World Bank IDA18 to introduce increased reliance on capital markets

9 February by Bretton Woods Project

IDA18 fourth replenishment meeting in Indonesia.

Credit: Heri Purwata on Crowdponent

Summary

. IDA18 to receive increased funding through capital markets, questions about debt risk

. IDA18 launched new $2.5 billion private sector window, including IFC and MIGA

. Concerns raised about social risks, IFC’s poor track record

After the final meeting of the International Development Association’s (IDA, the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 180 members in 1997), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

http://worldbank.org
’s low income country arm) 18th replenishment round in December, the World Bank announced a likely funding envelope of $75 billion for IDA through 2020. Every three years, donors meet to replenish IDA resources and review its policy framework (see Update 69). IDA18’s $75 billion, however, does not quite compare with IDA17’s $52 billion (see Observer Winter 2014), because IDA18 is expected to use its strong credit rating to leverage Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. its equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. and raise about a third of the $75 billion through the capital debt markets, subject to eventual repayments. Another third of the IDA18 funds will come from the Bank’s own resources, such as the International Bank for Reconstruction and Development (IBRD, the Banks middle income country arm), the International Finance Corporation’s contribution (IFC, the Banks private sector arm) and from borrowers’ repayments of earlier IDA credits.

Paddy Carter of UK-based think-thank Overseas Development Institute commented that “comparing headline numbers from IDA17 to IDA18 can be misleading, in the sense that borrowing cannot really be considered ‘replenishment’ and the decision by donor countries not to put more money into IDA is hard to square with their rhetoric about the need to scale up efforts for sustainable development.” Tim Jones from UK-based NGO the Jubilee Debt Campaign cautioned: “Raising money from capital markets ties IDA funding more closely into the interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
the World Bank can borrow at. In the future this could mean higher interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates for IDA recipients; increasing risk of future debt crises.”

According to the Bank’s December press release, to date, a total of 48 countries have pledged resources to IDA18, also accounting for a third of the funds, and additional countries are expected to pledge in the near-term. Details of the contributions made by individual countries are to be announced in spring. As with IDA17, the UK is likely to remain the largest donor, followed by the US. According to newssite Nikkei Asian Review, Japan is the third largest donor with a $5.23 billion contribution, an increase of about 20 per cent from three years ago.

A total of 75 low-income countries are eligible to benefit from the IDA18 financing of grants and low- to zero-interest loans. The Bank said in its December press release IDA18 will double the resources to address fragility, conflict and violence to more than $14 billion and provide an additional $2 billion for refugees and countries that host them. Caroline Heider director general of the Bank’s Independent Evaluation Group (IEG), told Devex in October that a key finding of a 2016 evaluation of the World Bank’s engagement in situations of fragility, conflict and violence “is that the causes of conflict, the shape of the political economy and the identity of key stakeholders are often either not understood [by the Bank]… or are understood but not translated into a strategy or operational programme.” Korinna Horta of German NGO Urgewald commented “this substantial rise in IDA resources will increase the pressure of the World Bank to accelerate lending at a time when it has greatly weakened its environmental and social standards (see Observer Autumn 2016, Summer 2016). The number of problem projects is likely to rise significantly with untold risks to affected people and their environment. The Bank needs to ensure project implementation benefits the poor.”


Private sector window

IDA18 includes a controversial plan to create a $2.5 billion private sector window (PSW) to complement existing investments into private sector development in IDA countries. The PSW will be introduced together with the IFC and Multilateral Investment Guarantee Agency (MIGA, the Bank’s political risk insurance arm). A September IDA report on PSW set out the proposed governance arrangments with details still to be worked out, noting that strategic direction and monitoring will be provided by an oversight committee composed of the Boards of the three institution. According to the Bank, the PSW “will help mobilise private capital and scale up private sector development in the poorest countries, particularly in fragile situations”. NGO Oxfam raised concerns about the PSW in a September briefing, urging the Bank to ensure private sector investments are pro-poor: “Social risk is especially important to consider in the context of fragile states where there is a real possibility for fuelling social conflict, particularly those related to land and natural resources.” Nick Galasso of Oxfam International expressed further concerns in December, arguing that the IFC “has a poor record of protecting the communities they’re supposed to be helping from the impacts of their clients’ projects (see Observer Spring 2016). We urge the Bank to significantly reform and ramp up their oversight and protections before a single dollar is invested.”


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