OM Section A1/BP
Issued on 28 March 2006
Page 1 of 2
OPERATIONS MANUAL
BANK POLICIES (BP)
These policies were prepared for use by ADB staff and are not necessarily a complete
treatment of the subject.
CLASSIFICATION AND GRADUATION OF DEVELOPING MEMBER COUNTRIES
A. Introduction
1. Article 14 (v) and (vi) of the Agreement Establishing the Asian Development Bank (the
Charter) provide that, in financing the development of its developing member countries (DMCs),
ADB will pay due regard to the ability of the borrower to obtain financing elsewhere on terms
and conditions ADB considers reasonable for the recipient, and that ADB will take due account
of the borrower’s capacity to service ADB loans.1
B. The Policy
2. While the DMCs are eligible for ADB assistance, ADB employs a classification system
for its DMCs to meet the requirements of the Charter (para. 1). Classification of the DMCs
based on these criteria determines their eligibility to borrow from the Asian Development Fund
(ADF) and ordinary capital resources. As economic conditions in a DMC change over time, its
classification may also change. Once a DMC has reduced its dependence on official assistance
and has reliable access to private capital, it may graduate from regular ADB assistance.
C. Scope of the Policy
1. Classification
3. The two main criteria adopted to classify the DMCs are (i) per capita gross national
product (GNP), and (ii) debt repayment capacity. The per capita GNP criterion uses as an
indicator the latest available International Development Association (IDA) “operational cutoff” as
updated from time to time.
4. Unlike the per capita GNP criterion, the debt repayment capacity of DMCs cannot be
captured by a simple indicator. To address this, a multidimensional evaluation that combines
quantitative and qualitative assessments has been developed. The quantitative assessment of
debt repayment capacity is based on (i) debt sustainability ratio, (ii) private capital inflow as a
share of total capital inflow, (iii) gross domestic savings rate, and (iv) size of the economy. The
qualitative assessment is based on the following indicators: (i) categorization as a heavily
indebted poor country by the World Bank and the International Monetary Fund, (ii) volatility of
export growth, (iii) main external financing source, (iv) degree of access to IDA funds, and (v)
whether sovereign borrowing by the country is rated by Moody’s and Standard and Poor’s.
2. Graduation from ADF
1
The Charter also provides that ADB should have special regard for the needs of smaller and less developed
countries.
OM Section A1/BP
Issued on 28 March 2006
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OPERATIONS MANUAL
BANK POLICIES (BP)
5. Country criteria are the primary consideration for access to and graduation from ADF. As
a country that is grouped under a certain level of ADF eligibility develops to the point where it
achieves and retains the criteria for the next level, it graduates to that level. Movement between
groups is bidirectional, and graduation is not irreversible. To avoid frequent movements and
ensure that the change in economic circumstances is not transitory, a time lag of 4 years is
usually provided between attaining the criteria and formal graduation. Periodic review of
eligibility for, or graduation from, ADF normally coincides with the ADF replenishment exercise.
3. Graduation from Regular ADB Assistance
6. To reflect the progress that DMCs have made in reducing their dependence on
nonconcessional official assistance and having reliable access to international capital markets,
graduation from regular ADB assistance is expected to occur within 4 years of a DMC’s meeting
three graduation criteria: per capita GNP, creditworthiness as reflected in adequate access to
international capital markets, and advanced level of development of economic and social
institutions. Graduation from regular assistance does not change the development status of a
country, but it formally differentiates high-income nonborrowing DMCs from other DMCs.
Graduation from regular ADB assistance means that the country has reached a stage where it
can carry forward the development process without regular ADB assistance.
Basis: This OM section is based on
ADB. 2002. Doc. R247-02. Review of Cost-Sharing Limits for Project
Financing as an Element of ADB’s 1998 Graduation Policy. 7 November.
Manila.
ADB. 1998. Doc. R204-98. A Graduation Policy for ADB’s DMCs.
Corrigendum 1. 26 November. Manila.
This OM section is to be read with OM Section A1/OP.
Compliance: This OM section is subject to compliance review.
For inquiries: Questions may be directed to the Director of the Strategic Planning, Policy,
and Interagency Relations Division, Strategy and Policy Department.
28 March 2006 Prepared and issued by the
This supersedes OM Section A1/OP Strategy and Policy Department
issued on 23 December 2004. with the approval of the President.
OM Section A1/OP
Issued on 28 March 2006
Page 1 of 4
OPERATIONS MANUAL
OPERATIONAL PROCEDURES (OP)
These procedures were prepared for use by ADB staff and are not necessarily a complete
treatment of the subject.
CLASSIFICATION AND GRADUATION OF DEVELOPING MEMBER COUNTRIES
A. Introduction
1. ADB’s policy on eligibility of developing member countries (DMCs) to borrow from the
Asian Development Fund (ADF) requires DMCs to be classified according to two main criteria.
This OM section details the methods and results of classification of DMCs.
B. Application of the Policy
2. Reliable macroeconomic information is a prerequisite for classifying a DMC. Normally,
ADB prepares an economic report before classifying a new DMC, and a Board paper on
classification of the DMC is prepared only after the economic report has been completed. In
some cases, however, it is sufficient to rely on reports prepared by the World Bank, the
International Monetary Fund, or United Nations agencies.
1. Classification
3. The criteria adopted to classify DMCs are per capita gross national product (GNP), and
debt repayment capacity. Initially, the operational benchmark for per capita GNP is applied to
divide DMCs into two categories: those below and those above the latest available International
Development Association (IDA) per capita GNP operational cutoff. (The IDA operational cutoff
was $925 in 1997 prices). Each income category is then differentiated on the basis of debt
repayment capacity: weak, limited, and adequate.
4. Application of the two criteria successively results in a 12-cell matrix (Appendix) that
yields the following system of four groups of DMCs’ eligibility to borrow from ADF and ordinary
capital resources (OCR):1 (i) ADF only (Group A), (ii) ADF with limited amounts of OCR (Group
B1), (iii) OCR with limited amounts of ADF (Group B2), and (iv) OCR only (Group C).
5. Group A includes countries that have weak debt repayment capacity, except those with
per capita GNP above the cutoff and that are not classified as least developed.2 Group B1
includes countries with per capita GNP above the cutoff but that have weak debt repayment
capacity while not being classified as least developed, and countries with limited debt
repayment capacity, except those that are not classified as least developed and have per capita
GNP above the cutoff. Group B2 includes countries that have limited debt repayment capacity,
are not classified as least developed, and have per capita GNP above the cutoff; and countries
with adequate debt repayment capacity, except those that are not classified as least developed
and have per capita GNP above the cutoff. Group C includes countries that have adequate debt
1
This excludes DMCs that have graduated from regular ADB assistance.
2
United Nations. 2003, December. List of Least Developed Countries. Available: www.un.org.
OM Section A1/OP
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OPERATIONS MANUAL
OPERATIONAL PROCEDURES (OP)
repayment capacity, are not classified as least developed, and have per capita GNP above the
cutoff.
6. The DMCs3 and their eligibility for ADF and OCR are as follows:
(i) Group A: ADF only
Afghanistan, Bhutan, Cambodia, Kiribati, Kyrgyz Republic, Lao People’s
Democratic Republic, Maldives, Mongolia, Myanmar,4 Nepal, Samoa,
Solomon Islands, Tajikistan, Timor-Leste, Tuvalu, and Vanuatu
(ii) Group B1: ADF with limited amounts of OCR
Azerbaijan, Bangladesh, Cook Islands,5 Marshall Islands, Federated
States of Micronesia, Pakistan, Sri Lanka, Tonga, and Viet Nam
(iii) Group B2: OCR with limited amounts of ADF
People’s Republic of China,4 India,4 Indonesia,6 Nauru,4 Palau,4 Papua
New Guinea, and Uzbekistan
(iv) Group C: OCR only
Fiji Islands, Kazakhstan, Malaysia, Philippines, Thailand, and
Turkmenistan
7. ADB lending on OCR terms and ADB guarantees with counter-guarantees from a
government can be considered on an exceptional basis for Group-A DMCs for projects that are
foreign exchange earning and are able to fully service their foreign debt from their net foreign
exchange earnings. Resources for Group-B1 DMCs are predominantly ADF with limited OCR
for revenue-earning projects, determined on a case-by-case basis. Resources for Group-B2
DMCs are predominantly OCR with limited ADF for projects with low revenue-earning capacity
but high socioeconomic benefits, determined on a case-by-case basis.
2. Graduation from ADF
8. Concessional assistance is most needed and effective in DMCs that have weak debt
repayment capacity, low domestic savings, and low income. It becomes less needed as debt
repayment capacity improves and incomes increase. Graduation from one level of access to
ADF to the next is triggered under the following conditions:
3
This excludes DMCs that have graduated from regular ADB assistance.
4
Currently no access to ADF.
5
Limited OCR eligibility applies only after improvement in the external debt position.
6
On watch list for graduation from ADF.
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Issued on 28 March 2006
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OPERATIONS MANUAL
OPERATIONAL PROCEDURES (OP)
(i) for least developed countries (LLDCs) and non-LLDCs (other), when debt
repayment capacity increases from weak to limited, or from limited to adequate;
(ii) for LLDCs, when they graduate from the LLDC classification and also achieve
per capita GNP above the cutoff; and
(iii) for non-LLDCs (other) below the per capita GNP cutoff, when they cross the per
capita GNP threshold.
9. In the event of a combination of (i) and (ii), or (i) and (iii), graduation takes place over
two levels, e.g., from Group A to Group B2, or from Group B1 to Group C.
3. Graduation from Regular ADB Assistance
10. Graduation from regular ADB assistance reflects the progress a DMC has made in
reducing its dependence on nonconcessional official assistance and follows the transition
process to its logical conclusion. The policy provides a specific process by which DMCs
graduate and a framework for the relationship among graduated DMCs, borrowing DMCs, and
ADB.
11. The criteria for graduation from regular ADB assistance are (i) per capita GNP, (ii)
availability of commercial capital flows on reasonable terms, and (iii) attainment of a certain
level of development of key economic and social institutions. The per capita GNP benchmark
needed to trigger the graduation procedure adopts the International Bank for Reconstruction
and Development benchmark of $5,445 (in 1997 prices).
12. Availability of commercial capital flows is a measure of creditworthiness. In assessing
that measure, a thorough country-specific evaluation is undertaken to determine whether
prevailing policy, incentive structures, and institutions encourage the use of capital to support
investment, and whether the growth of exports will provide the basis for sustained
creditworthiness. Key considerations in this evaluation include macroeconomic stability,
exchange rate policy, extent of trade and investment liberalization, privatization, tax reform,
financial sector liberalization, and corporate governance.
13. Development management is contingent upon context and opportunity. As such,
assessment of the level of development of key economic and social institutions is necessarily
country specific and takes into account (i) the quality of processes for macroeconomic
management, (ii) the regulatory and supervisory framework in the financial sector, (iii) the
efficiency and flexibility of labor markets, and (iv) the legal system.
14. Once a country crosses the per capita GNP threshold for graduation from regular
assistance, its readiness to graduate is reviewed annually. Graduation is expected to be
achieved within 4 years of meeting all three graduation criteria. At that time, Board approval
may be sought on a no-objection basis. ADB may also reduce or cease regular lending to a
country whose per capita GNP is below the threshold for graduation, if its creditworthiness and
performance warrant such action.
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OPERATIONS MANUAL
OPERATIONAL PROCEDURES (OP)
15. ADB seeks an understanding with a graduating country regarding the length of the
phase-out period, the number and type of projects to be included, and the total amount of
lending. Sectors that have received sustained commercial financing, both external and
domestic, may be graduated ahead of other sectors, and lending volume may thus taper off
gradually. Direct private sector investment by ADB in graduating DMCs is also discontinued.
16. Graduation from regular assistance is not linked to the development status of the
country, nor does it signify termination of a DMC’s relationship with ADB. In the context of an
economic crisis, emergency assistance is available to graduated DMCs; ADB may provide
expert services and technical assistance (on a reimbursable basis) as requested and if
available; ADB may assist in capital market development; transfer of technology may be
arranged between graduated DMCs and other DMCs; cofinancing opportunities with ADB may
arise; ADB may promote private-to-private flows from graduated DMCs to other DMCs; and
graduated DMCs may become involved in subregional projects.
Basis: This OM section is based on OM Section A1/BP, the documents cited
herein, and
ADB. 2005. Doc R280-05. Development Status and Country Classification
of Republic of Palau. 17 October. Manila.
ADB. 2004. Doc. R254-04. Country Classification of Timor-Leste.
22 November. Manila.
ADB. 2004. Doc. R159-04. Review of the Classification of Uzbekistan
under ADB's Graduation Policy. 2 September. Manila.
ADB. 2002. Doc. R183-02. The Country Classification of Turkmenistan.
17 September. Manila.
ADB. 2001. Doc. R40-01. The Country Classification of Azerbaijan.
14 March. Manila.
ADB. 2000. Doc. R261-00. Review of Papua New Guinea's Classification
under ADB's Graduation Policy. 17 November. Manila.
Compliance: This OM section is subject to compliance review.
For inquiries: Questions may be directed to the Director of Strategic Planning, Policy,
and Interagency Relations Division, Strategy and Policy Department.
28 March 2006 Prepared and issued by the
This supersedes OM Section A1/OP Strategy and Policy Department
issued on 23 December 2004. with the approval of the President.
OM Section A1/OP
Issued on 28 March 2006
Appendix
OPERATIONS MANUAL
OPERATIONAL PROCEDURES (OP)
ADF ELIGIBILITY OF DMCS AS PER DECISION MATRIXa
Debt Proposed Per Capita GNP Cutoff ($925 in 1997 prices)
Repayment
Capacity Below Per Capita GNP Cutoff Above Per Capita GNP Cutoff
b
LLDC Other LLDC Other
Weak ADF only ADF only ADF only ADF with limited
OCR
(A) (A) (A) (B1)
Afghanistan Kyrgyz Republic Maldives Cook Islandsd
Bhutan Mongolia Samoa FSM
Cambodia Tajikistan Tuvalu Marshall Islands
Kiribati Vanuatu Tonga
Lao PDR
Myanmarc
Nepal
Solomon Islands
Timor-Leste
Limited ADF with limited ADF with limited ADF with OCR with limited
OCR OCR limited OCR ADF
(B1) (B1) (B1) (B2)
Bangladesh Azerbaijan Indonesiae
Pakistan Nauruc
Sri Lanka Palauc
Viet Nam Papua New Guinea
Adequate OCR with limited OCR with limited OCR with OCR only
ADF ADF limited ADF
(B2) (B2) (B2) (C)
Indiac Fiji Islands,
c
PRC Kazakhstan
Uzbekistan Malaysia
Philippines
Thailand
Turkmenistan
ADF = Asian Development Fund, DMC = developing member country, FSM = Federated States of Micronesia, GNP =
gross national product, Lao PDR = Lao People’s Democratic Republic, LLDC = least developed country, OCR =
ordinary capital resources, PRC = People’s Republic of China.
a
Some cells do not list DMCs because current borrowing DMCs do not fit the specific characteristics of a particular
cell. This could change as new members are classified and existing DMCs graduate to the next level.
b
The following DMCs are classified as LLDCs: Afghanistan, Bangladesh, Bhutan, Cambodia, Kiribati, Lao People’s
Democratic Republic, Maldives, Myanmar, Nepal, Samoa, Solomon Islands, Timor-Leste, Tuvalu, and Vanuatu,
(United Nations. December 2003. List of Least Developed Countries. Available: www.un.org).
c
Currently no access to ADF.
d
Limited OCR eligibility will take effect only after the country’s external debt position has improved.
e
On watch list for graduation from ADF.
