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TWN Info Service on Finance and Development (Oct07/03)

12 October 2007


WORLD BANK’S NEW INITIATIVES IN FIGHT FOR FINANCIAL SURVIVAL

The World Bank Group recently announced two major initiatives aimed at maintaining its operational relevance and financial future. The concurrent decisions by the Bank Executive Board to pledge a record US$3.5 billion from its income to the Bank’s concessional financing facility, the International Development Association (IDA) and to cut loan charges to middle-income borrowers reflect the organisation’s current fight for organisational and financial survival in light of diminishing business from client states and declining revenue streams.

The decisions highlight the yawning asymmetries in the Bank’s governance and operational structure. They reflect the reality that while developed countries continue to wield most power in the institution, it is the middle-income countries that are increasingly financing the World Bank through their use of and payment for financial services at the IBRD and the IBRD’s subsequent cross-subsidisation of financing to low-income members at the IDA.

Below is a report on the Bank’s new initiatives. It was published in the SUNS #6339, Monday, 8 October 2007. Any reproduction or re-circulation of this article requires the permission of the SUNS (sunstwn@bluewin.ch).

With best wishes
Martin Khor
TWN


World Bank’s New Initiatives in Fight for Financial Survival
By Celine Tan

The World Bank Group recently announced two major initiatives aimed at maintaining its operational relevance and financial future. The concurrent decisions by the Bank Executive Board to pledge a record US$3.5 billion from its income to the Bank’s concessional financing facility, the International Development Association (IDA) and to cut loan charges to middle-income borrowers reflect the organisation’s current fight for organisational and financial survival in light of diminishing business from client states and declining revenue streams.

In an announcement on 27 September, World Bank President Robert Zoellick unveiled plans to double the Bank’s contributions from its retained earnings to the 15th replenishment round of the IDA which funds low-income countries at the same time as it is to reduce and simplify charges, including cutting interest rates by about a quarter of a percentage point, on loans to middle-income countries.

The US$3.5 billion pledge to the IDA will be contributed equally by the International Bank for Reconstruction and Development (IBRD) which lends to middle-income countries, and the International Financial Corporation (IFC), the Bank’s private sector arm which provides loans and services to the private sector in member states. This is the first time that the World Bank’s contribution to IDA is also derived substantially from the income of the IFC.

The Bank is hoping that this pledge demonstrates leadership by example by spurring other donor countries to increase their commitments to IDA which is at risk of facing a significant financial shortfall due to declining donor contributions and foregone repayments from borrowers due to debt relief under the Multilateral Debt Relief Initiative (MDRI).

The IDA needs to meet its target of US$39 billion to cover its estimated financing needs under IDA 15 commitment period (2009-2011), including meeting lost credit re-flows under the MDRI amounting to US$6.7 billion over the next ten years. So far, donor contributions have fallen short of the Bank’s estimates with firm donor commitments for the MDRI alone standing only at US$3.8 billion, leaving a gap of US$2.9 billion.

Last month, Zoellick admitted that the Bank was facing “an uphill task” in persuading donor governments to increase their commitments to IDA due to various factors, including budgetary constraints and taxpayer resistance in donor countries and the weak US dollar and Japanese yen.

Selling the Bank to donors has also been made more difficult given the credibility crisis generated by the internal controversy surrounding Zoellick’s predecessor, Paul Wolfowitz, and the mounting criticism of the Bank’s operations, particularly its conditionality policies, and concerns over the effectiveness of its financing in low-income countries.

The Bank is also increasingly facing competition from other financing sources, including from what it terms as “non-traditional” official creditors – emerging market economies such as China and Brazil with large current account surpluses – and from international capital markets. Many low-income countries, particularly those in sub-Saharan Africa, are turning to alternative sources to finance development projects.

Increased creditworthiness of many middle-income countries are also enabling them to seek alternative financing from the Bank and the decision last week to reduce and simplify the charges associated with IBRD lending can be viewed as a means of wooing customers back to its fold. Last year, the IBRD experienced its fifth consecutive year of net negative outflows, reflecting a general trend in the decline of official financial flows to developing countries.

The previous IBRD fee structure has been described by the Bank itself as “among the most complicated among multilateral development banks as it included six elements to determine a loan’s cost” This has been replaced by “a small front-end fee and a reduced interest rate spread” (the gap between the rate at which the Bank borrows and lends), bringing loan pricings back to the levels prior to price increases in 1998.

Seventy-nine countries, including middle-income and creditworthy low-income countries, are eligible to borrow from the IBRD.

The simplification of the fee structure and reduction in charges is part of a wider Bank strategy to compete with international capital markets for the business of middle-income countries. In addition to simplifying loan pricing, the Bank’s middle-income countries (MIC) strategy aims to reduce the transaction costs of Bank financing through streamlining internal Bank procedures and enabling faster and simpler pre-and-post-loan approval processing for countries seeking Bank lending.

It also involves moving towards country systems approach for addressing issues of social and environmental concerns and replacing the existing safeguards policies of the Bank, a transition that has been opposed by civil society groups.

The strategy, reviewed and approved by the Development Committee, the Bank’s political oversight body, at its Annual Meetings last year, also looks towards developing other services to court the business of middle-income countries, including the provision of fee-based advisory services, unbundled from lending and scaling up lending to sub-national entities and encouraging greater cooperation among the World Bank Group agencies - the IBRD, IFC and the Multilateral Investment Guarantee Agency (MIGA).

The twin announcement of the fee simplification and the increase in IDA contributions was also made to demonstrate the Bank’s commitment to both its client base - middle-income and low-income countries - and not at the expense of either.

According to Zoellick: “These decisions reflect both our commitment to IDA, the single largest source of donor funds for many poor countries, and to our middle-income country partners, who have asked us to serve their needs through IBRD”.

However, the decisions also highlight the yawning asymmetries in the Bank’s governance and operational structure. They reflect the reality that while developed countries continue to wield most power in the institution, it is the middle-income countries who are financing the World Bank through their use of and payment for financial services at the IBRD and the IBRD’s subsequent cross-subsidisation of financing to low-income members at the IDA.

The estimated financing shortfall in IDA due to foregone repayments under the MDRI also highlights the fact that low-income countries have been financing a significant portion of the concessional lending facility themselves. A report on IDA’s long-term financial capacity earlier this year revealed that principal repayments from borrowers and charge income (known as credit re-flows) have formed an increasingly important part of the IDA’s resources since a decade ago.

Combined with IDA’s investment income and draw-downs of its liquid assets, the total internal resources of IDA account for 23% of total resources available to IDA for financing.

The situation at IDA mirrors that of its sister institution, the International Monetary Fund (IMF)’s concessional lending facility, the Poverty Reduction and Growth Facility (PRGF). In February this year, an expert committee on the IMF’s revenue model – the Crockett Panel –  found that there was a reliance on income derived primarily from crisis financing operations to middle-income countries to fund a range of activities at the IMF, including defraying administrative costs of the PRGF.

This fact that middle-income developing countries have been shouldering a significant portion of the costs of running the Bretton Woods institutions but not having a significant say in how the resources are deployed have previously been downplayed by the Bank and Fund.

 


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