Collaborating across the World Bank Group
The World Bank’s principle institutions—the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA)—work in ever-closer coordination with the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) to leverage the collective strength of the World Bank Group for the benefit of its partner countries. The comparative advantage of the World Bank Group is its ability to work with different stakeholders. This ability comes from the powerful combination of country depth and global breadth, public and private sector instruments and relationships, multisector knowledge, and the ability to mobilize and leverage financing.
Before developing a new partnership strategy with a country client, the Bank Group completes a Systematic Country Diagnostic, which identifies the barriers to eliminating extreme poverty and boosting shared prosperity in the country. World Bank experts are organized across teams of Global Practices—14 key technical areas of development expertise—and Cross-Cutting Solution Areas—global challenge areas including gender, jobs, and fragility. They work in concert with country-based staff, IFC, MIGA, and country partners to prioritize the Bank Group’s program of financial, analytical, advisory, and convening support. These priority areas are based on the Bank Group’s comparative advantage and the client’s priorities. This support comes together in the Country Partnership Framework, which outlines the strategic interventions on which the Bank Group and partner country will engage.
This process has been in place since July 2014, and as of the end of this fiscal year, the Bank Group has completed Systematic Country Diagnostics in 62 countries and new Country Partnership Frameworks in 46 countries. The early lessons from the preparation of the first group of strategies indicate that this new model has improved coordination and collaboration among World Bank Group institutions. The Systematic Country Diagnostic has added considerable value to the Bank Group’s engagement with countries through a robust empirical and analytical basis for prioritizing interventions.
Collaboration across IBRD, IDA, IFC, and MIGA has grown over time, and spans a range of activities at the regional, country, sector, and thematic levels. This collaboration includes the preparation of joint Country Partnership Frameworks, joint investment projects—notably for infrastructure and the financial sector—and joint advisory services and investment climate activities. For example, to help increase clean and affordable energy in Ghana, the Bank Group is providing a $200 million IBRD loan and a $500 million IDA guarantee for the Sankofa Gas Project. IFC is providing $300 million in financing for the project sponsor, and MIGA is providing $217 million in guarantees against risk to support the sponsor’s commercial borrowing needs. The project will fuel up to 40 percent of Ghana’s current generation capacity and replace polluting fuels with cleaner, more affordable, domestic natural gas.
The World Bank is accountable to its shareholders and the public through a set of feedback and accountability mechanisms. These include the World Bank Group Corporate Scorecard, the IDA Results Measurement System, and regular opportunities to discuss progress on operations with the Bank’s Board of Executive Directors.
IBRD financial commitments
IBRD is a global development cooperative owned by its 189 member countries. As the largest multilateral development bank in the world, it supports the World Bank Group’s mission by providing loans, guarantees, risk management products, and advisory services to middle-income and creditworthy low-income countries, as well as by coordinating responses to regional and global challenges. In fiscal 2017, new IBRD lending commitments amounted to $22.6 billion for 133 operations, of which 11 were IBRD and IDA blended operations.
IBRD resources and financial model
To fund development projects in member countries, IBRD finances its loans from its own equity and from money borrowed in the capital markets through the issuance of World Bank bonds. IBRD is rated Aaa by Moody’s and AAA by Standard & Poor’s, and investors view its bonds as high-quality securities. Its funding strategy is aimed at achieving the best long-term value on a sustainable basis for borrowing members. IBRD’s ability to intermediate the funds it raises in international capital markets to developing member countries is important in helping to achieve its goals.
All IBRD bonds support sustainable development. IBRD issues its securities through both global offerings and bond issues tailored to the needs of specific markets or investor types. Its bonds connect the private and public sectors to the World Bank’s development goals through such investors as asset managers, insurance companies, pension funds, central banks, corporations, and bank treasuries from around the world. IBRD issues bonds to investors in various currencies, maturities, and markets, and at fixed and variable terms. It often opens new markets for international investors by issuing new products or bonds in emerging market currencies. IBRD’s annual funding volumes vary from year to year.
IBRD’s strategy has enabled it to borrow at favorable market terms and pass the savings on to its borrowing members. Funds not immediately deployed for lending are held in IBRD’s investment portfolio to provide liquidity for its operations.
Figure: IBRD Business Model
In fiscal 2017, IBRD raised U.S. dollar equivalent (USDeq) 56 billion by issuing bonds in 24 currencies. Its equity comprises primarily paid-in capital and reserves. Under the terms of the general and selective capital increase resolutions approved by the Board of Governors on March 16, 2011, subscribed capital is expected to increase by $87.0 billion, $5.1 billion of which will be paid in. The subscription periods for selective capital increase and general capital increase are expected to end in March 2017 and March 2018, respectively, following the approval by the Board of Executive Directors of extension requests by shareholders. As of June 30, 2017, the cumulative increase in subscribed capital totaled $78.7 billion. Related paid-in amounts in connection with the capital increase were $4.6 billion.
As a cooperative institution, IBRD seeks not to maximize profit but to earn enough income to ensure its financial strength and sustain its development activities. Of fiscal 2017 allocable net income, the Board of Executive Directors recommended to the Board of Governors the transfer of $123 million to IDA and the allocation of $672 million to the General Reserve. As part of its lending, borrowing, and investment activities, IBRD is exposed to market, counterparty, country credit, and operational risks. The World Bank Group’s Chief Risk Officer leads the risk oversight function, independently reports to the Board on an ongoing basis, and supports the institutional decision-making process via dedicated risk committees. In addition, IBRD has put in place a strong risk management framework, which supports management in its oversight functions. The framework is designed to enable and support IBRD in achieving its goals in a financially sustainable manner. One summary measure of IBRD’s risk profile is the ratio of equity to loans, which is closely managed in line with its financial and risk outlook. This ratio stood at 22.8 percent as of June 30, 2017.
IDA financial commitments
IDA is the world’s largest multilateral source of concessional financing for the poorest countries. It provides concessional development credits, grants, and guarantees to support these countries’ efforts to increase economic growth, reduce poverty, and improve the living conditions of the poor. In fiscal 2017, 78 countries were eligible for IDA assistance. In addition, India, which graduated from IDA in fiscal 2014, received transitional support on an exceptional basis through the IDA17 period, covering fiscal years 2015–17. In fiscal 2017, new IDA lending commitments amounted to $19.5 billion for 261 operations, of which 11 were IBRD and IDA blended operations. These commitments included $16.2 billion in credits, $3.2 billion in grants, and $50 million in guarantees.
IDA resources and financial model
Traditionally IDA has been funded largely by contributions from developed 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. The groundbreaking IDA18 package will transform this approach by introducing a hybrid financing model that blends contributions with market debt starting IDA18. IDA received its first-ever public credit rating—triple-A—in 2016. Development partners meet every three years to replenish IDA’s funds and review its policies. Administrative expenses have been recovered primarily through service charges paid by recipient countries.
IDA’s commitment authority is denominated in Special Drawing Rights (SDRs). The U.S. dollar equivalents presented here are based on the reference exchange rate for IDA17 and provided for illustrative purposes. Under the IDA17 Replenishment, total resources amounted to SDR 38.7 billion (equivalent to $57.9 billion). This total reflects updates made after the replenishment discussions.
Figure: IDA Business Model
A total of 48 partners, 4 of which are new contributing partners, have provided SDR 16.9 billion ($25.5 billion) in grants, of which SDR 0.7 billion ($1.1 billion) is the grant element from concessional partner loan contributions. Partners have provided SDR 3.3 billion ($4.9 billion) in concessional partner loans or SDR 2.5 billion ($3.8 billion) excluding the grant element of the loans. Contributing partners have also provided SDR 2.8 billion ($4.2 billion) in compensation for debt relief under the Multilateral Debt Relief Initiative. Credit reflows (principle and interest repayments) from IDA recipients provided SDR 11.1 billion ($16.8 billion). This figure includes SDR 1.9 billion ($2.8 billion) from contractual accelerated repayments of outstanding credits from IDA graduates and voluntary prepayments as well as SDR 1.7 billion ($2.6 billion) of balances carried forward from previous replenishments. Transfers from IBRD and IFC, including associated investment income, amounted to SDR 1.7 billion ($2.6 billion). These transfers are approved annually by IBRD’s Board of Governors and IFC’s Board of Directors, and are based on evaluations of the institutions’ annual results and financial capacities.
The IDA17 commitment authority was increased by $5 billion in fiscal 2016. Of these funds, $3.9 billion established the Scale-Up Facility for the remainder of IDA17, $900 million replenished the Crisis Response Window, and $200 million supported assistance to refugees in the Middle East and North Africa. This one-time measure was financed by resources freed up through more efficient use of IDA’s liquidity.
IDA17 and IDA18 Replenishments
Anchored in the World Bank Group Strategy, the IDA17 policy package included a range of policy commitments and performance indicators under IDA’s Results Measurement System. The overarching theme of ”Maximizing development impact” focused on helping IDA countries better leverage private resources, public resources, and knowledge, with greater emphasis on both results and cost-effectiveness. The four IDA17 special themes—climate change, fragile and conflict-affected states, gender equality, and inclusive growth—aimed to strengthen IDA’s engagement on frontier issues at the global, regional, and country levels.
The transformational IDA18 Replenishment was finalized in December 2016, and resulted in a record replenishment size of $75 billion to finance projects from July 1, 2017, to June 30, 2020. Three IDA18 special themes were retained from IDA17— climate change; gender and development; and fragility, conflict, and violence—and two new themes were introduced—governance and institutions, and jobs and economic transformation—which align with the overarching theme of “Toward 2030: Investing in growth, resilience, and opportunity.”
Figure: IDA Replenishments
IBRD and IDA risk management transactions
IBRD offers financial products that allow clients to efficiently fund their development programs and manage risks related to currencies, interest rates, commodity prices, and disasters. In fiscal 2017, the Bank’s Treasury executed USDeq 1.7 billion in hedging transactions, including USDeq 633 million in currency conversions and USDeq 1.1 billion in interest rate conversions, in order to assist borrowers in managing currency and interest rate risks over the life of their IBRD loans. Disaster risk management transactions totaled $425 million in pandemic bonds and derivatives to provide financial support to the Pandemic Emergency Financing Facility. The Bank’s Treasury executed swap transactions totaling USDeq 109 billion to manage the risks of IBRD’s balance sheet.
IDA manages the risks on its balance sheet related to currencies and interest rates and helps member countries manage risks related to disasters by executing transactions with financial markets. In fiscal 2017, the Bank’s Treasury executed swap transactions totaling USDeq 15.7 billion to manage the risks of IDA’s balance sheet and a $34 million transaction to renew coverage of the Pacific Disaster Insurance Program, which provides protection against earthquakes and tropical cyclones in the Cook Islands, the Marshall Islands, Samoa, Tonga, and Vanuatu.
Budgeting effectively for complex development issues
The World Bank Group aligns its resources using the “W” process for strategic planning, budgeting, and performance review. The five points of the “W” represent specific decision points in the process:
W1: Senior management sets strategic planning priorities for the World Bank Group.
W2: Management at the vice presidential unit (VPU) level reviews and responds to corporate priorities.
W3: Senior management refines the guidance on priorities for each institution within the World Bank Group.
W4: VPU-level management develops work programs and staffing plans in response to determined priorities and planned budget envelopes.
W5: Senior management reviews the aggregation of the VPU-level budgets. The Board reviews and approves the VPU budget envelope for the subsequent fiscal year.
The “W” process is anchored in the demands and expectations of clients to define and set institutional priorities, reinforce selectivity and efficient delivery, and support stronger World Bank Group collaboration. Over the past several budget-planning cycles, the World Bank Group has made significant progress in aligning revenues and expenses, and tilting budgets in favor of institutional priorities.
At a time of economic uncertainty and global challenges, the World Bank Group is being asked to address a growing number of complex development issues. During the planning period for fiscal 2018–20, the Bank Group will focus on trends and priorities arising from the organization’s goals of ending extreme poverty and boosting shared prosperity, the Forward Look exercise, the scaling up of operations in IDA countries (especially fragile and conflict-affected areas), and the IDA18 policy commitments. To scale up support for better leveraging of resources through private sector engagement, the new IDA Private Sector Window has been established to increase private sector investment in low-capacity and fragile environments, along with ongoing work to build a more agile, efficient, and innovative Bank Group.
Dealing with global political and economic policy uncertainties
The World Bank Group’s Chief Risk Officer monitors the global political and economic environments that could affect the institution’s finances, and has an overview of both financial and operational risk. In fiscal 2017, the global economy entered a period characterized by some recovery but high uncertainty. Economic growth in advanced economies remains weak, lower commodity prices have hurt developing economies, and high corporate leverage and related external borrowing in the larger emerging markets constitute a further fundamental vulnerability for the World Bank’s borrowing countries.
Policy uncertainty presents a key overarching risk, and there is a significant chance that economic activity could diverge from the baseline that foresees a gradual strengthening of global activity. Potential protectionist pressures are a significant risk. There remains considerable uncertainty, however, as to what extent and when such pressures might translate into concrete measures and the forms these might take. Countries with open economies and that are dependent on trade, including many low-income countries, would be among the most vulnerable. Increased protectionism could also affect 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, which would affect both interest rates and risk appetite. The most vulnerable countries are those dependent on portfolio investment to finance current account 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 be a source of risk and disruption.