Africa: Statement of Under Secretary David Malpass Before the U.S. Senate Foreign Relations Subcommittee

11 February 2019

Washington, DC — The Trump administration's stance towards the World Bank was detailed in Senate testimony by Treasury Department Undersecretary David Malpass. On February 6, President Trump nominated Malpass to be president of the Bank. The relevant section of the testimony is below. Here is the full statement before the U.S. Senate Foreign Relationbs Subcommittee on Multilateral International Development, Multilateral Institutions, and International Economic, Energy, and Environmental Policy

World Bank Capital Increase

Regarding the World Bank’s request for a capital increase, we secured commitments on most of the reforms discussed in my testimony before Congress a year ago.  Though it will take time to implement, it is a solid reform package that better aligns the World Bank with U.S. national security, foreign policy, and economic priorities.

Treasury pushed hard for the adoption of a new mechanism to limit World Bank lending and ensure the durability of this capital increase.  Based on this push, the International Bank for Reconstruction and Development (IBRD) will adopt a new financial sustainability framework that restricts annual lending commitments to those that can be sustained in real terms over the next 10 years through organic capital accumulation alone.  The framework also includes a buffer to allow for a crisis response without the World Bank having to approach the United States and other shareholders for a capital increase.  This new framework is aimed at achieving financial discipline and avoiding future capital increase requests.  IBRD Governors will review the framework every five years, providing them an opportunity to push for any needed enhancements to ensure the IBRD continues operating within its existing financial resources.

As a direct result of the reform package, the IBRD committed to directing a bigger share of its lending to poorer countries, with the share of lending going to countries below the IBRD graduation income threshold increasing to 70 percent (from the current level of 60 percent); and to applying its graduation policy more rigorously, freeing up resources for countries that most need them.  The reform package introduced differentiated loan pricing, making it the first MDB to adopt differentiated pricing for non-concessional sovereign lending.  This will provide better-off, more creditworthy countries with an incentive to pursue market financing, rather than IBRD financing.

The World Bank will also constrain the growth of staff salaries, which are the biggest driver of increases in its administrative budget.  Beginning with the World Bank’s FY 2020 budget, the annual general salary adjustment for staff salaries will be capped.  Management will also conduct a study of recruitment and retention, strengthen performance management, and undertake efforts to remove low performers.  With these changes, staff compensation and World Bank administrative costs will grow at a slower rate than in past years.

The IBRD capital increase is packaged with an increase in the capitalization of the International Finance Corporation (IFC), the part of the World Bank Group that focuses on lending to and investing in the private sector in developing countries. We declined to participate in the IFC capital increase based on our assessment that the IFC did not need more capital to be impactful. Other countries wanted to expand the IFC on their own, and packaged their support for the IBRD reforms to an IFC expansion.  Our voting power will be diluted to 16.4 percent from 21.0 percent, but we maintained our veto through a reduction in the IFC’s veto threshold, which will be adjusted from 20 percent to 15 percent.  However, we succeeded in negotiating that shareholders will, in parallel, seek an amendment to the IFC Articles of Agreement to reduce the threshold that allows the United States to maintain our veto over any future IFC capital increases from 20 percent to 15 percent.  We will also be seeking Congressional authorization to vote for such an amendment.

We will work with Congress regarding the subscription to the IBRD capital increase.  Supporting the GCI would lock in the reforms, improve the effectiveness of World Bank programs, and complement U.S. assistance for strategically important partners.  In short, the package will encourage countries to be more self-sufficient in financing their development, focus official development resources on needier countries with less access to other sources of finance, and create a more financially-disciplined World Bank whose lending growth is constrained and therefore more sustainable.  The reform package will also advance other U.S. foreign policy objectives, including offering developing countries development finance based on transparency and high standards to counter Chinese over-lending.

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