Global Crisis Drives Call to Increase Bank Group Resources
February 2010—The World Bank has been a major source of support for the developing world since 1946, providing financing, grants, knowledge and advice where others would not or could not. Never have the institution’s services been in such great demand as in the last year and a half, during the worst financial crisis in 80 years.
From July 2008 through January 2010, the World Bank Group committed $89 billion to developing countries as the trade, finance, and investment that fueled their growth dropped precipitously, endangering several decades-worth of hard-won development gains.
Stimulus packages were beyond the ability of many countries. Many already had been weakened by global food and fuel crises and faced increasing malnutrition among vulnerable populations. As countries endured growing unemployment and dropping revenues, the Bank Group’s swift actions kept children in school, health clinics open, trade flowing and local banks operating.
Years of prudent financial management and a AAA rating enabled the Bank Group to mount this vigorous response. The Bank Group’s International Bank for Reconstruction and Development (IBRD) has lent $500 billion over its history, from an $11 billion capital base paid in by shareholders. Most of the money for development in middle-income countries has been raised through bond sales to private investors, not taxpayer contributions.
As increasingly complex and global challenges loom in the 21st Century, the Bank Group is asking shareholders to strengthen the institution’s ability to respond to developing country needs by replenishing the capital base. It is the Bank’s first such request in 20 years.
“A well capitalized World Bank Group would be positioned to play a leading role in the global response to the challenges of globalization, development, and financial crisis,” World Bank President Robert B. Zoelllick said at the recent World Bank-IMF Annual Meetings.
“If the IBRD continues its lending at the current rate, by mid-2010 it will be capital constrained…In the face of the next crisis – another food emergency, the next epidemic – can we afford to have a World Bank Group that has to hold back?”
Support Buoyed Safety Nets, Infrastructure and Eastern Europe
As the financial crisis unfolded, the Bank Group provided innovative solutions and a record amount of resources for developing countries:
The IBRD—which provides financing and technical assistance to countries—committed a record $53.1 billion.
The International Finance Corporation (IFC), the Bank Group’s private sector development arm, committed $15.5 billion, and launched an array of crisis-response initiatives, including a $3 billion fund to strengthen banks, a $5 billion Global Trade Liquidity Program, and a $2.4 billion Infrastructure Crisis Facility.
The Multilateral Investment Guarantee Agency (MIGA), the Bank Group’s political risk insurance agency, issued $1.9 billion in guarantees, the majority of which went to support continued lending by banks in response to the financial crisis
In FY09, $21 billion went to infrastructure – critical to recovery, jobs, future growth and productivity. The Bank has committed to scale up assistance to $15 billion per year from an earlier target of $11 to $13 billion per year through the Infrastructure Recovery and Assets Platform (INFRA), a multi-donor program.
Another $4.5 billion went to safety nets and social protection programs in FY09 to boost access to basic social services, especially maternal/infant health and nutrition and school-feeding programs. The effort also built or scaled up pre-existing targeted safety net programs, and developed labor market policies to provide income support for the unemployed.
In Central and Eastern Europe, the Bank Group worked closely with other multilateral development banks on a $31 billion package to rescue the financial systems of several countries. IBRD, IFC and MIGA committed about $10.8 billion for lending, political risk insurance, and initiatives in sectors including banking, infrastructure, and trade.
Another $17.1 billion in FY09 was committed to help countries in Latin America and the Caribbean adversely impacted by the global downturn in trade and commodity prices. This was a 70 percent increase over the previous fiscal year and a record high for the global development institution in the region.
Demand Remains High
Negative fallout from the financial crisis continues, and the world will likely be living with the ripple effects of the financial crisis for years.
Much of the $1.2 trillion external debt raised by emerging market banks and firms between 2003 and 2007 is now maturing, putting pressure on borrower’s finances at a time when the average cost of external borrowing was about 9.5% during the first months of 2009, almost 50% higher than the 6.4% cost that was paid in pre-crisis years when the debt now being rolled over was contracted.
Overall capital flows from private sources will fall short of developing countries’ financing needs in 2009 by between $350 billion to $635 billion, according to an October 2009 report (pdf). The situation is of particular concern in countries which entered the crisis with large deficits, countries that relied on commodity exports, countries with large share of remittances in GDP, and countries with underdeveloped local capital markets for domestic borrowing.
The Bank Group expects to lend more than $40 billion to developing countries in FY10, with another $55-60 billion projected over the following two years.
The poorest countries are projected to have a financing shortfall of $11.6 billion for core spending on health, education, safety nets, and infrastructure.
The needs in Africa are great; only one in three rural Africans has access to an all-season road. An infrastructure study of 24 countries released in November estimated that transforming African infrastructure will require an additional $31 billion a year.
Capital Infusion Will Help the Poorest
The Bank is already taking several measures to increase its capital base, including raising interest rates on IBRD loans and working to tap previously unusable paid-in currencies of some shareholders, among other steps. A capital increase will enable a strong multilateral institution for future crises. And it can help vulnerable people in both middle- and low-income countries.
Not only do 70 percent of the world’s poor live in middle-income countries, but almost half of IBRD’s income over the last three years has gone directly to the poorest countries – through the International Development Association (IDA), the Bank’s lending window which provides mostly interest-free credits and grants to low-income countries that lack significant access to global capital markets.
Middle-income countries (MICs) have also become important trading partners of low-income countries (LICs); their share of world imports has nearly tripled, from 12% in 1996 to 31% in 2008. MICs are also a major source of remittances for LICs, accounting for an estimated $10-16 billion out of a total $32 billion in 2008.
For its part, IDA disbursed a record $14 billion between July 2008 and October 2009 through fast-tracking of funds and processes. About $7.8 billion went to 30 countries in Africa in FY09—a 39 percent increase over the previous year.
IFC has pledged $1.75 billion to IDA over a three-year period, and it has contributed more than $1 billion so far. Over half of IFC projects were in low-income countries in the past fiscal year. IFC activities promote sustainable private sector development, which expands economic opportunities for the poor.
Strong continued support for IDA will also be needed to offset increased and accelerated assistance provided during the crisis.
“We continue to see negative fallout from the economic crisis, and in developed countries it’s a matter of jobs and economic growth,” Zoellick said January 15 in Berlin.
“For too many poor countries, it’s the searing pain of millions going hungry or getting sick with the impact on a generation of children being felt for many years. We estimate 64 million more people will fall into extreme poverty between 2009 and 2010, because of this economic crisis, and to put that number in context, that’s larger than most European countries.”