Deploying Resources Strategically

IDA financial commitments and services

The International Development Association (IDA) is the world’s largest multilateral source of concessional financing for the poorest countries. It provides financing in the form of development loans, grants, and guarantees to support these countries’ efforts to increase economic growth, reduce poverty, and improve the living conditions of the poor.

In fiscal 2018, 75 countries were eligible for IDA assistance. In addition, three countries—Bolivia, Sri Lanka, and Vietnam, which graduated at the end of the IDA17 cycle—are receiving exceptional transitional support from IDA. New IDA lending commitments amounted to $24.0 billion for 207 operations, of which two were IBRD and IDA blended operations. These commitments included $18.5 billion in credits, $5.0 billion in grants, and $463 million in guarantees. In addition, 12 projects and one program were supported under the IDA18 IFC-MIGA Private Sector Window (PSW) for a total of $185 million.

Table: IDA Top Country Borrowers, Fiscal 2018
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IDA financial resources and financial model

Traditionally, IDA has been funded largely by contributions from high- and middle-income partner countries. Additional financing comes from transfers from IBRD’s net income, grants from IFC, and borrowers’ repayments of earlier IDA credits. As part of the groundbreaking IDA18 package, IDA shareholders agreed to transform IDA’s financing model, leveraging its strong capital base to pioneer a new model for development finance that combines donor funding with funding raised in the capital markets. IDA received its first-ever public credit rating—triple-A—in 2016. IDA’s financial strength is based on its robust capital position and shareholder support, as well as on its prudent financial policies and practices, which help to maintain its triple-A credit rating.

On April 17, 2018, for the first time, IDA issued $1.5 billion of debt in the international capital markets. This inaugural IDA bond received strong reception in the market, with total orders reaching $4.6 billion from around the world. IDA’s borrowing program will enable IDA to significantly scale up its support toward achieving the Sustainable Development Goals, while offering investors an efficient way to contribute to global development. 

Figure: IDA Business Model

Every three years, development partners meet to review IDA’s policies, assess its financial capacity, agree on the amount of financing for the next replenishment period, and commit to additional contributions of equity that are required to meet IDA’s objectives and development goals. The Financing Framework for the IDA18 Replenishment, which covers fiscal 2018–2020, is managed predominantly in Special Drawing Rights (SDRs). US dollar equivalent figures given here are calculated using the IDA18 reference exchange rates. Development partners agreed to a financing envelope of $75 billion (equivalent to SDR 53 billion) to provide credits, grants, and guarantees to IDA’s client countries. Of this amount, $63.5 billion is expected to be used on concessional terms, $9 billion on IBRD terms for the Scale-Up Facility and transitional support, and $2.5 billion for the PSW. IDA administrative expenses are recovered primarily through the net charges and interest paid by recipient countries.

To support IDA18 financing, a total of 55 partners—five of which are new or re-engaged contributing partners—have agreed to provide SDR 16.1 billion (equivalent to $22.6 billion) in grants, of which SDR 0.9 billion ($1.2 billion) is the grant element from concessional partner loan contributions. Partners are also providing SDR 3.6 billion ($5.1 billion) in concessional partner loans, or SDR 2.7 billion ($3.8 billion) excluding the grant element of the loans, and SDR 2.9 billion ($4.1 billion) in compensation for debt relief under the Multilateral Debt Relief Initiative.

IDA18’s effectiveness was achieved in November 2017, when 60 percent of the partner Instruments of Commitment (IoCs) and concessional loan agreements were received. As of June 30, 2018, 48 partners had submitted IDA18 IoCs and concessional loan agreements. Resources in the amount of SDR 29.0 billion (equivalent to $40.6 billion) have been released and made available for commitment to date.

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Figure: Recent IDA Replenishments

Focusing on the implications of global political and economic policy uncertainties

The World Bank Group’s Chief Risk Officer monitors the global political and economic impacts that could affect the institution’s finances. In fiscal 2018, economic growth in advanced economies reaccelerated, while activity in developing countries also rebounded. Uncertainty, however, remained significant, with the potential for financial market turbulence from the following possible areas.

Policy uncertainty in some advanced and larger developing economies continues to present an overarching risk, and there is a significant chance that economic activity could diverge from the forecast of continued strengthening of global activity. Similarly, geopolitical tensions remain elevated, with potential impacts on financial market confidence and volatility.

Trade growth is picking up after two years of marked weakness, although this comes against the backdrop of new protectionist measures, prompting two key concerns: first, whether measures are narrowly focused and largely bilateral or whether they will be applied more generally; second, whether affected countries respond with retaliatory trade measures setting off a cycle of escalation. Countries with open economies and dependent on trade, including many low-income countries, would be among the most vulnerable. Increased protectionism could also impact foreign direct investment flows to developing countries.

The policy stance of major central banks as they move at varying paces to normalize monetary policy is another source of uncertainty. Market interest rate expectations could adjust abruptly in response to higher inflation or fiscal policy developments, affecting both interest rates and risk appetite. The most vulnerable countries are those dependent on investments to finance large current accounts and/or fiscal imbalances. Divergence from monetary policy expectations could also lead to further exchange rate movements. Corporate sectors that need to service large unhedged foreign currency borrowing could face stress in the face of sharp exchange rate moves. In some countries, large contingent liabilities could also be a source of risk.