World Bank Ready to Expand Lending

"FY1988 was an excellent year for the World Bank," Ernest Stern, Senior Vice President for Finance, stated here today. He cited approval of a capital increase which raised the Bank's total authorized capital to $171.4 billion, achievement of $1 billion of net income, and increasingly cost-effective and growing access to international markets. "These results," he said, "provided a very strong basis for the planned expansion by 10 percent per year of the Bank's lending to developing countries to over $20 billion a year by the early 1990s."

The Bank's net income for FY1988, which ended on June 30, 1988, was $1,004 million, compared with last year's $1,113 million. When added to reserves, it will bring total reserves to $8.5 billion.

The Bank completed its $10.8 billion multi-currency borrowing program at an average cost of 6.70 percent. The Bank also saved $476 million, in present value terms, from refinancings not included in the FY1988 borrowing program. The refinancings totaled $4.4 billion equivalent of earlier high coupon borrowings. Largely because of these savings, the Bank was able to lower its pool-based lending rate twice in FY1988. The lending rate now stands at 7.59 percent for the six months beginning July 1, 1988. This is the lowest rate since the pool-based lending rate system began in July 1982.

Borrowing Program

The Bank borrowed $10.8 billion in 18 currencies. After swaps, 96 percent of the borrowing program was in six currencies -- US dollars, Japanese yen, Deutsche mark, Swiss francs, Pounds sterling and Dutch guilders. Although the remaining 12 currencies accounted for only 4 percent of the after-swaps program, they represented 17 percent, or $1.8 billion, of the before-swaps program.

Swaps, totaling $1.8 billion, continued to play a prominent role in obtaining funds at substantial savings made possible because of the advantage the Bank enjoys vis-a-vis other borrowers in selected capital markets. These cost savings benefit the Bank's borrowers directly by reducing the Bank's pool-based lending rate.

Except for $295 million of incremental Central Bank Facility borrowings, the $10.8 billion FY88 borrowing program consisted of fixed-rate, medium-term and long-term borrowings. The borrowings had an average life of 9.8 years.

In the FY1988 borrowing program the Bank:

- Continued to diversify the sources of funding by currency. The Bank engaged in first-time public issues in the domestic markets of Denmark, Kuwait and Spain and returned, after absences of 2-3 years, to the domestic markets of Austria, Canada and France. The Euromarkets were the source of first-time public offerings of Italian lire bonds. While the US dollar remained the largest single vehicle currency for swaps, its relative share decreased compared to prior years as other currencies provided good swap opportunities.

- Expanded its program of Continuously Offered Longer-Term Securities (COLTS) by $1.2 billion (compared to $0.5 billion in FY1987) and broadened the distribution channels for COLTS in order to diversify the investor base in North America. In May 1988, the Bank enlarged its group of COLTS selling agents by adding 14 U.S. regional and 3 Canadian firms to the existing group of New York-based primary agents.

- Enhanced the secondary market liquidity and trading of certain issues by enlarging the size of those issues. The Bank expanded an original Pounds sterling 200 million 9-1/4 percent 20-year bond issue by an additional tranche, which brought the total amount of the issue to Pounds sterling 350 million. The Bank also reopened its fourth 'Daimyo' yen issue of 5-1/8 percent 10-year bonds. The reopening created a Yen 160 billion public issue, the largest by a non-resident in that market.

Investment Program

The Bank's actively managed liquidity, which stood at $19.5 billion on June 30, 1988, yielded a realized rate of return on average investments of 8.51 percent, representing $1.7 billion of investment income that includes $135 million of capital gains.

Lending and Disbursements

New loan commitments by the Bank in FY1988 totaled $14.8 billion compared to $14.2 billion last year. Disbursements reached a record level of $11.6 billion, up $250 million from FY1987. The highly indebted middle-income countries again accounted for about 45 percent of total loan commitments, and fast-disbursing policy-based lending accounted for about a quarter of FY1988 loan commitments.

Service payments to the Bank on loans totaled $15.0 billion. Repayments of principal were $8.2 billion and interest payments and commitment fees were $6.8 billion.

Return on Earning Assets

The Bank's return on average total earning assets – both disbursed and outstanding loans and liquid investments –- was 8.30 percent in FY1988, compared to 8.52 percent in FY1987. The average return on its loans, which totaled $81.8 billion at June 30, 1988, was 8.25 percent, compared to 8.78 percent in FY1987.

The average cost of total funds, consisting of outstanding debt which averaged $88.3 billion and the Bank's equity which averaged $13.8 billion, was 6.46 percent, compared to 6.73 percent during FY1987. The Bank's equity at June 30, 1988 consisted of $5.4 billion of usable paid-in capital plus $8.5 billion of reserves and accumulated net income, compared to $4.9 billion and $7.7 billion, respectively, at June 30, 1987.

Financial Policy Developments

The Bank established improved repayment terms for loans committed after April 28, 1988, to both low- and middle-income countries. This will increase the net flow of funds from the Bank to these borrowers. For middle-income countries, the grace period was extended to five years on loans to be committed in the next three years. This is expected to increase the Bank's net disbursements to middle-income countries between FY1992 and FY1995 by $3.4 billion, an important contribution toward meeting their urgent external capital requirements. For the low-income borrowers -- those with per capita incomes below $836 in 1986 -- the Bank approved a permanent shift in repayment terms from one of equal repayments of ·principal, plus interest, to an annuity basis. The annuity system will increase net disbursements to low-income countries by an estimated $5 billion between now and the year 2000. Since repayment periods for borrowers are not lengthened, repayment amounts will be larger in the later part of the amortization schedules.

Consistent with its traditional prudent approach to financial management, the Bank's Executive Directors on June 7, 1988, revised the provisioning policy. As before, a country is placed in non-accrual status when its debt service payments to the Bank are more than six months overdue. But while formerly the Bank made provisions against the possibility of loan losses in a specific country when payments became two years overdue, under the new provisioning policy the Bank will begin to provision on a consolidated basis when a borrower is placed in non-accrual status. Currently, there are eight countries in non-accrual status -- Nicaragua, Guyana, Liberia, Syria, Peru, Sierra Leone, Zambia and Panama.

Pursuant to the new policy the World Bank's management has recommended that for FY1988 $421 million be charged against income and credited to the consolidated provision for possible loan losses, This, when added to amounts provisioned prior to FY1988, will raise the total specific loan loss provision to $500 million.

The data in this release are preliminary and unaudited.

Table II

World Bank Average Costs, Profitability And Returns

(Percentages, Based On Average Balances During Fy88)

l/ Does not include $4.4 billion of refinancings of prepaid borrowings.

2/ Equity defined as usable paid-in capital, reserves and accumulated net income.

3/ Interest on loans and commitment charges as a percent of average disbursed and outstanding loans.

4/ Includes realized capital gains (losses).

5/ Equity defined as total paid-in capital, reserves, and accumulated net income.

Table I

World Bank Borrowings

(Amount in US$ million, as of June 30, 1988)

a/ Swap transactions totaled $1,795 million.

b/ Does not include $4.4 billion of refinancings of prepaid borrowings.

c/ Represents borrowings in Australian dollars ($174.S million), Austrian schillings ($75.3 million), Belgian francs ($132.1 million). Canadian dollars ($346.9 million), Danish kroner ($119.6 million), ECU ($167.3 million), Finnish markkaa ($148 million), French francs ($184.1 million), Italian lire ($241.9 million), Kuwaiti dinars ($105.3 million), Luxembourg francs ($55 million) and Spanish pesetas ($83.1 million).