The Bank’s lending focuses on work at the country level and reflects the Bank’s focus on achieving the MDGs. Lending is tailored to individual country needs, with lending instruments that are becoming increasingly flexible.

The clients of IBRD are generally the middle-income countries and, because of the limitation on IDA resources, some of the larger low-income countries that are deemed creditworthy for borrowing. IBRD offers loans that have long maturities and reflect its own favorable market costs. In fiscal 2003 IBRD provided loans totaling $11.2 billion in support of 99 projects in 37 countries.

The clients of IDA are the poorest countries, which usually cannot afford to borrow on commercial terms. IDA offers concessional, no-interest loans (called “development credits”) to these countries, which are normally repayable in 35 to 40 years including a 10-year grace period. In fiscal 2003 IDA provided $7.3 billion in financing for 141 projects in 55 low-income countries.

Poverty reduction is at the core of lending from both IBRD and IDA, through investments that support growth as well as investments in basic public services. Through partnerships with other institutions, cofinancing and trust funds also are made available for projects. Figure 2.1 shows the typical cycle of a Bank project. Figures 2.2 to 2.4 show IBRD/IDA lending by region, theme, and sector. Table 2.2 shows World Bank lending by theme and sector. A detailed explanation of the Bank’s financing is contained in volume 2 of this Annual Report.

The Role of IBRD

Countries with a per capita income of less than $5,115 that are not IDA-only borrowers are eligible to borrow from IBRD. Countries with higher per capita incomes may borrow under special circumstances or as part of a graduation strategy. It is important to note, however, that the amount that IBRD is prepared to lend to eligible countries at any given time depends on their creditworthiness as individual IBRD borrowers. Thus, countries may be eligible to borrow but may not have access to IBRD resources because of poor creditworthiness. In addition, net IBRD loans outstanding to any individual borrower, irrespective of the borrower’s creditworthiness, currently may not exceed $13.5 billion.

Seventy-five percent of people who live on less than $1 a day live in countries that receive IBRD lending. The borrowers typically are middle-income countries that enjoy some access to private capital markets. Some countries are eligible for IDA lending as a result of their low per capita incomes, but they are also creditworthy for some IBRD borrowing. These countries are known as “blend borrowers.” Even excluding IBRD loans to the blend countries, a full 25 percent of those who live on less than $1 a day live in countries that are IBRD borrowers. IBRD provides important support for poverty reduction by helping clients gain access to capital in larger volumes, on good terms, with longer maturities, and in a more sustainable manner than the market provides.

IBRD is a AAA-rated financial institution—with some unusual characteristics. Its shareholders are sovereign governments. Its member borrowers have a voice in setting its policies. IBRD loans (and IDA credits) typically are accompanied by nonlending services to ensure more effective use of funds. And, unlike commercial banks, IBRD is driven by development impact rather than profit maximization.

IBRD Lending

New lending by IBRD in fiscal 2003 was $221 million less than the previous year’s level, whereas the number of new operations approved was higher than last year’s, at 99. The new approvals reflect smaller average commitment volumes per operation, as the share of adjustment lending returned to normal levels after a record high last year. The decline in adjustment lending commitments was offset somewhat by investment lending commitments, which grew to $7 billion, representing the largest volume since fiscal 1999.

Underlying the IBRD lending program in fiscal 2003 was robust lending to Latin America, with $5.7 billion or 50 percent of total lending, followed by Europe and Central Asia with $2 billion and East Asia and Pacific with $1.8 billion. Lending was not as concentrated as it was in fiscal 2002. Whereas only two countries, Brazil and Turkey, made up roughly 45 percent of total lending last year, 5 countries, including Argentina, Brazil, China, Colombia, and Mexico had a combined commitment volume equaling 49 percent of total lending in fiscal 2003.

Law and Justice and Public Administration was the leading sector for IBRD lending, receiving $2.6 billion, or 23 percent of the total. Lending to Health and Other Social Services was second, representing $2.1 billion, or 18 percent of the total.

The thematic distribution of lending in fiscal 2003 was led by Financial and Private Sector Development and Human Development. Figures 2.5 through 2.7 show IBRD lending by region, theme, and sector. Table 2.3 shows World Bank adjustment commitments in fiscal 2000–03.

IBRD Resources

As part of its regular financing operations, IBRD raised $17 billion at medium- to long-term maturities in international capital markets in fiscal 2003. This funding volume was below the $23 billion raised in fiscal 2002. IBRD issued loans with a wide range of maturities and structures in fiscal 2003. Product diversification helps IBRD expand its investor base and reduce lending rates on its loans. IBRD’s financial strength is based on the support it receives from its shareholders and on its array of financial policies and practices designed to maintain a high credit standing in the international markets.

IBRD Financial Strength. IBRD’s operating income in fiscal 2003 was $3,021 million, and allocable net income (that can be allocated to reserves and development activities) was $3,050 million. IBRD retained $2,410 million out of allocable net income in its general reserve—higher than the previous year, when $1,291 million was retained—in keeping with IBRD’s strategy to preserve long-term financial strength and support other development needs. IBRD also added $100 million of the fiscal 2003 income to the surplus account. IBRD maintained adequate liquidity in fiscal 2003 to ensure sufficient cash flow to meet its obligations. As of June 30, 2003, the liquid asset portfolio was about $27 billion.

Managing Returns to Maintain Strength. As a cooperative institution IBRD seeks not to maximize profit but to earn a return on assets sufficient to ensure its financial strength and sustain its development activities on an ongoing basis. IBRD achieved an annual net return on assets of about 1 percent per year. The net return on assets for fiscal 2003, however, rose above the 2 percent level due to a reduction in the provision for loan loss. Figure 2.8 shows the net return on average earning assets for fiscal 1999–2003.

Managing Risk. Consistent with its development mandate, the principal risk taken by IBRD is the country risk inherent in its portfolio of loans and guarantees. Risks related to interest and exchange rates are minimized, although the Bank remains highly active in global credit markets to deliver financial instruments on the finest terms that are best suited to the needs of borrowers. One summary measure of the Bank’s risk profile is the ratio of loans to balance sheet equity, which is closely managed in line with the Bank’s financial and risk outlook. Figure 2.9 shows the equity-to-loans ratio as of June 30, 2003.

Achieving Efficient Intermediation. IBRD enjoys an exceptional franchise in capital markets, thus reflecting the capital commitments of its sovereign shareholders and the preferred creditor status accorded by its borrowing members that provide it with a high credit rating (AAA) and allow it to borrow for long maturities on favorable terms. This is reflected in the relatively low cost basis of its new lending, an average spread of about 37.8 basis points (1 basis point equals 0.01 percent) below London InterBank Offered Rate in fiscal 2003, and the high volumes it can intermediate relative to its paid-in capital and retained earnings.

In fiscal 2003 the Bank’s outstanding borrowings from capital markets exceeded $103 billion (net of swaps), and its total disbursed and outstanding loans were approximately $116 billion. The size of borrowings was about three times the size of its equity. Figure 2.10 shows the Bank’s borrowings and investments as of June 30, 2003. Table 2.4 shows select IBRD financial data for fiscal years 2002 and 2003.

Generation and Distribution of IBRD’s Net Income

IBRD earns income from the interest margin on its loans (returns on loans less cost of borrowings), interest margin on investments, and contribution from its equity. Barring unexpected credit events, IBRD generates net income after allowing loan loss–provisioning expenses and administrative expenses, including its contribution to the staff retirement accounts.

IBRD’s allocable net income serves several purposes related to the Bank’s mission. A portion of net income is retained annually to ensure IBRD’s financial integrity. The general reserve allows IBRD to assume credit risk in lending to countries at the lowest funding costs, which in turn benefits borrowers. Income retention has enabled IBRD to maintain financial soundness through past periods of both deteriorating loan quality and surging loan demand.

Support to IDA has consistently been a priority. Over the last five years $1.570 billion (or about 18 percent of IBRD’s net income) has been transferred to IDA.

Support for the Heavily Indebted Poor Countries (HIPC) Debt Initiative has also been important. Over the last five years, transfers to the HIPC Trust Fund have amounted to a total of about $1,030 million, averaging about 12 percent of annual IBRD net income.

IBRD’s allocable net income helps meet other development needs from time to time. It enables IBRD to respond to unforeseen humanitarian crises and provide grants or other support for worthy causes. IBRD also regularly shares income with its borrowing members through partial waivers of the commitment fees and, for qualifying borrowers, through waivers of contractual interest charges on loans.

Financial strength and standing in the markets allow IBRD to leverage its equity by four times in the international bond markets. This leverage increases IBRD’s ability to lend for development activities. Figure 2.11 shows the proposed allocation of the Bank’s net operating income.

The Role of IDA

IDA is the world’s largest single source of concessional financial assistance for the poorest countries, and it invests in basic economic and human development projects. Eligibility for access to IDA resources is governed by two basic criteria: a country’s relative poverty (as measured by per capita income) and its lack of creditworthiness for IBRD resources. The operational income cutoff for IDA eligibility in fiscal 2003 was a per capita gross national income of $875. The amount of IDA resources that countries receive depends on the uality of their policies to promote growth and reduce poverty, which are assessed on an annual basis. In exceptional circumstances IDA extends eligibility to countries that are above the income cutoff but are not fully creditworthy to borrow from IBRD, such as small island economies.

IDA recipient countries face complex challenges in striving for progress toward the MDGs. Policy priorities include strengthening the fight against the spread of communicable diseases, including HIV/AIDS; building a healthy investment climate as a prerequisite for private sector investment; promoting gender equality; and improving the quality of basic education and poor people’s access to it.

IDA assistance is in the form of highly concessional credits, and since the beginning of fiscal 2003 the Association has also introduced an expanded use of grants, in line with the arrangement for the 13th Replenishment of IDA (IDA-13) that governs IDA operations in financial years 2003 to 2005. The grants are specifically to address hardships faced by the poorest and most vulnerable IDA countries. On this basis the grants are used to finance operations in the poorest and most debt-vulnerable countries and in countries recently emerging from conflict, and to finance HIV/AIDS programs and natural disaster reconstruction.

IDA is financed by its own resources and by donor governments, which come together every three years to decide on the amount of new resources required to fund IDA’s future lending program and to discuss lending policies and priorities. Since 2001, senior-level borrower representatives also participate in these replenishment discussions. Thirty-eight countries are now IDA donors.

Donor contributions historically have been determined on the basis of countries’ relative economic strength and on their commitment to poor countries; as such the major industrial nations have been the largest contributors to IDA. Donor nations also include developing and transition countries—some of them IBRD borrowers and former IDA borrowers—such as Argentina, Brazil, Hungary, the Republic of Korea, the Russian Federation, and Turkey. IDA’s financial strength is based on the strong and continued support of its donors, as well as on repayments of past credits. (See IDA at www.worldbank.org.)

IDA Commitments

IDA commitments in fiscal 2003 totaled $7.3 billion for 141 operations, consisting of $6.1 billion in credits (not including an IDA guarantee of $75 million to Vietnam), and $1.2 billion in grants. Although below last year’s record high, IDA lending commitments in fiscal 2003 still represent the third highest on record and are above the average annual total for the last five years.

The largest share of IDA resources went to Africa, with $3.7 billion for 60 operations, constituting 51 percent and 43 percent of total IDA commitments and operations, respectively. South Asia followed with $2.1 billion for 29 operations. Among countries, Bangladesh, the Democratic Republic of Congo, Ethiopia, India, and Uganda represent the largest single recipients of IDA financing.

In fiscal 2003 about 17 percent of total IDA operational financing came in the form of grants in the following categories: operations benefiting the poorest countries, $241 million; poorest and debt-vulnerable countries, $406 million; postconflict countries, $306 million; HIV/AIDS projects and components, $214 million; and natural disasters reconstruction projects, $65 million.

Health and social services and law and justice and public administration were the leading sectors for IDA support, each receiving $1.4 billion, or 19 percent of the total.

The most prominent theme of resource commitments in fiscal 2003 was human development, which accounted for 21 percent of commitments. Major attention was also paid to social protection and risk management; rural development; public sector governance; and financial and private sector development.

Also Available:

Figure 2.12: IDA Commitments by Region
Figure 2.13: IDA Commitments by Theme
Figure 2.14: IDA Commitments by Sector

IDA Resources

Fiscal 2003 marked the first year of IDA-13, which will fund commitments for fiscal years 2003 through 2005. IDA-13 will provide a total of special drawing rights (SDRs) 18 billion (about $24 billion) of concessional resources to IDA-eligible borrowers over the three-year period. This amount includes SDR 10 billion (approximately $13 billion) of new donor contributions; IDA internal resources, including repayments of principal from past credits and service charges on the order of SDR 7.3 billion (about $10 billion); IBRD net income transfers (if available) of SDR 0.7 billion; and a small carryover of donor resources from the previous replenishment. Figure 2.15 shows the sources of IDA’s funding over the last three replenishments. Figure 2.16 shows IDA’s stepped-up efforts in the social sectors.

Under IDA-13 arrangements a major initiative was launched to strengthen IDA’s focus on results. This included the development of a system to measure and monitor the results of IDA’s assistance across countries and to track the contribution made by IDA programming to country outcomes.