Yellen hails 'progress' on World Bank reform, but demands more action

United States Treasury Secretary Janet Yellen piled more pressure on the World Bank to enact reforms aimed at lending countries more money to address climate change, pandemics, and other global concerns, even as she praised progress in the months since she launched a campaign to overhaul the anti-poverty lender. “We have begun the evolution of the World Bank,” Yellen said in a speech Thursday. “We have made real progress over the past four months.” She said the regional development banks would come under scrutiny next. The World Bank released its proposed road map for reform publicly last month. Among its ideas is a call for a capital increase so that it can better meet global challenges — a major demand of key shareholders, notably the U.S. and Germany. A capital increase would give the bank more funds to leverage and increase its lending capacity. Shareholders have put in about $20 billion since the lender was founded after World War II. Yellen did not mention the proposed capital increase in her speech and did not take questions from the press. However, it is clear that the Treasury wants to see bank management make progress on areas she outlined in her speech, including a clear vision for addressing global problems, as well as plans for incentivizing borrowing countries to take out loans for such projects. The goal is for management and shareholders to agree on the low-hanging fruit by the end of the World Bank’s Spring Meetings in April, and then get around to thornier issues ahead of the annual meetings in October. “In the next few months, we expect to see ideas begin to be translated into action,” Yellen said at the Center for Strategic and International Studies event. The U.S. is the World Bank’s largest shareholder and has tremendous influence over other board members, especially in the West. Not all countries are yet fully on board with Yellen’s ideas. The secretary, who recently spent a week in Africa, appeared responsive to concerns of low-income countries that their needs on fighting poverty could get brushed aside if the banks are pushed to focus on climate. “They don’t want global challenges addressed at the expense of poverty reduction and the Sustainable Development Goals,” Yellen said, referring to her conversations with African ministers. The evolution “does not mean shifting the bank away from its traditional work,” she said. “It means expanding the work of the bank to better include addressing global challenges.” World Bank management has held meetings with shareholders of various income levels for lengthy, and at times, contentious talks, as Yellen and her team try to build a coalition of countries in favor of reforms. Yellen acknowledged that asking countries to borrow more for so-called global public goods comes at a time when many African nations are facing a “debt overhang” which imperils their path to development. This means they owe too much and in many cases cannot repay it, let alone take on additional debt for more projects. Meanwhile, global progress on reducing poverty has recently reversed for the first time in decades. “This is just a barrier to being able to move forward,” she said of the unsustainable debt burdens. Most recently, Ghana, a once fast-growing nation, effectively defaulted on its debt. Yellen noted she is in talks with China, a major creditor to low-income nations, to move ahead with debt restructuring talks so that these countries can again tap capital markets for their development priorities. “China’s lack of willingness to comprehensively participate and move in a timely way has really been a roadblock,” she said. She noted that there will be an International Monetary Fund roundtable on debt at the upcoming Group of 20 major economies ministers’ meeting in India, which could prove critical for resolving some of the obstacles. On the World Bank reforms, one of the key issues still unresolved is how management plans to better use the resources it has. Last year, a group of independent experts released a complex report on the capital adequacy framework for the entire multilateral lending system, which argued there were ways for the multilateral lenders to take more risks and increase lending without damaging their prized AAA credit ratings. The bank’s ability to get shareholders on board with a capital increase may well end up depending on its ability to come up with a plan for more efficient uses of its existing paid-in capital. However, as Devex reported, maintaining the AAA while lending more is not simple, with credit rating analysts concerned about the banks taking on too much risk.