Finance

Background

The IDA replenishment

2 April 2007 | Inside the institutions


Notice: Undefined variable: briefing_cover in /var/www/web130/web/wp-content/themes/bretton-woods-project/library/template-fragments/article.php on line 70

versión en español

Every three years, a series of meetings is held to cajole rich countries into putting money into the coffers of the World Bank’s International Development Association (IDA). This money allows IDA to lend interest-free and provide grants to the world’s poorest countries. The first replenishment in 1960 totalled $1 billion. IDA 14, the most recent replenishment concluded in early 2005, collected $33 billion of which $18 million was in new donor contributions. Most of the growth in real terms took place in the first two decades. For over two decades there has been no real growth in donor contributions.

Donors have provided 71 per cent of IDA resources to date. The US is the largest contributor historically (22 per cent), with Japan, Germany, the UK and France rounding out the top five. Due to its large contribution to the most recent replenishment, the UK is now the second largest contributor. The list of contributors also includes oil-rich countries such as Saudi Arabia and Kuwait, as well as newly-industrialised countries and some middle-income countries. American contributions have been in steady decline; in fact, $525 million in commitments by the US remains unpaid.

middle-income countries are making a contribution to IDA when they repay the interest on loans taken from the IBRD.

Complementing donor resources are so-called ‘internal flows’. These have accounted for 23 per cent of total resources available to IDA. This includes principal repayments from borrowers and investment income. These resources play a crucial role in the transition from one replenishment round to the next, allowing flows to continue while donors bicker over who will pay how much. The remainder of IDA resources come from transfers from other arms of the World Bank, the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (historically 6 per cent, but currently at about 9 per cent). This means that middle-income countries are making a contribution to IDA when they repay the interest on loans taken from the IBRD.

Over the course of 2007, four meetings will take place. The first happened in Paris in March. The next will take place in Mozambique in June. The third will take place in the autumn in Washington, and the final meeting will be back in Europe at the end of the year. Most important at these meetings are the financial commitments that are made by donor countries. This involves delicate negotiations where Bank staff first present proposals in Mozambique as to how much financing they think that each IDA region can ‘absorb’, then donors will respond with how much they think they can afford to give.

However, these meetings have also become key opportunities for donors to try to influence how their money is spent. The ‘conditions’ they attach to IDA support have grown to lengthy wish lists over the years. Donors conceded during IDA 14 negotiations that the transaction costs of all these conditions were too high and their solution was to try to prioritise a limited number of ‘special themes’. Indicators were drawn up to track progress on the themes. Eleven suggestions for IDA 15 themes were put forward by sixteen different donor countries in December last year. At the first IDA 15 meeting three themes were selected – aid architecture, country-level aid effectiveness, and ‘fragile’ states.

At the table at these meetings are Bank staff and donor countries’ IDA ‘deputies’. These are senior civil servants from development, finance or foreign affairs ministries. Southern country ‘observers’ were allowed in for the first time in IDA 14. For IDA 15, a dozen borrowing country representatives and four observers from middle-income countries will sit at the meetings. Since agreement at the meetings is reached by consensus, the influence of these countries’ representatives will depend on personal initiative. Civil society observers are not allowed.

By the end of the year, the story turns to capitals where the budgeting processes needed to meet these commitments take place. This can be a non-event, as in the UK, where spending on IDA is subsumed under approval by parliament of an entire departmental comprehensive spending review. In contrast, in the US, the treasury is responsible for securing resources from congress to meet IDA replenishment commitments. Congress ‘appropriates’ the funds during its annual congressional budget cycle. It has, in the past, used these opportunities to try to influence US treasury policy towards IDA, introducing legislation which requires, for example, voting restrictions on environmentally sensitive projects.

How do they decide who gets IDA funds?

IDA currently provides funds to 82 countries. The cutoff for IDA eligibility is decided by a measure of average income per person ($1025 GNI/capita for 2007). The formula by which the IDA pot is divided amongst these countries is a complicated one. It factors in population and economic wealth, but is heavily weighted towards a ‘country performance’ rating. This rating is based both on the controversial scores that the Bank gives to the quality of the country’s policies (Country Policy and Institutional Assessments, see At issue, Update 43) and the performance of the Bank’s lending portfolio in the country.

Like all good rules, this one has a number of ‘exceptions’: relatively wealthier and larger countries have their access levels capped; and additional resources can be earmarked for post-conflict countries, countries experiencing natural disaster, or for regional integration projects or other ‘special purposes’. Sixty-two per cent of IDA 14 resources will be allocated using the formula; another 14 per cent go to the capped wealthier countries (India, Indonesia and Pakistan); 10 per cent go to post-conflict countries and 8 per cent go to ‘special purposes’ agreed during the replenishment process.

IDA credits have no interest charge, with principal repayments stretching up to 40 years, including a 10 year grace period. Grants were introduced in IDA 13, and currently make up approximately 20 per cent of IDA resources transferred to member governments.

Throughout IDA’s history, 32 countries have ‘graduated’. This means that their per capita income has risen above the cutoff point, leaving them to borrow at higher cost from the IBRD. The first to graduate was Chile in 1961; the most recent to do so was Macedonia in 2001. Of the 32 graduates, nine have since ‘reverse graduated’ back to IDA-eligible status. This includes Papua New Guinea, Congo, Nicaragua, Cameroon, Indonesia, Honduras, Ivory Coast and Nigeria.