Q&A: What donors and clients want from IDA19

WASHINGTON — On Oct. 21 and 22, during the World Bank Annual Meetings, member countries will meet for the third time to negotiate the terms of a financing package of the bank’s fund for low-income countries, the International Development Association.

Along with determining how much money it is willing to contribute — the bank has targeted roughly $80 billion, which includes grants from donors, as well as proceeds from some creative financial engineering — IDA’s member countries will also look to make progress on a policy framework for the fund’s investments.

Devex spoke to Akihiko Nishio, the World Bank’s vice president of development finance, about where things stand in the replenishment process and what donors and client countries alike want to see in the next iteration of IDA.

This conversation has been edited for clarity and length:

What is the current state of the IDA 19 replenishment? Are you confident that you'll be able to secure a larger replenishment than last time around?

Overall the IDA 19 replenishment discussions are going very well … I think there is considerable agreement from the donors and from the client countries on the overall direction of where IDA 19 is heading, in terms of both the policy orientation and also in terms of the size of the financial package.

On the policy direction, there has been a very strong convergence right from the beginning that the key issues that IDA should address for the IDA 19 period are the following five things: jobs and economic transformation; climate change; fragile state; gender; and governance. Also with IDA 19, we have introduced an innovation called core-cutting issues, which will cut across these five special themes, and there was very strong convergence of views that these need to be addressed. They are: disability, human capital project, debt, and technology.

Now on the financing side, I think from the IDA community, both the donors and the client countries, there is a strong sense that we should aim for at least the size of IDA 18, but in real terms. As you may recall, IDA 18 had $75 billion dollars as a total package to be committed to developing countries, and that was 50% larger than the previous one. So maintaining that size, on a real term basis, really is quite an ambitious target, but I think all parties agree that we should aim for at least that amount.

Debt sustainability is a big priority for the U.S. government in particular. What specifically has it asked IDA to do as part of this replenishment package?

There were a number of things that were signaled by the IDA member countries. One was to introduce improved debt transparency because we still have situations where part of a country's debt is not disclosed. It's not known, it's not understood, and that of course is a huge risk to the country … In particular, the U.S. has been very strong on that point, and [World Bank President] David Malpass, as you saw in his speech, is also very concerned about that.

Another message that came very clearly from the IDA community is, try to incentivize client countries to borrow sustainably — incentivize in the sense of using the tools that are available to IDA through allocation of grants, the volume of allocations ... In that light many also mentioned that the fragile states, which have low capacity, many of them with debt issues, should not be penalized by getting very high hurdles on the requirements they need to meet under this incentivizing process. So, pay due attention to fragile states, was another very strong message we got from the IDA community.

Another request was to really reach out to other creditors, not only the Paris Club ones but also the non-Paris Club — the so-called emerging donors. We have been doing that, actually, for more than a decade. But we are being asked to step up that effort and really engage more deeply with these creditors. So we have proposed a certain model that we call the Sustainable Development Finance Policy — SDFP — which is now being finalized in discussions with the IDA donor and client country representatives, and we will finalize that in the course of the replenishment in the coming couple of months.

It sounds like you're saying there might be some conditionality attached to IDA's financing, which strikes me as a little bit of a departure for IDA. Am I correct in understanding that to be a bit about a new addition?

I wouldn't call them conditionalities. These countries will be given resources. They will have country envelopes to work with. The current proposal is that if, in a reasonable period of time — and we're essentially looking at two years — there is no measurable progress in the policy actions to be taken for debt sustainability, then we could reduce the allocation for the third year.

Our thinking is this is something that we may never have to use because two years is a pretty long time. We're going to provide a lot of technical assistance — we're already doing that but we're going to step that up. As you know, we do these debt sustainability assessments for all low-income countries once every year, and that itself is a great source of technical support and capacity building. So we will be stepping that up over the course of the coming period, and we will be really helping them to make progress on their own debt sustainability.

What exactly would you be reaching out to emerging donors about? What would you be engaging with them on, and where are the leverage points for IDA?

In terms of outreach to non-Paris Club creditors, perhaps the most important goal is to achieve a shared understanding of what are the paths for sustainable borrowing for a given country. To what extent can a country borrow, on a concessional basis and also a non-concessional basis, to grow over time without jeopardizing their fiscal situation, their balance of payments, etc.

We believe that there is a tool that will greatly facilitate such shared understanding, and that's the DSA — the debt sustainability assessment — because that is a very dispassionate, analytical, fact-based tool, which will show under which assumptions what are the possible borrowing trajectories for the country.

From there we could have a debate about how much this country can borrow, and if they borrow it should be at what kind of terms, how close they are to getting into a more difficult situation in terms of debt. So we can have very informed discussions around the DSA, and that's something that we want to table with the non-Paris Club creditors. The DSA is a joint product of both the World Bank and the IMF. So we are working very closely with the IMF, and we plan to do a lot of the creditor outreach with the IMF.

And now you have a very familiar face at the IMF to coordinate with Managing Director Kristalina Georgieva.

Yes exactly, and she knows exactly what I'm talking about. Every single detail of what I just mentioned she knows inside out.

You said that climate change is another priority that your donors have asked you to tackle. Will there be a requirement that a certain percentage of IDA financing include climate co-benefits?

There will be a target, and we're still in discussion as to what that target would be. But from the World Bank side, we are fully, fully committed to the climate agenda, and we want to stretch as much as possible. So we are looking at past trends and the existing pipeline and trying to figure out what would be the stretch goal that we can come up with.

There is one particular point that I would like to make on the climate co-benefits, which is that given the very strong demands on operations for the human capital project, and also very strong push to support the fragile states in a scaled-up manner, these trends will pull us in the other direction.

The human capital project essentially is broken down into education, health, and social protection, and by the nature of the operations, the climate co-benefits are not huge. And then what we provide to the fragile states — they tend to be lower in terms of co-benefits compared to the non-fragile states. So because we're being asked to do more on the human capital side, more on the FCV side, they're really going to pull us from reaching higher co-benefits. So we have to look at the overall picture and come up with a stretch goal.

It sounds like you are just being asked to do more in general.

There are lots of different things that the IDA community has been asking us to do. Another very big thing, especially from the client-side, is jobs and economic transformation. The energy around that theme has been really extraordinary. It's obviously because, primarily in sub-Saharan Africa and also in Northern Africa, there is this great need to generate jobs. I believe it's 15 million new jobs that need to be created per year in sub-Saharan Africa over the next 10 years.

So that is really pushing the client countries, and also the donor countries, to get IDA to do more to generate jobs, and that would mean more in connectivity projects to integrate labor forces into the market economy, more infrastructure projects to be able to export and import goods more freely, more power so that you can actually have manufacturing and services sectors that rely a lot on power, also capacity building, not only of people but also enterprises.

All of these things will be in great demand. So that gives you a sense of a vast array of areas that IDA 19 has been asked to go into.

That gives me a great sense, and also a bit of anxiety about what it must be like to try to balance all of those different interests.

The beauty of IDA, if I may say so, is that IDA rests on a country-based model, meaning it's really up to the country to look at its own needs and make decisions about what it will borrow for. That is a critical difference from these vertical funds like the Global Fund, or Green Climate Fund, etc.

We have these fungible IDA resources, which is allocated to the country, and the country can use it according to its strategy, its vision, and we are active in just about every sector you can imagine. Even in the same region, we would have a mix of priorities, mix of sectoral operations that are very different from its neighbors.

Do you think your donors understand that the country-based model is important? As they're trying to express their own interests, are they willing to give client countries power to decide as well?

My strong belief is that IDA has enjoyed much success — it's now nearing its 60th anniversary — largely because people see the value of the country-based model. The country-based model ... allows IDA, by supporting the client country, to become a glue, which binds other development partner efforts together.

For instance, when you have a health vertical fund and an education vertical fund, you need somebody to tie them together and also link them to infrastructure operations, to economic management operations. You need a platform. You need a glue. By supporting the client country, IDA has been able to do that. The way IDA has grown over the years, the longstanding support that is coming from donors, I think it owes very much to that particular model.

Malpass recently alluded to something similar, which was this initiative to create country platforms in eleven different countries. How do you understand that initiative, and do you think it will have implications for how IDA operates?

The country platform is about aligning development partners around the client countries' leadership. So it's really a coordinated development assistance effort. I think David really wants the bank to play a vital role in making that happen, and this is particularly important in today's development assistance climate, because you have a multitude of participants — not just the traditional ones, including us, but also you have the non-Paris Club creditors, you have the private sector. It's a lot more complicated than before.

So to have a country-focused discussion around the development priorities for the country … would be very beneficial. Now, given the kind of platform function that IDA can play, as I mentioned earlier, I think IDA will be able to play a significant role in these country platforms. What is really key is that the client country itself leads the process. Otherwise, it just becomes completely meaningless.