On this page: IBRD | IDA
The World Bank’s mission is to reduce poverty – an important commitment to which the Bank should be held and against which its activities should be evaluated. In its first year of operation, 1946, the Bank lent less than $500 million. Today, the World Bank provides between $20 and $30 billion annually for activities ranging from agriculture to trade policy, from health and education to energy and mining.
The World Bank is among the largest sources of public financing in the world. However its various roles as lender, knowledge broker, and gatekeeper to development finance collectively serve another purpose: to steer investor dollars and aid flows to targeted countries and sectors. The poverty focus of these investments is often questionable.
The World Bank as lender
The World Bank lends money to low and middle-income governments for two general uses: investment projects and policy reforms. Investment project lending typically supports public works such as water systems, roads and schools. The World Bank also lends money for economic, institutional or other policy reforms, often known as “structural adjustment” or “development policy” lending. These reforms can influence the amount and composition of public spending in your country and the design of your government’s economic and social policies, affecting things like the cost of electricity and water, labor laws and investment regulations.
World Bank lending can take the form of loans or grants, and the poorest countries often receive both. In recent years, the Bank has increased the proportion of its financing provided through grants.
The Bank typically requires certain actions of borrowing countries in advance of loan/grant approval and/or in the course of a project’s implementation - known as “conditions” or “conditionality.” Conditions can range from requiring a government to privatize its state-owned companies or adopt lower trade tariffs, to mandating new budget and procurement procedures. The Bank’s imposition of controversial conditions on borrowing governments has been heavily criticized over the years, as a violation of a country’s sovereignty and an undemocratic way to force reforms that can have substantial consequences on people and planet.
The World Bank as knowledge broker
The Bank has cornered the market on development research, publishing numerous books and reports that frame the debate on development issues. In the absence of alternative sources of information, many countries get their information about economic policies and development models from the World Bank. In 2000, the World Bank created its own research and training group – the World Bank Institute (WBI) – to directly influence development discourse. The WBI conducts trainings of government officials, including parliamentarians, and civil society representatives on various dimensions of development policy and planning.
The World Bank as gatekeeper to development finance
Finally, the World Bank influences the overall amount and composition of development financing available to countries. Both the World Bank’s own lending and other donors’ decisions are shaped by the Bank’s research and analysis – in particular, by Bank studies like the Country Policy and Institutional Assessments (CPIA) and Investment Climate Assessments (ICA), which rate countries largely on the basis of their economic policies and openness to foreign investment. Since many donors take their lead from the Bank, the institution’s financing decisions and evaluations of country development strategies affect borrowing country access to capital from a broad spectrum of sources. The Bank’s gatekeeper role is much stronger for aid-dependent countries without credit ratings than for countries that have access to international capital markets.
IBRD
The IBRD lends only to sovereign governments or for projects guaranteed by sovereigns. In 2007, the IBRD lent $12.8 billion for 112 operations, new loans, guarantees, and guarantee facilities for middle-income countries. IBRD borrowers are generally considered to be middle-income countries, roughly defined by the IBRD as countries with a per capita income between US$936 to US$11,455. Countries with higher per capita incomes may borrow from the IBRD under special circumstances as may some countries with lower income levels, but which are deemed creditworthy for IBRD lending. The IBRD offers loans at near-market terms but with more time to repay than if they borrowed from a commercial bank-typically 15 to 20 years with a three-to-five-year grace period before repayment of principal begins. IBRD borrowers typically have some access to private capital markets.
With a US$4.35 billion share of total IBRD commitments in 2007, Latin America and the Caribbean had the highest lending percentage among the regions at 34 percent. Europe and Central Asia followed with US$3.3 billion (26 percent) and East Asia and Pacific with US$2.8 billion (22 percent).
The IBRD has lent over US$430 billion since its founding over 60 years ago. While in the IBRD had new lending commitments for 112 operations in 2007, 56 percent of total IBRD lending went to the five largest borrowers - Argentina, China, India, Turkey and Colombia - up from 52 percent in fiscal 2006. Major attention was paid to transportation lending. Figures of regional lending by theme and sector are recorded in the 2007 World Bank Annual Report.
While IBRD has developed a large range of lending "products," IBRD loans generally take one of two forms: investment lending for specific projects (roads, dams, etc.) or adjustment lending conditioned on structural and policy reforms by the borrower. IBRD adjustment lending has ranged from 35-64 percent of total commitments over the past five years despite Bank policy not to exceed a 25 percent cap.
IBRD is financed primarily by selling bonds to private investors, backed up by the pledges of its member governments. Upon joining the IBRD, member governments must "subscribe" to a portion of the Bank's capital stock, in effect promising to purchase a specified number of shares. Members are required to purchase only a small portion of their subscription ("paid-in capital") while the remaining portion ("callable capital") remains an outstanding pledge (which Bank has never needed to request). In 2003, the IBRD had paid-in capital of US$11.5 billion and callable capital of US$178 billion. With capital backing of nearly US$200 billion from its member governments, the IBRD is able to raise significant funds on international capital markets at preferred "AAA" credit rates and then lend those funds to borrowers at rates slightly below those offered by commercial lenders. In 2005 the IBRD raised US$13 billion on the capital markets and in 2007 the figure was US$11 billion.
Conservative financial and lending policies and practices instill a high degree of investor confidence in IBRD securities. These policies and practices also instill a high degree of discipline in the IBRD's relations to its borrowers. These policies and practices include:
- All loans are made directly to, or guaranteed by, a member country of IBRD.
- IBRD is recognized by the major credit rating agencies to enjoy a preferred creditor status with its borrower-shareholders, in effect, putting the IBRD first in line for debt repayment.
- Since its inception in 1945, IBRD has never written off a loan.
- The IBRD freezes loan approvals and disbursements if a country fails to pay obligations on time.
- Strict limits are set on loan concentration in individual countries.
- It is IBRD practice not to reschedule interest or principal payments on its loans (though this does occur from time to time).
- The IBRD has made a profit every year of its existence-over US$1.65 billion in 2007.
According to the World Bank's website, the IBRD is "committed to make further improvements to the services it provides its members." To meet the growing demands of middle-income countries, the IBRD is "overhauling financial and risk management products, broadening the provision of free-standing knowledge services and making it easier for clients to deal with the Bank."
IDA
The International Development Association-the Bank's "concessional," or low-cost lending arm, provides funding to the poorest member governments of the World Bank. These governments have been assigned credit ratings so low that they are unable to borrow from commercial lenders or from the main lending arms of the MDBs. IDA is an important source of credit for these countries, with average annual lending commitments of US$10 billion over the last 3 years (compared to US$8.1 billion over the previous 3-year period).
Since its inception in 1960, IDA has lent over US$182 billion, with over US$100 billion outstanding for repayment. IDA’s largest single borrowers are India, Pakistan, Nigeria, Vietnam, and Ethiopia. In 2007, IDA commitments reached $11.9 billion for 189 operations ($9.6 billion in credits, $2.2 billion in grants, and $0.1 billion in guarantees). In 2007, major attention was paid to law & justice and public administration lending. Figures of lending by region, by theme, or by sector are recorded in the 2007 World Bank Annual Report.
Seventy-nine countries are currently considered eligible to borrow from IDA. To be eligible, IDA borrowers must (a) lack sovereign creditworthiness, (b) have a per capita income of less than US$1,095 (in fiscal year 2009) and (c) must meet certain "performance" criteria set by the World Bank.
IDA loans, known as "credits" have 20, 35, or 40-year repayment periods with a 10-year grace period on repayment of principal. IDA credits do not carry interest charges per se, but do carry a .75 percent "service charge" on disbursed funds (no grace period on this fee). In the past several years IDA has increasingly provided a portion of its funding in the form of grants.
IDA is funded through three main sources: reflows from previous loans, transfers from IBRD net income, and contributions from IDA donors. Of the nearly US$22.2 billion Special Drawing Rights (SDR) (about US$32.5 billion) projected for IDA funding over the 2006-2008 fiscal year period, the funding is divided into SDR 12.1 billion (about US$17.7 billion) in new donor contribution, SDR 8.7 billion (about US$12.7 billion) in internal resources (repayments of principal from past credits and investment income), SDR 1.3 billion (about US $1.9 billion) in IBRD net transfers and SDR 0.1 billion (about US$0.15 billion) in grants from IFC. Reflow payments from past loans to the poorest countries have become an increasingly important source of IDA resources. However, with the implementation of the Multilateral Debt Relief Initiative (MDRI), some internal resources are no longer available and will be replaced by donor contributions under the MDRI replenishment (IMF website).
IDA donors come together every three years to negotiate the amount of new resources required to replenish IDA's lending program and to discuss lending policies and priorities. IDA negotiation for 2006-2008 fiscal years concluded in February 2005 at the 14th Replenishment agreement. The most recent replenishment of IDA’s resources the fifteenth replenishment (IDA15) was finalized in December 2007, and finances projects over the three-year period ending 2011. Donor contributions amounted to SDR 16.5 billion (US$25.1 billion) in resources to finance projects, a 42% increase (in USD terms) over the previous replenishment. During the IDA15 replenishment meetings, donors provided additional contributions for the MDRI replenishment of SDR 4.1 billion (US$6.3 billion), in order to cover IDA's debt relief costs due to the MDRI during the IDA15 disbursement period (FY09-19) as agreed under the MDRI. Donors will meet to review the progress of IDA15 at a Mid-Term Review Meeting to be held in the fall of 2009. The IDA replenishment process provides a degree of influence on setting development priorities by the IDA Deputies. For more information, see BIC's Web page on MDB replenishments.
IDA lending flows to an immense array of programs and projects, from basic health and education provision to economy-wide adjustment operations, from water supply and sanitation to oil, gas, and mining projects. Over the past decade adjustment lending has comprised anywhere from 16 to 27 percent of IDA annual commitments. The bulk of IDA lending supports individual investment projects. In recent years IDA has become, according to the Bank, "the single largest source of donor funds for basic social services to the poorest countries." IDA has increased its investment lending in social sectors from roughly 20 percent of overall commitments in the late 1980s to around 40 percent by the mid-1990s. Over the past several years IDA has targeted 50 percent of its new commitments to countries in Africa.