The Bank's mission of poverty reduction is vital in low-income countries, where the incidence of poverty is the highest, the institutional constraints are most severe, the investment climate may not be conducive to sustainable growth, and access to resources is most limited. Bank strategy for attacking poverty in low-income countries is based on the Poverty Reduction Strategy Paper (PRSP) approach, introduced at the end of 1999. PRSPs are country-authored, results-oriented, comprehensive road maps based on broad country consultation with internal and external partners and stakeholders. The PRSP identifies a country's macroeconomic, structural, and social policies and serves as the framework for cross-sectoral programs that promote growth and reduce poverty. It acts as the basis for development aid, including IDA credits.

During fiscal 2005 the Bank's Executive Directors considered eight full PRSPs, including one fully revised second PRSP, and two interim PRSPs. Forty-seven countries now have full PRSPs. In addition, 20 countries provided annual progress reports on their poverty reduction strategies. Jointly with the International Monetary Fund, the Bank reviewed the poverty reduction strategy process to consider progress and challenges. The review assessed the experiences of countries, donors, and other stakeholders, including civil society organizations; identified lessons learned from those experiences; and made recommendations for enhancing the process.

PRSP-based IDA assistance to low-income countries includes Poverty Reduction Support Credits, which support country-owned poverty reduction priorities as reflected in government budgets. In fiscal 2005 the Executive Directors of the World Bank approved 17 credits in 17 countries.

THE ROLE OF IDA

IDA is the largest source of concessional financial assistance for the world's poorest countries. In fiscal 2005 countries with annual per capita income of up to $895 were eligible for IDA assistance. IDA also supports some countries, including several small island economies, that are above the income cutoff but lack the creditworthiness needed to borrow from IBRD. The amount of IDA resources countries receive depends on the quality of their policies to promote growth and reduce poverty, which are assessed annually.

IDA recipient countries face complex challenges in meeting the MDGs. Policy priorities include promoting growth and reducing poverty; enhancing public sector governance and transparency; helping countries recover from conflicts, crises, and disasters; developing infrastructure; improving the quality of basic education and poor people's access to it; strengthening the fight against HIV/AIDS and other communicable diseases; and building a healthy investment climate as a prerequisite for private sector investment. (See “Addressing Worldwide Poverty”.)

Traditionally, IDA provided assistance in the form of highly concessional credits. Since fiscal 2003 it has expanded the use of grants, which will be used to finance projects in the most debt-vulnerable IDA countries beginning in fiscal 2006. (See IDA at http://www.worldbank.org/.)

IDA COMMITMENTS

IDA commitments in fiscal 2005 reached $8.7 billion for 160 operations, consisting of $6.7 billion in credits, $2 billion in grants, and $0.1 billion in guarantees. This is slightly below last year's record high.

Africa received the largest commitment of IDA resources with $3.9 billion, constituting 45 percent of total IDA commitments. South Asia and East Asia and Pacific followed with $2.9 billion and $1.1 billion, respectively. Fiscal 2005 marked the last year of the IDA13 replenishment, and the limits on IDA13 resources had an impact on Africa figures in particular. Among countries, India, Vietnam, Bangladesh, Pakistan, and Ethiopia represented the largest single recipients.

In fiscal 2005 about 21 percent of total IDA financing was provided in the form of grants to the following clients and projects: debt-vulnerable poorest countries, $897 million; postconflict countries, $463 million; poorest countries, $316 million; HIV/AIDS projects, $133 million; and natural disaster reconstruction projects, $49 million.

Public administration, including law and justice, was the leading sector receiving IDA support, with $2.2 billion, or 26 percent of the total. Significant support was also provided to the health and social services and transportation sectors, representing $1.3 billion and $1.1 billion, respectively.

The two most prominent themes were human development and rural development, accounting for 19 and 17 percent of IDA commitments, respectively. Major attention was also paid to financial and private sector development (16 percent), public sector governance (16 percent), and social protection and risk management (8 percent). The figures  below show IDA commitments by region, theme, and sector.

SHARE OF TOTAL IDA COMMITMENTS BY REGION

SHARE OF TOTAL IDA COMMITMENTS BY THEME

SHARE OF TOTAL IDA COMMITMENTS BY SECTOR

IDA RESOURCES

IDA is financed by its own resources and by donor governments. Every three years donor governments and representatives of borrower countries meet to discuss IDA's policies and priorities and to agree on the amount of new resources required to fund IDA's lending program. Historically, the major industrial nations have been the largest contributors to IDA. Donor nations also include developing countries and transition economies—some of them current IBRD borrowers and former IDA borrowers.

Negotiations for the 14th Replenishment of IDA(IDA14) concluded in February 2005. The IDA14 agreement, which governs the use of IDA resources for fiscal years 2006–8, provides 24.2 billion in special drawing rights (SDRs)(about $35.3 billion). This amount includes SDR14.1 billion (about $20.7 billion) in new donor contributions; SDR8.7 billion (about $12.7 billion) in internal resources, including repayments of principal from past credits and investment income; and SDR1.1 billion (about $1.5 billion) in IBRD net income transfers, subject to approval by IDA's Board of Governors. Donor countries made firm financial commitments to the replenishment, but some are still exploring the possibility of increasing pledges to reach the 30 percent target increase in commitment authority supported by IDA donors. (See figures for the sources of IDA funding and for IDA's impact on social sector efforts.)

SOURCES OF IDA FUNDING

IDA'S STEPPED-UP EFFORTS IN THE SOCIAL SECTORS

LOW-INCOME COUNTRIES UNDER STRESS

Effective engagement with low-income countries under stress (LICUS) is essential for long-term development and global security. Work continued this year on increasing the effectiveness of aid, with the Bank providing close oversight of progress in the 25 most fragile states. Heightened operational readiness and close partnerships with other donors allowed fast and flexible support in postconflict countries such as Haiti, Liberia, and Sudan. To improve links between security and development, the Bank and the United Nations Development Group developed the Transitional Results Matrix, a planning tool that helps countries prioritize and enhance the coherence of international support across political, security, economic, development, and humanitarian arenas.

Bank research demonstrated the high costs fragile states impose on their neighbors and the inequity of aid allocations between “aid darlings” and “aid orphans.” This led to an agreement for the Development Assistance Committee of the Organisation for Economic Co-operation and Development to develop a watching brief system for these countries. The Bank also cosponsored a senior-level forum, “Development Effectiveness in Fragile States,” which helped develop common principles for good international engagement in these countries.

The Bank implemented several institutional reforms to improve its response in LICUS. The Country Policy and Institutional Assessment rating system was amended to recognize performance improvements at the bottom of the spectrum. Aggregate budgets for analytic work were maintained, and the LICUS Trust Fund committed $20 million to support reengagement in the most fragile countries in nonaccrual with the Bank. (See www.worldbank.org/licus.)

DEBT RELIEF AND DEBT SUSTAINABILITY

The Bank continued to provide debt relief to the world's poorest and most heavily indebted countries in fiscal 2005. It also worked to improve debt sustainability in an effort to help these countries meet the MDGs.

Under the Heavily Indebted Poor Countries (HIPC) Initiative (www.worldbank.org/debt), 27 countries are now receiving debt relief that is expected to total more than $54 billion over time. Eighteen countries have reached the “completion point,” where debt relief becomes irrevocable. In fiscal 2005 the boards of the Bank and the International Monetary Fund voted to extend the HIPC Initiative through December 31, 2006. Unlike previous extensions, this one applies only to countries that satisfied HIPC income and indebtedness criteria as of the end of 2004.

The debt relief program has significantly reduced debt stock in HIPCs (see figure) and has allowed poverty-reducing spending in those countries to rise (see figure).

Together with the International Monetary Fund, the Bank has developed a framework for assessing debt sustainability in low-income countries that will guide lending decisions in a way that balances a country's need for funds with its ability to service debt, and in a manner tailored to the country's circumstances. The framework reflects feedback from extensive consultations with government officials, multilateral and bilateral donors, academics, and civil society organizations.

HEAVILY INDEBTED POOR COUNTRIES DEBT RELIEF

TRENDS IN POVERTY-REDUCING EXPENDITURES BEFORE AND AFTER ASSISTANCE UNDER THE HIPC INITIATIVE