BURLINGTON, Vt. — Two Democratic lawmakers have called on the U.S. Government Accountability Office to review the “financial viability” of the World Bank’s fund for low-income countries, the International Development Association.
Rep. Maxine Waters, chairwoman of the House Financial Services Committee, and Sen. Patrick Leahy, vice chairman of the Senate Appropriations Committee, sent a letter to GAO last month asking that the office “analyze IDA’s financing model, financial viability, and risk management.”
IDA is the largest source of development finance in the world’s poorest countries. It raises funds every three years from donor governments and uses them to provide grants and low-interest loans to low-income countries for programs across a range of sectors. The lawmakers’ interest and concern stem from the World Bank’s decision, prior to IDA’s 18th funding replenishment in 2016, to start borrowing funds from capital markets, as well as rising debt distress in many parts of the world.
“There is a real question as to its [IDA’s] ability to sustainably increase financing volumes to meet the greater needs of countries coming out of the global crisis.”— Charles Kenny, senior fellow, Center for Global Development
By using the money that donors contribute as leverage to issue bonds, IDA has been able — in its last two replenishment rounds — to significantly increase its resources, without significantly increasing its demands on donors. IDA’s 19th replenishment saw the fund secure $82 billion, up from $75 billion three years earlier. That increase came despite a nearly 9% cut in contributions from the U.S. government, IDA’s largest donor.
“IDA claims that raising funds from the capital markets by leveraging IDA’s equity will enable more efficient use of donor contributions, thereby allowing IDA to significantly scale up development financing for low-income countries,” Waters and Leahy wrote in their letter to Gene Dodaro, head of GAO.
“However, raising funds in capital markets poses risks for IDA as well as for borrower countries particularly considering the devastating impact of the COVID-19 pandemic on the global economy,” the lawmakers added.
The letter does not criticize the bank’s decision to raise funding for IDA through the capital markets but requests a review to generate more information that can help the U.S. Congress perform its oversight duties and to prepare for the upcoming negotiations over IDA’s next replenishment.
The lawmakers’ concern is that if more countries experience debt distress due to COVID-19 and other financial pressures — something the bank has frequently warned about — they could struggle to repay their IDA loans. Since those repayments are part of IDA’s resource base, and if donor contributions stagnate or even decline, they note that the fund could struggle to maintain its level of concessional lending to low-income countries.
The World Bank's fund for low-income countries, the International Development Association, raised a record $82 billion from donors.
“If IDA does not achieve its financing projections because recipient countries struggle to repay their IDA obligations, then member countries—including the United States—will likely need to increase their contributions in future replenishments simply to sustain lending volumes,” they wrote.
The lawmakers added that this kind of increased demand on donors could conflict with the White House’s plan to reduce U.S. contributions to replenishments at multilateral development institutions — which it justifies, in part, by pointing to IDA’s ability to borrow from the markets instead.
“I think IDA's financial position remains very strong, but there is a real question as to its ability to sustainably increase financing volumes to meet the greater needs of countries coming out of the global crisis that have slipped further behind on development targets,” Charles Kenny, a senior fellow at the Center for Global Development, wrote to Devex by email.
“Hopefully the GAO report can help illustrate the scale of the problem --and the scale of donor resources required to fix it,” he added.
A World Bank spokesperson wrote to Devex that the bank appreciates “the strong, bipartisan support for IDA in the US Congress” and that the $82 billion secured in the last replenishment is “particularly important amid the global pandemic.”
“We look forward to working with the GAO on their review,” the spokesperson added.