Nordics resist World Bank bid to fill IDA funding gap with loans
The World Bank wants loans from donors on top of grants to close a massive funding gap in IDA, the largest global financing source for poor countries. Nordics fear the ad hoc move will hurt IDA’s long-term funding.
A proposal to allow donors to provide loans instead of grants to the International Development Association (IDA) was originally intended to lure China on board as a new major donor. That has not happened yet. But Western donors, hit by austerity, have jumped on the band wagon tempted by a cheaper way to fulfill their World Bank pledges.
A spokesperson at the Bank confirms to Development Today that the Board approved the new funding mechanism in late November as a preparation for the fourth and last negotiation round for the 17th replenishment of IDA, which takes place in Moscow in mid-December.
“Such a fundamental change in IDA’s funding structure requires a thorough analysis and should not be rushed through as a result of funding constraints,” says Anna Westerholm, head of the Swedish IDA negotiation team, to Development Today.
By including loans, the Bank hopes to secure USD 50 billion for IDA over the next three-year period; this is about the same level as for the current IDA 16.
IDA provides subsidised loans and grants for the world’s 82 poorest countries. Last year IDA committed a total of USD 16 billion for programmes ranging from health and education to building of bridges and roads to energy projects.
Every third year, donors meet to negotiate the replenishment of IDA and policy directions for the World Bank. The IDA policy decision offers vital guidance for bilateral aid as well.
The lion’s share of IDA funding comes from donor grants. For IDA 16, which expires by the end of June 2014, donor grants amounted to USD 32 billion. The remaining funds came mainly from reflows as recipient countries repay old IDA credits. These credits carry small or zero interest and are repaid over up to 40 years. USD 3 billion from surpluses in other branches of the World Bank, such as the IBRD, which provides loans on market terms for better-off countries, and the private sector arm IFC, are also transferred to IDA.
The Nordic and Baltic countries have a joint seat at the World Bank Board. During the IDA negotiations, they have argued against the new funding model where donors can provide part of their contributions as loans instead of grants.
The Norwegian Chief IDA negotiator Bjørn Brede Hansen says that while no one questions the need for a robust IDA replenishment, the robustness of IDA17 cannot be a matter of volume only, a point the Nordic-Baltic group has raised repeatedly in the negotiations.
TERMS FOR A COMPROMISE
Development Today has spoken to several Nordic negotiators. They all acknowledge that donor loans will be part of the IDA 17 deal in spite of Nordic resistance.
The discussions now circle around the terms for accepting such a compromise. The Nordics want to cap the amount of loans and prevent them from creating a precedence for future IDA deals. They want this to be a one-off deal, and for donors to go back to grant funding at the next crossroads three years from now.
The Nordics also insist on full transparency about the process to avoid being faced with “surprises” at the pledging meeting in Moscow. It has been proposed that 80 per cent of donor contributions must given the form of grants on a no-exception basis. The Bank has promised to provide a figure ahead of the Moscow meeting, indicating how much in loans donors have indicated they are willing to offer and the terms attached. The Nordics have asked for a break-down of the figure by individual donor.
Development Today has learned that players like the United Kingdom, the largest among IDA’s donors, as well as Japan, France, Canada and Italy have in discussions with Bank management said they are considering providing loans as part of their contributions.
The Bank’s own proposals indicate that donor loans could amount to USD 3.5 -5.5 billion. It has worried the Nordics that the World Bank Board has set the ceiling for such loans as high as USD 9.2 billion. Bank management has said that its intention is not to seek as much as this.
According to Westerholm at the foreign ministry in Stockholm, the new loan arrangement creates uncertainty about IDA and could threaten its long-term sustainability. The current system ensures that repaid IDA loans can be used to give out new loans for poor countries.
Moreover, the Nordics want to set up a “firewall” between the loans and the grants in IDA, and have demanded a legal guarantee that their grant cannot be used to cover interests and losses in the case of loan defaults.
Westerholm says to Development Today that the World Bank has not been able to provide such a legal guarantee, but has offered technical assurances, like safeguards, related to the loans. The Bank also says there are no examples of defaulted IDA loans, while the Nordic reply is that you cannot rule this out.
This has been an area of special concern for Finland, which is known as a hardliner when it comes to not accepting debt risk on behalf of other countries. The country caused a political row in the European Union in the fall of 2011 when it insisted on special collateral for taking part in a European Union bailout package for Greece during the euro zone crisis.
Donor loans for the World Bank are referred to as Concessional Partner Loans (CPL). Ambassador Pekka Hukka, who is responsible for IDA negotiations in Helsinki, says they are concerned about the additionality of such loans and equal treatment of donors.
He says CPLs come with incentives, such as ODA additions and voting rights based on the grant element of the loan.
“Such a loan with an interest rate is kind of an investment and, as usual, the risks associated with the new loan-based contributions need to be covered by those who provide them, as an investment risk. Not that a default would be likely. It cannot, however be ruled out,” he says.
Meanwhile, Sweden is not happy with the current status in the negotiations. Westerholm points out that the Nordics have been loyal and generous donors to IDA for a long time and deserve to be listened to.
“We think we should have achieved more and are not satisfied. It is obvious that the outcome of the final negotiations will have an impact on how much we can contribute,” she says.
The issue of donor loans versus grant financing of IDA plays into a bigger discussion about IDA’s future. Over the coming decade, dozens of countries are expected to graduate from IDA because of strong economic growth in many developing countries.
This means they can no longer receive support from the agency and in future IDA will have a stronger focus on some less populous countries in Africa, compared to China and India which have been IDA’s largest clients during the past two decades.
A greater focus on Africa also fits with the Bank’s two new goals towards 2030 that were launched earlier this year: to end extreme poverty so that the number of people living on less than USD 1.25 a day is lower than 3 per cent; and to promote growth so that it benefits the 40 per cent poorest in recipient countries.
According to the Washinton-based Center for Global Development, the number of eligible borrowing countries could decrease by half by 2025.
A main concern on the Nordic side is that if the financing mechanism for IDA is to be changed it requires a thorough analysis of the long-term consequences, including IDA’s changing focus and the Bank’s new strategy.
Finland’s Hukka says the four main arms of the Bank need to cooperate more towards the same goals outlined in the Bank Group’s new strategy.
“It is important that IDA is better linked to the other organisations in the Bank so that we have one bank instead of four,” he says.
One of the main points for the Nordics has been to get the private sector arm IFC to invest more in the poorest countries and fragile states and to work more closely with IDA.
“IFC is the fastest growing agency in the World Bank and it gives an added value as a share of its surplus is transferred to IDA,” says Anders Ørnemark at Denmark’s foreign ministry.
INDIA, SPECIAL CASE
China is no longer eligible for IDA loans, while India is in a transition phase during IDA 17.
India is, however, a special case. It has reached the ceiling for IBRD loans and has technically graduated from IDA, but it remains home to one third - 400 million – of the world’s poor people, according to the World Bank.
Bank management has proposed that India should receive “transitional” IDA funding amounting to USD 3.3 billion over the next three years, compared to about USD 5 billion during the current IDA period.
Hansen says there is strong support among donors for assistance to India during a transition period because of the huge numbers of poor people in the country. But the prime responsibility for addressing poverty at home must rest with India.
In the first phase of the IDA negotiations, the main focus was policy priorities. A Bank official says the Nordic countries have achieved good results here. There are strong formulations about gender, more resources to fragile states, climate and inclusive growth in IDA’s next policy programme.
Hansen says the Nordics have pushed these “special themes” relentlessly in IDA 17 and he is very pleased with the outcome.