Eugene H. Rotberg
The financing of economic development is one of the principal purposes for which the Bank was established. The care employed in managing the Bank’s finances and borrowings is directed toward ensuring that it will be able to raise sufficient funds to finance its development program. That is its basic job. The future of the Bank ultimately depends on the policies and practices that govern the quality of its lending. To maintain the continuing support of its member governments, its loans must stimulate economic growth in the less developed countries where it lends. At the same time, it must satisfy those from whom it borrows its funds that it will meet its obligations.
The lending operations of the Bank are different from those of the private market. How are they different? Loans must be granted on a basis of sound financial and economic analysis; the projects must produce an acceptable rate of return; and, in each case, the prospect for repayment must be apparent. Bluntly put, the Bank has proven to be a tougher, harder lender than many commercial institutions. It asks questions and receives answers on issues that are relevant to the making of loans but are rarely dealt with by commercial institutions.
Over 90 per cent of the Bank’s loans are committed to the financing of specific development projects. The Bank does not lend in support of military or political objectives, or for the purpose of facilitating exports of any particular industrialized country. Of the $29 billion equivalent in loans committed by the Bank over the past three decades, including the $2.5 billion sold to third parties, a total of almost $7 billion has been repaid. Disbursed and outstanding loans held by the Bank on December 31, 1975 amounted to over $12.6 billion, and a further $9.4 billion of committed loans had not yet been disbursed.
A broad spectrum of projects is financed by the Bank. They are in such sectors as agriculture and rural development, industry, power, telecommunications, transportation, education, urban development, and water supply and sewerage. Education, for example, is essential for raising the level of competence and increasing the skills necessary for implementing economic development. Improvements in urban areas and in water supply and sewerage facilities contribute to the health and well-being of people in developing countries and, therefore, to their productive capabilities.
It is reasonable for potential lenders to the Bank to raise questions about the creditworthiness of the governments to which the Bank lends. The World Bank makes loans to borrowers who cannot obtain the funds on reasonable terms elsewhere. There is no pretense that the Bank can predict with certainty which borrowers 10, 15, or 20 years from now will be creditworthy. The discussion here centers on what the Bank’s several hundred economists and financial analysts look at in evaluating the creditworthiness of a potential borrower.
The Bank staff examines the country’s per capita income, and its potential for the future. It looks at the country’s population growth, its savings rate, and the vehicles through which savings occur. It examines the country’s foreign exchange position, its sources of borrowing, its tax base, and its terms of trade. The staff closely monitors the potential borrower’s external debt—its interest and principal requirements for the immediate and foreseeable future. It studies the country’s reliance on export commodities, whether one or several, and prepares the economic analyses required to show how the country’s exports could be affected by declines in international commodity prices. It examines the country’s imports, and whether imports could be curtailed in order to conserve the necessary foreign exchange to meet debt obligations. It examines the country’s tariff structure, its reliance on food and energy imports, its overall economic health, and the relative commitment of resources to productive and unproductive projects. The Bank insists on receiving and has the right to receive this information. There are few commercial institutions or governments which are equipped to make this kind of creditworthiness study before making a loan.
There is no incentive to do other than make the right determination as to whether or not a country will be able to service its debt to the Bank. A significant portion of the Bank staff is committed to that responsibility, and, if sufficient doubt exists, the country does not receive a Bank loan. A great deal of time, effort, energy, and intelligent thinking goes into making decisions which are for the benefit of both the borrower and the bondholder.