We all are aware that IDA VI [the Sixth Replenishment of resources for the International Development Association] has had a rough time in [the United States] Congress, as we all know that the final outcome was that Congress appropriated $700 million for FY82…. It’s clear that we are not going to have sufficient IDA funding to meet our planned operational targets.
As you know, other donor countries may prorate their IDA contributions in line with the U.S. total. Even if such members contribute more than that, we estimate that we will only have about $2.6 billion in IDA resources available to us in FY82, instead of the planned $4.1 billion.
That means that we have to retool our plans as carefully as we can, and look for instances in which we can provide more IBRD [the International Bank for Reconstruction and Development] loans in order to offset to some degree the cuts we will have to make in our planned IDA commitments. In some IDA countries we may be able to introduce some initial blending of IDA and IBRD funds; and in others, in which we already blend, we will have to harden the mix….
IDA, however, remains the world’s most important single source of concessional assistance for the poorest of the poor developing countries, and I do not believe that the United States will turn its back on those hundreds of millions of individuals who only want a chance to improve their own economic performance….
The really right way to think about IDA is to think of it for what it actually is: an international investment and development institution, owned and operated by the world’s governments, and founded specifically to serve its poorest developing member countries which cannot yet afford to borrow on IBRD or market terms.
In every other respect—save the terms—IDA has the same rigorous standards as the IBRD. There is simply no difference at all in the project quality or priority.
The IDA credit—considered simply as a product design of the World Bank—is now 20 years old. Its terms have remained essentially unchanged: a 50-year maturity; 10 years of grace; no interest charge; and a ¾ of 1 per cent service charge on disbursed balances.
Just this past Tuesday [January 5, 1982], the Board made the first slight alteration in IDA terms since its inception. On future IDA credits, in addition to the traditional ¾ of 1 per cent service charge on disbursed balances, there will be a new ½ of 1 per cent service charge on the undisbursed balances.
This change was made to rectify what has become a basic asymmetry in IDA’s income. Its main administrative expenses arise at an early stage: during project preparation and start-up activities. But the income from the traditional service charge does not start flowing until much later, when the credit is being gradually disbursed as the project proceeds.
This timing mismatch between cost and repayment has entailed operating deficits to IDA since 1976. These deficits were covered at first by using up accumulated surpluses from earlier years. Since more deficits of this type were expected in future years, the time had come to correct the asymmetry. The newly approved service charge on undisbursed balances will enable IDA to recover its costs more promptly, without making its credits significantly more costly.
Now, this is a small and beneficial change.
Other changes—not as small, but even more beneficial—are worth at least exploring.
And when I say “beneficial” I mean to the entire membership of IDA—to the donors and recipients alike—as well as to the Association itself.
The original IDA formula calls for credits to be extended to IDA recipients at zero interest for 50 years. Now if the individual IDA recipient countries are doing their job well and making better than average development progress—and if the World Bank is doing its job well and continues to help these countries through further IDA credits and then IBRD loans, and economic advice, and technical assistance throughout—then theoretically at least there ought to come a time ultimately when increases in new replenishment grants to IDA from donor countries could slow down. They could slow down because the volume of repayments received by IDA from credit extensions using earlier replenishments start to become significant. And these repayments can be used in perpetuity for recycling over and over again.
But that point in time (under the existing IDA product design) takes a very, very long time indeed. Even by the end of this decade, i.e., 8 years from now when IDA will be celebrating its 30th birthday, the annual aggregate of repayments from IDA credits extended in the 60s and 70s will approximate only $200 million. IDA money is out there now for 50 years. And a very great deal can happen in 50 years. There can be a lot of successes that no one anywhere could anticipate 10 or 20 years before.
And that is really exactly what has been happening. Look at Korea and the Philippines, and some 22 other countries including Chile, Turkey, Jordan, Ivory Coast, and Colombia that have graduated from IDA.
This raises the question of whether we ought to start thinking of IDA more in terms of its recycling potential.
At least theoretically, there ought to be a way to design an equitable trigger mechanism in future IDA credits—credits not yet negotiated—that would provide for countries that have been IDA graduates for some years to accelerate the repayment of their IDA balances after they have reached a certain level of development progress on a comparative basis.
And the same kind of equitable trigger mechanism could perhaps be designed into future IBRD loans as well, which now typically have 20-year maturities. Countries having reached a certain level of progress, or having graduated from IBRD, might then accelerate their repayments of outstanding balances so that these funds, too, would be recycled more quickly into new loans for other countries that have not been as successful in their economic development progress.
As I say, these at the moment are merely speculations. But they are worth exploring because as matters stand both IDA and IBRD are very limited as recycling instrumentalities.
They have the potential, at least, of becoming more effective recycling mechanisms, and I think that potential should be examined and assessed very thoroughly.
Now, let me say a few more words specifically about IBRD.
Overall, our total borrowing volume this year may exceed $8 billion; it may be over $9 billion next year, and $10 billion a year later. To support these plans we are having productive discussions with our underwriters here and with key institutions abroad. This, of course, is one of the principal reasons I made two trips to the Middle East recently, and why I will be going to Japan in the next few days.
Earlier this week on Tuesday [January 5, 1982], the Board also approved the introduction of a front-end fee of 1.5 per cent on the face value of all new IBRD loans. The borrowers can either pay this fee from their own resources when the loan is approved, or capitalize the fee by adding the one-time charge to the loan itself.
This action was taken to forestall any potential decline in the Bank’s income over the medium term as a result of adverse movements in exchange rates and interest rates. It will generate more revenues promptly and strengthen the Bank’s standing in the international capital market.
I think it important to emphasize two points here.
In the first place, Bank financing is not concessional. IBRD lending is not a “taxpayer’s handout.“… Our loan interest charges (currently 11.6 per cent per annum) are based on cost—plus a modest markup—but there is a lagged timing mismatch. Notwithstanding that phenomenon (which I will explain in a moment), we do earn a return on our paid-in capital of about 8 per cent.
IDA, however, is different. Here there is no interest charge on the credits extended, only a modest service charge designed to cover costs. But remember, IDA uses grant money received from donor countries and not borrowed money from the marketplace.
In the second place, IBRD needs to be concerned about the level of its net income and the general trend of its profitability over a period of years because it is not dependent on taxpayers’ money as a source of its funds. Rather, it is reliant on the international marketplace as a source of most of its funds, and therefore it needs to maintain a strong financial position to be able to access the capital markets at the finest rates possible.
But now that the Bank has established a front-end fee to help stabilize its income, a much wider task needs to be addressed. We need to improve the Bank’s overall financial flexibility and examine ways to reduce its exposure to unnecessary interest rate risks.
There is in the current financial environment a stubborn structural problem: that of having committed loans to be disbursed in future years at interest rates fixed at one point in time, and then subsequently having to fund those commitments in later periods when the financial markets are in a much different (and in recent years in a much more difficult and volatile) environment than that existing at the time the loans were committed.
Additionally, there has been a gradual and growing reluctance on the part of investors generally to purchase long-term bonds at fixed rates—because of the trends of even higher interest rates over at least the last 15 years or so, and because of the inflationary expectations in future years. These realities of the marketplace require that we be increasingly and aggressively innovative in meeting our borrowing requirements through the use of swap arrangements, of indexed currency borrowings, and floating-rate securities where appropriate.
The wide swings in market rates over the years, and the volatility existing in the international markets generally, are forcing us to at least consider whether we should introduce a degree of variability in our lending rates, as well as whether we should tap the more plentiful short-term markets at appropriate times and in appropriate amounts. At the same time, we recognize that the World Bank is first, last and always a development bank and that we should avoid even the appearance of a commercial bank in our approach to lending. Nevertheless, how the burden of the interest-rate risk can be moderated or shared or avoided in future years is a basic financial issue which we are constantly addressing and shall continue to do so in order to maintain the superb financial condition that currently exists.
In the meantime, of course, the agreement on our General Capital Increase has now come into effect, and it is important that our member countries move forward with their subscriptions. When these are completed, they will boost IBRD’s capital from about $42 billion to over $82 billion at current exchange rates.
My view is that we should look for further lending capacity in the Bank in future years through the mechanism of additional general capital increases, and not through a change in the gearing ratio.
New capital subscriptions are cheap (in budgetary terms) for our member countries, and indeed can theoretically be without any cost whatever if the paid-in portion is reduced to zero. And there is little risk involved in additional capital subscriptions since—given the sound lending practices of the Bank; and given an enviable experience (unmatched anywhere else) of never having suffered a default in its 36-year existence; and, moreover, given a policy, without exception, of never refinancing any of the obligations owed to it—any calls on this capital in the future are extremely remote and highly unlikely. It should be emphasized that calls on capital can only be made for the purpose of paying off its borrowed indebtedness.