Leaders have called for a record replenishment of the Bank's grants and concessional lending arm. Much bigger changes are needed.
When he assumed the presidency of the World Bank in June 2023, Ajay Banga promised a bigger and better Bank. During the just concluded annual Spring Meetings, Banga reiterated this ambition and his hope for a 20%-25% increase in donor contributions to the International Development Association (IDA), the arm of the World Bank that provides grants and concessional loans to low-income countries. If achieved in its upcoming fundraising round (IDA21), this would bring donor contributions to $28-30 billion, which could leverage at least $100 billion over the next three years.
Banga's expression was followed, last weekend, by a communiqué from African leaders regarding the IDA's future direction. While the statement itself shirked away from a specific number, presidents such as Kenya's William Ruto in their speeches mentioned a target of "at least $120 billion" - implying slightly larger donor contributions.
As the World Bank's concessional arm, the IDA provides low-cost development finance for countries with per capita GDP below $1,315. The IDA raises funds from donors - mostly high-income countries - through three-year fundraising rounds referred to as replenishment rounds. Since 2017, the IDA has been leveraging donor contributions by a ratio of around 4:1 by borrowing in capital markets. The most recent replenishment round (IDA20), in 2021, raised $93 billion through donor contributions amounting to $23.5 billion.
If Banga or African leaders' target was met, it would be - in absolute terms - the biggest replenishment in IDA's history. Rightly so. However, neither $100 billion nor $120 billion comes anywhere near the level of ambition needed to meet the moment, for three specific reasons.
First, the fact that $100-120 billion might be historic is testament to just how low ambition has been in the past. The increase in both real and absolute terms for both targets is small. Since 2012, donor contributions to the IDA have declined steadily from $26 billion to $23.5 billion as contributions of all but nine donors have decreased in absolute terms. Moreover, considering inflation, contributions of all OECD donor countries have declined in real terms, with one or two exceptions. Thus, $28-30 billion or even $35 billion would not represent a significant increase relative to historical trends. Rather, it would barely restore previous levels of funding.
Second, the significance of any hoped-for increase pales further when we consider that the level of demand on IDA's resources has increased exponentially. Take African countries, 39 of which are eligible to borrow from the IDA. The UN Economic Commission for Africa (UNECA) estimates Africa needs around $1.3 trillion per year to achieve the Sustainable Development Goals (SDGs) by 2030. Yet in the fiscal year 2023, they received just $25.8 billion from the IDA, less than 2% of $1.3 trillion. Although this is a welcome contribution and 75% of the IDA's total commitments, it is far cry from what is needed. $25.8 billion is barely more than the $23.6 billion per year that a single African country, Ethiopia, needs to spend on infrastructure alone to achieve its SDGs, according to internal forecasting by Development Reimagined. And this is to say nothing about the significant financing needs required for climate change mitigation and adaptation.
While the IDA cannot meet the full financing needs of developing countries on its own, it must step up its support if it wants to maintain its image as the largest provider of concessional finance globally.
Third, it is not just on the quantitative front that IDA ambition is lacking but the qualitative side. It is not just a question of how much but how.
Since 2017, the IDA has leveraged donor contributions by borrowing against its equity. This approach has allowed it to increase the amount of resources it makes available to its members, but it also increases the risk and cost of IDA's operations relative to simply attracting more donor contributions. This is especially important when interest rates - and therefore the cost of borrowing - is high.
The impact of this cost is not limited to the here and now. It also affects IDA's ability to lend in the future. In other words, costly borrowing today means less resources will be available for lending tomorrow due to increased spending on repayments. The fact that raising money on capital markets is expensive right now should automatically imply that donors must significantly increase their contributions to the IDA in real terms. Financial engineering to leverage a small pool of resources, even by a ratio of 4:1, will not deliver a bigger and better bank at the scale required.
Three concrete fixes
If the World Bank and its largest shareholders are at all serious about building a big and better bank that works for all countries - especially low-income countries in Africa that have historically been underserved - then they must match their words with actions. They must significantly increase the amount of concessional lending available to low-income countries. There are three concrete ways to do this.
First, the lowest hanging fruit is to increase the level of transfers into the IDA from the International Bank for Reconstruction and Development (IBRD), the World Bank's lending arm for middle-income countries. The IBRD earns interest at market rates so can on-lend those earnings. Yet between 2015 and 2023, its transfers to the IDA declined by about 55% from $0.65 billion to less than $0.3 billion. This was partly due to a decision in 2017 by the Bank's (highly unrepresentative) Board of Governors to adopt a formula-based approach to determining IBRD's annual transfers to the IDA. This formula must be overturned to enable bigger contributions relative to the fiscal space the World Bank has, rather than its financial performance as determined by Credit Rating Agencies.
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Second, donor contributions to the IDA must rise significantly. To this end, Development Reimagined has proposed at least a doubling of donor contributions by December 2024. We are not alone. The G20 Independent Expert Group report recommended a tripling of resources by 2030 if the IDA is to effectively execute its mandate and meet the level of demand it is facing.
Third, the World Bank should overhaul its lending guidance and policies so its loans can be better used by borrowing governments. From ever shortening maturities, to problematic debt sustainability assessment frameworks and the use of market-based conditions, the evidence is clear that the World Bank's instruments have often hindered rather than enabled poverty reduction. To really use IDA well, the Bank needs to reform from the inside out so that borrowing governments can do their job well.
These three actions, which build on ideas shared and discussed at the latest "IDA for Africa Heads of State Summit", will truly enable momentum for the IDA beyond the lukewarm ambition expressed from many quarters so far.
Trevor Lwere is an Economist at Development Reimagined. He has a background in Economics and Global Affairs.
