With donor countries posting record debts and budget deficits, how can the World Bank raise more resources to lend to the world’s poorest countries? The Center for Global Development proposes a new financing model that could free up to USD7.5 billion worth of World Bank resources for lending to poor, vulnerable countries.
The model, proposed by CGD visiting fellow Benjamin Leo, seeks the early graduation of IDA-blend countries to full IBRD status. IDA-blend countries are usually emerging economies that get loans from both lending arms of the World Bank: the concessional International Development Association and the International Bank for Reconstruction and Development, which usually puts higher interests on its loans. IDA-blend countries include India and Vietnam.
Under the proposed model, qualified IDA-blend countries will get loans exclusively from IBRD, freeing up resources in IDA’s portfolio for poorer countries.
The IDA would still factor in the lending for affected countries to avoid overburdening these with high interest that they may not be able to pay.
Leo proposes that IDA give upfront grants to affected countries, which will be used to pay the interests of their loans to IBRD. Through this model, the countries would only need to shoulder the loan principal.
The model allows IDA to reallocate funds that it would otherwise have provided to emerging countries. Given the current IDA replenishment cycle, the model could unlock up to USD7.5 billion in additional assistance to poor countries, Leo says.
The expert adds that the Inter-American Development Bank is using already successfully a similar model for lending to low-income and lower middle-income country clients.
“With the IDA-16 replenishment and IBRD general capital increase negotiations currently underway, they have an excellent window of opportunity to implement this win-win-win approach,” Leo concludes in his working paper titled “Leveraging World Bank Resources for the Poorest: IDA Blended Financing Facility Proposal.”