New Innovations in Finance, Increased Private Sector Support
WASHINGTON, April 1, 2014—World Bank Group President Jim Yong Kim today announced a series of measures aimed at strengthening the World Bank Group to better meet the evolving needs of clients, including a $100 billion increase in the lending capacity of the Bank’s lending arm for middle-income countries over the next decade, new innovations in financial management, and a boost in the institution’s ability to provide private sector support. This follows the record $52 billion replenishment of IDA, the World Bank’s fund for the poorest, in December 2013.
Speaking today at the Council on Foreign Relations (CFR) in Washington in advance of the World Bank/IMF Spring Meetings, Kim outlined how the Bank is positioning itself to better achieve its goals of ending extreme poverty by 2030 and boosting shared prosperity for the lowest 40 percent in developing countries.
“We now have the capacity to nearly double our annual lending to middle-income countries from $15 billion to $26 to $28 billion a year. This means that the World Bank’s lending capacity will increase by $100 billion to roughly $300 billion over the next ten years,” said Kim. “This is in addition to the largest IDA replenishment in history, with $52 billion in grants and concessional loans to support the poorest countries.”
Boosting IBRD’s Margins for Maneuver
In addition to the previously announced $400 million in cost savings over the next three years that can be reinvested, Kim described a series of measures at the International Bank for Reconstruction and Development (IBRD)—which provides financing, risk management products, and other financial services to middle-income countries—that have the potential to transform IBRD by substantially increasing its ability to serve its clients. These include:
- Increasing IBRD’s Single Borrower Limit by $2.5 billion for Brazil, China, Indonesia, India, and Mexico, with a 50 basis point surcharge on the incremental amount.
- Revising IBRD’s minimum equity-to-loan ratio to reflect improvements in portfolio credit risk, enabling more efficient utilization of shareholder capital while remaining financially prudent.
- Changing IBRD’s loans terms, including restoring the 25 basis point commitment fee charged on undisbursed balances, and offering longer maturities with increased maturity differentiation.
This will allow IBRD’s annual lending commitment capacity to expand immediately from the current $15 billion in annual lending to more than $25 billion per year. Therefore, the Bank’s clients over the next 10 years can see IBRD’s capacity, in terms of the maximum loan book it can prudently support, increase from about $200 billion to nearly $300 billion, which would also boost the Bank’s countercyclical crisis-response capacity. With an infrastructure financing gap currently estimated at $1.2-1.5 trillion per year in emerging market and developing economies, additional resources that remain attractive relative to bond markets should continue to be in demand.
New Innovations at MIGA move further toward “One World Bank Group”
Kim also described how separate arms of the World Bank Group are working even more closely together to achieve greater efficiencies.
For example, the Bank Group’s political risk insurance arm, the Multilateral Investment Guarantee Agency (MIGA) is entering into an innovative MIGA/IBRD exposure exchange agreement to improve the diversification of each organization’s portfolios, thereby freeing up capacity to support additional business. The first exchange will be of an IBRD exposure to Brazil for a MIGA exposure to Panama, under a MIGA contract for non-honoring of sovereign financial obligations. Both Panama and Brazil will see benefits, as IBRD and MIGA will have more headroom to do additional business in each country.
Kim also noted that MIGA is planning to increase its new guarantee extension by nearly 50 percent over the next four years.
Harnessing the private sector to help end poverty
Kim described how IFC is looking to enhance its support in achieving the global lender’s twin goals, with an expectation that it will close to double its financing over the next decade.
“IFC, the largest provider of multilateral financing for the private sector in developing countries, expects it will nearly double its portfolio over the next decade to $90 billion. In 10 years, we believe its annual new commitments will increase to $26 billion.” said Kim.
The World Bank Group has seen its financial support to developing countries double over the past ten years, from $25.8 billion in FY04 to $52.6 billion in the last fiscal year. The cumulative effect of the additional lending capacity at IBRD, the largest-ever IDA envelope, and growing business at IFC and MIGA will be significant, Kim noted.
“Taken as a whole, the World Bank Group’s annual commitment, which today is around $45 to $50 billion, is expected to grow to more than $70 billion in the coming years. This increased financial firepower represents unprecedented growth for the World Bank Group. We are now in a position to mobilize and leverage, in total, hundreds of billions of dollars annually in the years ahead.”
Enhancing the World Bank’s Equity Management Framework
In his speech at CFR, Kim noted, “We are strengthening our financial house to make sure that we have the capability and financial firepower to scale up our revenue and build our capital if we are going to meet some of the great needs in the developing world.”
Another such measure is to stabilize and protect income generated from IBRD equity to improve the Bank Group’s financial sustainability. An enhanced Equity Management Framework will allow management to respond with more flexibility to changing market and macroeconomic conditions, within agreed rules and risk parameters. The Framework is designed to reduce the interest rate sensitivity of IBRD’s equity income, which accounts for a major portion of revenues, and aims to achieve income stability and protection by applying prudent governance and careful risk oversight.
A Better ‘Solutions Bank’
Kim asserted that the World Bank Group is now on a better footing to help countries meet their development challenges going forward.
“Today, we are now better positioned to be the ‘Solutions Bank.’ We are aligning our programs and our talent to help countries grow more inclusively, which will help the poor and vulnerable lift themselves out of poverty.”