The press release on the financial results shows that fiscal year 1990 was a year of solid financial performance for the World Bank. The World
Bank continued to strengthen its financial structure in FY90 and is well positioned to meet borrowing member countries' evolving needs for development finance. Net income exceeded $1 billion for a sixth consecutive year; disbursements reached an all-time high of $13.9 billion; with an allocation of $750 million to reserves, we have reached an 11% reserve/loan ratio, fully meeting our target; and two of the nine countries in non-accrual were able to settle their arrears to the Bank in full.
As you know, we obtain most of the funding for our loans from the world financial markets. In FY90, we completed a borrowing program of $11.7 billion equivalent in 15 currencies. The average cost was just under 8% and the average maturity was 7.7 years. An active swap program - $3.1 billion - again provided substantial savings which helped to keep the average cost down and enabled us to maintain diversification in our sources of funding. The FY90 borrowing program included the introduction of our global bonds whose reception fully met our expectations.
Let me comment briefly on some of these main points before my colleagues and I try to answer any questions you might have.
For obvious reasons, the World Bank does not seek to maximize income.
We are a cooperative institution and our income derives principally from the loan charges paid by our members. Our objective is to keep those charges as low as possible consistent with income necessary to build and maintain adequate reserves and a strong financial position. I will return to that point later.
Net income FY90 had some unusual features. We took a one-time charge of $106 million to fund fully existing liabilities for post-retirement health and life insurance benefits. We also reduced, for a second year in a row, our commitment fee to 1/4%, from the contractual level of 3/4%, a t a cost to FY90 net income, but a benefit to our borrowers of $150 million. We also added $357 million to our provisions against loans to countries in non-accrual. This brings our provisions up to 40% of currently affected loans.
On the plus side, we benefitted from the clearance of arrears by Guyana and Honduras which added accumulated interest overdue of $124 million to FY90 income, and from a strong performance in the management of our liquid portfolio of $17 billion.
Reserves are our primary buffer against major unforeseeable events and, as such, we attach great importance to them. There are two points of particular relevance.
Under the revised currency management system introduced two years ago, we have been able to insulate the R/L ratio from exchange rate movements by matching the currency composition of reserves to that of loans outstanding. This has reduced sharply the amount of net income which had to be devoted to maintaining a given R/L ratio as exchange rates fluctuated. We can now predict accurately how much net income will be required to maintain the R/L ratio.
And second, we have been building our reserves. Our objective was an R/L ratio in the 10-11% range. Starting with an R/L ration of 8.5% in FY86 the ratio has risen steadily; and with this year's addition to reserves we are pleased that we have reached the upper end of this range.
At $13.9 billion, disbursements reached a new high. These gross disbursements translate into net disbursements of $6.3 billion to our active borrowers.
In substantial part, the increase in disbursements reflects the Bank's active participation in the debt reduction efforts under the Brady Plan.
Total disbursements to Mexico, for instance, were $3.6 billion. Of this, $1.3 billion were for the interest support component of the Mexican restructuring. A further $150 million went for principal reduction in the Philippines.
As you know, at the end of last year, 9 countries were in non-accrual status. As I mentioned, Guyana and Honduras cleared their arrears fully. Payments of principal and interest totaled $205 million. Panama has resumed servicing its debt, thus stabilizing its arrears. Partial payments were received from Nicaragua and Zambia, signaling both the intent to clear their arrears in the near future and progress in developing work-out programs. We are quite hopeful that the number of countries in non-accrual status will be reduced further this fiscal year.
I say this despite the fact that we had to place Guatemala's loans in non-accrual status on July 2.
What these developments demonstrate is that members intend, as soon as they can, to clear their arrears to the World Bank, and that the international community, through support groups or consultative groups, is prepared to assist in this effort. Second, it shows that the Bank's strategy for dealing with these problems works. Our efforts, together with the IMF, to help countries formulate and implement adjustment programs, and then arrange for a financing package with bilateral and multilateral lenders, can restore members to eligibility for borrowing.
I should also note that we are considering five membership applications, from Bulgaria, Czechoslovakia, Namibia, Mongolia and Switzerland. We expect that all necessary steps for admission of the first three will be completed in time for our Annual Meetings in September. Mongolia applied only last week.
Finally, I promised to return briefly to the question of net income. Having reached our R/L ratio, we know that we can maintain it at 11% by allocating 11% of our net disbursements--which will amount to about $600-$650 million per year--to reserves. Our expected income with present charges and spreads is likely to exceed that requirement substantially. Our first priority, therefore, is to begin to reduce costs to our borrowers. We have already taken the first step by waiving, on an annual basis, a portion of the commitment fee. We expect to be able to continue to do this. Beyond that, and in consultation with our Board, we will want to review whether we can apply a similar procedure to lower our 50 B.P. spread. Both measures, of course, will reduce our net income. I mention this because if we go ahead, we will not continue to report annual net incomes in excess of $1 billion in future years. But, lower net income figures for these reasons would not reflect a lower income-generating capacity, but a discretionary decision not to retain income which is not needed to maintain our very strong financial position, particularly at a time when many of our borrowers face serious cash flow problems. The procedure that would be used to lower net income would be designed to allow us to tap our full income-generating capacity, should circumstances ever require that.