First ever real-terms drop in IDA agreed

Replenishment negotiations focus on private sector, fragile states

18 September 2013

More than two months after International Development Association (IDA) deputies met in Managua, Nicaragua in early July, the World Bank published the summary of the discussions and decisions made. This marks the half-way point for the negotiation of the 17th replenishment round of the IDA, the process by which donor countries decide on their financial contributions to the Bank’s low-income country arm for the period 2014-17 (see Update 85, 69).

The chairperson’s summary reveals a lack of consensus on how to adapt IDA given the changing environment for aid provision and the shift of countries with the largest poor populations to middle-income status. The agreed range of possible financing scenarios represent a real terms drop in the size of the replenishment, which some may interpret as a failure for World Bank president Jim Yong Kim in his first IDA replenishment round.

Financing framework

From the Bank’s point of view the biggest crisis facing IDA is a lack of resources. The Bank knows that donor countries are slashing aid budgets, constraining the availability of resources for the IDA pot. The deputies indicated their preference for three out of the five financing scenarios presented by the Bank, which put total IDA 17 resources between $47 billion to $52.4 billion, implying in real terms something between holding steady and an 11 per cent decline.

"a dangerous reinforcement of a lack of focus on inequality"

Of the five scenarios presented, only two included even small nominal increases in donor contributions. Basic grant contributions are expected in nominal terms to be about $23 billion, the same as in IDA 16, equivalent to a 6.6 per cent decline in real terms. The Bank is expecting declines in internal IDA reflows as well. The Bank proposed to make up the difference by borrowing from donors. IDA has not before borrowed money, and only operated on grants from donors. Borrowing presents problems related to how to allocate IDA voting rights and who bears the exchange rate risks related to these loans. The allocation of voting rights is based on the “grant element” of the loan from donors, but this depends on the selection of an appropriate discount rate, which was not agreed in Managua. To deal with the exchange rate risk the Bank agreed to ask all lenders to denominate their loans in special drawing rights, an international unit of account, rather than their national currencies.

Finally in Managua, the deputies agreed to make IDA’s loan terms less generous for countries borrowing from it. While the fragile states will see an increased allocation of resources, non-fragile states will see declines. On top of that, the terms of concessional credits will be hardened with a smaller grace period and higher interest rates. The Bank claims this will not affect the debt sustainability of IDA borrowers.

Special theme reflects strategy reform, private sector push

The IDA deputies, a group of about 30 officials from IDA contributing countries, agreed the overarching IDA 17 theme as “maximising development impact”. The Bank’s paper prepared for the Managua meeting outlined three main elements of the overarching theme were “leveraging private resources”, “leveraging public resources”, and “leveraging knowledge”. The paper proposed that the Bank “step up its support for IDA countries to catalyse private resources and to promote foreign and domestic private investment for development priorities such as infrastructure, particularly regional transformational projects.”

Resorting to management jargon, the paper claims the overarching theme “encapsulates IDA’s enhanced value proposition”. In simpler terms it is the mechanism by which the Bank wants to define linkages between IDA 17 and the Bank’s two goals on poverty and shared prosperity (agreed in April) and the strategy (to be agreed in October) that Kim is introducing as part of his reorganisation and reform of the Bank (see Update 86, 85, 84).

The Bank’s renewed pushed for large-scale infrastructure under this rubric of “regional transformational projects” again met resistance from the IDA deputies. The subject had been a Bank proposal for a special theme, but this was rejected in the first meeting in March (see Update 85). In the paper for the Managua meeting, the Bank included rhetorical commitments to “reflect maximum stakeholder ownership and benefit, and pay close attention to environmental and social safeguards. This will include ensuring extensive consultation and responsiveness to local concerns … for maximum lasting and socially inclusive development impact.” It asked for an increase in the financing for the IDA regional programme to pay for these project and easing the eligibility and financing rules. However deputies “expressed scepticism about proposed rule changes with several participants requesting a case-by-case approach.”

Continuation of other special themes

Aside from the overarching theme, the deputies agreed the continuation from IDA 16 of the special themes on gender, fragile and conflict affected states (FCS) and climate change, and the addition of a new theme on “inclusive growth”.

One of the major innovations agreed was the development of a “turn-around window” for FCS. This sets up a special window within IDA that can be used to give extraordinarily large allocations to countries that are turning around, provided they meet several conditions. The extra finance will be time limited and follow a per capita model rather than an allocation based principally on country performance rankings. It marks a small chink in the armour of the Country Policy and Institutional Assessment (CPIA), a set of annual rankings of country policies that informs the allocation of IDA resources (see Update 69, 52, 43). However, overall the emphasis for FCS is on “drivers of fragility and conflict”, which will be incorporated into country strategies for all IDA FCS, and on the private sector, with joint IDA and International Finance Corporation (IFC, the Bank’s private sector arm) business plans to be developed for at least 10 countries. Much of the policy detail is expected to be influenced by an internal independent evaluation of the Bank’s work in fragile states which is due to be released in October.

‘Inclusive growth’ is supposed to “speak to the need to maintain the growth momentum in IDA countries while ensuring that the opportunities and benefits of growth are broadly distributed throughout the population, including the poorest and most disadvantaged groups, thus contributing to the [World Bank Group] goals for poverty eradication and shared prosperity.” The Bank’s 2008 definition of inclusive growth, from the What is inclusive growth? knowledge briefing, “emphasise[s] the idea of equality of opportunity in terms of access to markets, resources, and unbiased regulatory environment for businesses and individuals” rather than equality of outcomes, spelling out that the “focus is on productive employment rather than on direct income redistribution”. Reacting to the incorporation of this concept into IDA 17 Jeroen Kwakkenbos of European NGO network Eurodad said: “considering the Bank’s spotty history in promoting de-regulation and market liberalisation, this inclusive growth focus is a dangerous reinforcement of a lack of focus on inequality in the World Bank strategy and in IDA countries.” Many critics fear the Bank is not focusing enough on inequality (see Update 85).

For the special theme of gender equality (see Update 74, 72), in Managua the IDA deputies “emphasised the need to increase the level of ambition in the policy commitments for IDA 17, in particular by deepening the integration of gender into strategies and operations and placing greater emphasis on measuring the achievement of project gender equality objectives and the collection of gender disaggregated data.” There was implied criticism of the Bank’s approach for the last three years of IDA, as some IDA deputies “felt that the gender informed standard was not sufficiently ambitious and requested clarification of what would constitute ‘follow up’ on gender mainstreaming. Participants also stressed that more needs to be done to mainstream gender in lagging sectors.” The meeting also featured disagreement over what indicators should be used to promote greater access to sexual and reproductive health and rights for women.

Finally, IDA will continue with its special theme on climate change, reflecting Kim’s rhetorical focus on climate issues in his first year at the Bank (see Update 83). The main change being proposed is “to integrate climate risk assessment in all new operations”, and there was pressure from the Managua meeting for the Bank to have “more ambition in certain aspects, particularly in relation to the quality of how climate and disaster-related risks are integrated in country strategies.” However, the Bank continues to evade a discussion of how IDA fits in with the broader climate finance architecture, despite a request from IDA deputies during an IDA 16 midterm review in November 2012 for the Bank to produce a paper on this topic. In Managua, deputies again asked “for more clarity on the links to other sources of financing for climate change adaptation such as the Green Climate Fund.”

During the negotiations, civil society organisations have called for different indicators and priorities. For example, in July international NGO Save the Children called on “IDA deputies to make tackling malnutrition and ensuring more equitable development progress major priorities for IDA 17,” and asked for “equitable progress towards Universal Health Coverage (UHC)”. In September, International NGO RESULTS similarly “recommend[ed] IDA prioritise nutrition with increased funding and with the inclusion of nutrition indicators in IDA 17’s Results Measurement System.” In September among other recommendations, Oxfam asked the Bank to “move toward disaggregating most of the data by income group to ensure inequalities are reflected.”