Alternative ways to fund the International Development Association (IDA)

Wor1dDeve1opment,Vo1.25,No.3,pp.291-310,1997 0 1997Elsevier Science Ltd Printed in Great Britain. All rights reserved 0305-750x/97 $17.00 + 0.00

Pergamon

PII: SO305750X(96)00111-8

Alternative Ways to Fund the International Development

Association (IDA)

JONATHAN

Congressional

SANFORD*

Research Service, Washington, DC, U.S.A.

Summary. - This paper discusses the present method and three alternative ways the International Development Association (IDA) - the World Bank’s concessional loan facility - might he financed. All cost the donors less than the present system, while providing borrowers with the same amount of aid. The alternatives also have drawbacks however, that may limit IDA’s future capabilities in certain respects. The paper also discusses a way IDA’s funds might be supplemented temporarily if the donors have difficulty implementing the pending 1 lth IDA replenishment plan. 0 1997 Elsevier Science Ltd. All rights reserved Key words - foreign aid, development,

1. UNSETTLED

international

ISSUES

finance, World Bank, poverty, debt

payments, the United States was able to participate in decisions and procurement4 Members of Congress and others have criticized the US exclusion from the 1997 fund. Legislation adopted in 1996 seeks to persuade the other donors to allow US participation in the fund. Treasury Department officials say that, without that change, the United States will be able to participate in about half the loans scheduled for consideration by IDA in 1997. Many IDA donor countries are experiencing serious budgetary pressures. In some, such as the United States, budgetary problems and debate about the efficiency of the World Bank have made it difficult for the government to marshal1 political support for the multilateral banks. IDA accounts for only about 18% of all lending approved annually by the World Bank and the four regional development banks. From a budgetary perspective, however, IDA accounts for nearly 60% of the money the United States budgets annually to fund its participation in the multilateral banks. The proportion for other IDA donor countries is comparable. In the United States, at least, IDA is the most exposed multilateral development bank (MDB) program in the annual foreign aid appropriations bill. Critics of the MDB program have raised a number of concerns. Some have urged that

On March 19, 1996, representatives of more than 30 donor countries agreed in Tokyo on plans for a new replenishment of the International Development Association (IDA), the World Bank’s concessional loan facility. This is the 1 lth replenishment of IDA’s resources (IDA 11) since the Association was created in 1960. New contributions to the three-year plan will total $11 billion - $4.38 billion in fiscal 1997 as contributions to an interim fund and $3.7 billion annually in 1998 and 1999 as regular IDA contributions.’ The United States, still finishing its payments to the last replenishment, was not originally expected to contribute to the 1997 interim fund.* In fiscal 1998 and 1999, it will be expected to contribute $800 million annually (20.86% of the total regular IDA contributions excluding the interim fund).’ Without the interim fund, IDA would have little more than the expected US payment, the annual contribution to IDA from the World Bank’s net income, and funds received in repayment for previous IDA loans with which to fund its operations. Its volume of lending would be reduced to perhaps a third its level for 1996. Because the United States was not scheduled to contribute to the 1997 interim fund, it would not be allowed to participate in decisions regarding the use of those funds. US firms would also be ineligible to participate in procurement financed by loans from the 1997 fund. This situation is unusual. In 1984, the last time other donors made extra contributions to IDA because United States was seriously behind in its IDA

*This article builds on work previously Nevertheless, the views expressed here author and not necessarily those of CRS Congress. Final revision accepted: October 297

written for CRS. are those of the or the Library of 5, 1996.

298

WORLD

DEVELOPMENT

funding for IDA and other MDB programs be cut until the MDBs implement policy changes they have proposed. Others have argued that funding for the MDBs should be reduced permanently or eliminated because of perceived limits or deficiencies in the program. Their comments have sometimes made it easier for opponents to justify reduced funding for the multilateral agencies. Meanwhile, supporters of the MDB program have stressed the need for increased attention to various concerns. Some say the MDBs should focus mainly on poverty alleviation or on programs that meet basic human needs. Some urge more attention to environmental protection. Others urge more emphasis on economic growth, economic policy reform, private sector growth, or expansion of developing countries’ export income. Some have underscored the role the MDBs can play in stimulating exports and building future export markets for donor countries in the developing world. Though not necessarily contradictory, the variety of goals has made it difficult sometimes for supporters of the MDB program in the United States to focus their arguments on behalf of US participation in the MDBs. In 1996, the Clinton Administration asked Congress to appropriate the $935 million needed to complete the US payment to IDA 10. Congress decided, however, to appropriate $700 million for IDA in fiscal 1997. The effect of this shortfall is uncertain. Some other IDA donor countries are losing patience with the United States. At one point this past year, it looked to many that the IDA 11 replenishment plan might come unraveled if the US payment for fiscal 1997 was too low. (The House voted in June to approve only $525 million in its version of the fiscal 1997 appropriations bill.) This danger seems to be passed. Still, the reduction in US financial support for IDA may have consequences. Other donors may stop according the United States its traditional influence in IDA and the other MDBs. They might support increased IDA aid to countries (such as China) where the United States is seeking reduced lending.5 Alternatively, the other donors might decide to slow their own contributions to IDA and to channel more aid through their bilateral programs or through multilateral aid programs associated with the European Union. Germany, at least, is required by law to match any reductions in US contributions to IDA with similar reductions of its own. This paper looks at ways that IDA’s funding mechanism might be changed in future replenishments to ease the burden on the donors without diminishing the amounts available to help poor countries. It also discusses one way IDA’s resources could be supplemented during the IDA 11replenishment period. The alternatives identified here would provide loans to IDA’s borrower countries at the same cost they currently pay. The cost to the donors, however, would be less. Nevertheless, at least one option might

require changes in the IDA funding mechanism that some countries (the United States, for example) would have difficulty implementing. The alternatives here presume no changes in the current focus or terms of IDA lending. The cost of funding IDA could decrease if changes were made in the countries or kinds of activities the program financed. This would, however, reduce some of the benefits the program currently provides to low-income countries. In short, this paper discusses alternative ways IDA funds might be raised rather than alternative ways IDA funds might be used.

2. THE SIZE OF IDA The IDA 1 lth replenishment is significantly smaller than prior IDA funding plans. The IDA 10th replenishment (IDA lo), covering the period July 1993 through June 1996, comprised contributions totalling over $18 billion. The ninth replenishment (IDA 9), covering the period July 1990 through June 1993, provided IDA with $14.7 billion (almost $17 billion at current exchange rates) in new resources. This is the first time since IDA 7 (1984) that a new IDA replenishment will be smaller than its predecessor in dollar terms. IDA is the largest single source of concessional aid to low-income countries. In 1993, on a net flow basis (new disbursements minus repayments), IDA loans accounted for 84% of all concessional loans and 18% of all foreign aid received by poor countriesh (see Figure 1). In dollar terms, the volume of IDA lending has grown rapidly. In 1996, IDA loan commitments totalled $6.86 billion, more than twice (209%) the $3.14 billion IDA committed in 1986 and more than four times (415%) the $1.66 billion it committed in 1976 (see Figure 2). Some of this apparent growth is due, however, to the decline in the US dollar, which lost roughly a third of its relative value (compared to other major currencies) in the late 1980s. IDA now officially denominates the value of its IDA loans in Special Drawing Rights (SDRs), the International Monetary Fund’s (IMF) unit of account. The rate of growth in IDA lending is more modest (up 85% from 1986 and 334% from 1976) if the value of its prior loans is also calculated in SDR terms (see Figure 3). In terms of the actual purchasing power transferred from the donors to recipient countries, however, the growth of IDA lending has been much smaller than the above data would suggest. Much of the apparent growth in recent years can be attributed to inflation. In constant 1992 dollars, IDA’s 1996 loan commitments totalled $6. I8 billion, less than the $6.47 billion it lent in 1991 and the $6.58 billion it committed in 1992’ (see Figure 4). In real terms, IDA’s total loan commitments in 1996 were smaller than the amount it lent 16 years earlier, in 1980.

WAYS TO FUND IDA

ALTERNATIVE

100%

__---

T-

1

299

Millions

of

199%

Dollars

6000 5003 4000 3ooc 2000 70 72 70 76 78 8C 82 84 86 83 Y3 42 -18

-56

of Ccncessioual of Concessloual

Loans daus/Sra3ts

C 60

Figure 1. Nerflow ifIDA aid as a share of total aid, 1970-93.

Millions

7000

of Current

Dollars

6003 5000 4000 3000 2000 1000 0 60

Figure

64

2. Growth

68

72

76

80

84

88

in IDA loan commitments

92

96

in dollars,

1960-96.

Millions

of

SDRs

5000

4occ

3000

64

1000

0

in IDA loan commitments

in SDRs,

68

72

76

80

84

Figure 4. Growth of IDA loan commitments (constant 1992 dollars), 1960-96.

3. REPAYMENT

88

92

96

in real terms

TERMS FOR IDA LOANS

IDA lends mainly to low-income countries. Its loans are generally repayable over 40 years following a IO-year grace period. IDA charges no interest on its loans, but borrowers pay a three-fourths of 1% service charge to defray the World Bank’s costs in making loans. The repayments from borrowers (called “reflows”) return to IDA coffers and are available to finance new loans in future years. In effect, IDA is a revolving fund that recycles its resources twice a century. Over time, because of the effects of inflation, the value of IDA resources will decline. The purchasing power of IDA funds generated by reflows will be less each time they are recycled as new loans. The World Bank calls the resources it provides from IDA “credits” in order to distinguish them from the “loans” it provides from its market-based lending facility, the International Bank for Reconstruction and Development (IBRD). The repayment requirements are no less strict, however, for IDA credits than for IBRD loans. If a country falls more than 90 days in arrears in its IDA or IBRD loan payments, all disbursements on other loans and all processing of loan applications for the country are suspended.

4. CURRENT

2000

Figure 3. Growth 1960-96.

1000

METHOD FOR FUNDING IDA

At present, the money IDA lends is contributed by the governments of its higher-income member countries. In the 10th IDA replenishment (IDA lo), 35 countries agreed to contribute 13 billion Special Drawing Rights (SDR) - or about $18 billion under then-prevailing exchange rates -to fund IDA operations during 1993-95. The United States agreed to

300

WORLD DEVELOPMENT

provide $3.75 billion, or 20.86% of the total. Japan, Germany, France, the United Kingdom, Canada, and Italy agreed to provide 52.17% of the funds. Other developed countries agreed to contribute 16.7%, two Arab oil-exporting countries about l%, and several middle-income developing countries about 1.26% of the total. The remaining 8.1% was not subscribed. For the basic IDA 11 replenishment, the contribution shares will be about the same as those for IDA 10. The final percentages are not available, however, as several donors were changing administration and had not yet formally confirmed their participation in the plan. When the World Bank’s Board of Executive Directors agrees to make an IDA loan, the funds are not paid to the borrower right away. Rather, IDA opens a line of credit and disburses money as the project is implemented and the bills from contractors are presented for payment. Like most countries, the United States gives IDA non-interest bearing, nontransferable, non-revokable letters of credit when it formally commits itself to contribute funds. These are encashed as IDA needs funds to pay for project procurement. (A few countries make their payments at the time of commitment, so IDA will have some resources on hand to pay its operating costs.) For countries such as the United States, the actual cost of funding their contribution begins with the IDA disbursement rather than with the submission of their letter of credit or their national legislature’s appropriation of funds. Table 1 shows the hypothetical cash flow for $1 billion in IDA loans. With this data, one can calculate the value of IDA loans to borrowers and the cost of IDA contributions to donor countries. The table shows the likely disbursement and loan repayment pattern for $1 billion in IDA loans approved about the same time in calendar 1996. In Table 1, the loans are disbursed over an eight-year period, with $50 million paid out the first year, $150 million the second year, $300 million the third and fourth years, and $100 million the fifth and sixth years. This approximates the disbursement pattern for IDA loans.* The $1 billion in IDA loans illustrated in Table 1 are repaid over a 50-year period. Borrowers pay only the 3/4 of 1% annual service charge on their outstanding balance for the first 10 years of the loan. During the next 10 years, according to the payment schedule reported by the World Bank, borrowers repay 1% of the principal each year in their outstanding balance. (They also continue paying the threefourths of 1% service charge on that balance.) During the last thirty years, borrowers pay 3% of the principal each year (in addition to the service charge). In Table 1, the 50-year sequence is computed for each disbursement. Thus, since the last disbursement occurs in the year 2001, the last repayment occurs 50 years later, in 2050. The borrowers

will have then repaid everything they owed for the $1 billion in loans approved in 1996. Many loans approved since the early 1980s have shorter repayment periods (35 years for some countries). For simplicity, none of these are assumed to be included in the $1 billion worth of loans illustrated in Table 1. Were they included, the basic analysis would not change. The flow of loan repayments would be greater, though, and the cost to borrowers would be greater and the cost to donors less than those illustrated in Table 1. Table 2 shows the cost the donor countries would bear if they were to finance IDA three different ways. The top line shows the cost of the present system.9 The second and third lines show the costs of two altematives. The cost of a third alternative is illustrated at a later point (Table 3) in this paper. In each case, the prevailing interest rate is assumed to be 7%. In the current IDA funding system, the donors incur no cost until IDA disburses funds. In Table 2, the payments from the donors match the IDA disbursement schedule shown in Table 1. The $1 billion in IDA loans may have been approved in calendar 1996, but the donors pay only a small portion of their contribution that year. The rest of their payments are spread over the next five years. Thus, the net present value (NPV) of the donors’ promise to pay $ I billion to IDA is worth approximately $789 million in calendar 1996. Under the current system, no funds are returned to the donors once they have made their contribution. Loan repayments remain with IDA to fund future loans and to lessen the amount the donors will need to contribute in the future to sustain a particular level of IDA aid. If IDA member countries should decide to dissolve the organization, each member country would receive back a share of IDA’s assets - the loans due IDA from its borrowers - in proportion to its ownership share in the Association.

5. ALTERNATIVE METHODS FOR FUNDING IDA A fundamental question for the consideration of any alternative policy prescription is whether it is possible to provide poor countries with the same amount of assistance that IDA currently offers, but at a lower annual cost to the donor countries. The three options discussed in this paper explore possible ways this might be done. The level and timing of the savings vary for each alternative. The first option is an interest subsidy arrangement in which IDA uses the money contributed by the donors to pay the interest on IBRD loans rather than to make no-interest IDA loans directly. The second is a plan whereby IDA returns to the donors all the money they contributed to fund IDA no-interest loans as the borrowers repay the loans. The third is an arrangement whereby IDA subsidizes the

ALTERNATIVE WAYS TO FUND IDA

301

Table l.Hypotheticalcash~ow(millions) fora$lbillionIDAloancommitmentmadeincalendar1996

Cumulative Disb Cumulat Reflows Outstanding Bal

Cumulative Disb Cumulat Reflows Outstanding Bal

1996

1997

1998

1999

$50.00 $0.00 $50.00

$200.00 $0.00 $200.00

$500.00 $0.00 $500.00

$800.00 $0.00 $800.00

$900.00 $0.00 $900.00

2004

2005

2006

2007

2008

$1 ,OOO.OO $1 ,OOO.OO $0.00 $0.00 $1,000.00 $1,000.00 2012

Cumulative Disb Cumulat Reflows Outstanding Bal

Cumulative Disb Cumulat Reflows Outstanding Bal

Cumulative Disb Cumulat Reflows Outstanding Bal

2021

2015 $1 ,ooo.oo $74.50 $925.50

2022

$ I,OOO.OO $ I,OOO.OO $173.50 $203.50 $826.50 $796.50

$1.ooo.oo

$233.50 $766.50

2023

$1 ,oOo.oo $263.50 $736.50

2028

2029

$1.000.00 $413.50 $586.50

$1.000.00 $443.50 $556.50

$1,000.00 $473.50 $526.50

2036

2037

2038

$1,000.00 $683.50 $316.50

$1 ,ooo.oo $713.50 $286.50

$1,000.00 $743.50 $256.50

2045

2046

2047

$1,000.00 $952.00 $48.00

$1 ,ooo.oo $976.00 $24.00

$l,OOO.OO $653.50 $346.50 2044

Cumulative Disb Cumulat Reflows Outstanding Bal

$ I ,ooo.oo $1 ,ooo.oo $2.50 $7.50 $997.50 $992.50

2014

$1 ,OOO.OO $1 ,OOO.OO $l,OOO.OO $44.50 $54.50 $64.50 $955.50 $945.50 $935.50 2020

Cumulative Disb Cumulat Reflows Outstanding Bal

2013

$1 .ooo.oo $0.50 $999.50

$l,OOO.OO $893.50 $106.50

2030

$l,OOO.OO $923.50 $76.50

203 1 $1 ,ooo.oo $503.50 $496.50 2039

interest cost of IBRD loans to poor countries, using the repayments from old IDA loans to pay the subsidy for the new IBRD loans.

(a) An interest subsidyfinanced

2000

by donors

IDA currently makes direct no-interest loans. As noted before, borrowers pay a three-fourths of 1% service charge to cover IDA administrative costs. The first alternative would have IDA subsidize the interest cost of IBRD loans to poor countries. The World Bank would get the money it needs to make these loans by

2016 $1 ,ooo.oo $85.50 $914.50 2024

$1,000.00 $293.50 $706.50 2032 $1 ,ooo.oo $533.50 $466.50 2040 $ I ,ooo.oa $773.50 $226.50 2048

$1 ,ooo.oo $99 1.oo $9.00

2001

$1,000.00 $0.00 $1,000.00 2009

$1 ,ooo.oo $15.50 $984.50 2017 $1 .ooo.oo $99.50 $900.50 2025

2002

$1,000.00 $0.00 $1.000.00 2010

$ I ,ooo.oo $24.50 $975.50 2018 $ I ,ooo.oo $119.50 $880.50 2026

$1,000.00 $323.50 $676.50

$1.000.00 $353.50 $646.50

2033

2034

$1 ,ooo.oo $563.50 $436.50

$1 ,OOo.oo $593.50 $406.50

2041

2042

$1,000.00 $1,000.00 $803.50 $196.50 2049

$1 ,ooo.oo $997.00 $3.00

$833.50 $166.50

2003

$1,000.00 $0.00 $1,000.00 2011

$1,ooo.oo $34.50 $965.50 2019

$1,ooo.oo $145.50 $854.50 2027

$1,000.00 $383.50 $616.50 2035 $1,000.00 $623.50 $376.50 2043 $l,OOO.OO $863.50 $136.50

2050

$ I ,ooo.oo $1 .ooo.oo $0.00

borrowing in world capital markets. The cost of a subsidized loan for the borrower, however, would be essentially the same as that for current IDA loans. Borrowers would pay the first three-fourths of 1% of the interest cost of the subsidized loan.‘” IDA would contract with the IBRD to pay the remainder and the contributions from donor countries would be used to pay for the subsidy. The Bank could vary the level of subsidy for each loan depending on the economic status of the borrower. The poorest countries could get a full subsidy, for example, while subsidy for countries nearing graduation from IDA (now called “blend” countries) could be reduced until they eventually pay

302

WORLD DEVELOPMENT

Table 2. Cost to donorsfor

Current IDA IBRD Subsidy Plan* Refundable IDA*t

Current IDA IBRD Subsidy Plan Refundable IDA

Current IDA IBRD Subsidy Plan Refundable IDA

1997

1998

1999

2000

$50.00 53.13 $50.00

$150.00 $12.50 $150.00

$300.00 $3 1.25 $300.00

5300.00 $50.00 $300.00

5100.00 $56.25 $100.00

2004

2005

2006

2007

50.00 $62.50 $0.00

$0.00 $62.50 $0.00

$0.00 $62.47 ($0.50)

2012

2013

$0.00 $59.72 ($10.00)

$0.00 $5 1.66 ($28.00) 2028

Current IDA IBRD Subsidy Plan Refundable IDA

$0.00 $36.66 ($30.00) 2036

Current IDA IBRD Subsidy Plan Refundable IDA

$0.00 $2 1.66 ($30.00) 2044

Current IDA IBRD Subsidy Plan Refundable IDA

IDA (miliions) and the cost of two alternatwes

1996

2020 Current IDA IBRD Subsidy Plan Refundable IDA

the current method ofjinancing

$0.00 $6.66 ($30.00)

method.s

2001

2002

2003

$100.00 562.50 $100.00

$0.00 962.50 $0.00

$0.00 $62.50 $0.00

2008

2009

2010

2011

$0.00 $62.34 ($2.00)

$0.00 $62.03 ($5.00)

$0.00 $61.53 ($8.00)

$0.00 $60.97 ($9.00)

$0.00 $60.34 ($10.00)

2014

2015

2016

2017

2018

2019

$0.00 $59.09 ($10.00)

$0.00 $58.47 ($10.00)

$0.00 $57.84 ($10.00)

$0.00 $57.16 ($11 .OO)

$0.00 $56.28 ($14.00)

$0.00 $55.03 ($20.00)

$0.00 $53.41 ($26.00)

2021

2022

2023

2024

2025

2026

2027

$0.00 $49.78 ($30.00)

$0.00 $47.91 ($30.00)

$0.00 $46.03 ($30.00)

$0.00 $44.16 ($30.00)

$0.00 542.28 (530.00)

50.00 $40.41 ($30.00)

$0.00 $38.53 (530.00)

2029

2030

2031

2032

2033

2034

2035

$0.00 $34.78 ($30.00)

$0.00 $32.91 ($30.00)

$0.00 $31.03 ($30.00)

$0.00 $29.16 ($30.00)

$0.00 $27.28 ($30.00)

$0.00 525.41 (530.00)

$0.00 $23.53 ($30.00)

2037

2038

2039

2040

2041

2042

2043

50.00 $19.78 ($30.00)

$0.00 $17.91 ($30.00)

$0.00 $16.03 ($30.00)

$0.00 $14.16 (530.00)

$0.00 $12.28 ($30.00)

$0.00 510.41 ($30.00)

$0.00 $8.53 ($30.00)

2045

2046

2047

2048

2049

2050

NPV

50.00 $4.78 ($30.00)

$0.00 $0.00 (528.50)

$0.00 $0.00 ($24.00)

$0.00 50.00 ($15.00)

$0.00 $0.00 (56.00)

$0.00 $0.00 ($3.00)

$789.44 $647.59 $592.20

*Amount donors pay annually to buy down an IBRD loan to IDA rates. tNegative numbers are payments to donors from IDA as loans are repaid.

the full cost of their IBRD loans. The interest subsidy approach is basically the method the IMF uses to finance its concessional loan program, the Enhanced Structural Adjustment Facility (ESAF). The concept of an IDA interest subsidy scheme was first broached in 1964 by David Horowitz, thenchairman of the Central Bank of Israel. He estimated that the World Bank could have lent $3 billion in IDAequivalent loans during the late 1960s at a yearly cost to donors of about $120 million.” In 1986, Charles Blitzer said IDA’s annual volume of lending could be

doubled, at a lower cost to donors, if an interest subsidy facility were created.‘* The World Bank opposed the Horowitz proposal and it received only brief consideration by the IDA donor countries. The Bank worried, among other things, that a subsidized loan scheme could have an adverse effect on the cost the IBRD paid to borrow funds. At the time, the IBRD was still establishing itself in the market. A few years earlier, the World Bank had resisted the creation of IDA for somewhat the same reason. Bank management was concerned

ALTERNATIVE

WAYS TO FUND IDA

that bond markets might confuse the IBRD and IDA and conclude that World Bank lending to poor countries (by whatever means) somehow diminished the security and creditworthiness of the IBRD itself. Today, the World Bank is well established in world capital markets. There may be grounds for worrying, nevertheless, that a subsidized loan scheme might blur the distinction between the regular IBRD and its concessional affiliate. Care would be needed in its introduction. Likewise, the procedural and technical aspects of a new subsidy facility would need careful attention. Purchasers of World Bank bonds may worry that the risk associated with the IBRD’s loan portfolio might be higher if it increases its exposure (via an interest subsidy scheme) in low-income countries. This may not be a valid concern, given IDA’s favorable repayment record and the low rate (i.e. IDA terms) the poor countries will pay for these loans. The World Bank could take appropriate steps, though, to adjust for this concern.” More important is the question whether the donor countries will actually provide the money they promised to subsidize these IBRD loans. If a subsidy scheme is to work, the donors must contribute all their subsidy payments up front, or they must contribute a certain amount each year without fail during the next half-century. Paying the costs up front diminishes the budgetary attractiveness of the subsidy option.lJ Basing a plan on the absolute assumption that donors would pay on time would be unworkable. The difficulty the United States has had staying current on its IDA payments might suggest that donor countries will likely be slow occasionally making their promised subsidy payments in future years. If the donor countries do not make all their subsidy payments on time, the full weight of a previously-subsidized IBRD loan would fall either on the low-income borrower (who may default) or on the IBRD (as an operating loss). Neither is a sustainable proposition. The present example (the middle rows in Table 2) assumes that IDA pays the difference between an IDA and IBRD loan. To simplify analysis, the example also assumes the IBRD makes fixed-rate loans.15 The present example assumes an IBRD interest charge of 7..5%.“j Borrower countries would pay the first threefourths of 1% and IDA would cover the remaining 6.75% of the regular IBRD interest charge. An IBRD loan of $1 billion, disbursed according to the schedule shown in Table 1, would cost the donors $3.13 million in 1996, $12.50 million in 1997, etc. The cost would peak at $62.5 million annually between 2001 and 2005. Thereafter it would gradually decline, reaching zero in 2046. Because the donors’ payments are spread over a long period of time, the net present value of a $1 billion loan commitment in 1996 financed in this manner would be about $648 million. This is about 18% less than the net present value of same volume of loans

303

financed under the current system. Unlike the current IDA funding system, the borrower countries’ loan repayments in an interest subsidy scheme would not accrue to the donor countries or to the Bank. Rather, the borrowers’ repayments of principal will be used by the IBRD to retire the bonds the World Bank sold to finance the original loans.

(b) Repay the donors The second alternative resembles the current IDA procedure, except that the loan payments from the borrowers are returned to the donor countries as they are received by the Bank. Currently, loan payments (reflows) accrue to IDA and are used to finance future loans. IDA reflows are expected to total $675 million in fiscal 1996 and over $1.09 billion in fiscal 2000. The World Bank estimates that, in 10 to 20 years, if India and China are weaned from the program, IDA should be able to finance virtually all its future lending with reflows. After that point, no new contributions would be needed from donor countries in order for IDA to continue lending indefinitely. Instead of retaining all its loan repayments and becoming a perpetual loan fund two decades hence, IDA could return any future contributions it receives from donors as the repayments are received. If the plan went into effect with IDA 12, for instance, the donors would receive back 1% of their contribution 11 years after IDA makes its first loan funded with IDA 12 resources in 1999. They would receive back 3% of their contribution annually during the last three decades oi the loan. IDA would retain for reuse all the repayments it receives for loans financed with the $93 billion contributed through 1995, the $935 million due from the United States in fiscal 1997, and the $11 billion planned for IDA I I. If IDA member countries decide IDA needs to have a loan program in the future which is larger than that it can sustain with the reflows generated by its permanent resources, the legislatures of IDA donor countries could be asked to provide new contributions. Arguably, the need for new appropriations and future action by national legislatures on World Bank funding plans should help maintain oversight and accountability for the program. The influence national legislatures can exert over IDA and other multilateral development banks (MDB) programs almost surely will be less if the MDBs need no new appropriations to fund their operations. If the proceeds from the loan repayments were transferred to the donor countries as they are received, the donors’ cost of participating in future IDA replenishments would be reduced. The bottom rows in Table 2 show the donors’ cost if their contributions to a IDA replenishment were refundable. (For the sake of presentation, the table assumes this replenishment begins

304

WORLD DEVELOPMENT

in 1996.) The negative numbers show payments going back to the donors as loan repayments are received. Through the year 2005, the costs would be the same as those for the present IDA system. Beginning in 2006, however, the annual cost would decline as the reflows are credited to the donors (at the rate shown in Table 1). Refunds continue to flow to the donor countries until the last repayments are made in the year 2050. Making future contributions refundable would freeze the size of the IDA program. If a refundable plan went into effect with IDA 12 in 1999, IDA’s permanent resources would total $105 billion. The World Bank reports that, between 1999 and 2005, its reflows from prior IDA loans should be total more than $10 billion. During the next five years, they should total over $12 billion. Arguably, a revolving fund with this level of income would be able to finance a considerable amount of assistance to poor countries. If IDA donors believe IDA needs additional resources overand-above those available from reflows to its permanent loan pool, they can fund future replenishments. There is no necessary reason why the money from these replenishments should accrue to IDA’s permanent resources rather than to the donor countries themselves. IDA’s need for resources should be smaller in the next century if some of its current borrowers successfully grow and develop. The net present value of a $1 billion contribution to IDA pledged in 1996 under a refundable plan would be about $592 million. This is 25% less than the net present value of contributions made under the current system. The administrative arrangements the World Bank would have to adopt in order to implement a refundable IDA scheme should not be so cumbersome as to negate its potential benefits for donor countries.

(c) An interest subsidyfinanced

by reflows

A third alternative might be considered. Instead of letting IDA become a self-financing off-budget program 10 years from now, IDA member countries might pledge some of IDA’s anticipated reflows now to cover the costs of an interest subsidy program. As those reflows are received, they would be used to pay the interest on subsidized IBRD loans approved in 1996. The IDA donors have over 60% of the voting power in IDA. If they find this use of IDA reflows desirable, they should be able to implement it through resolution by the IDA Board of Governors or Executive Directors. If IDA set aside the reflows from some of its outstanding loans as a potential source of income, it could make $1 billion in subsidized loans in 1996 without any need for new contributions. Table 3 shows the financial flows associated with $1 billion in subsidized IBRD loans. The cost to IDA (NPV) in 1996 of $1 billion in loan commitments under this plan would

be about $625 million. The direct cost to the donor countries would be zero. The concept of an IDA interest subsidy facility financed by reflows has been discussed previously.17 If IDA reflows are pledged to cover the cost of a subsidized IBRD loan, they are not available to fund new IDA loans in the future. Rather, they would have been used to pay the interest due the bondholders who supplied the money that financed the IBRD loan. If IDA waits to use its reflows until they are received, the loan repayments can be used to finance future IDA loans. The difference is one of using money now or using it decades from now to fund development loans. If a borrower receives a loan now, it can fund a project that presumably will improve its development or economic situation. If the loan is deferred several decades, until the reflows to fund it are received, the borrower country will need to wait that long to undertake a needed project. A $1 loan made in 1996 with resources obtained by pledging future IDA receipts will be worth $1 in 1996 dollars. On the other hand, assuming a constant 2% rate of inflation for the next century, a new loan made with $1 in IDA reflows received in 2025 would be worth about 56 cents in 1996 dollars. When the repayments from the 2025 loan are received, their average value will be about 29.3 cents in 1996 dollars. A $1 loan made in 2050 with the last payment received from a 1996 IDA loan would be worth 34 cents in 1996 dollars. The average value of the repayments for that loan would be worth about 17.5 cents in 1996 dollars. Thus, the utility of maintaining IDA as a revolving loan fund may be of diminishing value for both the borrower and donor countries. No new contributions from the donors would be needed for IDA to pledge some of its reflows to facilitate new subsidized IBRD lending. If IDA’s permanent resources are eroded in this manner, however, the IDA donors may decide they need to contribute extra money in the future to restore the depleted funds. Table 3 assumes that modest increments are added to IDA replenishments 12 through 26 during the next 50 years for this purpose. These payments are shown on Table 3 as potential commitments incurred in the years those future IDA replenishments would occur. The size of each incremental IDA contribution is equal to the amount of IDA reflows used in the previous three years to subsidize $1 billion in IBRD loans approved in 1996. Assuming the donors disbursed their contributions immediately to restore those funds, the cost they would incur to fund that $1 billion in extra 1996 lending would worth (NPV) $509 million in 1996. It is 35% less than the cost of contributions to the current IDA system and 14% less than the cost of participation in a refundable IDA replenishment. The likelihood that IDA borrowers will repay their debts to the World Bank are strong. The World Bank is considering plans to forgive or expunge some debt

ALTERNATIVE

305

WAYS TO FUND IDA

Table 3. Cost for third alternative: Subsidizing IBRD loans (in millions ofdollars) using IDA reflows alone

Subsidy Cost Direct Cost to Donors* Potential Commitmtt

Subsidy Cost Direct Cost to Donors Potential Commitmt

Subsidy Cost Direct Cost to Donors Potential Commitmt

Subsidy Cost Direct Cost to Donors Potential Commitmt

Subsidy Cost Direct Cost to Donors Potential Commitmt

Subsidy Cost Direct Cost to Donors Potential Commitmt

Subsidy Cost Direct Cost to Donors Potential Commitmt

1996

1997

1998

1999

2000

2001

2002

2003

$3.13 $0.00 $0.00

$12.50 $0.00 $0.00

$31.25 $0.00 $46.88

$50.00 $0.00 $0.00

$56.25 $0.00 $0.00

$62.50 $0.00 $168.75

$62.50 $0.00 $0.00

$62.50 $0.00 $0.00

2004

2005

2006

2007

2008

2009

2010

2011

$62.50 $0.00 $185.34

$62.50 $0.00 $0.00

$62.41 $0.00 $0.00

$62.34 $0.00 $187.31

$62.03 $0.00 $0.00

$61.53 $0.00 $0.00

$60.97 $0.00 $184.53

$60.24 $0.00 $0.00

2012

2013

2014

2015

2016

2017

2018

2019

$59.12 $0.00 $0.00

$59.09 $0.00 $179.16

$58.47 $0.00 $0.00

$57.84 $0.00 $0.00

$57.16 $0.00 $173.47

$56.28 $0.00 $0.00

$55.03 $0.00 $0.00

$53.41 $0.00 $164.72

2020

202 1

2022

2023

2024

2025

2026

2027

$5 1.66 $0.00 $0.00

$49.78 $0.00 $0.00

$46.03 $0.00 $0.00

$44.16 $0.00 $0.00

$42.28 $0.00 $132.47

$40.41 $0.00 $0.00

$38.53 $0.00 $0.00

2028

2029

2030

203 1

2032

2033

2034

2035

$36.66 $0.00 $100.59

$34.78 $0.00 $0.00

$32.91 $0.00 $0.00

$31.03 $0.00 $98.72

$29.16 $0.00 $0.00

$27.28 $0.00 $0.00

$25.41 $0.00 $81.84

2036

2037

2038

2039

2040

2041

2042

2043

$21.66 $0.00 $0.00

$19.78 $0.00 $64.97

$17.91 $0.00 $0.00

$16.03 $0.00 $0.00

$14.16 $0.00 $48.09

$12.28 $0.00 $0.00

$10.41 $0.00 $0.00

$23.53 $0.00 $0.00

2044

2045

NPV

$6.66 $0.00 $37.88

$4.78 $0.00 $0.00

$625.12 $0.00 $509.45

$47.9 I $0.00 $149.34

$8.53 $0.00 $0.00

*Amount donors would need to contribute annually to interest subsidy plan. tAmount donors would need to pledge in future replenishments if they decided to replace any reflows used to subsidize IBRD loans. Figure in table is amount donors would need to pledge. NPV is calculated for each pledge assuming payment over six years as in Table I.

owed it by low-income countries. In some cases, a good portion of this is old IBRD debt. In other cases, debt owed to IDA is also part of the forgiveness plan.‘* In any case, debt forgiveness is being considered in order to reduce the poor countries’ debt burden, not because the prospect of collecting the debt is low. IDA has a good repayment record. Few borrowers are in arrears or default. Through 1995, according to the World Bank annual report of that year, IDA had made loan commitments totalling $97.8 billion, of which

about $71.5 billion was outstanding. The rest had either been repaid or not yet disbursed. That year, principal and charges overdue on all IDA loans totalled $131 million. The six countries from which payments were overdue owed IDA a total $3.38 billion.19 No loans had been written off in previous years. Many of IDA’s past borrowers are becoming more creditworthy as their economies develop; they must repay their IDA loans if they expect continued access to IBRD or commercial credit. Finally, IDA’s current

306

WORLD DEVELOPMENT

borrowers would be cutting themselves off from a major course of international credit if they stopped repaying their IDA loans. As an extra precaution, the World Bank could hold back a fraction of its reflows (especially in the first 15 years of the plan) as a special reserve against contingencies. It would probably be prudent, in any case, to introduce an IDA loan subsidy program gradually and to commit its funds over a period of time.

6. AN INTEREST SUBSIDY FUND TO SUPPLEMENT IDA The United States and other IDA donor countries may need time to sort through the uncertainties affecting their participation in the multilateral banks and their relationships with one another. Budgetary problems in some donor countries and the uncertainties about the IDA 11 replenishment may be adding extra pressure to an already difficult situation. This could lead to results not intended by the participating countries. The United States and other IDA countries might consider the establishment of a modest-sized interest subsidy facility to supplement IDA’s regular resources during this interim period. This might help diminish some of the financial and time pressures now bearing on the donors and on the program. The World Bank would be able to make an additional $2 billion in IDA-rate loans in 1996 or 1997 if its member countries established an IBRD interest subsidy facility. Loans from the facility would be disbursed on the same basis (Table 1) and the costs to the borrower would be the same as those for regular IDA loans. To subsidize the interest costs on these loans, IDA would transfer money annually to the subsidy facility for payment to the IBRD. Table 4 shows how the cash flow on a $2 billion subsidy facility might work.2o IDA would commit itself to transferring $100 million annually to the facility from its reflows for 35 years and $1 million a year for 13 additional years. The interest cost on the disbursed balance from the $2 billion in new loans would be the same (though doubled, because twice as much is being lent) as that shown in Table 2. The facility would spend $6.25 million in 1996 to pay interest on the subsidized $2 billion in IBRD loans. This would rise to $125 million in 2002. Thereafter, as the borrower countries repay principle, the outstanding balance and the resulting cost of the interest subsidies will decline. During the first four years of the plan, the facility would accrue a surplus and it would earn interest (here 7%) on its cumulative balance. Thereafter, as the cost of the interest subsidies exceeds the amount transferred each year, the facility would run an annual deficit and draw down its cumulative balance. The

cumulative balance would never fall to zero. After 35 years, in fact, it would be so large that the transfer of IDA reflows could be cut to $ I million annually. After an additional 13 years, the annual transfer of reflows to the facility could be stopped altogether. When the last of the IBRD subsidized loans is retired, the subsidy facility would have $4.4 million in its coffers for return to IDA. Altogether, over the half-century course of the program, IDA would have used $3.5 billion in reflows (worth $2.05 billion in 1996 dollars using the above assumptions) to fund an extra $2 billion in concessional lending in 1996. Augmenting IDA’s resources in this manner would assure that sufficient funds are available to provide concessional aid to low-income countries while the donor countries sort out their current difficulties. No new appropriations by legislatures would be necessary. Additional subsidy facilities could be created in later years if the World Bank member countries found that they were needed. The reflows available from IDA’s current portfolio of outstanding loans would be sufficient to finance a $16 billion interest subsidy program in 1996. Additional subsidy facilities for $1 billion could be funded annually from new reflows during the next few decades. Creating an interest subsidy program of this size would probably be inappropriate, however. It would take time to implement, so the effect would be spread in any case over several years. The World Bank might have difficulty making effective use of so much money over a short period of time. Heavy reliance on reflows to fund World Bank concessional lending might decrease the donor countries’ impulse to contribute new IDA money. Finally, it would almost totally deplete IDA’s resources by the time it was fully implemented. Many analysts would suggest it would be unwise to draw down IDA’s permanent resources so much when it is not clear that IDA will have enough new contributions in the future to maintain its basic program. A modest-sized interest subsidy facility, implemented for only a year or two as an interim measure, would not necessarily have these shortcomings.

7. CONCLUSION Each of the alternatives discussed in this paper has benefits and drawbacks. All would reduce the amount of money IDA would have available for lending during the middle of the 21st century. A refundable IDA plan or an IBRD interest subsidy scheme financed with new payments by the donor countries would not reduce the permanent size of the IDA, though they would also not add to its permanent resources. All three alternatives would cost less (on a net present value basis) than the current method of funding the IDA program. Over the long term, a refundable IDA

307

ALTERNATIVE WAYS TO FUND IDA

Table 4. Cost (millions) of subsidizing $2 billion in IBRD loans on IDA terms using only IDA reflows 1996 A. B. C. D. E.

IDA Reflows Cost of Subsidy Annual Cash Bal Interest Earned Cumulative Bal

$100.00 $6.25 $93.75 $0.00 $93.75

2003 A. B. C. D. E.

$100.00 $125.00 ($25.00) $16.03 $220.01

2011 A. B. C. D. E.

$100.00 $120.69 ($20.69) $10.05 $132.97

2019 A. B. C. D. E.

A. B. C. D. E.

A. B. C. D. E.

A. B. C. D. E.

$100.00 $106.81 ($6.81) $5.43 $76.15

2004 $100.00 $125.00 ($25.00) $15.40 $210.41

2012 $100.00 $119.44 ($19.44) $9.31 $122.84

2020 $lOQ.Oo $103.31 ($3.31) $5.33 $78.17

1997

1998

1999

$lOo.cO $25.ocl $75.00 $6.56 $175.31

$100.00 $62.50 $37.50 $12.27 $225.08

$lcQ.Oo $100.00 $0.00 $15.76 $240.84

2005

2006

2007

$100.00 $125.00 ($25.00) $14.73 $200.14

$100.00 $124.94 ($24.94) $14.01 $189.21

$100.00 $124.69 ($24.69) $13.24 $177.77

$100.00 $124.06 ($24.06) $12.44 $166.15

2013

2014

2015

2016

$100.00 $118.19 ($18.19) $8.60 $113.25

$lGQ.Oo $116.94 ($16.94) $7.93 $104.24

$lOQ.oO $115.69 ($15.69) $7.30 $95.85

$100.00 $114.31 ($14.31) $6.71 $88.25

2021

2022

2023

2024

$100.00 $95.81 $4.19 $5.89 $94.15

$100.00 $92.06 $7.94 $6.59 $108.68

$100.00 $88.31 $11.69 $7.61 $127.97

2030

203 1

2032

$100.00 $65.81 ($34.19) $21.56 $363.77

$1.00 $62.06 ($61.06) $25.46 $328.17

$100.00 $99.56 $0.44 $5.47 $84.07

2027

2028

$100.00 $77.06 $22.94 $12.73 $217.51

$loo.cKl $73.31 $26.69 $15.23 $259.42

2035

2036

2037

2038

2039

$1.00 $43.31

$1.00 $39.56 ($38.56) $11.96 $144.31

$1.00 $35.81 ($34.81) $10.10 $119.60

$1.00 $32.06 ($31.06) $8.37 $96.90

$1.00 $47.06 ($46.06) $16.05 $199.27

($42.31) $13.95 $170.91

2029 $100.00 $69.56 $30.44 $18.16 $308.02

2043

2044

2045

2046

2047

$1.00 $17.06 ($16.06) $2.97 $29.32

$0.00 $13.31 ($13.31) $2.05 $18.07

$0.00 $9.56 ($9.56) $1.26 $9.77

$0.00 $3.00 ($3.00) $0.68 $7.45

$0.00 $3.00 ($3.00) $0.52 $4.97

2000 $1c0.00 $112.50 ($12.50) $16.86 $245.20

2008

$1.00 $58.31 ($57.31) $22.97 $293.83

2040 $1.00 $28.31 ($27.31) $6.78 $76.38 2048 $0.00 $1.13 ($1.13) $0.35 $4.20

2001 $100.00 $125.00 ($25.00) $17.16 $237.36

2009 $100.00 $123.06 ($23.06) $11.63 $154.71

2017 $100.00 $112.56 ($12.56) $6.18 $81.87

2025 $100.00 $84.56 $15.44 $8.96 $152.37

2002 $100.00 $125.00 ($25.00) $16.62 $228.98

2010 $100.00 $121.94 ($21.94) $10.83 $143.61

2018 $100.00 $110.06 ($10.06) $5.73 $17.53

2026 $100.00 $81.19 $18.81 $10.67 $181.84

2033

2034

$1.00 $54.56 ($53.56) $20.57 $260.84

$1.00 $50.81

2041 $1.00 $24.56 ($23.56) $5.35 $58.16 2049 $0.00 $0.38 ($0.38) $0.29 $4.11

($49.81) $18.26 $229.28

2042 $1.00 $20.81 ($19.81) $4.07 $42.42

2050 $0.00 $0.00 $0.00 $0.29 $4.40

308

WORLD DEVELOPMENT

would add less to the donor countries’ national debts than would continued use of the current method or use of a interest subsidy plan financed with new donor contributions. An interest subsidy plan financed solely with the flow of repayments from prior IDA loans would cost the donors the least. It would, however, also erode IDA’s permanent resources. Money used to cover the financing costs for current IBRD subsidized loans cannot be used several decades hence to fund new IDA loans. In deciding whether they wish to use IDA reflows to finance an interest subsidy scheme, the donor countries might consider two issues. First, is it in the best interests of the donor countries (and of the legislatures of the donor countries) for IDA to be a self-financing off-budget loan facility financed primarily with money received as repayments from its prior loans? This will ease the budgetary impact of IDA for donor countries when this situation is reached in 10 to 20 years. But it may also lessen the former donor countries’ ability to influence IDA’s policies and operations. Second, is it likely that IDA will need to continue lending substantial amounts to low-income countries

during the middle of the next century? If some poor countries succeed in improving their economic situation, the need for major IDA lending many decrease. Donors may want to consider whether IDA’s resources should be leveraged now to address the current needs of the world’s poor countries or whether those resources should be husbanded for use decades from now in order to address development problems evident at that time. If IDA’s resources are used now (through a subsidy scheme to supplement the regular IDA program), they will have more purchasing power because they will avoid the diminishing effects of inflation and they may have a substantial effect on world poverty and development. On the other hand, if IDA’s resources are used in this matter and the additional low-cost World Bank loans do not have a positive effect, the debt load of IDA borrowers will be needlessly increased. Fewer resources also will be available in the next century to address world development needs. The donor countries would then need to decide whether to increase, reduce, or maintain their support for IDA lending.

NOTES 1. The total for the Interim Fund is 4.384 billion SDR: the total over two years for the basic IDA 11 replenishment is 5.05 1 billion SDR. The SDR was worth $1.46 12 in March 1996. The World Bank’s fiscal year goes from July 1 through June 30. Most other IDA donor countries have completed their 2. payments to IDA 10. The United States, by contrast, had not yet contributed the final $935 million (about 25% of the amount it originally agreed to provide) for IDA 10. The donors’ plan was subsequently approved by the 3. World Bank Executive Directors and transmitted to member country governments (World Bank, 1996a). 4. Technically, only countries that contributed to the 1984 fund had a right to participate in the procurement it financed. Countries could qualify as donors however, if they made a nominal contribution. The United States ultimately made such a contribution and qualified. Today, relations among the IDA donors are more strained. It is unlikely that other countries will let the United States qualify for procurement from the 1996 fund through a similar nominal payment. The IDA 11 agreement says China will cease to be eli5. gible to borrow from IDA when that replenishment concludes in 1999. Meanwhile, the World Bank estimated, in its fiscal projections for a new replenishment, that China would borrow about 4% of IDA funds during 1996-99. The United States has argued in recent years that China’s economy is strong enough to obviate its need for IDA aid. See Sanford (1996a), pp. 9910).

6. World Bank (1996b). Foreign aid includes concessional loans, grants, and technical assistance grants; 1993 is the last year for which full data are available. I. The figures for constant 1992 dollars were calculated using the implicit price deflator index numbers published by the US Department of Commerce Bureau of Economic Analysis. The 1996 figure was calculated by the author assuming a 2.2% annual rate of inflation. See: [President Bill Clinton] Economic Report qf the President. Transmitted to the Congress Februury 1996. (Washington, DC: US Govt. Print. Off., 1996), Table B-4, p. 286. Bureau of Eumomic Analysis Web Site. (HTTP:IfWWW.BEA.DOC.GOV/ BEA/SUMNIP-D.HTML). 8. Project loans usually disburse at a somewhat slower rate, often making their last payments for project costs 8-10 years after work on the project commenced. Structural and sectoral adjustment loans disburse much more rapidly, however, often paying out all their funds within a few years of loan approval. Adjustment loans have comprised up to a quarter of all World Bank lending in recent years. Hence, a somewhat more rapid disbursement rate is used here. Changing the disbursement rate would have no significant effect on the results in this paper. 9. The calculation does not count any borrowing cost the donors might sustain funding their contributions. A case could be made that the methods for funding IDA shown in Table 3 should include borrowing costs. Most donors use some borrowed money to fund their IDA contributions. Furthermore, when the money is not borrowed, its opportu-

ALTERNATIVE

WAYS TO FUND IDA

nity cost might be taken into account. Even when a loan is repaid, the opportunity cost for the money used to make the repayment might be considered as part of the original cost. If interest or opportunity costs are compounded thus, the price of anything becomes prohibitively high. If a donor borrowed $1 billion to fund a contribution to IDA, it would need $461 billion to clear the debt and associated interest 55 years later. If the debt compounded another 20 years, its annual payment cost ($1.8 trillion) would exceed the current size of the Federal budget., This principle applies equally strongly to any other expenditures, domestic or foreign, including the activities lasting only a short while. To avoid the paralyzing effect this has on analysis, this paper excludes interest and opportunity costs from its calculation of the cost of an IDA contribution. 10. The IBRD covers its administrative costs by charging its borrowers an interest rate that is one-half of 1% greater than the rate the IBRD pays to borrow funds. A slightly higher rate would be appropriate for low-income countries, as the costs of administering loans for low-income countries may be somewhat higher than those for regular IBRD borrowers. 11. For a discussion of the Horowitz proposal, see Mason and Asher (1973, pp. 213-14). See also: The World Bank (1965).

14. Theoretically, the donors could appropriate sent value of their future contributions to a trust it could earn interest during the interim period. however, procedural and political impediments countries from using that option.

the net prefund, where In practice, may hamper

15. The administrative arrangements would be more complex if the loan subsidy scheme financed variable interest rate loans. Donors may find that the money they had designated to pay their share of the subsidy plan may be too much or not enough when the IBRD varies the interest rates on its outstanding loans. (In this respect, they would have the same experience borrowers currently have when they sign up to borrow IBRD variable rate loans.) Uncertainty about the future trend in IBRD loan rates makes calculation of the cost and net present value of the donors’ participation in the plan impossible. 16. This is higher than the current IBRD rate but similar to the rate charged during most of the past decade. The current IDA funding system does not relate the cost of donors’ contributions or the available supply of concessional loans with world interest rates. Higher interest rates would make the subsidy scheme more expensive. In this circumstance, the donors may be less willing to commit themselves to support subsidized loans. This may give both the donor and borrowers an additional incentive to keep world interest rates low. 17.

12.

309

Sanford, (1988, pp. 787-796).

Blitzer (1986).

13. Market concern about extra risk from a subsidy scheme could be alleviated if the plan were phased in gradually, in conjunction with other IDA lending funded by regular contributions. If this is not sufficient, the World Bank could take steps to separate the bonds that finance its subsidized operations from other IBRD bonds. (For legal reasons, this may be necessary in any case.) If bond purchasers believe the loans guaranteed by the interest subsidy scheme are riskier, they will require the Bank to pay higher interest on these bonds. The higher cost would then be passed on to the donor countries participating in the subsidy scheme. If the market’s estimation of risk is appreciably higher than normal, of course, the potential savings from a subsidy scheme would be vitiated and a different IDA funding mechanism would be necessary.

18. On September 30, 1996, the Developing Committee of the World Bank and IMF endorsed an Action Program aimed at resolving the debt problems of the heavily indebted poor countries. Leaving aside small changes (most significant being the announcement that Paris Club creditors would forgive up to 80% rather than 90% of the bilateral debt owed them by these countries), this was basically the same plan the Development Committee considered at its April 1996 meeting. For a discussion, see: Sanford (1996b). 19. The six were Afghanistan, Syria and Zaire.

Liberia,

Somalia,

Sudan,

20. If a $3 billion subsidy facility were desired, all amounts on Table 4 would be increased by half. If a $4 billion facility is wished, all amounts are doubled.

REFERENCES Blitzer, Charles R., “Financing the World Bank” in Richard E. Feinberg et al., Benveen Two Worlds: The World Bank’s Next Decade (New Brunswick, NJ: Transaction Books, 1986). Bureau of Economic Analysis Web Site. (HTTP: //WWW.BEA.DOC.GOV/BEA/SUMNIP-D.HTML). Economic Report of the President. Transmitted to the Congress Februury 1996 (Washington, DC: US Government Print. Office, 1996), Table B-4, p. 286. Mason, Edward and Robert Asher, The World Bunk Since Bretton Woods (Washington, DC: The Brookings Institution, 1973). Sanford, Jonathan E., Multilateral Development Bunk Lending to China. CRS Report for Congress 96-369 F

(Washington, DC: Congressional Research Service, July 8, 1996a). Sanford, Jonathan E., “Africa’s debt burden: Proposals for further forgiveness,” CSIS Africa Notes, No. 189 (Washington, DC: Center for Strategic and International Studies, October 1996b). Sanford, Jonathan E., “Feasibility of a World Bank interest subsidy account to supplement the existing IDA program,” World Development, Vol. 17, No. 7 (July 1988). pp. 787-796. World Bank, The Horowitz Proposal: A Staff Report (Washington, DC: The World Bank, February 1965). World Bank, Additions to IDA Resources: Eleventh Replenishment, Interim Trust Fund for FY97, and

310

WORLD DEVELOPMENT

Termination of the FY84 Special Fund. IDA/R9664 (Washington, DC: World Bank, April 17, 1996a). World Bank, STARS World Bank Data on Diskett, 1996,

Version 3.0 (Washington, DC: International Department of the World Bank, 1996b).

Economic