The donor-funded World Bank arm responsible for lending to the globe’s poorest countries is preparing to raise billions of dollars in financial markets after being awarded a credit rating for the first time in its 56-year history.
The International Development Association has since its founding in 1960 been funded by donors in three-year rounds. It is in the process of trying to raise some $75bn to fund low and no-interest loans to countries like Bangladesh and Malawi.
But faced with fiscal constraints in many donor countries and a surge in demand for its lending, the IDA is now looking to tap financial markets and this week secured AAA credit ratings from both Standard & Poor’s and Moody’s.
The goal is to issue bonds backed by IDA’s own balance sheet that would both allow the bank to increase the resources it has available to help poor countries and private sector investors to get involved.
Joaquim Levy, the former Brazilian finance minister who last year joined the World Bank as chief financial officer, said the move represented a “landmark” for development finance.
“What is unique and transformative is that we are no longer thinking of a narrow donor model but about a quite unique hybrid model where we are combining donors with tapping into financial markets,” said Axel van Trotsenburg, who as the World Bank’s vice-president for development finance is leading the IDA negotiations this year.
“It’s not the purpose to do some [financial] engineering for engineering’s sake. This is engineering to increase the resources we have to help poor countries,” he said.
Mr van Trotsenburg said IDA would not be going to financial markets before July next year, when the new fundraising results take effect. The latest IDA “replenishment” — known as IDA18 — is due to climax in December this year with a donor conference in Indonesia.
“This is a very first step. We are still in the negotiations,” he said. But “it is fair to say [any issuance in financial markets] will be billions of dollars,” he added.
It’s not the purpose to do some [financial] engineering for engineering’s sake. This is engineering to increase the resources we have to help poor countries
The IDA move is part of a broader shift now under way to get the private sector to play a larger role in development, whether via philanthropists such as the Gates Foundation, wealthy investors looking for feel-good ways to secure returns or companies chasing profits in new markets.
Behind that is simple economic reality. By most calculations delivering on the 17 “sustainable development goals” agreed at the UN a year ago, including eliminating poverty and hunger in the world, will costs trillions annually. The UN has estimated that in infrastructure alone the world needs $5tn-$7tn annually in investment, and that dwarfs the current aid handed out by rich countries which last year reached $131bn, according to the OECD.
Under its current president, Jim Yong Kim, the World Bank has also been pushing to find other new ways of engaging the private sector. A special nutrition trust fund launched last year was seeded by a foundation that grew out of one of the world’s biggest hedge funds, The Children’s Investment Fund, and another that organises the philanthropic giving of some of Swiss bank UBS’s wealthiest private clients. But it is being managed by the World Bank and has attracted funds from public sector donors.
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