Devex Invested: Your primer for the biggest IDA replenishment ever

There is a lot at stake in Seoul, South Korea, later this week at the 21st replenishment of the International Development Association, or IDA, the World Bank’s fund for low-income countries.

At a time when many of the lowest-income countries face mounting debt distress and have a harder time borrowing from capital markets, the funding from IDA is critical. A conversation I had earlier this year with Malawi’s ambassador to the United States, Esme Jynet Chombo, has stuck with me. She told me: “Without IDA Malawi will perish.”

In Malawi, IDA has been transformative and has helped fund agriculture projects, health care facilities, and infrastructure as the country has faced numerous challenges. And many IDA recipients, especially African leaders, have been particularly vocal about the importance of IDA this replenishment round.

In a major twist ahead of the big event, there seems to be turmoil in South Korea with President Yoon Suk Yeol declaring martial law on Tuesday and opposition leaders denouncing the move as unconstitutional. It’s still unclear what impact this could have on the meetings, so watch this space for our reporting.

Meanwhile, here’s what you need to know about the replenishment itself:

The target: The goal is to raise around $100 billion for IDA this replenishment, though some have called for $120 billion. Due to IDA’s structure and ability to borrow, reaching the lower target will require between $27 billion and $28 billion from donors.

Cautious optimism: This IDA replenishment has been a bit unusual in that a lot of pledges have already come in. “Donors and the IDA team did a great job building a sense of momentum,” Clemence Landers, a senior policy fellow at the Center for Global Development, tells me. The target is “quite realistic” and even if donor contributions fall short, the bank may be able to use additional internal measures to hit the $100 billion target, she adds.

The pledges so far: Just last week, the United Kingdom announced a £1.98 billion ($2.5 billion) contribution — a 40% increase on the last three-year allocation before taking inflation into account. Several other countries have announced roughly 40% increases, including host South Korea and Denmark. The U.S. has already announced a $4 billion pledge, but the big question here is whether the incoming Trump administration will honor that pledge. (Last time Donald Trump reduced the U.S. contribution slightly after coming into office.)

The question marks: There are still some notable questions when it comes to top donors. What will China, currently the sixth-largest donor, pledge, and will it be big enough to leapfrog other top donors? And what about Japan, where currency devaluation will mean a sizable increase is needed just to match its last contribution? Germany and France are also two countries to watch as are newer donors including India, or returning ones like Brazil, which did not contribute last time.

A quality package: While the focus this week will certainly be on the money, the lengthy negotiations leading to the replenishment have focused extensively on the accompanying policy package — the details of how IDA funds will be distributed and how they should be used.

Dirk Reinermann, the director of IDA resource mobilization, said last week that those negotiations were “nearly done.” In line with other World Bank reform moves, this policy package reduced the policy commitments that countries have to meet by about half, he said. “We're very happy with the quality of the package and the robustness of it, but also that it will be less of a burden to implement for our partners.”

Borrowing countries will also be able to choose between a smaller amount of grant dollars, or a larger amount of loans depending on their needs. The funding will go to support climate-related projects, agriculture, health, digitization, and more, based on country priorities.

For a bit of context, over the past five years, IDA’s financing for food and nutrition security was $28.4 billion and for some countries, it is the main or only source of financing, write Norway’s International Development Minister Anne Beathe Tvinnereim and World Bank’s Akihiko Nishio in a Devex opinion piece about the critical role IDA plays in addressing food security.

You can’t please all of the people all of the time: Unsurprisingly, not everyone is happy with all the details. Some experts wanted more robust targets on gender and worried that without specifics, progress could backslide. And one of the most hotly debated elements was the private sector window, which has been widely criticized for being ineffective and for a lack of transparency. It survived in part because borrowing countries want it, but expect a lot of scrutiny going forward.

Background reading: The World Bank’s IDA replenishment —  the money, the odds, the high stakes

Opinion: Solving the global food crisis requires investment at scale

Listen: What’s at stake in the World Bank’s IDA replenishment

Another debt downer

Speaking of debt, a new World Bank report out today finds that low- and middle-income countries paid a record $1.4 trillion toward debt in 2023. The lowest-income countries, those eligible to borrow from IDA, have seen their interest payments on external debt quadrupled in the past decade, hitting an all-time high of $34.6 billion in 2023.

Ethiopia, Ghana, Pakistan, Sri Lanka, Zambia, and Laos are hit the hardest, with some already defaulting on their debt or seeking restructuring. South Asia and sub-Saharan Africa had the steepest increases in interest payments — far faster than the growth of their gross national incomes.

To add insult to injury, the debt distress is causing private creditors to withdraw. The report places some blame at the feet of private creditors. “For two years in a row now, the external creditors of developing economies have been pulling out more than they have been putting in — with one striking exception. The World Bank and other multilateral institutions pumped in nearly US$85 billion more in 2022 and 2023 than they collected in debt service payments,” Indermit Gill, the World Bank’s chief economist, writes in the report.

ICYMI: Debt levels are high, but will solutions come through? (Pro)

Don’t miss: Risk aversion and credit ratings — why Africa is paying more for debt (Pro)

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New name, same game

The 2024-2029 European Commission starts work this week, with Czech former investment banker Jozef Síkela stepping into the development portfolio.

It’s a critical moment with NGOs and some members of the European Parliament arguing that the commission — the world’s third-largest donor of official development assistance — has lost its way with an overly self-interested approach to aid, my colleague Vince Chadwick tells me.

The commission, the European Union’s executive arm, says it can perfectly pursue its own strategic interests in things like critical raw materials and green hydrogen at the same time as furthering the U.N.’s Sustainable Development Goals.

Given that, it is telling to see how the commission has defined Síkela’s responsibilities on its website, including:

1. Make a success of Europe’s wannabe Belt and Road initiative, dubbed the Global Gateway.

2. Mobilize more resources from EU countries, development banks, export credit agencies, and the private sector.

3. Lead EU engagement in the fledgling just transition partnerships designed to help decarbonize countries like Vietnam and Indonesia.

4. Ensure the EU promotes the SDGs.

That chronology will do little to allay those who argue poverty eradication should be the EU’s primary objective, just like it says in the EU founding treaties. Expect these tensions to grow when the commission releases its 2028-2034 budget proposal sometime next year.

ICYMI: EU risks legal action over failure to use aid to fight poverty, top MEP says (Pro)

See also: EU aid to least developed countries is trending way down (Pro) 

Vince may have been keeping an eye on developments in Brussels, but he's in Canberra, Australia, this week for the 2024 Australasian AID Conference. Should you also be in town, don't hesitate to drop him a line via vince.chadwick@devex.com

What we’re reading

Industrial policy’s rebirth could endanger emerging economies, warns EBRD [Devex]

Return to Trumpworld: Who will shape U.S. aid policy? [Devex Pro]

Could a payment-by-results approach put local organizations in charge? [Devex Pro]

Vince Chadwick and Jesse Chase-Lubitz contributed to this edition of Devex Invested.