Author: Lara Cornaro

An Innovative IFI Operating Model for the 21st Century

Last year saw major contributions to the international finance reform agenda, including Finance for Climate Action (the “Songwe-Stern report”), the Bridgetown Agenda, and the Independent Review of Multilateral Development Banks’ Capital Adequacy Frameworks submitted to the G20 finance ministers.

2023 will be a critical period for implementing reforms to meet the scale and urgency of the climate crisis while also addressing the other crises facing developing countries – food and energy price inflation, debt sustainability, among others – as well as development priorities as targeted in the Sustainable Development Goals. International pressure and a leadership change at the World Bank have created an opportunity to dramatically increase the volume of finance that the international financial system can deploy. As shareholders look to reform the international financial architecture, it is important to consider not only where the additional capital will come from, but also how capital can be effectively spent for maximum climate and development impact. 

This paper lays out key products and processes that need to be introduced, reformed, and/or scaled to effectively deploy existing and new volumes of climate finance. The paper focuses on the multilateral development banks (MDBs), notwithstanding the critical roles of other institutions such as the International Monetary Fund (IMF) and other public development banks (PDBs). It builds on seminal reports such as the “Songwe-Stern report” by zeroing in on the specific models that can be adopted and scaled with urgency. 

When It Comes to World Bank Reform, April Will Be Disappointing. But that Shouldn’t Be the End of the Story.

This blog is one in a series by experts across the Center for Global Development ahead of the IMF/World Bank Spring Meetings. Each post in the series will put forward a tangible policy “win” for the World Bank or the broader MDB system that the author would like to see emerge from the Spring Meetings. Read the other posts in the series, and stay tuned for more.

Reform of the World Bank is in the eye of the beholder—not just how it’s going, but even what it is. US Treasury Secretary Janet Yellen has arguably devoted more time than any of her counterparts to defining the need for change and the goals of a reform agenda, engaging in an impressive series of public speeches (see here and here), meeting with MDB heads and stakeholders, and pressing the issues with officials in other governments.  Yellen’s visibility comes with the role of being the bank’s largest shareholder, a position the United States has used many times over the years to pursue reforms at the institution. I am reminded of a comment by an MDB official a long time ago as he listened to the details of the latest US reform agenda. “You Americans are always talking about MDB reform,” he said. “Reform this, reform that. When we will finally be able to declare ourselves ‘reformed’?” Indeed.

So just how pivotal is this particular reform moment? Defined around the monumental tasks of restoring development progress, mitigating and adapting to climate change, avoiding the next pandemic, and taking on various other global challenges, it certainly feels like an important moment, overwhelmingly so. But when it comes to the World Bank, it can help get one’s mind around things by focusing on the “bank” part. If much of the reform agenda is about financing, then what can we say about the goals and progress toward those goals? Here the picture becomes a lot clearer, and it’s not hugely encouraging so far.

Financing the vision articulated by Secretary Yellen and others really boils down to two things: bigger financing volumes and easier terms. In the eyes of the reformers, the World Bank must deliver much higher volumes of finance for development, climate, pandemics, and so on. And that financing must be on more attractive terms to properly incentivize the borrowers, on which all of this depends.

When it comes to making World Bank lending terms more attractive, there is nothing concrete to point to in terms of progress to date. Bank management’s roadmap paper last year proposed a new concessional lending window and replenishment process for the IBRD, but that idea does not seem to have been embraced by anyone, including the United States.

That leaves the question of financing volumes. Outgoing president David Malpass shared publicly last week that decisions taken during the Spring meetings would increase the World Bank’s financing capacity by up to $50 billion over the next decade, or $5 billion a year. These comments appear to refer specifically to IBRD lending to the bank’s middle-income client countries. IBRD lending commitments last year totaled $33 billion, so these measures would increase annual lending capacity by about 15 percent, or “up to” 15 percent per Malpass’s comments.

Here is where historical comparisons can be helpful. Financial reforms led by bank management in 2014 nearly doubled the IBRD’s annual lending capacity, and a capital increase in 2018 boosted lending by another third. The former was done with relatively little input from shareholders and even less fanfare, and the latter was done with the unlikely support of the Trump administration. So, despite the ambitious rhetoric and intensive shareholder discussions over the past year, the near-term outcomes are underwhelming by the experiences of recent history.

This is particularly so when we consider what’s been missing from the IBRD-focused discussions to date. Alongside IBRD lending of $33 billion last year, IDA provided $37 billion to low-income country governments. With the bank now providing $70 billion in annual commitments, that $5 billion increase in lending capacity seems even less significant. The disappointing headlines for the Spring Meetings are beginning to write themselves: World Bank commits to a possible 7 percent increase in support for its clients, with nothing on offer to its poorest members.

This characterization could turn out to be grossly unfair, particularly if we look beyond the April meetings. Recent months have seen the major shareholders acknowledge the need to support low income governments through IDA, while scaling up ambition on climate. The April outcomes will not deliver on those goals, but perhaps that disappointing fact will spur much more ambition going into the Fall. By that time, a new World Bank president will be in place and almost certainly wanting to lead an agenda that is ambitious rather than anemic.

The Road to a Better World Bank Starts with a Commitment to IDA

This blog is one in a series by experts across the Center for Global Development ahead of the IMF/World Bank Spring Meetings. Each post in the series will put forward a tangible policy “win” for the World Bank or the broader MDB system that the author would like to see emerge from the Spring Meetings. Read the other posts in the series, and stay tuned for more.

The International Development Association (IDA) has emerged as the largest financing arm of the World Bank Group in the last few years, and demand for IDA finance is poised to remain high as poor countries face a daunting global outlook. But these headwinds also make IDA’s financial future less certain. As the world debates multilateral development bank (MDB) reform and the proposed World Bank “Evolution Roadmap,” IDA has not featured as prominently as the future of the International Bank for Reconstruction and Development (IBRD)—even as many developing countries express concern that the Bank’s evolution not come at the cost of the Bank’s development mission. The Spring Meetings are an opportunity for a reset.

IDA has exceeded IBRD’s financing volumes since 2020, when it increased its commitments by close to $20 billion in response to the global COVID pandemic, and they have remained high, with IDA committing $42 billion in 2022, outstripping both IBRD ($33 billion) and the International Finance Corporation ($17 billion). To sustain these levels, donors moved to replenish IDA’s funds a year ahead of schedule. Since then, IDA’s annual financing commitments have continued to grow as the low-income countries its serves have been barreled by a series of exogenous shocks—from global supply chain crises to interest rate normalization by advanced economies—that occurred against the backdrop of deteriorating debt dynamics. Today IDA remains a first port of call for countries hit by crises and an essential component of many poor countries’ external financing mix.

But these factors have combined to put pressure on IDA’s medium-term outlook and its ability to sustain these high financing levels. If IDA maintains a 2023 financing envelope on par with 2022 levels, the fund will have committed almost two thirds of its available financing in the first half of its replenishment cycle, with a year left to go before it receives a fresh batch of funds. To address this likely shortfall IDA has launched a fundraising exercise around its Crisis Response Window (CRW)—an IDA set-aside that disburses budget support for countries needing emergency financing linked to an exogenous shock—but many key donors appear tapped out.

A fundamental question for IDA is whether there are balance sheet efficiency type measures (à la the G20 review of MDB capital adequacy frameworks) that could be relevant to IDA. In the past, I arguedthat IDA should take a more ambitious approach to its own large equity base and borrow more from the market to increase its financing to poor countries. Whether this argument remains relevant in a high-interest environment is less clear.

Over the past several cycles, IDA has become less dependent on donors. It has managed to nearly double in size while donor contributions have essentially flatlined for almost a decade. This is because IDA has a hefty amount of reflows from loans that it can recycle for new projects, and because the institution has started going to capital markets to borrow against its loan portfolio. Last cycle, IDA raised around $23.5 billion in financing from donors for a total replenishment envelope of $93 billion.

But the burning question: can this continue? To date, most of the investigation into MDB financial efficiency, including the capital adequacy framework (CAF) report, has centered on the hard loan windows. A similar independent study focused on IDA is critically important. Part of the complexity that donors need to grapple with is how interest rates will affect IDA’s ability to borrow from the market. In a benign interest rate environment, IDA was able to issue at historically low cost and pass along those low costs to its borrowers. At the peak of COVID, when interest rates were at historic lows, our back-of-the-envelope calculations showed it cost less than 20 cents on the dollar to buy down an IDA market bond to concessional terms. Contrast that to today, where that number is closer to 40 cents, by our estimates. That clearly changes a lot of the equation around market borrowing, including whether it is affordable and compatible with IDA’s current financing needs. To add to the headwinds, deteriorating debt dynamics will have a depressant effect on reflows over the medium to long term. In addition, the specter of reverse graduations—where countries like Sri Lanka that had graduated out of IDA financing may once again qualify as they suffer economic distress—will increase the claims on IDA resources.

During the Spring Meetings, much of the focus will be on IBRD, which has occupied center stage in the roadmap conversation. But discussion around new sources of grants for middle-income countries have many low-income countries rightly nervous. I hope that during the Spring Meetings key IDA donors reaffirm in no uncertain terms their strong political commitment to IDA—whether that comes out in the DC statement, G20 communique, or elsewhere. IDA countries should be reassured that they too are part of the Bank’s evolution process and can plan on steady IDA infusions over the medium term. An early statement of political support could help ease tensions, setting up the evolution process as a win for all, rather than a series of difficult tradeoffs.