Everything you need to know about the World Bank's reform plans

Set up in 1944 to finance the rebuilding of Europe in the aftermath of World War II, the World Bank and International Monetary Fund now find themselves in a very different place — and in need of an overhaul to reflect today’s changing realities. Or so goes the story according to a group of vocal, mostly Western donors and experts, who have been calling specifically for the World Bank to reorient itself to focus more squarely on the impacts of climate change, alongside other “global public goods” such as pandemic prevention, alongside growing its lending capacity. As part of this, the bank was also tasked with taking on more risk to stretch its balance sheet to unlock more capital — all without jeopardizing its coveted AAA credit rating. The call was spearheaded by the United States in 2022, which gave the bank a deadline of December 2023 to come up with an “evolution road map.” The bank heeded the call and presented a plan, renamed the “World Bank Evolution,” at the Annual Meetings held in Marrakech, Morocco, last October. The 34-page document was approved by the institution’s shareholders and included a new vision and operating model for the lender, signaling that the bank is ready for the modern era in which developing countries are buffeted by a dizzying array of global challenges including climate change-related shocks, pandemics, and war. Official updates are likely to come during the bank’s Spring Meetings in April in Washington, D.C., but four months on, how much progress has been made, and is the World Bank on track to meet the demands of its donors and critics? Furthermore, even if the bank can grow its balance sheet and do more on climate, how significant will this be given that the institution itself estimates total spending needed to address the challenges of climate, pandemics, and conflict in the countries it works in will cost approximately $2.4 trillion per year through 2030? To put that into perspective, last year the bank issued $128 billion in loans, grants, investments, and guarantees. ‘Livable planet’ The headline-making reform agreed in Marrakech was the bank’s new vision statement — to “create a world free of poverty on a livable planet.” Said to be the brainchild of the bank’s new president, Ajay Banga, who took over last June, the phrase “on a livable planet” is code for climate change. The bank needs the euphemism due to tensions between Western donors’ desire to see a sharper focus on climate change and borrower countries’ concerns that the bank’s resources will be diverted from their own country-specific development priorities, such as poverty alleviation. The bank has already shown it is taking its new vision seriously, announcing a target of spending 45% of annual financing on climate-related projects in the next fiscal year, up from 35%. The World Bank’s “Evolution” document also commits the bank to work on eight so-called global public goods — cross-border issues that are traditionally underfunded. These are climate action, fragility and conflict, pandemic preparedness, energy access, food and nutrition security, water security and access, enabling digitization, and protecting biodiversity. However, experts have raised questions about how the bank will actually deliver on its new vision and ambitious climate target, alongside the other goals. “One of the biggest questions coming out of the evolution road map is how do we incentivize countries to borrow significantly more for climate?” Clemence Landers from the Center for Global Development told Devex. “It is difficult for the World Bank to direct where its funding goes; it is essentially demand driven.” Furthermore, rising interest rates are making loans from the International Bank for Reconstruction and Development, or IBRD — the arm of the bank that lends to middle-income countries — more expensive, making it harder to sweeten the deal for climate projects, Landers pointed out. Annalisa Prizzon, principal research fellow at the global affairs think tank ODI, welcomed the new vision statement while warning that integrating it within the bank’s notoriously fractured operating structure will be tricky. “The new vision and mission statement for the World Bank embraces sustainability as a necessary attribute of poverty eradication and shared prosperity … thus integrating development and global challenges. … But this vision must be reflected in how the bank operates, which should connect systematically across country and sectoral responsibilities,” Prizzon told Devex. Stretching the balance sheet The bank has made solid progress on its financial reforms, designed to squeeze more lending out of the bank’s existing balance sheet instead of asking donors for fresh capital. Major shareholders are keen to avoid a capital increase — where they pay in more money and also redistribute shares — for two main reasons: Domestic budgets are tight and the U.S. wants to make sure China doesn’t increase its voting share. Many of the bank’s reforms were guided by the G20 Independent Expert Group on strengthening the MDBs, whose 2022 report called on development banks to unlock billions of dollars in new lending by taking on more risk and easing capital requirements. In financial speak, this involves changing the bank’s “capital adequacy framework” to deliver “balance sheet optimization.” As a result, the bank has vowed to unlock up to $125 billion in additional lending over the next 10 years through a host of new financial measures including lowering the equity-to-loan ratio from 20% to 19%; increasing the limit on shareholder bilateral guarantees by $10 billion; and removing statutory lending limits. Additional reforms, announced last July, include a $5 billion portfolio guarantee program that would allow shareholder countries to underwrite loans, protecting the World Bank against default, and a hybrid capital proposal that allows the bank to issue bond-like instruments without diluting its capital. These were signed off in Marrakech and early supporters included Germany, which pledged up to €305 million (about $320 million) in hybrid capital, and the U.S., which pledged $1.25 billion, some of which will be used for loan guarantees. It still comes down to capital However, while the bank’s financial reforms have garnered a lot of airtime — and seem to be progressing relatively fast compared to other reforms — some experts have questioned their overall significance and argue that the bank still needs a capital increase. “The G20 panel report talks about these innovations not as a replacement for shareholder capital, but as useful tools to create more space to deal with emergencies, like the Ukraine conflict where the MDBs need to do more lending quickly,” Chris Humphrey from ODI told Devex. “Hybrids, risk transfers and other innovations are excellent new tools for MDBs, but if shareholders want to increase MDB operational capacity in the long term, they need to contribute core capital,” he added. However, according to Karen Mathiasen, project director at the Center for Global Development and a former U.S. Department of the Treasury official, the bank doesn’t actually need more money, or at least not for IBRD. “I do not see a pressing demand from IBRD borrowers at this point that requires a new influx of capital,” she told Devex. Instead, Mathiasen said the bank needs more concessional finance, which means raising more money for the International Development Association, or IDA, the bank’s lending arm for the lowest-income countries. Banga has already pledged to make the next IDA replenishment — happening in December this year — the largest replenishment of all time. “The challenge is with IDA and I think shareholders should focus more on IDA this year because the needs are so dire,” Mathiasen said. Banga said something similar at the recent CGD event, describing IDA as “the single most important thing in the World Bank.” Concessionality but at what cost? A potential challenge for the IDA replenishment comes from the fact that shareholders have said they want to see IBRD offer concessional finance to incentivize middle-income countries to borrow for global public goods projects. This is also key to Banga’s “livable planet” agenda. Indeed, the bank’s evolution document states that “additional concessional resources will also be critical to incentivize IBRD countries to address global challenges, particularly when there is a global public good element with spillover benefits.” However, this will put the lowest-income countries’ noses out of joint, and rightly so, according to Mathiasen, who said: “Fundraising for IBRD should not be done at the expense of IDA.” ‘Fixing the plumbing’ The World Bank has also vowed to reform the way it does business, making it faster and more efficient by reducing red tape, streamlining processes, replicating scalable projects, and getting deals approved more quickly. This will make it a better partner for borrower countries who have long complained about the bank’s bureaucracy, Banga said. Officially, the changes are referred to as the bank’s “new playbook”; unofficially, the president refers to it as “fixing the plumbing.” Specifically, Banga has committed to slash the time it takes to get a bank project off the ground from 19 months to 12, he said during a Center for Global Development event in Washington, D.C., earlier this month. But the bank’s governance structure was proving a thorn in his side, the president lamented during the CGD event. While shareholders, understandably, want to be involved in decisions about how their taxpayers’ dollars are spent, this has led to a mushrooming of rules and stipulations and a fragmented system that is difficult to scale, Banga explained. Meanwhile, borrower countries are eager to see the bank move faster, and some are already seeking quicker, Chinese alternatives. For example, IDA is encumbered by more than 1,100 rules, Banga explained. He wants to get it down to 150 but admits it has been more challenging than he anticipated. “We’re all wasting time on this stuff,” he said. “We just need to find a way to thread the needle between the importance of shareholder tax money being used and the unintended consequences on the other end,” Banga said. Part of the acceleration plan involves a risk-based framework that allows projects to be evaluated differently based on their size and exposure. For example, applying higher levels of scrutiny to a $2.5 billion hydroelectric project in Ghana versus a $3 million school project in Nepal, due to their differing potential financial, environmental, and social risks. However, civil society groups have raised concerns that this streamlining effort may erode the bank’s hard-won environmental and social safeguards. While Banga said he is committed to creating a system that maintains these standards while also speeding up approval times, CGD’s Landers said that finding this balance will be tough, with borrower countries eager to see the bank move faster. “It may not sound like it, but I think this is one of the most ambitious and significant reforms, but the political economy is complicated and needs to be deftly navigated,” Landers told Devex. Another playbook innovation, one which bank sources said is nearly complete, involves overhauling the corporate scorecard — the way the bank measures performance — by cutting the number of indicators from 153 to around 20 and reorienting the focus toward impact rather than inputs. Private sector pipedreams As the former CEO of MasterCard, Banga’s arrival at the bank revived hopes that the institution could finally realize its fabled “billions to trillions” agenda, which would see World Bank billions catalyzing trillions in additional private investment. In response, Banga set up the Private Sector Investment Lab, announced in June and comprising 15 finance chief executives. They are tasked with finding new ways for the bank to entice private investment into low- and middle-income countries. The lab met for the first time in New York in October and more updates are expected during the Spring Meetings in April. However, speaking at CGD, Banga appeared downbeat about the prospect of getting the private sector to invest more in low- and middle-income countries. “We cannot wish it in,” he said, adding that “speaking to it in governmental meetings” was not the way to make progress. Instead, the bank can help by working with countries to clear some of the “hurdles” that CEOs report, such as a lack of clear regulatory policy. Banga also wants to boost the bank’s ability to offer guarantees, partly by growing the Multilateral Investment Guarantee Agency, or MIGA — which offers political risk insurance and guarantees to private sector investors and lenders — from $6.8 billion to $20 billion by 2030. Then the bank is “putting together all the guarantee shops” within the bank and offering a simple “cafeteria-menu style” of guarantees to increase takeup by making the process easier for clients, he said. But all these changes will take time to bear fruit, Banga said, and he was notably silent on the idea of trillions of dollars being on the table. “But please don’t hold your breath that you’re going to get $100 billion of private sector investing next month. If that happens, it’s not because of me, it’s because … they’ve found projects they like,” Banga said. Development experts have welcomed Banga’s realism and echoed it with their own calls for caution. “The Evolution road map might not have been revolutionary for the World Bank Group, but it did provide a clear plan and direction for the institution to better address the challenges of the 21st century by integrating development and global challenges and serving the needs and priorities of their clients more effectively,” ODI’s Prizzon told Devex. “However, implementing the next stage of the World Bank's Evolution road map will require not only considerable technical work but also … more critically … the political will to see it through,” she added.