 2017 2016 Revenues $ 48 $ 42 $ 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 $56 million at June 30, 2018 ($52 million— June 30, 2017) 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, 2018 funds recorded as Other non-interest revenue under these arrangements totaled less than $1 million (less than $1 million—fiscal year ended June 30, 2017 and $9 million—fiscal year ended June 30, 2016). IDA FINANCIAL STATEMENTS: JUNE 30, 2018 99 NOTE I—DEVELOPMENT GRANTS A summary of changes to the amounts payable for development grants for the fiscal years ended June 30, 2018 and June 30, 2017, is presented below: In millions of U.S. dollars June 30, 2018 June 30, 2017 Balance, beginning of the fiscal year $ 6,583 $ 6,099 b a Commitments 4,964 2,627 Disbursements (including PPA grant activity) (2,847) (2,105) Translation adjustment 43 (38) Balance, end of the fiscal year $ 8,743 $ 6,583 a. Includes $50 million contribution to Pandemic Emergency Financing Facility (PEF) which will be expensed when the amounts are disbursed from PEF Financial Intermediary Funds. b. Excludes $5 million PEF disbursements made from PEF Financial Intermediary Funds. For the fiscal years ended June 30, 2018 and June 30, 2017, the commitment charge rate on the undisbursed balances of IDA grants was set at nil percent. 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) and currency translation adjustments on functional currencies. These items are presented in the Statement of Comprehensive Income. The following table presents the changes in Accumulated Other Comprehensive Income balances for the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016: In millions of U.S. dollars Fiscal Year Ended June 30, 2018 2017 2016 Balance, beginning of the fiscal year $ (2,039) $ (1,219) $ (875) Currency translation adjustments on functional currencies 1,364 (820) (344) Balance, end of the fiscal year $ (675) $ (2,039) $ (1,219) 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 a Staff Retirement Plan and Trust (SRP), a Retired Staff Benefits Plan and Trust (RSBP) and a 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 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 $322 million ($426 million—fiscal year ended June 30, 2017 and $215 million—fiscal year ended June 30, 2016). 100 IDA FINANCIAL STATEMENTS: JUNE 30, 2018 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, 2018, the SRP and the RSBP were underfunded by $460 million and $100 million, respectively. The PEBP, after reflecting IBRD and IDA’s share of assets which are included in IBRD’s investment portfolio of $1,028 million, was underfunded by $750 million. NOTE L—OTHER FAIR VALUE DISCLOSURES The table below presents IDA’s estimates of the fair value of its financial assets and liabilities along with their respective carrying amounts as of June 30, 2018 and June 30, 2017. In millions of U.S. dollars June 30, 2018 June 30, 2017 Carrying Value Fair Value Carrying Value Fair Value Assets Due from Banks $ 523 $ 523 $ 483 $ 483 Investments (including securities purchased under resale agreements) 36,075 36,075 32,033 32,033 Net loans outstanding 145,656 118,508 138,351 111,539 Derivative Assets Asset-liability management 15,715 15,715 19,525 19,525 Borrowings 1 1 - - Investments 6,198 6,198 4,318 4,318 Liabilities Borrowings Concessional partner loans 5,811 6,660 3,660 4,175 Market borrowings 1,494 1,494 - - Securities sold/ lent under repurchase agreements/ securities lending agreements and payable for cash collateral received 2,543 2,543 2,560 2,560 Derivative Liabilities Asset-liability management 15,745 15,745 19,550 19,550 Borrowings 15 15 - - Investments 6,198 6,198 4,523 4,523 Valuation Methods and Assumptions As of June 30, 2018 and June 30, 2017, 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 and Loans, refer to Note C—Investments, Note D—Borrowings, Note E—Derivative Instruments and Note F—Loans and other exposures, respectively. Due from Banks: The carrying amount of unrestricted and restricted cash is considered a reasonable estimate of the fair value of these positions. IDA FINANCIAL STATEMENTS: JUNE 30, 2018 101 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, for the fiscal years ended June 30, 2018, June 30, 2017 and June 30, 2016. In millions of U.S. dollars Fiscal Year Ended June 30, 2018 Unrealized gains Realized gains (losses) excluding Unrealized gains (losses) realized amounts (losses) 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 (losses) excluding Unrealized gains (losses) realized amounts (losses) 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 In millions of U.S. dollars Fiscal Year Ended June 30, 2016 Unrealized gains Realized gains (losses) excluding Unrealized gains (losses) realized amounts (losses) Investments-Trading—Note E $ 170 $ 339 $ 509 Non-trading portfolios, net Asset-liability management—Note E - (35) (35) Investment portfolio—Note C - 35 35 Total $ - $ * $ * * Indicates amount less than $ 0.5 million 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, 2018, is not expected to have a material adverse effect on IDA's financial position, results of operations or cash flows. 102 IDA FINANCIAL STATEMENTS: JUNE 30, 2018