In an effort to meet changing client needs, the World Bank will start offering its borrowers financial products denominated in their domestic currencies.
With these products, Bank clients will have an option to convert or swap, depending on the loan product, disbursed loan amounts into their domestic currency. The local currency financial products will be confined to the local expenditure component of the World Bank's financing, and clients' requests will be considered on a case-by-case basis.
"The demand for World Bank financial products in the national currencies of clients stems from the growing interest among our borrowers in reducing their currency risk exposure and in onlending to their sub-borrowers in local currency for projects that generate local-currency revenues," says Graeme Wheeler, director of the Bank's Financial Products and Services Department. Wheeler, however, anticipates that "the volume of local currency swap transactions is likely to be modest given the small number of liquid swap markets in emerging market currencies and the fact that the Bank may not be the most competitive provider of local currency finance."
An indicative list of emerging market currencies in which the World Bank might be able to undertake currency conversions or swap transactions, subject to government approval, includes Brazilian real, Czech koruna, Hungarian forint, Indian rupee, Mexican peso, Philippine peso, Polish zloty, South African rand and Thai baht. However, the availability of these currencies, and the terms and conditions that the Bank could obtain, will depend on swap market conditions at the time of execution of the proposed transactions. Because conditions in emerging financial markets can change rapidly, the Bank will consider each request on a case-by-case basis.
The introduction of World Bank financial products in borrowers' currencies is part of the Bank's efforts to offer clients more flexible financial instruments for managing their balance sheet risks. In 1999, the Bank started offering clients a new loan product with flexible currency, interest rate and repayment features and a variety of hedging products which can help borrowers manage their financial risks over the life of their IBRD loans. These products have received strong endorsement from borrowers.
In another effort to respond to changing client needs, the Bank has also announced the retirement of the currency pool loan the only financial product the Bank offered its borrowers from 1980 to 1993.
Demand for currency pool loans had been on a steady decline since 1993 when the Bank provided clients with a choice of financial instruments. During the past two years, currency pool loans have comprised 2 percent of new loan commitments. With the LIBOR-based fixed spread loan introduced in 1999, Bank clients can replicate the main characteristics of currency pool loans and also obtain access to a range of embedded risk management alternatives. Currency pool loan terms will not be available for new IBRD loan commitments whose invitation to negotiate is issued on or after March 1, 2001.