June 1, 2023

Last month, the World Bank announced its intention to mobilize $12 billion for a new Crisis Facility for IDA, the arm of the bank that provides concessional lending and grants to the poorest countries.  The Crisis Facility will augment emergency funding for IDA’s most vulnerable borrowers and provide new resources for Ukraine and Moldova. Shareholders will be asked to pledge to the new facility by December 2023, shortly before the start of the next IDA replenishment in early 2024.

The proposal reflects a compromise with donors who objected to an accelerated fundraising schedule for IDA 21, having agreed to one for IDA 20 after the COVID-19 crisis hit. Concern about the optics of using IDA resources to support Ukraine in the absence of a parallel initiative to benefit IDA countries was no doubt also a deciding factor, especially as much of the economic pain in IDA countries stems directly from the Russian invasion.  

IDA management is hoping to mobilize $6 billion to supplement IDA’s crisis response window (CRW), which, due to IDA’s leveraging capacity, requires $4 billion in new donor commitments. Though ambitious, the rationale for a top-up is sound: absent new resources, the CRW is likely to fall well short of demand driven by the fuel and foods crises, lingering effects of COVID-19, and extreme weather events.  

For IDA 20, donors allocated $3.3 billion to the CRW, and of this total, management has already allocated 60 percent, although the replenishment has yet to hit the one-year mark. In addition, only $100 million remains of the $1 billion in early response funding, which was set aside to deal with food insecurity and disease outbreaks. 

Even if the CRW campaign succeeds, early commitment figures indicate that total funding levels could fall during years two and three of IDA 20 period (July 1, 2022-June 30, 2025).  In the first nine months of IDA 20, commitments reached $20.5 billion, nearly equivalent to last year’s figures over the same time period (July-March 2022, the last year of IDA 19).  Funding typically accelerates in the last quarter of replenishment years, and indeed by June 30, 2022, IDA committed another $16.5 billion. Should commitments reach a comparable level in year one of IDA 20 (which ends this month), IDA funding could fall in years two and three by as much as $12 billion. This estimate assumes that IDA will meet its fundraising target of $6 billion this year.   

The new Crisis Facility will also provide funding for Ukraine and Moldova (to help manage the influx of refugees).  Historically Ukraine has borrowed only from the IBRD, which lends to creditworthy middle-income countries, but due to its high-risk profile the IBRD cannot take on any new exposure.  As a result, new funding will come from IDA’s balance sheet, which has significant excess capacity. The funding target for Ukraine is also $6 billion, but because it will be on standard IBRD (not IDA) terms, the cost to donors is half the ask for the IDA CRW (i.e., $2 billion).    

A new, off-year fundraising campaign is risky, and the dual fundraising goals compound this risk. IDA donors are not feeling especially generous, at least in part because of the extra payment they incurred as part of the accelerated replenishment for IDA 20. Indeed, it is noteworthy that despite language in the latest G7 Leaders’ Communique emphasizing the scale and urgency of the development agenda, IDA does not get a mention. 

In addition, shareholders may choose to prioritize funding for Ukraine over IDA, precipitating an outcome that the World Bank should take pains to avoid: a successful fundraise for Ukraine and a disappointing one for IDA. A scenario under which Ukraine benefits from IDA resources while IDA recipients get only a meager top-up would needlessly exacerbate the trust deficit between donors and borrowers that is playing out in the context of the current debate over the World Bank’s mandate (i.e., the extent to which it should incorporate global challenges, like climate change, and how to finance them). But if bilateral aid allocations are anything to go by, this scenario is not implausible. While the OECD reported record high levels of official development assistance (ODA) in 2022 ($204 billion), much of the increase reflected in-country donor refugee costs, amounting to over 14 percent of total ODA, or $29 billion. In addition, direct support to Ukraine amounted to nearly 8 percent of ODA, nearly equivalent to the decline in funding to sub-Saharan Africa.  

The new World Bank president, Ajay Banga, enters the fray on June 2, and his ability to coax new IDA funding from reluctant donors will be an early test of his leadership. The stakes are high: engineering a successful fundraising campaign that benefits IDA countries and Ukraine is needed to help rebuild trust among executive board members and successfully conclude negotiations around the World Bank’s evolution roadmap, currently a top priority. It will also be an early opportunity for Mr. Banga to prove his mettle. 

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.

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