What a $13B capital increase means for World Bank lending

WASHINGTON — The World Bank’s shareholders agreed last week they want to see a “bigger and better institution” — but member countries haven’t always agreed on what that means for the multilateral development bank.

On Saturday, the bank announced it had secured a hefty $13 billion general capital increase as part of a broader package of reforms, which will see its annual lending capacity rise to $100 billion by 2030, according to a press release. That is nearly double its current lending levels, which totaled $59 billion in 2017.

The deal, set to be finalized at the bank’s annual meetings in Bali, Indonesia, in October, comes alongside some significant reforms — including changes to loan pricing, shareholding percentages, policies, and internal operations — which have implications for the bank’s activities going forward.

Under the agreement, the International Bank for Reconstruction and Development, the World Bank’s medium-income lending arm, will receive a $7.5 billion boost, while the International Finance Corporation, which lends to the private sector, is set to get $5.5 billion. The deal is the conclusion of months of intense negotiation, or “shadow boxing” as one bank insider described it to Devex, among the competing factions within the bank’s 188 shareholders.

Devex spoke to multiple World Bank executive directors who were involved in the months-long negotiations. They revealed that some of the toughest discussions dealt with striking a balance between rigor and flexibility — and preserving the bank's relationships with all its clients and shareholders.

“We wanted to see reforms so that the bank gets better as well as getting bigger,” said David Kinder, the United Kingdom’s alternate executive director to the bank, adding that this meant reaching a deal that everyone was happy with. The bank “is stronger when we bring everyone in,” he said.

Shareholding negotiations — a ‘zero sum game’

“The most difficult discussion was around shareholding, because the shareholding review is a zero sum game,” said Frank Heemskerk, executive director for the Netherlands constituency.  

Discussions around China’s shareholdings were especially contentious, according to Heemskerk and other bank directors Devex spoke to.

Under the deal, the bank’s biggest shareholders agreed to minor reductions in their percentage shareholding in IBRD, while China saw its stake rise by nearly a third, from 4.68 percent to 6.01 percent. In its communique, the bank’s development committee explained the changes are intended to “rebalance shareholding and reduce extreme underrepresentation” of smaller and poorer countries.

In 2015, the board introduced a new way of calculating shareholding percentages using a “dynamic formula” that takes into account a country’s economic weight and its contributions to the International Development Association, the bank’s lending facility for the poorest countries.  While China scores high on gross national income, its IDA support remains low. This is galling to IDA-supporting countries who saw their shareholdings diluted, including the Netherlands, which has maintained its support to IDA despite cuts to its domestic development budget. It will make it “difficult to pitch for another IDA contribution” from the Dutch government, Heemskerk said.

The United States delegation hinted it expects China to up its IDA allocation in the coming years, stating: “We expect countries benefiting most from the new shareholding arrangement to take on a greater share of the burden to help the poorest.”

However, the shareholder changes are unlikely to have a major impact on the World Bank board’s voting behavior, said Otaviano Canuto, executive director for the Brazil constituency.

“The U.S. remains the biggest voice, followed by Japan … so that didn’t change … But everyone was happy enough,” he said.

Higher borrowing costs for middle-income countries

While China increased its shareholding, this was counterbalanced by reforms designed to reduce the amount of lending the bank offers to middle-income countries, including China. The GPI package calls on IBRD to channel 70 percent of its resources to lower-income countries, although these targets will not be binding in crisis situations, which could include another financial crisis.

The deal also sets new pricing guidelines to address the fact that IBRD currently charges all its clients, from recent IDA graduates to relatively rich countries, the same rate to borrow. Under this agreement, the bank will charge richer countries a higher maturity premium, meaning they pay more the longer it takes them to pay back the loan. This should mean some countries with access to capital markets stop borrowing from the bank, and will also incentivize them to pay back their loans faster, creating capital for those who need it more, Canuto said.

The price increase by itself is only a “small factor,” but will have a “signaling effect” on middle-income country shareholders, which have all “accepted that the volume of World Bank lending to upper-middle income countries will decrease over time,” according to Kinder.

Sources at the bank told Devex that China’s willingness to agree to the price increase relates to its perception of its evolving status at the bank as both a borrower and a lender.

“China wants to keep its foot in both camps,” one said, and seeks to continue associating itself with other developing countries for geopolitical reasons, “while also showing itself as a big player in the international system.”

Even if lending volumes go down, all the executive directors Devex interviewed expressed a strong desire to ensure middle-income countries are still welcome to access bank services, including loans but also technical assistance, enabling the bank to influence a country’s development agenda.

For Heemskerk, if the bank wants to influence China, then lending must be a crucial part of its offering since “lending is the anchor between the ministry of finance and the World Bank.”  Offering technical assistance and advisory services alone is less likely to appeal, he added.

Graduation still at the discretion of the borrower

As with issues of loan pricing, debates around country graduation often come down to arguments over flexibility versus rigor.

The U.S. representatives have called for a “more rigorous, transparent, and rules-based” policy around graduation — the point at which a country is deemed to have a high enough per-capita income and also strong institutions and market access to no longer need bank financing.

For Canuto, this would go against the long-held notion that “graduation is something entirely at the discretion of the borrowing country, as it has always been,” adding that borrowing countries “want flexibility, not the establishment of straitjackets.”

Heemskerk said that the package brought “more discipline” into the graduation discussion without taking away from the voluntary nature of the decision. This is a “pragmatic” decision, he said, at a time of global economic uncertainties which mean that countries that have graduated may find themselves needing to come back to IBRD, as was the case with South Korea, Malaysia, Chile, and Costa Rica in the 2000s.

“I hope we won’t see another debt crisis … but you never know,” he said. “It’s good to bring more discipline into the [graduation] discussion, but at same time remain pragmatic.”