The World Bank is quietly preparing the first capital increase in nearly 20 years to replenish the coffers after unprecedented lending in 2008 and the coming two years.
Nov. 6, 2009
During the Annual Meeting in Istanbul, World Bank President Robert Zoellick outlined a capital increase request for up to $11 billion in paid-in capital.[1] The primary rationale is that lending $100 billion between FY09-11 (as encouraged by G-20) will stretch the balance sheet to the limit. Projected new commitments by IBRD between FY09-12 total $136 billion, or about $34 billion per year or 2-3 times average IBRD lending. Not having a GCI would limit annual IBRD lending to about $10 billion in the coming years, compared to a historical annual average of about $19 billion. The demand analysis on which the Bank’s GCI is based is a minimum post-crisis capacity to lending $15 billion per year (see page 45 for IBRD lending trends).
Several documents were released to the press in Istanbul, outlining the rationale for a WB GCI and related governance issues:
The IFC is also included in the request for additional capital, after losing nearly $1 billion in equity in 2008 as a result of the financial crisis. The WB proposal suggests a two step approach to raising the $1.8 to 2.4 billion (or a 75% to 100% increase in the IFC's currently authorized capital).[2] Such a capital increase for the IFC is considered necessary to permit growth in the investment portfolio from $34.5 billion to about $50 billion over “the next few years.” This represents nearly a 50% increase in private sector lending.
The U.S. is by far the largest IFC shareholder with 24.03% of all subscribed shares, followed by Japan (5.96%), Germany (5.44%), France (5.11%) and the UK (5.11%). Brazil, Russia and India together represent 8.53% of IFC shares.
President Zoellick claims that the Bank will “face serious constraints” and will need to begin to “ration” lending if the Bank doesn’t get new resources. The primary justification for the capital increase was a decline in the IBRD’s equity to loan ratio (risk bearing capacity) from about 35% in FY 09 to below 23% after FY10, and could drop as low as 15% after allocating over $100 billion in lending between FY09-11 in response to the global financial crisis.[3] The proposed $5-$11 billion in additional paid-in capital would help prevent the E/L ratio from falling below 23%.
The IBRD can tolerate a lower E/L ratio (of 5 or 6 to 1 leverage) due to the diversity of borrowers and other factors. The IDB, for example, claims it can’t drop below 30%.
The WB DEC analysis refers only to paid-in capital, not callable capital. Paid-in capital is $11.5 billion, or only 6% of total member capital contributions to the World Bank. IBRD callable capital is $178.4 billion, for a grand total of $189.9 billion in total subscribed capital.[4] The World Bank is attempting to avoid the stigma associated with big capital requests, but as they admit in footnote 9 of the GCI document, a capital increase requires increasing callable capital as well. Thus, if the maximum GCI is for $11 billion in additional paid in capital, the request effectively represents a 100% increase in donor contributions to the Bank (and would effectively double the callable capital). The World Bank GCI Research paper estimated that a $5 billion capital increase would cost the U.S. about $850 million over 5 years.
The proposed IBRD/IFC GCI does not have any direct relationship to IDA 16, which is expected to require a replenishment of $42 billion over 3 years. The IBRD GCI does have an indirect relationship to IDA needs because 46% of IBRD income is transferred to IDA.
Compared to the $100 - $200 billion in additional capital sought by the regional development banks, or the $750 billion garnered by the IMF, the paltry $5-10 billion in additional paid-in capital requested by the World Bank might seem like small change. However, if we compare callable capital amounts, the World Bank is also asking for a similarly large contribution.
There is a reference to a variety of possible mechanisms that should be explored to generate the additional capital for IBRD and IFC, such as raising fees, syndicating loans, etc. There is also reference to a sequencing that would see a “Selective Capital Increase” (which is conditioned on voice and vote reforms) as a first and interim step, possibly followed by a full capital increase.
Comparative advantages listed by the World Bank included:
- Generating knowledge (i.e. Conditional Cash Transfers)
- Guiding the other MDBs on development best practices
- World-class risk management
- Convening finance ministers on global financial architecture
- Leading on the provision of global public goods
The four drivers of scaled-up World Bank Operations that depend on a GCI include:
- Public and private sector demand for more development finance
- Demand for development knowledge
- Leadership on climate change
- Avoiding future financial crises
Donor responses and the reform agenda:
Key donor government responses indicated enough skepticism with Zoellick’s proposal that the space for tying the GCI to a reform agenda is likely the only way such a request would be viable. The timeline suggests a window of about six months (mid- October, 2009 - early April 2010) to advance this reform agenda.
France, Britain, Italy, Canada and the U.S. raised the strongest objections to the Bank request for capital. Nordic countries, Netherlands, Spain and Australia voiced general support.
Among the borrowing countries, the BRICs spoke most loudly in favor of a GCI without conditions or progressive payment options that shift costs to them. Argentina's President, Cristina Fernandez de Kirchner, has come out publicly in favor of a World Bank GCI.
U.S. Treasury Secretary Timothy Geithner stated in his plenary speech that the U.S. was “seeking critical institutional reforms in any consideration of additional resources.” Geithner reiterated to the Bank’s governors a set of previously stated principles that have come to constitute an MDB “stress test” for U.S. capital reviews. These ‘Geithner Principles,’ were outlined earlier this year at the Inter- American Development Bank annual meeting in March, and highlighted the need for a cogent demand analysis, clear division of labor, stretching the balance sheet, doing more for the poorest, governance and risk management, demonstrating results. The U.S. has suggested it will make a collective decision on all of the GCIs in play by using this framework for assessing eligibility for U.S. funds.
French Finance Minister Christine Lagarde issued the most negative donor response. “The bank has a certain number of options and margins for maneuver, which do not justify an increase in capital at the moment.” In a plenary speech, Christian Noyer, France’s Alternate Governor for the Bank, emphasized a redefinition of the Bank’s approach to focus better on poor countries particularly through IDA.
Douglas Alexander, Britain’s Secretary of State for international development and Alistair Downing, Chancellor of the exchequer, both questioned the need for additional funds and emphasized the need for greater transparency and guarantees of effective resource use before consideration of a capital increase.
Among alternative options for winning a capital increase, Zoellick suggested a “contingent” plan, where a decline in the equity to loan ratio could trigger a temporary capital infusion that could then be returned if finances improved.
POSSIBLE Reform Agenda:
Solid demand analysis:
As the G-20 begins to discuss “exit strategies” and “unwinding the stimulus programs,” there is increasing pressure on the MDBs to clarify the rationale for new capital in terms of client demand. Some donor countries now feel that the IMF and ADB GCI approvals were made without adequate analysis, with calls emerging for IMF funds to be temporary. Each day that passes reduces the urgency associated with the financial crisis as a rationale for a GCI and the MDBs must rest more on their development track record.
France made the strongest statement that no IBRD capital increase is needed. The World Bank has substantial resources at its disposal to assist its members, resources that are far from being depleted.” France, among other donors, has suggested raising lending rates on middle income borrowers, and exploring a number of other measures. Geithner has stated, “We must be fully confident that additional capital is needed for the MDBs' hard loan windows and that any new resources will be managed well and used effectively.”
Transparency:
Secretary Geithner signaled, and Zoellick echoed, the need for improved information disclosure and governance reforms at the Bank as a top priority for the GCI reform agenda. Zoellick noted in a press conference that the World Bank was moving forward with a progressive disclosure policy revision that approximated the U.S. FOIA law.
While the new draft disclosure policy is a significant improvement, equally significant areas of disclosure remain in dispute. A broadly endorsed “model policy” calls for greater Board transparency, fewer exceptions to a positive list approach and a paradigm shift in the Bank’s commitment to translation – all of which are not endorsed in the new policy draft.
The Bank’s transparency commitments may be better measured on the basis of its implementation plan and related budgetary commitments and effectiveness framework. The World Bank Board will approve a final disclosure policy in December and civil society organizations have already signaled their interest in tracking the implmentation.
The World Bank should follow the IDB’s lead in creating a GCI Consultation process that lays out within the next month the steps necessary for ensuring adequate civil society participation before the looming decision points at the upcoming Spring meetings.
Governance:
The primary governance reforms from the Bank's perspective involve shifting voice and vote power within the Fund and Bank, to benefit the under-represented countries through a dilution of the over-represented ones. The leading BRIC nations maintain their demand for a 7% shift in voting power to developing countries at the Fund, which builds on an increase of 5% that the BRICs endorsed at the G20 meeting. The BRIC nations threatened to condition contributions of permanent funding for an IMF crisis facility, the New Arrangements to Borrow (NAB), on a greater say. The BRIC nations want more say over how the resources in the IMF NAB are spent, and have gone as far to suggest that the NAB should be governed according to voice and vote quotas proportionate to the most recent contributions, which might begin to simulate how the fund itself might be governed.
The U.S. has suggested support for the BRIC proposal, which would likely come at the expense of European nations.
The G24 demand for a 6% increase of developing countries voting rights at the World Bank was dismissed. Voting parity was postponed to the “future”. Brazil Finance Minister, Guido Mantega also proposed that the G24 groups of developing nations be given a seat at the G20 of leading global economic countries, which has supplanted the G7 of rich countries since the global financial crisis erupted.
For his part, Zoellick has resisted the BRIC position, with the Development Committee only conceding to an additional 3% on top of the prior 1.8% increase in voting rights for developing countries, and suggesting that parity be achieved over time. In addition to referring to the World Bank as the G-186, Zoellick has raised questions about the under-represented countries, suggesting that Singapore, Saudi Arabia and Israel could benefit.
The UN Report on Financial Reforms, chaired by Joseph Stiglitz, widens the debate on governance with a call for an entirely new international credit institution, based on a global economic coordinating council, that essentially starts from scratch in representing the G-192 on issues of global significance. Stiglitz pointed to the general lack of capacity for small economies to execute stimulus programs and the IFIs inattention to this problem as an indicator of widening gap between rich and poor countries to follow the crisis. Democratization of international financial governance is the only way to put certain issues up for debate (e.g. absence of consumption outside the U.S., legacy of capital market liberalization, inequality trends led by the U.S., a global reserve system not pegged to the dollar, etc.)
Most recently the Zedillo Commission:
The recently released Zedillo Commission report "Repowering the World Bank for the 21st Century" called for, among other things, the total redesign of the World Bank board. President Zoellick sent a letter praising the Commission but opposing some of the main recommendations of the report including:
- On voice and participation: decreasing the number of Board seats to 20 instead of the current 24 plus an additional Africa seat (25 in total); this formula will have a great impact on European Executive Directors
- On nature of the Board: suggestion to change the 'level' of representation to Ministerial rank or equivalent for all countries and creation of an Advisory council
- Equal developed and developing country representation at the IFC and IBRD
- Selection of Bank leadership: be merit-based, transparent, and without regard to nationality
This debate on governance is heating up and will be a top agenda item at the upcoming spring meetings in April 2010, where the issue of voice and vote reform could be decided/resolved.
Climate funding:
The U.S. suggested that it expects the World Bank, along with the other MDBs, to play a significant role in the integration of effective financing with development planning, policies and investments when it comes to climate change. “To succeed in this effort,” Geithner stated, “we need to encourage low income countries to pursue cleaner development strategies through renewable energy, as is being piloted by the ‘Scaling up Renewables Energy Program.” New estimates of between $100-150 billion per year in needed adaptation funding were circulated in Istanbul.
These climate commitments apparently clash with the direction of the WB Energy strategy, which has raised concerns about priorities to support coal, large hydro and continue a focus largely on supply of new power versus end use conversion incentives without strong mandates for GHG accounting and the provison of energy options analysis. Climate and energy will undoubtedly figure into the World Bank's GCI request.
Other possible reform issues that were not as widely mentioned in Istanbul, include:
- Development Effectiveness, Accountability, Results Management: The issue of development effectiveness was not mentioned as much in plenary speeches, but continues to be a prominent issue to watch as the Bank shifts away from a rules-based lending approach to an outcome-based approach. At the very least, with respect to the IFC – highly inadequate accountability on development outcomes
- IFC Performance Standards Review and the persistent inconsistency between the IFC and other standards with the World Bank Group.
Calendar:
The next six months will be decisive for shaping the reform agenda for any World Bank GCI. Agustin Carstens, Mexican Finance Minister and Chair of the Development Committee, stated that an updated review- including a review of the general capital increase- needs to be completed by the Spring 2010 semi-annual World Bank/IMF meetings.
Zoelllick acknowledged the support of Minister Carstens for the GCI, not uncoincidentally after Mexico acquired nearly $8 billion in fast disbursing Development Policy Loans since the financial crisis unfolded in late 2008.
Acknowledging the role of donor country legislatures in authorizing any capital increase, Zoellick stated, “we are in the world of politics.” Zoellick worked at the U.S. Treasury in the late 1980s during the last World Bank capital increase and is widely regarded as a seasoned politician. He forecast his approach to winning legislative approval by observing that the price of the last World Bank capital increase for an opposition (Democrat) Congress was a “huge housing bill.”
Secretary Geithner has suggested that the U.S. will make a collective decision on all MDB capital increase requests by the Spring of 2010, and could signal further details about the methodology in his November 17 speech to the Senate Finance Committee.
While the four working groups for the G-20 that privileged a focus on the IFIs are no longer meeting, the G-20 was endorsed as the formal coordination mechanism on global financial policy. In Pittsburgh, the G-20 subscribed to the U.S. proposal "A Framework for Strong, Sustainable and Balanced Growth," and the member countries are now trying to figure out what it means. The working relationship and Division of Labor (one of principles that the U.S. Treasury holds for the IFIs) is by no means clear for the G-20, G-8 and the IMF. The next G-8 meeting will take place in Ontario, Canada, alongside the G-20 meeting, also in Ontario, but hosted by South Korea. By 2011, leaders are hopeful to have a unified leaders summit. To the extent that IFI reforms are still part of this global reform agenda by 2011 remains to be seen.
[1] This section is based on WB Development Committee document DC 2009-0010, “Review of IBRD and IFC Financial Capacities – Working with Partners to Support Global Development Through the Crisis and Beyond,” Sept. 29, 2009
[2] IFC’s authorized capital stock is $2,450 million. At the end of FY09, IFC’s total capital was $16 billion, of which $2.37 billion was subscribed and paid-in capital, and $13,5 billion was accumulated retail earnings.
[3] The Bank considers a range of 23-27% for E/L ratios to be prudent. The IBRD E/L range is based on a top range of 27% based on the historically highest modeled unexpected shock size and the bottom of the range – 23% is derived based on the average modeled unexpected shock size of the last 10 years. The IBRD’s E/L ratio dropped to 17% in 1986-1988 prior to the most recent capital increase.
[4] See http://treasury.worldbank.org/cmd/htm/financial_shareholder.html