A Wrong Turn for World Bank Concessional Lending

By Jayati Ghosh & Farwa Sial

NEW DELHI – The International Development Association is the part of the World Bank that is meant to help the world’s poorest countries. Its explicit mission is “to reduce poverty by providing zero to low-interest loans and grants for programs that boost economic growth, reduce inequalities, and improve people’s living conditions.” The IDA provides around a quarter of its financing in grants, and the rest in concessional loans that can be repaid over 30-40 years, including a grace period of up to ten years.

In the fiscal year ending June 30, 2020, the IDA committed nearly $30.5 billion to low-income countries. Next month, the IDA’s 173 member states will meet to agree on its latest disbursal of funds, estimated at $94 billion for the two-year 2021-23 period. In annual terms, this is not much of an increase, especially given the massive economic devastation that the COVID-19 pandemic has caused in low-income countries.

Developing countries have been ravaged by a combination of the pandemic-driven health crisis, collapsing exports, rising global food prices, domestic economic contraction, falling fiscal revenues, and external debt overhang. The World Bank estimates that 97 million more people – many of them in Africa – will fall into extreme poverty in 2021. This could well be an underestimate, because it does not take into account higher food prices, increasing inequality, and the impact on the poor in South Asia.

Providing even the most basic support to people in increasingly precarious circumstances in the poorest countries will take a lot more than $47 billion per year. Researchers at the International Monetary Fund estimate that low-income countries will need around $200 billion over the four years until 2025 simply to recover from the pandemic and a further $250 billion to catch up with advanced economies. But even a smaller amount of IDA financing could provide some relief, especially in terms of governments’ fiscal space, and is important because of the low-interest terms.

But how much of this money will actually go to governments that desperately need to increase public spending on health and social protection, and to promote economic recovery? Unfortunately, there is a high risk that IDA funds will be used in part to favor private-sector actors, instead of enabling governments to support poor people directly.

This is because the World Bank Group, in line with its 2017 “Cascade” approach, introduced a “private finance-first” model that prioritizes private financing options over the use of public resources in development projects. As part of this broader strategy, the IDA launched its own Private Sector Window (PSW) in 2017 to mobilize private investment in recipient countries.

The PSW places donor aid resources under the direct control of the World Bank’s private-sector investment arm, the International Finance Corporation (IFC), and its private-sector guarantee arm, the Multilateral Investment Guarantee Agency (MIGA). This means IDA funds are being used to subsidize private-sector projects supported by the IFC and MIGA in low-income countries and fragile and conflict-affected states.

This redirection of development funds can be criticized on several counts. For starters, some have accused the World Bank Group of a lack of transparency for subsidizing firms through a non-competitive process on the basis of unsolicited proposals. The bank has also failed to demonstrate sufficient development impact, because the criteria for evaluating the PSW and demonstrating the “additionality” of private-sector finance are complex and technical and do not explicitly consider development effects. In fact, the PSW’s effectiveness appears to be limited to its role in underwriting risks associated with IFC and MIGA operations, rather than demonstrating private finance’s contribution to economic growth and sustainability. Lastly, some have criticized the PSW’s poor targeting of development-related projects in the context of responses to COVID-19.

Even the World Bank’s own PSW mid-term review noted that “the question of whether a project can take place without PSW support does not always have a simple answer.” The basic goal of introducing the PSW in developing countries – to bring private finance into development projects – also has not been realized. The 2021 assessment by the World Bank’s Independent Evaluation Group shows that, on the whole, the PSW has mobilized even less private capital than other blended-finance instruments like the MIGA Guarantee Facility.

The World Bank’s persistence with a private finance-oriented strategy – despite the glaringly obvious need for increased public spending – may in part reflect the IDA’s governance structure. The body’s establishment in 1960 represented a compromise accepted by developing countries, many of which had instead demanded a United Nations multilateral fund operating on the basis of “one country one vote” to help meet development needs. The United States’ influence in the World Bank prevented that, and the IDA’s 74 recipient countries now have less than 16% of the voting power. This democratic deficit at the multilateral level, along with a lack of accountability at evaluation stages, further reduces developing countries’ scope to influence decision-making.

The ongoing pandemic-induced reversal of positive development trends needs to be addressed through stable financing channels in developing countries. These channels should emphasize grants supporting essential public services like health and education, as well as infrastructure. Given the PSW’s inherent limitations, subsidizing the private sector to invest in public goods and services through the IDA will only exacerbate the pandemic’s harmful consequences.

As long as the IDA can be an important source of recovery funds for the poorest economies, those resources must be used effectively. This will require closing the PSW and, instead, providing resources directly to governments and developing alternative approaches to strengthen public finances and public services. We can no longer afford solutions that worsen the problem.

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Jayati Ghosh, Executive Secretary of International Development Economics Associates, is Professor of Economics at the University of Massachusetts Amherst and a member of the Independent Commission for the Reform of International Corporate Taxation. Farwa Sial is an economist and Senior Policy and Advocacy Officer at the European Network on Debt and Development (Eurodad).