A conversation with Moeen A. Qureshi, Senior Vice President, Finance, of the World Bank
F&D In very broad terms, would you give us an account of the Bank’s financial performance in the fiscal year just ended?
Qureshi Generally speaking, this performance has been excellent during the past year, particularly if you take into account the very difficult international environment. The Bank interacts with the financial markets in a number of ways; in addition it is the largest individual borrower in the world’s capital markets (excluding governments). Therefore, its operations both have an impact on the financial markets and are of great significance to the developing countries.
We have had an extremely successful borrowing program this year. We have borrowed close to $10 billion and, considering the prevailing interest levels, at remarkably reasonable costs—8.4 percent on average. The bulk of this was of medium- and long-term maturities, which is particularly heartening because the fixed-rate markets for medium- and long-term bonds have been quite difficult during the past year. The Bank’s commitments and disbursements have also reached record levels during the past year. I believe that in financial terms, that is, in terms of its credit standing and its prestige in the financial markets, the past year’s performance has made the IBRD even stronger—this despite the very serious difficulties that many of its borrowers face in the world’s financial markets because of heavy indebtedness.
The only serious disappointment has been in the mobilization of resources for IDA, which only produced $9 billion for the Seventh Replenishment. Efforts are continuing to raise additional concessionary resources, but certainly the level of funding for the Seventh Replenishment is dispiriting. We had hoped, given the needs of the poorest countries, that we would have a larger amount. The needs are greatest in sub-Saharan Africa, but there are other countries in Asia, such as Bangladesh and Nepal, that also need substantial assistance and are not able to utilize IBRD funds because they are not deemed to be creditworthy.
There was another major achievement during the past year: the Bank received a Selective Capital Increase of $8.4 billion. All in all, the past year’s performance in all areas except IDA was highly successful and a matter of great satisfaction to all of us.
F&D You mentioned that the Bank is the largest borrower in private markets and has an excellent credit rating. Why are Bank bonds an attractive investment in so many national markets?
Qureshi Bank bonds are attractive because investors recognize that the Bank has been a very sound and prudently run financial institution which has never had a default on its books. It has a policy against debt rescheduling, and this policy has been adhered to in the very difficult current environment. I think, too, that the main difference between commercial bank lending to the developing countries and that of the Bank is that our detailed appraisal methods, and the kind of dialogue that we have with these countries, ensures that funds are utilized for productive purposes. Moreover, the very sound financial structure of the Bank rests on its very conservative loan-to-capital ratio. Its large liquidity (which currently exceeds $15.5 billion) is an assurance to investors in Bank bonds that their investments are assured of liquidity in case the need arises. All of these factors have contributed to the Bank’s standing in financial markets. The performance of Bank bonds during the past year demonstrates a “flight to quality”; compared with, say U.S. Treasury bonds, the spreads on Bank bonds have narrowed during the past year.
There are other reasons for our financial strength. We have been able to innovate and adapt our lending and borrowing practices to the changing external environment. The shift to a lending system where the interest rate on our loans is adjusted every six months in relation to the “pooled” cost of Bank borrowing has greatly reduced the Bank’s exposure to interest rate risks. Similarly the development of new borrowing techniques has diversified our resources and broadened our access to financial markets. Our new Central Bank Borrowing Facility, for example, has given us more effective access to central bank funds, and we borrowed $750 million under it. In fact, our target was met within the first few days of the opening of the Facility. We expect to raise another $750 million during the coming year in this way.
We have also been able to engage in very large swap operations totaling about $1.5 billion, and this enabled us to convert high nominal cost borrowing into lower nominal cost borrowings. [This topic is discussed in more detail by Christine Wallich in “The World Bank’s currency swaps,” Finance & Development, June 1984.] The main benefit of these operations was to enable us to raise much larger funds than we would have been able to borrow directly in certain markets. Other innovations included the issuance of floating rate bonds as a way of tapping the U.S. variable rate market; the issue of discount notes in the same market, enabling us to borrow at rates that are comparable to those of U.S. public agencies; and the issuance, in the Eurodollar market, of bonds linked to the U.S. Treasury bill rate. All of these new approaches have strengthened our financial position.
F&D Will the greater emphasis on nonproject lending, such as the structural adjustment loans, affect investor confidence in the Bank?
Qureshi I have already mentioned the contribution of the Bank’s sound lending practices to its strong credit standing. The Bank has built up its reputation on sound, prudent, lending. Now, in regard to your specific question, nonproject lending will not hurt its credit standing. There have been times in the past when the Bank has made important departures in its lending policies (the advent of lending for rural development in the 1970s is an example). In the present world environment, it is quite clear that nontraditional lending, such as structural adjustment loans or sectoral or program loans, is, in fact, even more important to the economic health and prospects of the recipient countries than straight project lending. There are two reasons. First, many of these countries need to undertake important policy changes and economic reforms, and the nonproject loan is a device which allows us to promote the adjustment process through a policy dialogue. The second reason is that sound projects are not feasible if the policy environment is unsound. One cannot lend only for projects without also trying to make sure that the economic environment in which the projects are undertaken becomes sounder.
F&D You mentioned the Bank’s conservative gearing ratio (a one-to-one ratio between loans and capital). Suggestions keep coming up that the Bank should change this ratio. Why doesn’t it?
Qureshi The answer is really very simple. Our gearing ratio is not debt-to-capital, but loans-to-capital. Most of the capital subscription is in the form of callable capital which does not cost our shareholders anything. Moreover, it provides enormous support to the Bank in the market place, because it represents an assurance to investors that, in addition to the financial resources of the institution, their investment is backed by a guarantee. The Bank has always been managed in such a way that this callable or guaranteed capital will never be called, but it is there, and countries do not have to allocate any funds in order to provide callable capital. Now, our outstanding borrowings are about $45 billion. My feeling is that, if you were to change this ratio, you would be needlessly creating an issue with some of those investors who have provided these funds.
F&D Are there other ways of obtaining more leverage out of the Bank’s operations?
Qureshi There are options being discussed, but these are issues on which our Board of Directors and our shareholders have to decide. One idea that has been discussed in a very informal and preliminary fashion is that of a “Bank’s bank.” Such an entity would aim at doing the kinds of operations which will help restore the market’s confidence in the developing countries and to promote the flow of capital to them; for example, by using some of the Bank’s funds as seed money and then to leverage them (although much less than would be the case with the commercial banks).
F&D Let’s turn to IDA, where the funding experience is in contrast to the Bank’s success in raising funds from markets. What does the IDA shortfall indicate, and does it affect future replenishments?
Qureshi The shortfall indicates that the kind of cooperative and multilateral system that was built up after World War II for providing aid to the poorest countries can only survive and flourish if all of the shareholders are prepared to accept burden-sharing as an essential condition for the existence of this system.
IDA was started some 26 years ago when the Bank was requested by certain countries, particularly the United States, to administer funds on their behalf. In those days, the focus of attention was South Asia, which had food grain shortages and needed, it was felt, a major program of subsidized assistance. In that sense, IDA has been a great success; the subcontinent has made major strides, particularly in the area of food self-sufficiency but also in its general economic development. But the situation has changed. Other areas now have a very severe need for concessionary funding because they have no access to private resources. Without international recognition that a cooperative effort is needed once again, there will be great difficulty in meeting the needs of these countries.
The shortfall in the Seventh Replenishment raises the question whether an instrument that has basically served us very well in the past is still best suited to the present environment, and to present political perceptions. My feeling is that in the coming months we will need to take a thorough look at how IDA should evolve, so that it can respond better both to the continuing needs of recipients and to the requirements of some of the donors. Any modification will depend on the donors’ willingness and ability to cooperate on an international platform in assisting the poorest countries.
F&D Could the Bank itself make a larger contribution to IDA?
Qureshi First, the Bank has consistently contributed to IDA out of its profits, but after making an adequate contribution to reserves which is a requirement of its Articles. Second, the Bank’s income comes largely from the charges paid by its borrowers, most of which are developing countries and some of which are poor. Therefore, while it is entirely appropriate that some contribution should be made by the Bank as a symbol of its support for IDA, it should not substitute its own funds for those which must continue to come from the richer countries.
F&D To turn to another group of borrowers, the so-called newly industrializing countries, is the Bank still attractive as a source of finance for these countries?
Qureshi Very much so. There is no question that both with regard to the terms on which the loans are made and because of the broader contribution that a Bank loan brings, the Bank is an attractive source for all developing countries.
First, our current lending rate (July 1) is 9.89 percent. Today, those few developing countries that can borrow in the Eurodollar market do so at somewhat over 13 percent—that is, the LIBOR rate of about 12.8 percent plus a minimum of ¾ of 1 percent, which is the best that the most creditworthy countries can obtain. By comparison, the Bank’s lending rate looks pretty good. Second, the Bank provides long-term loans for specific projects or programs and the quality of Bank assistance is really measured by the contribution it makes to the economic development of its member countries.
F&D The Bank has recently tried to ease the debt problems of one of its borrowing countries, Paraguay, with an innovative loan. Could you shed some light on this and on whether the Bank is going to do more of this kind of lending in the future?
Qureshi The novel feature of the loan to Paraguay was to establish a cap on the loan’s interest payments so that the amount of annual debt service payment that the country would be obligated to provide would remain fixed. If there were an increase in interest rates during the loan period, this would generate additional payments that would extend the maturity of the loan. The Bank would finance the deferral, so to speak, of debt-service payments, by providing funds to the lenders in the meantime. The problem today is not only that many developing countries face a very heavy debt burden, but they are also faced with great volatility in the amount of debt-service payments because of fluctuating interest rates. The Bank’s purpose in providing this type of loan was to make interest payments more stable in order to ensure that the country could plan, undertake policy reforms, and adjust to changes in the international environment while at the same time meeting its obligations.
F&D To follow up on something you said earlier, do you see a trend away from multilateral toward bilateral lending, or do you think, since private banks are no longer as active as they were, that the Bank will take on part of their role in providing resources to developing countries?
Qureshi Let me try to respond to it in very broad terms because I think your question has very important implications for the future role of the Bank. It is ironic that people question the role of institutions such as the Bank at a time when there is so much need for them. Indeed, my view is that the present world environment is precisely the environment for which the IMF and the Bank were established in the first place. We have just gone through a very severe crisis. I believe the Fund has made a very important contribution to its resolution. But in many developing countries, particularly those that are heavily indebted, we are faced with the need for a much longer-term adjustment process. I personally feel that the Bank can make an important contribution, together with the Fund, in facilitating that process in a number of important ways: first, it must ensure that there is a clear recognition in developing countries of the changes that need to be made to adjust to the changed international environment; second, it needs to monitor the progress that is made and to provide information on this to financial institutions to help generate capital flows; and, third, it has to play a direct role in stimulating flows of capital.
Let me pick up the third part, which relates to your question. It is quite clear to me that even with a strong and sustained recovery in the industrial countries, private capital flows to developing countries, over the balance of this decade, are going to be well below the levels of the last ten years. These countries are, therefore, going to be short of the capital needed for even a minimum development effort. Clearly, this means that at least during a transitional period there must be institutions, such as the Bank, that can both make up a part of that shortfall and, more particularly, assist in getting as much as possible from private sources to complement their efforts.
In assisting countries we must remember that we live in a—to borrow a term used by Mr. Clausen—multipolar world, meaning that there are important differences as well as similarities among groups of developing countries. The poorest countries do not have access to private capital and their debt-service ratios do not appear as high as those of some of the middle-income countries (although they are very high in relation to their resources). They need concessionary finance. Another group of countries—the heavily indebted—today provide more than one half of their export proceeds, in many cases, for debt service. They have access to industrial country markets, but they need to maintain a minimum level of development effort to expand their export capacity. In a third group of countries, which are not so heavily indebted, the problems of adjustment are of a more traditional kind. In operating in these various countries, we have to identify the best approach for each case.
F&D You have had a very long and illustrious career, first in the Fund, then in the International Finance Corporation, and now as a senior official of the Bank. What have been your main frustrations and what your chief rewards?
Qureshi Let me start with the main satisfactions with the job. I believe that perhaps I am really the only person who has served in each of the Bretton Woods institutions, since I have worked with IBRD, IDA, and IFC, and also with the Fund. I shall limit myself to my experience in the Bank. I think it is really remarkable that the actual cash contributed to the Bank by all its shareholders is only about $3 billion, and that with these $3 billion we have been able to generate commitments of approximately $95 billion during the past 40 years. What a remarkable engine of economic development the World Bank is, that with such little seed money, it has been able to promote such a flow of private capital! People forget that in today’s world the Bank continues to promote private capital flows from the rich countries to the poor countries through its intervention in the world’s financial markets, at a time when the situation for the developing countries looks very bleak. I derive great satisfaction from the fact that the Bank has continued to expand its contribution to development.
The greatest frustration comes from almost the same source: the insufficient recognition of the potential of the Bretton Woods institutions. Again, speaking only for the Bank, it is my belief that the Bank is capable of doing very much more than it does to assist in resolving the current problems of the developing countries. What is needed is more shareholder support, and really only a little bit more money. As you have said, it is our fortieth anniversary. We are currently engaged in an exercise to determine the future role of the Bank, and we have started discussions with our Board of Directors on this issue. I hope the outcome will be a recognition that there is a greater role for the Bank in serving the interests not only of the developing countries but also of the international community.