Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The World Bank’s fund for the planet’s poorest nations is seeking a record financing haul to tackle mounting debt and climate crises.
The International Development Association (IDA) is in need of the “largest replenishment ever” of financial resources to provide cheap loans and grants to 75 developing countries, Dirk Reinermann, the bank’s head of resource mobilisation, told the Financial Times.
He did not specify a target, but IDA raised $23.5bn from donor countries in 2021, the last round of fundraising. That sum was raised to $93bn after tapping capital markets.
A wave of sovereign debt crises and costs related to mitigating the effects of climate change will require big increases in development funding, analysts said, at the same time as elections and cuts to aid budgets limit the spending appetites of IDA’s biggest donor nations such as the US and UK.
“Some of its biggest traditional donors have stuff going on that it makes it harder for them to cough up larger amounts [for IDA],” said Charles Kenny, senior fellow at the Center for Global Development think-tank.
IDA, which has $235bn of total assets, is seen by governments and policy groups as one of the most effective aid providers in the global fight against poverty, both because it can leverage capital markets to triple its annual windfall and give those funds to poor countries at concessional or marginal rates.
The fund “offers good value for money to donor countries, more than other grant-based facilities”, said Annalisa Prizzon, principal research fellow at development think-tank ODI.
IDA has to turn to richer countries to raise capital every three years because its assistance generates little financial return.
Many countries that face a debt crisis will have to pay back more to existing lenders and bondholders than they will receive in new loans. China, a major bilateral creditor, has stepped back from lending, reducing another source of funding for IDA recipient countries.
“Because of the macroeconomic environment, more countries are in difficult economic situations, meaning that they get IDA funding at concession [rates], requiring IDA to deploy more strategic capital,” Reinermann said.
According to Reinermann, this increased line of funding is set to cause IDA to reach the leverage ceiling imposed by its triple-A credit rating sooner than expected.
When IDA raised donor money in 2021, “the zero point for being able to fully leverage our capital at triple-A was in 2034,” he said. “Because of higher levels of debt distress and debt disbursement, that point is now in 2030, or four years earlier.”
Officials in some donor governments have called on the World Bank to use further leverage to eke out existing IDA resources, to the point of sacrificing its triple-A status. However, the bank has been cautious about moves that would lead to a downgrade of its rating.
Meanwhile, political and economic uncertainty in its four biggest donors — the US, the UK, Germany and Japan — create new challenges. It will have to rely on “impressive increases from traditionally smaller donors, as well as impressive lobbying of larger donors” to meet its targets, said Kenny.
Competition for funding is also adding pressure. From the second quarter of 2024 until the end of 2025, eight large development organisations, including the World Health Organization and the GAVI vaccine alliance, will be asking donor governments for an estimated $80bn, according to the CGD.
China, India and South Korea are among the former IDA recipients who have become significant donors in recent years. Oil-rich Gulf states, such as Saudi Arabia, are also tipped to increase their contributions this year. Analysts cautioned, however, that these new sources will not be enough to fill the greater demand for grants in the years ahead.
The World Bank could make money stretch further by reducing the relative share of grants given to countries that are at lower risk of default. But that would be unpopular with recipient countries, particularly those fighting the effects of climate change where IDA is seeking to target support.
There are other ideas, such as the sale of forms of hybrid capital to investors, but it is less clear if instruments such as subordinated debt will help given their complexity, said Amy Dodd, policy director for development economics at the ONE Campaign.
“IDA is a really simple instrument. Donors put in money, IDA takes that and leverages it with its resources and money coming back in,” she added. “There is value in the simplicity.”
Read the full article here
