LOAN CONCESSIONALITY

The degree of concessionality of a loan is measured by its “gift element”. The gift element is the difference between the nominal value of the loan and the sum of the present value of future debt service payments to be made by the borrower, expressed as a percentage of the nominal value.
If the interest rate on the loan is lower than the discount rate, the present value of the debt is lower than its nominal value, and the difference corresponds to the (positive) gift element of the loan.
The discount rate used to calculate the present value of the loan is a fundamental assumption in the calculation of the gift element. The discount rates used by the IMF are the currency-specific “Commercial Interest Reference Rates” (CIRR) published by the OECD. In concrete terms, ten-year average TCIRs are used for loans with maturities of 15 years or more, and six-month average TCIRs for loans with shorter maturities.
As a general rule, a loan is deemed to be concessional if its grant element is at least 35%. However, as indicated below, this threshold may be higher in certain cases.