ADB Annual Report 2007 - Financial Report

7/30/2019 ADB Annual Report 2007 - Financial Report

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a n n u a l r e p o r t

2007

Volume 2 | Financial Report


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a n n u a l r e p o r t

2007Vm 2 | Fici r


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TASF-3 Statement o Cash Flows or the Years Ended 31 December 2007 and 2006 81

TASF-4 Statement o Resources, 31 December 2007 82

TASF-5 Summary Statement o Technical Assistance Approved and Eective

or the Year Ended 31 December 2007 83

TASF-6 Notes to Financial Statements, 31 December 2007 and 2006 84

JAPAN SPECIAL FUND (JSF)Report o Independent Auditors

JSF-1 Statement o Financial Position, 31 December 2007 and 2006 88

JSF-2 Statement o Activities and Changes in Net Assets or the Years Ended

31 December 2007 and 2006 89

JSF-3 Statement o Cash Flows or the Years Ended 31 December 2007 and 2006 90

JSF-4 Notes to Financial Statements, 31 December 2007 and 2006 91

ASIAN DEVELOPMENT BANK INSTITUTE SPECIAL FUND (ADBISF)

Report o Independent Auditors

ADBISF-1 Statement o Financial Position, 31 December 2007 and 2006 96

ADBISF-2 Statement o Activities and Changes in Net Assets or the Years Ended

31 December 2007 and 2006 97ADBISF-3 Statement o Cash Flows or the Years Ended 31 December 2007 and 2006 98

ADBISF-4 Notes to Financial Statements, 31 December 2007 and 2006 99

ASIAN TSUNAMI FUND (ATF)


ATF-1 Statement o Financial Position, 31 December 2007 and 2006 106

ATF-2 Statement o Activities and Changes in Net Assets or the Years Ended

31 December 2007 and 2006 107

ATF-3 Statement o Cash Flows or the Years Ended 31 December 2007 and 2006 108

ATF-4 Notes to Financial Statements, 31 December 2007 and 2006 109

PAKISTAN EARTHQUAKE FUND (PEF)


PEF-1 Statement o Financial Position, 31 December 2007 and 2006 113

PEF-2 Statement o Activities and Changes in Net Assets or the Years Ended

31 December 2007 and 2006 114

PEF-3 Statement o Cash Flows or the Years Ended 31 December 2007 and 2006 115

PEF-4 Notes to Financial Statements, 31 December 2007 and 2006 116

REGIONAL COOPERATION AND INTEGRATION FUND (RCIF)


RCIF-1 Statement o Financial Position, 31 December 2007 120RCIF-2 Statement o Activities and Changes in Net Assets or the Period 26 February to

31 December 2007 121

RCIF-3 Statement o Cash Flows or the Period 26 February to 31 December 2007 122

RCIF-4 Notes to Financial Statements, 31 December 2007 123


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STATISTICAL ANNEXES

1 Sovereign and Nonsovereign Loan Approvals by Country, 2007 127

2 Grant-Financed Project Approvals by Country, 2007 131

3 Loan Approvals by Sector: 3-Year Moving Averages, 1968-19702005-2007 133

4 Loan Approvals by Sector, 2007 134

5 Sectoral Distribution o Loans, 2007, 19682007;

Sectoral Distribution o Grants, 2007, 19682007 1376 Loan and ADF Grant Approvals, by Country and Source o Funds, 2007 138

7 Projects Involving Cofnancing, 2007 139

8 Loan Disbursements, 2006 and 2007 141

9a Program Loan Disbursements, 2007 142

9b Trends in Program Lending and Grant, 19982007 142

10 Nonsovereign Approvals and Total Project Costs by Country, 2007 143

11 Nonsovereign Approvals and Total Project Costs by Sector, 2007 144

12 Nonsovereign Approvals by Year, 19832007 144

13 Nonsovereign Approvals by Country, 19832007 145

14 Number o Loans and Projects Approved and Under Administration,

Project Completion Reports (PCRs) Circulated, Projects Completed,

Loans Closed, and Project/Program Perormance Evaluation Reports (PPERs) Circulated 146

15 Amount o Loans Approved, Contracts Awarded, and Disbursements 14816 Technical Assistance Grants by Country and Regional Activities, 19672007, 2006, 2007 150

17 Technical Assistance Grants, 2007 152

18 Technical Assistance Grants by Sector, 19672007, 2006, 2007 160

19 Technical Assistance (TA) Loans and TA Grants by Sector, 2007 160

20 Regional Technical Assistance Activities, 2007 161

21 Net Transer o Resources (Ordinary Capital Resources and

Asian Development Fund), 20052007 165

22 Net Transer o Resources (Ordinary Capital Resources and

Asian Development Fund), 19982007 166

23 Asian Development Fund Resources and Commitment Authority 167

24 Technical Assistance Special Fund 168

25 Japan Special FundRegular and Supplementary Contributions 169

26 Japan Special FundAsian Currency Crisis Support Facility 169

27 Japan Fund or Poverty Reduction, 2007 170

28 Projects with ADB-Administered Grant Financing, 2007 Approvals 171

29 Contracts Awarded by Country o Origin, 2007:

Project LoansOrdinary Capital Resources 175


Project LoansAsian Development Fund 176


Project LoansOrdinary Capital Resources and Asian Development Fund Combined 177

32 Estimates o Payment to Supplying Countries or Foreign Procurement

Under Program Lending, 2007 178

33 Cumulative Contracts Awarded, By Country o Origin:

Technical Assistance Operations 17934 Contracts Awarded by Country o Origin, 20052007 180


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ManagmnDun andAnay

The Asian Development Bank (ADB) is an

international development fnancial institution

whose vision is to make Asia and the Pacifc region

ree o poverty. ADB was established in 1966

through the Agreement Establishing the Asian

Development Bank (the Charter), ratifed by 31

countries to promote the social and economic

development o the region and reduce poverty.


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As o 31 December 2007, ADB had 67 members, 48 owhich are in the region. ADB provides various orms onancial assistance to its developing member countries.The main instruments are loans, technical assistance,grants, guarantees, and equity investments. These instru-ments are nanced through ordinary capital resources(OCR), Special Funds, and various trust unds. OCRand Special Funds are used to nance operations thatare solely under ADB administration. Trust unds areexternally unded and are administered by ADB onbehal o donors. The Charter requires that unds romeach resource be kept separate rom the others.

ADB also provides policy dialogues and advisoryservices and mobilizes nancial resources through itsconancing operations tapping ocial, commercial,and export credit sources to maximize the develop-ment impact o its assistance. Conancing or ADBprojects can be in the orm o external loans, grants ortechnical assistance and components o loan projects,

and credit enhancement products such as guaranteesand syndications.

Ordinary Capital resOurCes

Funding or OCR operations comes rom three distinctsources: unds borrowed rom private placements andcapital markets, paid-in capital provided by sharehold-ers, and accumulated retained income (reserves). Thenancial strength o OCR is largely based on the supporto shareholders and on nancial policies and practices.Shareholder support is refected in the orm o capitalbacking rom members and in the record o borrowing

members in meeting their debt service obligations.Borrowed unds, together with equity, are used to

und OCR lending and investment activities as well asother general operations. Loans are generally madeto developing member countries that have attained ahigher level o economic development and to privateand other nonsovereign borrowers. Sovereign loans arepriced on a cost pass-through basis in which the costo unding the loans plus a lending spread is passedthrough to the borrowers. Nonsovereign loans arepriced based on market practice.

In addition to direct lending, ADB also providesguarantees to assist governments o developing mem-

ber countries and nonsovereign borrowers in secur-ing commercial unds or ADB-assisted projects. ADBexperienced a strong and growing demand or guaran-tees as credit enhancement products.

Ba f Fnana Rprng

Statutory Reporting. Table 1 presents selected nancialdata or 2007. ADB prepares its nancial statementsin accordance with accounting principles generallyaccepted in the United States (US). ADB complies with

Financial Accounting Standards (FAS) 133, Account-ing or Derivative Instruments and Hedging Activities,and its related amendments (collectively reerred to asFAS 133), including FAS 155 (Accounting or CertainHybrid Financial Instruments, an amendment to FAS133 and 140). FAS 133 allows hedge accounting onlyi certain qualiying criteria are met. An assessment othose criteria indicated that most o ADBs derivativetransactions are highly eective in hedging the under-lying transactions and are appropriate or reducingunding costs. However, applying FAS 133 hedge crite-ria will not entirely refect ADBs risk management andhedging strategies. Compliance with hedge account-ing will impose undue constraints on uture borrow-ings, loans, and hedge programs and will likely detractADBs eorts to eectively and eciently minimizethe unding costs or its borrowing member countries.Accordingly, ADB elects not to adopt hedge account-ing and reports all derivative instruments on the bal-

ance sheet at air value while recognizing changes inthe air value o derivative instruments or the year aspart o net income.

Supplemental Reporting. ADB manages its balancesheet by selectively using derivatives to minimize theinterest rate and currency risks associated with itsnancial assets and liabilities. Derivative instrumentsare used to enhance asset/liability management o indi-vidual positions and overall portolios, and to reduceborrowing costs. Certain nancial instruments (includ-ing all derivatives, structured borrowings, and certaininvestments) are recorded at their air value while

loans, the majority o borrowings, and certain invest-ments are recorded at carrying book value.

ADB uses derivatives to convert xed rate borrow-ings into foating rate borrowings. These borrowing-related derivatives are considered to be equivalent toxed rate assets; in general, the value o the derivativesdecline (loss) when market interest rate increases andvice versa. These derivatives would generally economi-cally oset the contractual obligations resulting rom thedebts. However, as most o these bonds are accountedor at their carrying book value, the reported valuesare not aected by interest rate movements. Becauseo the dierent methods used to account or the bonds

and their associated derivatives, the application o FAS133 creates volatility in the reported earnings. In addi-tion, applying FAS 133 does not ully refect the overalleconomic value o ADBs nancial positions.

The adoption o FAS 155 on 1 January 2006 toa degree alleviates the volatility in the reported earn-ings as only certain nancial instruments can be airvalued. FAS 155 allows air value measurement orhybrid nancial instruments that contain embeddedeatures that would otherwise be required to be treatedas separate derivative instruments (biurcated) in the


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Aan Dvpmn Bank

Table 1 Selected Financial Data( 31 December, amounts in $ million )

Statutory Basis

2007 2006 2005 2004 2003

Rvnu

From lon 1,442.3 1,210.1 1,036.3 1,038.3 1,383.3

From Invstmnts 683.2 564.5 377.4 265.6 251.2

From Gurnts 5.1 4.1 4.1 3.5 2.3

From Othr Sourcs 77.7 60.2 14.6 5.7 20.6

Total Revenue 2,208.3 1,838.9 1,432.4 1,313.1 1,657.4

expnss

borrowings nd Rtd expnss 1,389.8 1,116.3 893.2 861.7 993.2

administrtiv expnss 127.3 127.7 135.7 118.3 118.5

Tchnic assistnc to Mmr Countris (0.7) (1.2) (3.4) (2.4) (0.4)

Provision for losss (0.6) (32.5) (3.5) 2.2 12.9

Othr expnss 4.0 3.7 4.2 3.1 3.7

Total Expenses 1,519.8 1,214.0 1,026.2 982.9 1,127.9

Nt Rizd Gins 22.9 80.6 16.9 59.4 87.4

Nt Unrizd Gins (losss) 53.8 (135.4) (309.2) 41.0 (178.4)

Cumutiv effct of Chng in accounting Princip (4.6)

Nt Incom 765.2 570.1 109.3 430.6 438.2

avrg erning assts 42,780 37,904 36,092 36,364 37,540

annu Rturn on avrg erning assts 1.79% 1.50% 0.30% 1.18% 1.17%

Rturn on lons 5.00% 4.98% 4.35% 4.16% 4.56%

Rturn on Invstmnts 4.68% 4.18% 2.96% 2.21% 3.74%

Cost of borrowings 4.32% 4.81% 5.04% 3.37% 4.65%

equity-to-lon Rtiod 44.54% 47.51% 49.36% 51.64%

Pre-FAS 133 Basis

Nt Incom 711.4 705.5 415.6 389.6 616.6


annu Rturn on avrg erning asstsc 1.66% 1.86% 1.15% 1.07% 1.64%

Rturn on lons 5.14% 4.94% 4.35% 4.16% 4.56%

Rturn on Invstmnts 4.72% 4.27% 2.99% 2.34% 3.13%

Cost of borrowings 4.68% 4.31% 3.75% 3.58% 3.70%


Current Value Basis

Nt Incom 1,159.0 544.1 93.7 562.8 1,363.3


annu Rturn on avrg erning assts 2.65% 1.31% 0.23% 1.47% 3.39%

Rturn on lons 6.40% 2.58% (1.18%) 4.25% 4.97%

Rturn on Invstmnts 7.77% 5.48% (1.11%) 3.51% 5.88%

Cost of borrowings 5.32% 3.51% (1.34%) 3.56% 2.55%


= 0, () = ngtiv, $ = US dor, % = prcnt.

Nt of dministrtion xpnss octd to th asin Dvopmnt Fund nd on origintion costs tht r dfrrd. Composd of invstmnts nd rtd swps, outstnding ons (xcuding unmortizd front-nd fs) nd rtd swps, nd quity invstmnts.c Rprsnts nt incom for nt unrizd gins/osss on drivtivs, ovr vrg rning ssts.d approvd nd stishd in Frury 2004 to msur aDbs risk-ring cpcity.


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Annua Rpr 200

Table 2 Condensed Current Value Balance Sheets as at 31 December 2007 and 31 December 2006($ thousand)

31 December 2007

31 December

2006

Statutory

Basis

Reversal of

FAS 133

PreFAS 133

Basis

Current Value

Adjustments

Current Value

Basis

Current Value

Basis

Du from nks $108,821 $ $ 108,821 $ $ 108,821 $ 205,418

Invstmnts nd ccrud incom 13,440,728 13,440,728 13,440,728 12,891,140

Scuritis trnsfrrd undr scuritis

nding rrngmnt 5,041,387 5,041,387 5,041,387 1,922,901

Scuritis purchsd undr rs

rrngmnt 427,132 427,132 427,132 432,963

lons outstnding nd ccrud intrst 30,576,306 (538) 30,575,768 858,515 31,434,283 27,176,109

Provision for on osss nd unmortizd

nt on origintion costs 27,087 27,087 27,087 (14,324)

equity invstmnt 808,157 808,157 808,157 655,819

Rciv from mmrs 174,805 174,805 (69,778) 105,027 108,822

Rciv from swps

borrowings 17,968,867 923,370 18,892,237 (923,370) 17,968,867 12,986,831

Othrs 512,089 27,410 539,499 (27,410) 512,089 655,151

Othr ssts 463,793 463,793 463,793 480,870

TOTAL $ 69,549,172 $ 950,242 $ 70,499,414 $ (162,043) $ 70,337,371 $ 57,501,700

borrowings nd ccrud intrst $ 31,959,300 $ 617,924 $ 32,577,224 $ (553,555) $ 32,023,669 $ 27,972,473

Py for swps

borrowings 16,936,964 274,601 17,211,565 (274,601) 16,936,964 12,502,403

Othrs 583,320 14,255 597,575 (14,255) 583,320 655,461

Py undr scuritis nding

rrngmnt 5,092,316 5,092,316 5,092,316 1,954,409

accounts py nd othr iiitis 722,402 722,402 722,402 683,814

Total Liabilities 55,294,302 906,780 56,201,082 (842,411) 55,358,671 43,768,560

Pidin cpit 3,842,293 3,842,293 3,842,293 3,652,800

Nt notion mintnnc of vu

rciv (661,197) (661,197) (661,197) (672,899)

Ordinry rsrv 9,245,332 (2,500) 9,242,832 399,622 9,642,454 9,555,260

Spci rsrv 202,847 202,847 202,847 197,799

lon oss rsrv 182,100 182,100 182,100 130,100

Surpus 616,300 616,300 616,300 330,117

Cumutiv rvution djustmnts ccount (110,959) 110,959

Nt incom 31 Dcmr 2007 760,174 (53,814) 706,360 447,543 1,153,903

Nt incom 31 Dcmr 2006 539,963

accumutd othr comprhnsiv incom 177,980 (11,183) 166,797 (166,797)

Total Equity 14,254,870 43,462 14,298,332 680,368 14,978,700 13,733,140

TOTAL $ 69,549,172 $ 950,242 $ 70,499,414 $ (162,043) $ 70,337,371 $ 57,501,700 = 0, ( ) = ngtiv, $ = US dor.

Nt incom ftr pproprition of gurnt fs to Spci Rsrv.

reported nancial statements under FAS 133. As o 31December 2007, ADB holds a small portion o hybridnancial instruments in its borrowing portolio.

Because o the continued inconsistent account-ing treatment as described above, ADB has decidedto continue issuing two non-US GAAP supplemental

nancial reports to better refect its nancial positionsand risk management: current value and pre-FAS 133.Applications o consistent approaches on these state-ments allow better analysis or management inorma-tion and decision making.


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10 Aan Dvpmn Bank

Table 3 Condensed Current Value Income Statements for the Years Ended 31 December 2007 and 31 December 2006($ thousand)

31 December 2007

31 December

2006

Statutory

Basis

Reversal of

FAS 133 Effects

PreFAS 133

Basis

Current Value

Adjustments

Current Value

Basis

Current Value

Basis

ReVeNUeFrom ons $ 1,442,338 $ $ 1,442,338 $ $ 1,442,338 $ 1,210,071

From invstmnts 683,212 683,212 683,212 564,495

From gurnts 5,049 5,049 5,049 4,169

From othr sourcs nt 77,732 77,732 77,732 60,204

Total Revenue 2,208,331 2,208,331 2,208,331 1,838,939

eXPeNSeS

borrowings nd rtd xpnss 1,389,778 1,389,778 1,389,778 1,116,326

administrtiv xpnss 127,327 127,327 127,327 127,669

Tchnic ssistnc to mmr countris (683) (683) (683) (1,220)

Provision for osss (579) (579) 579

Othr xpnss 3,998 3,998 3,998 3,767

Total Expenses 1,519,841 1,519,841 579 1,520,420 1,246,542

Nt rizd gins 22,905 22,905 22,905 80,614

Nt unrizd gins 53,828 (53,814) 14 14 8

Currnt vu djustmnts 447,543 447,543 (161,402)

Provision for osss 579 579 32,515

NET INCOME $ 765,223 $ (53,814) $ 711,409 $ 447,543 $ 1,158,952 $ 544,132

= 0, () = ngtiv, $ = US dor.

FaS 133 djustmnts r rvrsd s th currnt vu djustmnts incorport th ffct of nt unrizd gins/osss on drivtivs. Currnt vu djustmnts incud th ffct of FaS 133 djustmnts.

Table 4 Summary of Current Value Adjustments($ thousand)

Balance Sheet Effects as of 31 December 2007

Income Statement Effects

Year to Date

Loans After

Swaps Investments

Borrowings

After Swaps Other Assets

Less Prior

Year Effectsa31 December

2007

31 December

2006

Tot Currnt Vu adjustmnts

on bnc Sht $ 824,682 $ 20,678 $ (95,214) $ (69,778) $ (532,290) $ 148,078 $ (295,567)

Unrizd Gins on Invstmnts 232,792 c 170,487

accumutd Trnstion adjustmnts 126,844d 40,298

Pnsion nd Post Rtirmnt

bnfit liiity adjustmnts (60,171)c (76,620)

Total Current Value Adjustments $ 447,543 $ (161,402)

= 0, () = ngtiv, $ = US dor.

Prior Yr effcts incud cumutiv currnt vu djustmnts on finnci instrumnts md in th prior yrs. Rts to unrizd gins/osss of invstmnts nd quity invstmnts cssifid s vi for s.c Ths r incudd in othr comprhnsiv incom undr th sttutory sis forming prt of currnt vu djustmnts for currnt vu rporting.d Rts to th ccumutd trnstion djustmnts for th priod nd nt currnt trnstion ffcts from FaS 133 rvrss.

Dun and Anay n currn Vau

Table 2 presents estimates o the economic value oOCRs nancial assets and liabilities taking into con-sideration changes in interest rates, exchange rates,and credit risks. Current value refects the exit price

or nancial instruments with liquid markets and isthe estimated air value. For nancial instruments withno market quotations, current value is estimated bydiscounting the expected cash fows by applying theappropriate market data. The current value resultsmay dier rom the actual net realizable value in the


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Annua Rpr 200 11

event o liquidation. The reversal o the eects o FAS133 removes its impact, as these eects are part o cur-rent value adjustments (Tables 3 and 4).

currn Vau Baan sh

Loans and Related Swaps. Most loans are made toor guaranteed by ADB members. ADB does not sellits loans believing that there is no market or them.The current value o loans incorporates managementsbest estimate o expected cash fows including interest.Estimated cash fows rom principal repayments andinterest are discounted by the applicable market yieldcurves or ADBs unding cost plus lending spread.

The current value also includes an appropriatecredit risk assessment. To recognize the risk inherentin these and other potential overdue payments, theloan value is adjusted through loan loss provision-ing. ADB has never suered a loss on sovereign loans

except opportunity losses resulting rom the dier-ence between payments or interest and charges not inaccordance with the loans contractual terms.

The positive adjustment o $0.8 billion indicatesthat the average interest rates on loans on an ater-swap basis are higher than ADB would currently origi-nate on similar loans.

Investments and Related Swaps. Under both the statu-tory and current value bases, investment securities andrelated derivatives are reported at air values based onmarket quotations when available. Otherwise, the cur-rent value is calculated using market-based valuation

models incorporating observable market data. The netpositive adjustment o $20.7 million resulted romunrealized gains on asset swaps due to increasing inter-est rates in certain markets.

Equity Investments. Under both statutory and currentvalue bases, equity investments are reported at airvalue when market values are readily determinable;by applying equity method or investments in limitedpartnership and certain limited liability companies, oror investments where ADB has the ability to exercisesignicant infuence; or at cost less permanent impair-ment, i any, which represents a air approximation o

the current value.

Receivable rom Members. These consist o promis-sory notes which may be restricted by member coun-tries. The current value is based on the cash fow othe projected encashment o the promissory notes dis-counted using appropriate interest rates.

Borrowings ater Swaps. The current value o theseliabilities includes the air value o the borrowings andassociated nancial derivative instruments, and is cal-

culated using market-based valuation models incorpo-rating observable market data.

The $95.2 million unavorable current valueadjustment is due to the act that the average cost othe borrowings on an ater-swap basis is higher thanthe market rate at which ADB can currently obtainnew unding.

currn Vau inm samn

For 2007, current value net income is $1,158.9 mil-lion compared with pre-FAS 133 net income o $711.4million and statutory reported net income o $765.2million (Table 3).

Current Value Adjustments. The total current valueadjustment o $447.5 million ($161.4 million in 2006)represents the change in the current value o all ADBnancial instruments during the year. The adjustment

refects changes in interest rates, currency exchangerates, and credit risks. This comprised a net avora-ble adjustment o $148.1 million rom the change inthe valuation o all outstanding nancial instruments,$126.8 million rom translation adjustments, $160.7million and $72.1 million rom unrealized gains oninvestments, and equity investments, respectively, o-set by $60.2 million additional pension and postretire-ment benet liability (Table 4).

Impact o Changes in Interest Rates. The net increasein the current value adjustments on the balance sheetduring 2007 was $148.1 million. It was a result o a

decrease in unrealized losses in the borrowing porto-lio o $52.5 million, increase in unrealized gains orloans o $103.7 million, oset by unavorable resultsor investment and other asset swaps o $3.2 millionand $4.9 million, respectively.

Impact o Changes in Exchange Rates. Translationadjustments, reported under the statutory basis as parto accumulated other comprehensive income, arepresented as current value adjustments. The generalweakening o the US dollar against most o the majorcurrencies in 2007 resulted in a positive translationadjustment o $126.8 million compared to $40.3 mil-

lion in 2006.

oprang Av

In pursuing its objectives, ADB provides nancialassistance through loans, technical assistance, guar-antees, and equity investments to its developing mem-ber countries to help them meet their developmentneeds. These assistance can be provided to sovereignand nonsovereign entities. ADB also actively promotesconancing o its development projects and programs


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12 Aan Dvpmn Bank

to complement its own assistance with unds romboth ocial and commercial sources including exportcredit agencies.

Loans. Until 30 June 2001, ADBs three windows orloans rom OCR were the pool-based multicurrencyloan, the pool-based single-currency loan in US dol-lars, and the market-based loan. With the introductiono LIBOR-based loan on 1 July 2001, the pool-basedmulti-currency loan and market-based loan are nolonger oered, and on 1 July 2002, the pool-basedsingle-currency loan in US dollars was retired. Eec-tive January 2004, the pool-based multi-currencyloans were transormed into pool-based single-cur-rency loans in Japanese yen. The LIBOR-based loanis a timely response to borrowers demand or loanproducts that suit project needs and eectively man-age their external debt. LIBOR-based loan productsgive borrowers a high degree o fexibility in managing

interest rate and exchange rate risks and at the sametime provide low intermediation risk to ADB. SinceNovember 2002, ADB has been oering local currencyloans to nonsovereign borrowers and expanded this tothe sovereign borrowers in August 2005.

Loan Approvals, Disbursements, Repayments, andPrepayments. In 2007, the Board o Directors approved38 sovereign and 22 nonsovereign loans totaling $7.3billion and $0.9 billion, respectively, compared with2006 approvals o 26 sovereign and 9 nonsovereignloans totaling $5.5 billion and $0.6 billion, respec-tively. Disbursements in 2007 totaled $5.2 billion ($4.7

billion or sovereign loans and $0.5 billion or nonsov-ereign loans) representing an increase o 18.0% romthe $4.4 billion disbursements in 2006. Regular prin-cipal repayments or the year were $1.4 billion ($1.3billion in 2006) while prepayments amounted to $0.1billion ($0.5 billion in 2006). In 2007, six loans wereully prepaid. As o 31 December 2007, the total loansoutstanding ater provision or losses and net unamor-tized loan origination cost amounted to $30.3 billion,o which $29.0 billion is or sovereign loans and $1.3billion is or nonsovereign loans.

In 2005, ADB established the multitranche nanc-ing acility (MFF), a debt nancing acility that allows

ADB to deliver nancial resources or a specic pro-gram or investment in a series o separate nancingtranches over a xed period. Financing tranches maybe provided as loans, guarantees, equity, or any combi-nation o these instruments based on periodic nanc-ing requests submitted by the borrower. In 2007, sevenMFFs totaling $4.0 billion (eight MFFs totaling $3.8billion in 2006), were approved under OCR. Periodicnancing requests under MFFs amounting to $2.0 bil-lion were approved in 2007 ($931.0 million in 2006).

Starting September 2005, ADB provided lendingwithout sovereign guarantee to entities that can beconsidered public sector borrowers but are structur-ally separate rom the sovereign or central govern-ment. Such entities include state-owned enterprises,government agencies, municipalities, and local govern-ment units. In 2007, three loans to state-owned enter-prises without sovereign guarantee totaling $105.0million were approved (two loans totaling $150.0 mil-lion in 2006).

Status o Loans. One sovereign loan and our nonsov-ereign loans with total principal outstanding balanceo $2.3 million ($6.1 million - 2006) and $16.5 million($29.7 million - 2006) respectively, were in non-accrualstatus. In total they represented 0.1% o the total OCRloans outstanding. The $13.2 million decline in non-sovereign loans is mainly attributed to the sale o twononsovereign loans which were in non-accrual status.

Loan Charges. LIBOR-based loans carry a foatinglending rate that consists o 6-month LIBOR and aneective contractual spread xed over the lie o theloan. The lending rate is reset every 6 months on eachinterest reset date and can be converted to xed rate atborrowers request. The lending rates or pool-basedsingle-currency loans are based on the previous semes-ters average cost o borrowings. Interest rates or mar-ket-based loans are either xed or foating. The foatingrates are determined based on 6-month LIBOR withreset dates o either 15 March and 15 September or 15

June and 15 December. Eective 2000, all sovereign

loans without specic provisions in the loan agree-ments were charged with lending spread o 60 basispoints over the base lending rate. In 2004, 20 basispoints o the lending spread were waived on sovereignloans outstanding rom 1 July 2004 to 30 June 2005or borrowers that did not have loans in arrears. Subse-quently, the policy was extended to cover the period upto June 2008. In December 2007, the Board o Direc-tors revised the lending rates or all sovereign LIBOR-based loans negotiated on or ater 1 October 2007 byreducing the eective contractual spread to 20 basispoints over the base lending rate and eliminating thewaiver mechanism or such loans.

ADBs variable lending rates or pool-based single-currency loans in US dollars and in Japanese yen areshown in Table 5.

For nonsovereign loans, the lending spread is deter-mined based on market practices, which is intendedto cover ADBs risk exposure to specic borrowersand projects.

ADB also charges a ront-end ee o 1.0% on sove-reign loans and 0.51.0% on nonsovereign loans to coverthe administrative costs incurred in loan origination.


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Annua Rpr 200 13

Table 5 Lending Ratesa(% per annum)

2007 2006 PSCLs

1 Jnury 1.31 1.49 Jpns yn

5.91 5.94 US dor

1 Juy 1.69 1.46 Jpns yn

6.34 5.86 US dor

% = prcnt, PSCl = Poo-sd sing currncy on. lnding rts r st on 1 Jnury nd 1 Juy vry yr nd r vid for 6

months nd r rprsntd nt of 20 sis points nding sprd wivr.

In 2004, the Board o Governors approved the waivero the entire ront-end ee on all new sovereign loansapproved rom 1 January 2004 to 30 June 2005. Sub-sequently, the policy was extended to cover the periodup to June 2008. In December 2007, the Board oDirectors approved the elimination o ront-end ees

or sovereign LIBOR-based loans negotiated on orater 1 October 2007.ADB applied a progressive commitment ee o 75

basis points on undisbursed loan balances or sover-eign project loans and a fat commitment ee o 75basis points or sovereign program loans. In October2006, as part o the enhancement o ADBs loan anddebt management products, all sovereign project loansnegotiated ater 1 January 2007 carried a fat com-mitment ee o 35 basis points on the ull amount oundisbursed loan balances. In April 2007, the Boardalso approved the waiver o 10 basis points o thecommitment charge on the undisbursed balances o

sovereign project loans negotiated ater 1 January2007 and 50 basis points o the commitment chargeon the undisbursed balances o sovereign programloans. The waiver is applicable to all interest periodsstarting rom 1 January 2007 up to and including 30

June 2008. In December 2007, the Board o Directorsapproved the reduction o the commitment chargerom 75 basis points or sovereign program loans and35 basis points or sovereign project loans to 15 basispoints or both sovereign program and project loansnegotiated on or ater 1 October 2007, and eliminatedthe waiver mechanism or such loans. For nonsover-eign loans, ADB charges a commitment ee o about

5075 basis points on the ull amount o undisbursedloan balances.

Rebates and surcharges are standard eatures osovereign LIBOR-based loans. To maintain the prin-ciple o cost pass-through pricing, ADB returns the

actual sub-LIBOR unding cost margin to its LIBOR-based loans sovereign borrowers through rebates. Asurcharge could arise i ADBs unding cost exceeds the6-month LIBOR, which is a remote possibility unlessADB experiences serious credit deterioration. Rebateor surcharge rates are set on 1 January and 1 July everyyear and are based on the actual average unding costmargin or the preceding 6-month period. Eective 1

July 2007, rebates or surcharges are passed on to theborrowers by incorporating them into the interest rate

or the succeeding interest period, rather than retroac-tively. Based on rebate rates, ADB returned an actualsub-LIBOR unding cost margin o $38.1 million to itsLIBOR-based loan sovereign borrowers in 2007.

Ocial Conancing or Loans. In 2007, $3.6 millionrom the OPEC Fund or International Developmentwas mobilized in loan conancing with partial admin-istration by ADB or a loan project o $60.0 million.

Technical Assistance. From 1967 to 1991, technicalassistance (TA) expenses were charged to OCR and othertechnical assistance unding resourcesthe Technical

Assistance Special Fund, the Japan Special Fund, andtrust/grant unds. From 1992 to 2000, no TA expenseswere charged to OCR. In 2001, the Board o Directorsapproved the nancing o high-priority TA programsout o OCR current income within a rolling 4-yearnancing ramework. The amount o nancing requiredvaries between years and is subject to the approval othe Board o Directors. In 2003, the Board reverted tothe practice o allocating OCR net income to the Tech-nical Assistance Special Fund and o nancing techni-cal assistance activities through it and other variousunding resources.

Guarantees. ADB provides guarantees 1 as creditenhancements or eligible projects to cover risks thatthe project and its commercial conancing partnerscannot easily absorb or manage on its own. Reduc-ing these risks can make a signicant dierence in

1 aDb offrs two typs of gurnt productspoitic risk nd prti crditdsignd to fciitt cofinncing y mitigting risk xposur ofcommrci ndrs nd cpit mrkt invstors. a poitic risk gurnt covrs ginst spcificy dfind poitic risks. a prti crdit gurntprovids comprhnsiv covr (of commrci nd poitic risks) for spcific portion of th dt srvic providd y cofinncirs. Ths gurntsr providd ony for projcts in which aDb prticipts.

Table 6 Rebate Rates(% per annum)

US dollar Japanese yen

1 Jnury 2007 0.30 0.36

1 Juy 2007 0.31 0.45

% = prcnt.


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14 Aan Dvpmn Bank

2 Dpnding on whthr aDb rtins risk or not, thr my or my not contingnt iiity to aDb.3 a b-on is trnch of dirct on nominy dvncd y aDb, sujct to igi finnci institutions tking fundd risk prticiptions within

such trnch nd without rcours to aDb. It compmnts n a-on fundd y aDb.4 Nt of susqunt cnctions.

mobilizing debt unding or projects. ADB has usedits guarantee instruments successully or inrastruc-ture projects, nancial institutions, capital markets,and trade nance. These instruments generally arenot recognized in the balance sheet and have o-bal-ance sheet risks. For guarantees issued and modiedater 31 December 2002 in accordance with FinancialAccounting Standards Board Interpretation No. 45(FIN 45), Guarantors Accounting and DisclosureRequirements or Guarantees, Including Indirect Guar-antees o Indebtedness to Others, ADB recognized atthe inception o a guarantee the noncontingent aspecto its obligations. ADBs total exposure on signed andeective loan guarantees is disclosed in Note F o OCRFinancial Statements. In 2007, ADB provided $376.0million or our guarantee operations.

Syndications. Syndications enable ADB to mobilizeconancing by transerring some or all o the risks asso-

ciated with its loans and guarantees to other nancingpartners.2 Syndications thus decrease and diversiy therisk prole o ADBs nancing portolio. Syndicationsmay be on a unded or ununded basis and may bearranged on an individual, portolio, or any other basisconsistent with industry practices. In 2007, $425.0 mil-lion or syndications through B-loans 3was providedor two projects.

Equity Investments. In accordance with ADBs Charterwhich mandates that its nonsovereign operations pro-mote the investment o private capital in the region ordevelopment, ADB provides assistance in the orm o

equity investments, in addition to loans without gov-ernment guarantees, and other nancing schemes. TheCharter allows the use o OCR or equity investmentsin private enterprises up to 10% o its unimpaired paid-in capital together with reserves and surplus, exclusiveo special reserves. The total equity investment port-olio or OCR or both outstanding and undisbursedapproved acilities amounted to $1,152.2 million atyear-end o 2007. This represented about 78.0% o theceiling dened by the Charter.

As o 31 December 2007, the total exposure o non-sovereign operations in equity investments amountedto about $1.1 billion.

In 2007, 5 equity investments totaling $79.8 mil-lion were approved compared with 13 4 equity invest-ments totaling $250.5 million 4 in 2006. In the sameyear, ADB disbursed a total o $115.6 million in equityinvestments, 11.0% decrease rom $129.9 million

disbursed in 2006, and received a total amount o$112.2 million rom capital distributions and divest-ments, whether in ull or in part, in 30 projects. Thedivestments were carried out in a manner consistentwith good business practices, ater ADBs developmentrole in its investments have been ullled, and withoutdestabilizing the companies concerned.

capa and Rur

Capital. Total shareholders equity on a statutorybasis increased rom $13.1 billion as o 31 Decem-ber 2006 to $14.3 billion as o 31 December 2007.This was due primarily to net income or the year o$765.2 million; net increase in other comprehensiveincome o $260.1 million (unrealized gain on invest-ments and equity investments o $232.8 million,avorable translation adjustments o $86.6 million,amortization o FAS 133 adjustment o $0.9 million,

oset by additional pension/post retirement benetobligation o $60.2 million); the net eect o changein special drawing rights value on capital and reserveso $159.3 million; and additional capital subscriptionreceived o $7.4 million. These were oset by alloca-tions to the Asian Development Fund (ADF) and theRegional Cooperation and Integration Fund, o $40.0million each.

In February 2007, Georgia became ADBs 67thmember, subscribing 12,081 shares. This brought thetotal authorized and subscribed capital to 3,546,311shares valued at $55,977.8 million as o 31 December2007. O the subscribed capital, $3,937.1 million was

paid-in and $52,040.7 million was callable. Callablecapital can be called only i required to meet ADBsobligations incurred on borrowings or guaranteesunder OCR. No call has ever been made on ADBscallable capital.

To ensure it has adequate risk-bearing capacity,ADB reviews its income outlook annually. Based onthat review, the Board o Directors allocates a portiono the previous years net income to reserves to ensurethat the level is commensurate with the income plan-ning ramework. In addition, to the extent easible, itallocates part o the net income to support developmentactivities in its developing member countries. In May

2007, the Board o Governors approved that the 2006net income o $565.9 million together with $138.5million transerred rom the cumulative revaluationadjustments account be allocated to loan loss reserveor $52.0 million, Surplus and Ordinary reserves or


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Annua Rpr 200 15

5 aDbs finnci poicis rquir tht poitic risk gurnt chrgd ginst nding imittions t th nomin vu of th gurntd oigtion,pus intrst tht wi ccrud for th succding intrst priod nd prti crdit gurnt t th prsnt vu of th gurntd oigtion.

6 Tot mount dos not ty to th rkdown du to rounding of th princip mount.

$286.2 million each, and to ADF and Regional Coop-eration and Integration Fund or $40.0 million each.

In February 2004, the Board o Directors reviewedADBs lending and borrowing limitations and approvedthe ollowing policies: gross outstanding borrowingsare limited to no more than the sum o callable capi-tal rom nonborrowing members, paid-in capital, andreserves (including surplus), subject to the Charterlimit o 100% o callable capital; and outstanding loancommitments measured by the sum o outstanding dis-bursed and undisbursed loans, equity investments, andguarantees5, are limited to no more than the sum othe subscribed capital and reserves (including surplusbut excluding special reserve).

In April 2007, the Board o Directors reviewedthe resource position o OCR. The review ollowed amedium-term capital management approach withinthe approved nancial ramework, or assessing theadequacy o current and prospective lending and bor-

rowing headrooms. The review concluded that ADBscapital position is sucient to support projected lendingoperations through 2009. As o 31 December 2007,headrooms or lending and borrowings were $15.4billion and $14.4 billion, respectively (compared with$18.3 billion and $15.9 billion, in 2006).

Borrowings. ADBs primary borrowing objective is toensure availability o unds at the lowest possible costor its operations. Thus in this respect ADB seeks todiversiy its unding sources across markets, instru-ments, and maturities. To achieve the objective, ADBcontinued in 2007 a strategy o issuing liquid bench-

mark bonds to maintain its strong presence in keycurrency bond markets, and raising unds through cost-ecient, opportunistic and private placement transac-tions to minimize borrowing costs. In addition, ADBcontinued to pursue its objective o contributing to thedevelopment o regional bond markets and o provid-ing local currency nancing or ADBs projects throughlocal currency bond issues. All proceeds rom new und-ing transactions are invested until they are required orADBs ordinary operations, including loan disburse-ments and renancing o maturing unding obligations.

2007 Funding Operations. In 2007, ADB completed 94

borrowing transactions raising about $8.9 6 billion inlong- and medium-term unds compared with $5.4 bil-lion in 2006. The new borrowings were raised in 13 cur-rencies: Australian dollar, Canadian dollar, Euro, HongKong dollar, Japanese yen, Kazakhstan tenge, Malaysianringgit, Philippine peso, Pound sterling, Singapore dol-

Table 7 Borrowings($ million)

2007 2006

Long Term

Tot Princip amount 8,854.3 5,397.2

avrg Mturity to First C (yrs) 5.2 5.9

avrg Fin Mturity (yrs) 9.4 6.7

Numr of Trnsctions

Puic Offrings 10 8

Privt Pcmnts 84 43

Numr of Currncis (for swps)

Puic Offrings 8 5

Privt Pcmnts 9 10

Short Terma

Tot Princip amount 3,139.1 1,642.8

Numr of Trnsctions 24 23

Numr of Currncis 3 3

$ = US dor. a uro-commrci pprs. at yr-nd, th outstnding princip mount ws ni in 2007 nd $179 miion

in 2006.

lar, South Arican rand, Turkish lira, and US dollar. Aterswaps, $8.4 billion or 95.0% o the 2007 borrowingswere in US dollar, $0.4 billion or 4.5% were in Japaneseyen and the remaining $0.05 billion or 0.5% were inKazakhstan tenge. The average maturity o 2007 bor-rowings was 5.2 years compared with 5.9 years in 2006.O the total 2007 borrowings, $4.0 billion was raised

through 10 public oerings, and 84 private placementsamounting to $4.8 billion. In addition, ADB raised $3.1billion in short-term unds under its Euro commercialpaper program to enhance its presence in the market andto meet temporary cash needs. Table 7 shows details o2007 borrowings compared to borrowings in 2006.

Table 8 Local Currency Bond Issues

Market

Principal

Amount

(million)

Coupon

Rate

(%)

Maturity

(years)

Hong Kong, Chin HK$ 1,500 4.00 5

Singpor S$ 250 3.27 5

Mysi MYR 500 4.00 10

Phiippins PHP 5,000 5.23 5

% = prcnt, HK$ = Hong Kong dor, S$ = Singpor dor, MYR = Mysinringgit, PHP = Phiippin pso.


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16 AsianDevelopmentBank

Interest Rate Structure of Outstanding

Borrowings (After Swaps)

Fixed

20.9%

Variable

79.1%

Interest Rate Structure of Outstanding Borrowings

(Before Swaps)

Fixed

91.5%

Variable

8.5%

FIGURE 2 Effect on Interest Rate Structures

Currency Composition of Outstanding Borrowings

(Before Swaps)

J apanese Yen

14.6%

U.S. Dollar

42.8%

Othera

Currencies

42.6%

Currency Composition of Outstanding Borrowings

(After Swaps)

U.S. Dollar

82.4%

J apaneseYen

13.4%

OtherCurrencies

b

4.2%

FIGURE 1 Effect on Currency Composition

a OthercurrenciesincludeAustraliandollar,Canadiandollar,Chineseyuan,Euro,HongKongdollar,Indianrupee,Kazakhstantenge,Malaysianringgit,Mexicanpeso,NewTaiwandollar,NewZealanddollar,Philippinepeso,Poundsterling,Singaporedollar,SouthAfricanrand,Swissfranc,Thaibaht,andTurkishlira.

b OthercurrenciesincludeAustraliandollar,Chineseyuan,Kazakhstantenge,Indianrupee,Philippinepeso,Poundsterling,andSwissfranc.

Local Currency Bond Issues. ADBs local currencybond issuances in 2007 are shown in Table 8. Duringthe frst quarter, ADB originated three local currencybond issues denominated in Hong Kong dollar, Sin-

gapore dollar, and Malaysian ringgit. The Hong Kongdollar note issue has a principal amount o HK$1.5billion ($192.3 million equivalent), a coupon o 4.0%per annum and a 5-year maturity. The Singapore dol-lar issue has a principal amount o S$250.0 million($162.5 million equivalent), a coupon o 3.3% perannum and a maturity o 5 years. Both were issuedunder the Asian Currency Note Programme. In Feb-ruary 2007, ADB returned to the bond market oMalaysia and launched its second note issue under

the 15-year MYR3.8 billion Medium Term Note Pro-gram. The issue has a principal amount o MYR500million ($142.9 million equivalent), a coupon o 4.0%per annum and a maturity o 10 years. Additionally,

in May, ADB returned to the Philippine bond marketand launched its second Philippine peso-denominatedbond issue. It had a principal amount o PHP5 billion($108.0 million), a maturity o about 5 years, and car-ried a fxed rate o 5.2% per annum.

Use o Derivatives. ADB undertakes currency andinterest rate swaps to raise, on a ully hedged basis,currencies needed or operations in a cost efcient waywhile maintaining its borrowing presence in major cap-


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Annua Rpr 200 1

ital markets. Figures 1 and 2 show the eects o swapson the interest rate structure and currency compositiono ADBs outstanding borrowings as o 31 December2007. Interest rate swaps are also used or asset/liabil-ity management purposes to match the liabilities to theinterest rate characteristics o loans.

lqudy Prf

The liquidity portolio helps ensure the uninterruptedavailability o unds to meet loan disbursements, debtservicing, and other cash requirements. It also con-tributes to ADBs earning base. ADBs InvestmentAuthority governs liquid asset investments. Its primaryobjective is to maintain the security and liquidity ounds invested. Subject to these two parameters, ADBseeks to maximize the total return on its investments.In compliance with its Charter, ADB does not convert

currencies or investment; investments are made in thesame currencies in which they are received. At present,liquid investments are held in 21 currencies.

Liquid assets are held in government and govern-ment-related debt instruments, time deposits, and otherunconditional obligations o banks and nancial insti-tutions, and, to a limited extent, in corporate bonds,mortgage-backed securities, and asset-backed securi-ties o high credit quality. They are held in our sub-portoliosprudential liquidity, operational cash, cashcushion, and discretionary liquidityall o which havedierent risk proles and perormance benchmarks. Theyear-end balance o the portolios in 2007 and 2006,

including receivables or securities repurchased underresale arrangements, and excluding securities transerredunder securities lending arrangements and pending salesand purchases, is presented in Table 9.

The prudential liquidity portolio is invested toensure that the primary objective o a liquidity bueris met. Cash infows and outfows are minimized tomaximize the total return relative to a dened level

Table 9 Year-End Balance of Liquidity Portfolioa

($ million)

2007 2006

Prudnti liquidity Portfoio 9,209.3 7,763.9

Oprtion Csh Portfoio 395.1 587.2

Csh Cushion Portfoio 778.8 953.9

Discrtionry liquidity Portfoio 2,550.5 3,830.6

Othr Portfoio 645.7

Total 13,579.4 13,135.6

= 0, $ = US dor.

Th composition iquidity portfoio my shift from 1 yr to nothr s prt ofongoing iquidity mngmnt.

Table 10 Return on Liquidity Portfolio(%)

Annualized Financial

Return

2007 2006

Prudnti liquidity Portfoio 5.84 4.25

Oprtion Csh Portfoio 3.95 3.82

Csh Cushion Portfoio 4.67 4.21

Discrtionry liquidity Portfoio 0.28 0.30

Othr Portfoio 3.64

= 0, % = prcnt.

Sprd ovr funding cost t 31 Dcmr.

o risk. The portolio is unded largely by equity, andperormance is measured against external bench-marks with an average duration o about 2 years. ADBrevised the liquidity policy in October 2006 to bringup to date its nancial and risk management policiesand practices in line with ADBs business activities andinitiatives and to harmonize its liquidity policy withother multilateral development banks. Under the newpolicy, the duration or the prudential liquidity port-olio can be extended up to 4 years or the portoliounded by equity. The remaining part o the prudentialliquidity portolio is unded by debt and is invested tomaximize the spread earned between borrowing costand investment income on high-quality investments.

The operational cash portolio is designed to meetnet cash requirements over a 1-month horizon. It isunded by equity and invested in short-term, highly liquidmoney market instruments. The portolio perormanceis measured against short-term external benchmarks.

The cash cushion portolio holds the proceeds oADBs borrowing transactions pending disbursement. It isinvested in short-term instruments, and the perormanceis measured against short-term external benchmarks.

The discretionary liquidity portolio is used to sup-port medium-term unding needs and is unded by debtto provide fexibility in executing the unding programover the medium-term to permit borrowing ahead ocash fow needs and bolster ADBs access to short-termunding through continuous presence in the market.

cnraua obgan

In the normal course o business, ADB enters into vari-ous contractual obligations that may require uturecash payments. Table 11 summarizes ADBs signicantcontractual cash obligations at 31 December 2007 and2006. Long-term debt includes direct medium- andlong-term borrowings excluding swaps but does notinclude any adjustment or unamortized premiums,discounts, or eects o applying FAS 133. Other long-


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1 Aan Dvpmn Bank

Table 11 Contractual Cash Obligations($ million)

2007 2006

long-Trm Dt 32,187.2 27,602.5

Undisursd lon Commitmnts 19,011.3 16,768.2

Undisursd equity Invstmnt Commitmnts 344.0 391.6

Gurnt Commitmnts 1,460.6 1,293.7

Othr long-Trm liiitis 450.6 373.4

Total 53,453.7 46,429.4

$ = US dor.

term liabilities correspond to accrued liabilities, includ-ing pension and postretirement medical benets.

Fnana Rk Managmn

In its development banking operations, ADB aces vari-

ous credit, market (interest rate and oreign exchange),liquidity, and operational risks. Sovereign loans andguarantees to its developing member countries consti-tute the large majority o ADBs portolio. ADB hasadopted an integrated risk management rameworkdesigned to ensure that credit and other risks areappropriately identied, measured, monitored, andmanaged. In November 2005, ADB established theRisk Management Unit, which is independent o thebusiness units and mandated to manage credit risk othe sovereign and nonsovereign loan and guaranteeportolios as well as market- and treasury-related risks.The unit has been implementing risk management tools

and methodologies under the said ramework.

Asset and Liability Management. The objectives oasset and liability management or ADB is to saeguardADBs net worth and overall capital adequacy, pro-mote steady growth in ADBs risk bearing capacity, anddene sound nancial policies to undertake acceptablelevels o nancial risks in order to provide resourcesor developmental lending purposes at the lowest andmost stable unding cost to the borrowers along withthe most reasonable lending terms, while saeguardingADBs nancial strength. The asset and liability man-agement saeguards net worth rom oreign exchange

rate risks, protects net interest margin rom fuctuationin interest rates, and provides sucient liquidity tomeet ADBs operations. ADB also adheres to cost pass-through pricing policy or the loans to sovereign bor-rowers, and allocates the most cost ecient borrowingsto und the loans. The asset and liability managementobjectives and practices were claried and ormalizedin 2006 through the Board-approved comprehensiveasset and liability management policy ramework.The ramework has ormalized the guiding principles

or managing the nancial assets and liabilities o theOCR and provided the governing ramework to guideall asset and liability management-related nancialpolicies, including liquidity, investments, equity man-agement, and capital adequacy.

Capital Adequacy. ADBs capital adequacy rameworkadopts the equity-to-loan ratio as the key measure oADBs available capital. The available capital should beadequate to absorb any unexpected losses rom its loanand guarantee portolios. ADB utilizes an internallydeveloped credit risk model to estimate the unexpectedloss in its loan and guarantee portolios. In addition tothat, the available capital should be able to absorb losso loan income due to a major and protracted nonac-crual shock in the loan and guarantee portolios whilematching growth in the portolios. Under the presentpolicy, ADB ensures that the equity-to-loan ratio ismaintained above a xed target o 35.0%.

In determining equity-to-loan ratio, ADBs equitycapital is dened as the sum o usable paid-in capi-tal, ordinary reserve, special reserve, and surplus. At31 December 2007, equity-to-loan ratio was 44.7%under the pre-FAS 133 basis (47.7% on 31 December2006). The higher-than-target equity-to-loan ratio rep-resents a strong equity capital position relative to thecredit risk assumed in its loan and guarantee portoliosindicating that both net income and equity capital areadequate to sustain signicant credit event.

Under its capital adequacy ramework, ADB uti-lizes the loan loss reserve to absorb expected lossesrom its loan and guarantee portolios. Hence, both

expected and unexpected losses or its loans andguarantees are addressed through adequate loan lossreserve and equity-to-loan ratio. On the other hand,loan loss provisions are made against impaired loansand recognized in the net income.

Country Credit Risks. The capital adequacy rame-work also links the adequacy o net income and equitycapital to the country credit risk o the sovereign loanand guarantee portolios. A credit risk model is used toestimate expected and unexpected losses in these port-olios, incorporating borrowers deault probability,loss given deault, projected exposure, and deault cor-

relations. In addition, ADB stress-tests net income pro-jections to ensure that net income is adequate to absorbthe loss o loan income due to credit shocks and to sup-port sucient growth. To assess the creditworthinesso its developing member countries independently, ADBadopted an internal country credit risk rating system.

Credit Risk o Nonsovereign Operations. Aside romproviding loans and guarantees to its developing mem-ber countries, ADB provides loans and guarantees to


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Annua Rpr 200 1

nonsovereign entities. These entities include privatesector rms, state-owned enterprises, and local govern-ments. ADB could also make equity investments in pri-vate sector rms and state-owned enterprises. ADBsnonsovereign investments are usually not backed bygovernment guarantees and are exposed to commercialand political risks. Currently, the nonsovereign invest-ment portolio is subject to an overall limit o $5 bil-lion. Managing and monitoring the risk are importantaspects in the project cycle. ADB evaluates not onlythe development impact o a project but also analyzesits credit strength; nancial, commercial, and technicalviability; and good corporate governance. Each non-sovereign project undergoes an in-depth credit analysisand appraisal prior to approval with emphasis beinggiven to the projects nancial sustainability and abil-ity to repay its debt. The nonsovereign operations aresubject to Board-approved prudential limits in respecto exposures to a single as well as group o entities,

industry sectors, and countries.The current private sector strategy ocuses on theinrastructure and nancial market sectors. Neverthe-less, ADB remains responsive to the changing needs odeveloping member countries and private investmentopportunities in other sectors. The objective is to builda diversied nonsovereign portolio in terms o bothcountries and sectors, while managing concentrationrisks by establishing appropriate limits or countries,industries, and groups o related companies.

The total amount o ADB assistance to a singleproject, including equity investments, loans, and guar-antees, must not exceed 25% o the total project cost

or $250 million, whichever is lower. This limit ensuresthat exposure to a single project or obligor on net basisis limited at any time to a maximum o 5% o the tar-geted portolio size o the nonsovereign portolio.

ADB streamlined approval o private sector invest-ment recovery operations. They generally involvenegotiations or nancial restructuring, oreclosure,or other remedies, including liquidation. Restructur-ing is undertaken only when it is expected to improveADBs prospects or recovery. I the nancial conditiono the entity has deteriorated beyond recovery, ADBmay have to proceed with liquidation or other legallypermissible orms o recovery.

Issuer and Counterparty Credit Risks. Treasury-related transactions also give rise to credit risk, or therisk o loss i an issuer or counterparty does not honorits nancial obligations to ADB.

To control issuer and counterparty credit risk,ADB has established stringent eligibility criteria thatimpose minimum credit ratings provided by at leasttwo reputable international credit rating agencies onits investments, and require that such investments be

placed with approved issuers or counterparties thatmeet required credit criteria. Furthermore, ADB has setsingle-issuer limits to its corporate investments, maxi-mum credit exposure to its depository banks, and otherlimits or controlling exposure to varied asset classes.

To mitigate counterparty credit risk arising romderivative transactions, ADB has strict counterpartyeligibility criteria. In general, ADB will undertakeswap transactions with counterparts that have met therequired minimum counterparty credit rating, executedan International Swaps and Derivatives AssociationMaster Agreement, and signed a credit support annex.Under the credit support annex arrangements, deriva-tives positions o ADB are marked-to-market daily,while collateral calls, transers, and adjustments withcounterparties are made in coordination with an exter-nal collateral manager. ADB also sets exposure limitson individual swap counterparties based on their creditratings and equity, and daily monitors current and

potential counterparty exposure against the limits.

Market Risks. ADB manages the market risk o itsliquid asset investments by adopting investment policyguidelines which allow or investments only in govern-ment and government-related debt instruments, timedeposits, and other unconditional obligations o banksand nancial institutions, and to a limited extent in cor-porate bonds, mortgage-backed securities, and asset-backed securities o high credit quality. The principalsource o investment risk arises rom income volatil-ity due to interest rate movements. ADB monitors andmanages interest rate risks by employing various quan-

titative methods. All positions are marked-to-market,and risk-sensitive measures, including potential expo-sure, are calculated and compared to internally estab-lished risk limits. On the other hand, ADB mitigatesthe market risks associated with its loan portolio byemploying derivatives to closely match the characteris-tics o such loans with those o borrowings.

ADB manages its currency risk to ensure thatexchange risk sensitivity is mitigated to minimizevolatility in the equity-to-loan ratio as the measure oequity capital adequacy and risk-bearing capacity. Thiscan be achieved by matching the currency o its liabili-ties and investments with the currency o its loans and

equity, thus, ensuring that fuctuations in exchangerates would have similar eects on both, and periodi-cally aligning the currency composition o its balancesheet. ADB measures such oreign exchange translationrisk in its liquidity investment portolio by setting anaggregate value-at-risk limit at 7% as maximum toler-ance or bearing both the interest and oreign exchangetranslation risks.

ADB manages its market risks by employing marketstandard risk parameters and assumptions in the valua-


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20 Aan Dvpmn Bank

tion and risk analysis o its treasury activities, enhancedperormance measurements and attribution methodol-ogies and systems or its investment portolios, supple-mentary risk management tools such as stress testingand scenario analysis, and a computer system that val-ues both plain vanilla as well as highly structured bor-rowings and their related swap transactions.

ADB engages external asset managers to invest inmortgage-backed securities and asset-backed securitieswith minimum ratings o AAA and in corporate bondswith minimum rating o A, totaling $1.3 billion. ADBdetermined, through its due diligence and review, that$117.0 million o these asset-backed securities investedin tranches o securitized home equity loans couldbe considered as sub-prime related holdings. ADBsassessment indicated that the current sub-prime creditcrisis had minimal impact to the overall portolio valuethrough this particular investment. On an aggregatebasis, ADBs investments have increased in value due

to the declining US dollar yield and fight to quality.ADB utilizes a custodian to provide the valuation othe externally managed investments and appropriatediligence revealed that the custodian adopted marketacceptable practice by obtaining valuation rom vari-ous independent pricing service providers includingbrokers quotation.

Liquidity Risks. The objective o ADBs liquidity policyis to ensure the availability o sucient cash fows tomeet all nancial and operational commitments despiteuncertain conditions in the capital markets. The policyestablishes minimum levels o liquidity to maintain

expected operation, even i access to capital marketsis temporarily denied. ADBs liquidity requirementsare primarily determined by expected lending volumesand disbursements, redemption o current borrowings,repayments and prepayments o loans, and cash romnet income. The policy denes ADBs annual net cashrequirement to meet large contractual obligations orloan disbursements and debt redemption.

In addition, ADB can raise discretionary liquidity,unded entirely by borrowings, to provide fexibility inthe unding and debt redemption schedule over time.The transition to the new liquidity policy, which mayresult in a higher level o prudential minimum liquidity

level, will be managed careully to avoid an unneces-sary surge in borrowing needs or negative implicationson the nancial ratios. Levels o liquidity and net cashrequirement are monitored on an ongoing basis andreviewed by the Board o Directors quarterly.

Operational Risks. Operational risk represents thepotential or loss resulting rom inadequate or ailedinternal processes or systems, human actors, or exter-

nal events including business disruptions and systemailure, transaction processing ailures, and ailurein execution o legal, duciary, and agency responsi-bilities. ADB is exposed to many types o operationalrisks, which are mitigated by maintaining a soundsystem o internal controls and processes. In addition,ADB has a rigorous process or approving transactionsthat requires reviews and authorization by all relevantparties to ensure that all transactions are properlyapproved, documented, monitored, and controlled.ADB has put in place a strategy to strengthen the busi-ness continuity plan to reduce the impact o disruptionaecting business processes.

summary f Fnana Prfrman

Net Income. Net income beore net unrealized gainswas $711.4 million, compared with $705.5 million in2006. The slight increase o $5.9 million (0.8%) was

predominantly due to the ollowing:

$236.7 million increase in net loan income, mostlyassociated with increase in interest income andother loan charges resulting rom higher inter-est rates and average outstanding loan portolio($28.1 billion - 2007; $24.3 billion - 2006);

$107.3 million increase in investment incomeresulting mainly rom increase in average invest-ment portolio ($14.4 billion - 2007; $13.4 bil-lion - 2006), due to higher liquidity requirementto meet projected loan disbursements, as well asrelatively higher interest rates in most invested

currencies (or the US dollar, there is a time lag orinterest to adjust, thus on average, US dollar rateo return is comparatively higher in 2007);

$0.3 million decrease in net administrativeexpenses, associated with $5.6 million increasein deerred loan origination costs related to newloans and guarantees, oset by $3.8 milliondecrease in expenses charged to ADF, caused bylesser operational activities or ADF compared toOCR; and $1.5 million increase in overall admin-istrative expenses o ADB;

$282.5 million increase in borrowings and relatedexpenses, including $9.0 million increase in real-

ized losses on purchase/redemption o bonds, dueto the increase in the borrowing portolio andhigher interest rates;

$25.5 million net increase in provision or loanlosses mainly attributed to the release o provisionsin 2006 resulting rom the change in provisioningmethodology or nonsovereign operations;

$17.9 million decrease in income rom equityinvestments resulting mainly rom $35.3 mil-


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Annua Rpr 200 21

lion decrease in net realized gains on disposalo equity investments, oset by $15.5 millionincrease in proportionate gains on equity invest-ments accounted or under equity method; and$2.0 million increase in dividend income orthe year.

Net Unrealized Gains and Losses on Derivatives,as required by FAS 133 and 155. ADB posted netunrealized gains on derivatives, which are used orhedging transactions, o $57.5 million, compared tonet unrealized losses o $138.5 million in 2006, dueprimarily to signicant downward shit o the USdollar yield curve at 2007 year-end, especially in theshort to medium term, and the strengthening o mostmajor currencies against the US dollar, compared tolast year. The eect o declining interest rates coupledwith continued weakening o the US dollar duringthe period had a net eect o increasing the borrow-

ing related derivatives value, i.e., swaps. The impactwas largely elt on the nonstructured debts and theirrelated derivatives, as the asset portion o the swapsare designed to behave as long-term xed assetsdenominated in the hedged-borrowings original cur-rencies. The liability portion o the swaps wouldbehave similar to long-term US dollar LIBOR-basedliabilities. Because o the asymmetrical accountingtreatment between the nonstructured debts and theirswaps, the net unrealized gains on the swaps were notoset by the increase in the value o the nonstructureddebts, which are not air valued but recorded at theircarrying book value. A air valuation o the nonstruc-

tured debts would have oset some o the unrealizedgains on the swaps. In addition, the declining interestrate environment would have increased the value othe debts, mainly xed rate US dollar bonds, whichdo not have any derivatives transactions attachedto them.

The appreciation o certain currencies against theUS dollar in 2007 specically the Japanese yen alsoaected the structured debt (hybrid instruments) port-olios to a certain extent. The increase in value o theunderlying debts outweighed the increase in the valueo the embedded derivatives, which are highly sensi-tive to the expected oreign exchange rates movements.

On an ater-swap basis, the change in air value o thestructured debts led to an unrealized loss o $5.3 mil-lion or the year ended 31 December 2007, as requiredby FAS 155. The unrealized losses were due mainly tomovements o oreign exchanges and interest rates. Asthe hybrid instruments are ully hedged, however, theswaps would economically oset any oreign exchangeand interest rate risks o the instruments (Note M ofOCR Financial Statements).

cra Aunng P and ema

Signicant accounting policies are contained in Note Bo OCRs nancial statements. As disclosed in the nan-cial statements, Management estimates the air valueo nancial instruments. Estimates by their nature arebased on judgment and available inormation; there-ore, actual results may dier and might have a mate-rial impact on the nancial statements.

Fair Value o Financial Instruments. Under statu-tory reporting, ADB carries its nancial instrumentsand derivatives, as dened by FAS 133 and its relatedamendments, including FAS 155, on a air value basis.These nancial instruments include embedded deriv-atives that are valued and accounted or in the bal-ance sheet as a whole. Fair values are usually basedon quoted market prices. I market prices are notreadily available, air values are usually determined

using market-based pricing models incorporatingreadily observable market data and require judgmentand estimates.

The pricing models used or determining air val-ues o ADBs nancial instruments are based on dis-counted expected cash fows using observable marketdata. ADB reviews the pricing models to assess theappropriateness o assumptions to reasonably refectthe valuation o the nancial instruments. In addition,the air values derived rom the models are subject toongoing internal and external verication and review.The models use market-sourced inputs such as interestrates, exchange rates, and option volatilities. Selection

o these inputs may involve some judgment and mayimpact net income. ADB believes that the estimateso air values are reasonable given existing controlsand processes.

In September 2006 and February 2007, theFinancial Accounting Standards Board (FASB) issuedFAS 157, Fair Value Measurements, and FAS 159,Fair Value Option or Financial Assets and Finan-cial Liabilities, respectively. FAS 157 emphasizes thedenition and methods or measuring air value, andexpands disclosure requirements or nancial report-ing purposes, while FAS 159 expands the scope onancial instruments that may be carried at air

value. These are discussed in more detail in Note B oOCRs nancial statements. These statements will beeective or nancial statements to be issued ater 31December 2007.

Provision or Loan Losses. Provision against loanlosses or impaired loans refects managements judg-ment and estimate o the present value o expecteduture cash fows discounted at the loans eective


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22 Aan Dvpmn Bank

7 US dor quivnt t 31 Dcmr 2007 xchng rts.

interest rate. ADB considers a loan impaired when,based on current inormation and events, it is probablethat ADB will be unable to collect all the amounts dueaccording to the loans contractual terms.

In 2006, the Board approved the revision o theloan loss provisioning methodology or ADBs nonsov-ereign operations to a risk-based model. The assess-ment applies the concept o expected loss to establishloss provision and loss reserve, similar to the conceptapplied to ADBs sovereign operations approved in2004. The provisioning estimate is perormed by theRisk Management Unit on a quarterly basis.

In the revised methodology, ADB uses an inter-nal risk rating system to estimate the probability odeault based on its past loan loss experience and vari-ous tools available in the market. Loans that are con-sidered impaired based on the probability o deaultare provisioned through the income statement. Thosethat are not impaired will be provisioned through the

establishment o a loss reserve in the equity section asan allocation o net income subject to the approval othe Board o Governors.

At 31 December 2007, provision or loan losseswas $15.0 million ($28.3 million - 2006), the reduc-tion resulting mainly rom the sale o two nonsove-reign loans which were previously provisioned.

speCial Funds

ADB is authorized by its Charter to establish and admin-ister special unds. These are the Asian DevelopmentFund (ADF), Technical Assistance Special Fund, Japan

Special Fund, ADB Institute Special Fund, the AsianTsunami Fund, the Pakistan Earthquake Fund, and theRegional Cooperation and Integration Fund. Financialstatements or each und are prepared in accordancewith generally accepted accounting principles exceptor ADFs which are special purpose nancial state-ments prepared in accordance with ADF Regulations.

Aan Dvpmn Fund

The ADF is ADBs concessional nancing window ordeveloping member countries with low per capita grossnational product and limited debt repayment capacity.

It is the only multilateral source o concessional assis-tance dedicated exclusively to reducing poverty and toimproving the quality o lie in Asia and the Pacic.Thirty-one donor members (regional and nonregional)have contributed to the und. Conancing with bilat-eral and multilateral development partners comple-ment ADBs ADF resources.

Table 12 ADF Commitment Authoritya

31 December 2007 and 2006

($ million)

2007 2006

Crryovr from aDF VIII 126.9 120.9

aDF IX Contriutionsc 2,144.4 1,292.9

aDF VIII Contriutions 164.6 157.8

OCR Nt Incom Trnsfr 120.0 80.0

lons Svings nd Cnction 890.8 316.5

expndd advnc Commitmnt authority 2,979.7 1,893.2

Provision for Disursmnt Riskd (157.9) (120.1)

Tot aDF IX Commitmnt authority 6,268.5 3,741.4

lons nd Grnts Committd (5,833.1) (3,240.3)

ADF Commitment Authority

Available for Future Commitments 435.4 501.1

( ) = ngtiv, $ = US dor.

Th schdu rfcts cumutiv commitmnt uthority for aDF IX. Th US dor quivnt of SDR 80.39 miion t ch yr-nd xchng rts.c Contriutions rcivd to finnc forgon intrst of grnts r xcudd s

thy hv n incorportd s csh infows in th computtion of expndd

advnc Commitmnt authority.d appis to contriution nd nt incom trnsfr rcivd prior to th doption

of th nw aDF Finnci Frmwork in Dcmr 2007.

Not: Tots my not dd du to rounding.

Contributed Resources. During the eighth replenish-ment o the ADF (ADF IX), donors recommended areplenishment o $7.0 billion, consisting o $3.3 bil-lion in new contributions rom donors and $3.7 billionrom internal resources based on the exchange ratespecied in the Resolution o the Board o Governors.ADF IX, which covers the 4-year period rom 2005 to

2008, became eective in April 2005 ater instrumentso contribution deposited with ADB or unqualiedcontribution exceeded 50% o all pledged contribu-tions. As o 31 December 2007, 28 donors have sub-mitted their Instruments o Contribution to ADF IXtotaling $3.5 billion including Irelands contributiono $34.0 million. Total deposited installment paymentsamounting to $2.5 billion include $2.1 billion orADF operations, $0.2 billion or Technical AssistanceSpecial Fund, and $0.1 billion or nancing orgoneinterest o grants. The remaining unpaid contributionsunder ADF VIII as o 31 December 2007 amountedto $171.9 7 million. (For details of amounts released for

operational commitment in 2007, see the column labeledAddition in Statistical Annex 23).

In May 2007, the Board o Governors approved thetranser o $40.0 million to ADF as part o OCRs netincome allocation ($40.0 million 2006). In addition,a total o $890.8 million rom loan savings and cancella-tions have been included in the commitment authority.


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Annua Rpr 200 23

This resulted rom managements continuous assess-ment o opportunities or reeing committed resourcesthrough cancellations o unused loan balances. During2007, promissory notes totaling $882.0 million havebeen encashed, $53.2 million o which was transerredto the Technical Assistance Special Fund.

Financial Framework. In December 2007, the Boardo Directors approved a new ADF nancial rameworkwhich aims to enhance the long-term nancial capacityo ADF and improve prudential nancial managementpractices. The new ramework establishes tranchingo liquidity to improve the liquidity management andprudential minimum liquidity level ADF should main-tain. The new ramework allows ADF to have a higherand more stable commitment authority or uturereplenishments and ensure that liquidity is managed ina transparent and ecient manner.

Currency Management. Eective 1 January 2006, thenew currency management ramework or ADF, whichwas approved by the Board o Directors in October2005, was implemented. Under this new ramework,the practice o managing ADF resources in as manyas 15 currencies was discontinued, and an approachbased on special drawing rights (SDR) basket o cur-rencies was introduced. ADF donor contributions andloan refows received in currencies that do not consti-tute SDR are immediately converted into one o SDRcurrencies to maintain SDR-based liquidity portolio.In addition, the borrowers obligations or new ADFloans are now determined in SDR.

Loan Conversion. In July 2007, as an application othe Board-approved new currency management rame-work, ADB oered a ull-fedged special drawingrights (SDR) approach to ADF legacy loans by provid-ing ADF borrowers the option to convert their existingliability (i.e., disbursed and outstanding loan balance)in various currencies into SDR, while the undisbursedportions will be treated as new loans. The conversionwill shorten the time horizon to achieve the ull ben-ets, reduce exchange rate volatility associated withlegacy ADF loans, and provide a consistent debt port-olio management ramework across peer multilateral

banks and all ADF loans. The conversion was madeavailable beginning 1 January 2008.

Revised Framework or Grants and Hard-Term Facility.In September 2007, the Board o Directors approvedthe revised ADF grant ramework which limits grantseligibility to ADF-only countries and introduced a

8 Incuds scuritis purchsd undr rs rrngmnt.

new hard-term ADF lending acility. The acility willhave a xed interest rate o 150 basis points belowthe weighted average o the 10-year xed swap rateso the special drawing rights component currenciesplus the OCR lending spread, or the current ADF rate,whichever is higher. Other terms are similar to thoseo regular ADF loans. In general, blend countries withper capita income not exceeding the InternationalDevelopment Association operational cuto or morethan 2 consecutive years and an active ordinary capitalresources lending program are eligible to borrow romthis new acility. The interest rate will be reset every

January through a Board inormation paper. The ratewill apply to all hard-term loans approved that yearand will be xed or the lie o the loan. For hard-termADF loans approved in 2007, the interest rate was setat 3.85%. No loans were approved under this newacility in 2007.

Loan Approvals, Disbursements, and Repayments. In2007, 36 ADF loans totaling $1.9 billion were approvedcompared with 45 loans totaling $1.3 billion in 2006.Disbursements during 2007 totaled $1.6 billion, anincrease o 20.9% rom $1.3 billion in 2006. At theend o the year, cumulative disbursements rom ADFresources were $25.1 billion. Loan repayments duringthe year amounted to $586.4 million. At year-end, out-standing ADF loans amounted to $24.0 billion.

Status o Loans. At the end o the year, 28 sovereignloans to Myanmar ($488.9 million) were in non-accrual status representing about 2.0% o the total

outstanding ADF loans.

Investment Portolio Position. The ADF investmentportolio8 amounted to $7.0 billion at 31 December2007 compared with $6.4 billion in 2006. About 88.0%o the portolio was invested in bank deposits and 12.0%was invested in xed income securities. The annual-ized rate o return on ADF investments in 2007 and2006 was 4.7% and 4.0%, respectively. At the end o2007, ADF investments were denominated in six cur-rencies, 98.3% o which were in special drawing rightscurrenciesUS dollar (USD), Japanese yen (JPY), euro(EUR), and pound sterling (GBP).

Grants. With the introduction o grant nancing inADF IX, 24 grants (16 2006) were approved in 2007totaling $519.3 million ($274.9 million 2006), while17 grants (22 2006) totaling $377.8 million ($346.5million 2006) became eective.


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24 Aan Dvpmn Bank

Conancing or Loans and Grants. In 2007, $82.0million was mobilized in ocial loan conancing orour loan projects totaling $186.1 million and $34.9million or three grant projects totaling $92.4 million.

Heavily Indebted Poor Countries (HIPC) Debt Relie.ADF donors requested ADBs participation in the HIPCdebt relie. In line with this, Management proposed tothe Board o Directors the Policy or Providing Heav-ily Indebted Poor Countries (HIPC) Relie rom AsianDevelopment Fund Debt and Proposed Debt Relie toAghanistan which will be considered in March 2008.In this paper Management recommends to the Board oDirectors the submission o a resolution to the Board oGovernors or ADB to participate in the HIPC debt relie,and to provide Aghanistan with debt relie upon theadoption o the resolution by the Board o Governors.

The HIPC Initiative was launched in 1996 by theInternational Development Association and Interna-

tional Monetary Fund (IMF) to reduce the excessivedebt burden aced by the worlds poorest countries.A sunset clause was stipulated to prevent the HIPCdebt relie rom becoming a permanent acility, mini-mize moral hazard and encourage early adoption oreorm programs. This has been extended several timeswith the latest sunset clause being end-2006 with aring-ence o its application to countries satisyingthe income and indebtedness criteria using end-2004data. Thus ar, Aghanistan is the only ADF borrowerthat has qualied or HIPC debt relie. The estimatedprincipal amount o Aghanistans ADF debt to be or-given is $81.5 million. 9 While other ADF borrowers

have met the HIPC indebtedness criteria, it is not pos-sible to currently estimate whether these countries willqualiy or HIPC debt relie.

Under the policy, upon approval o debt relie or acountry by the Board o Directors, the principal compo-nent o the estimated debt relie costs will be recordedas a reduction o the disbursed and outstanding loanson a provisional basis and charged against ADF income.The IDA and IMF Boards will decide when a countryhas satised the conditions or reaching the completionpoint. Upon reaching the completion point the debtrelie will become irrevocable. The accumulated provi-sion or HIPC debt relie will be reduced when debt

relie is provided on the loan service payment date.

thna Aan spa Fund

Review o Activities. With the eectivity o ADF IXand the third regularized replenishment o TechnicalAssistance Special Fund, contributions o $212.6 mil-lion rom 27 donors have been committed and $148.7

9 bsd on th disursd nd outstnding dt s of 20 Mrch 2006, convrtd to US dor using th xchng rt s of nd of Mrch 2006.

million have been received. In addition, India made awholly untied direct voluntary contribution amounting

to Rs2.25 million ($50,000 equivalent). At the end o2007, total Technical Assistance Special Fund resourcesamounted to $1,361.3 million, o which $1,168.2 mil-lion was committed (Statistical Annex 24).

Operations and Resource Position. Technical assist-ance (TA) commitments (approved and eective)declined rom $91.8 million in 2006 to $77.5 million in2007 or 107 TA projects that were made eective dur-ing the year, net o $11.9 million ($9.4 million 2006)write back o undisbursed commitments or completedand cancelled TA projects. Income rom investmentsincreased rom $11.8 million in 2006 to $14.2 million

in 2007 because o higher yields in some capital mar-kets. In addition, oreign exchange gains also increasedby $28.3 million, rom $7.4 million in 2006 to $35.7million in 2007, due to the appreciation o most cur-rencies against the US dollar. The uncommitted bal-ance available or uture commitments decreased rom$220.5 million in 2006 to $193.1 million in 2007.Technical Assistance Special Fund nanced 41.6% oall TA activities approved in 2007.

At the end o the year, Technical Assistance SpecialFund investments stood at $295.1 million, up by 7.1%rom 2006. Other assetsdue rom banks and con-tributors, advances to consultants, and otherstotaled

$81.8 million.

Japan spa Fund

Review o Activities. The technical assistance (TA)grants nanced by Japan Special Fund continued tosupport ADB operations aimed at reducing poverty. In

January 2007, Japan contributed 3.3 billion ($27.7

Table 13 Technical Assistance Special FundCumulative Resources($ million)

2007 2006

Rgurizd Rpnishmnt

Contriutions 425.7 425.7

aoctions from OCR Nt Incom 683.0 683.0

Dirct Vountry Contriutions 88.8 88.8

Incom from Invstmnt nd Othr Sourcs 167.3 152.9

Trnsfrs from th TaSF to th aDF (3.5) (3.5)

Total 1,361.3 1,346.9

( ) = ngtiv, $ = US dor.aDF = asin Dvopmnt Fund, OCR = Ordinry Cpit Rsourcs, TaSF = Tchnic

assistnc Spci Fund.


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Annua Rpr 200 25

Table 14 Japan Special FundTechnical Assistance by Sector, 2007a

$ Millionb %

Trnsport nd Communictions 10.4 24

lw, economic Mngmnt, nd

Puic Poicy 8.6 20

enrgy 8.3 19

Wtr Suppy, Snittion, nd Wst

Mngmnt 3.4 8

agricutur nd Ntur Rsourcs 3.4 8

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ADB Annual Report 2007 - Financial Report

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