Reforming the World Bank’s approach to risk could have a significant impact on lending for developing countries, according to a study commissioned by the Rockefeller Institute. The study, conducted by international finance analytics firm Risk Control, revealed that the World Bank’s lending arms, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), have substantial room to increase lending without jeopardizing the bank’s AAA credit rating. The report’s findings come as top World Bank shareholders, including the United States and China, prepare to meet to discuss ongoing reforms.
The study indicates that by easing the bank’s strict capital adequacy framework, the IBRD could increase lending by $162 billion over a decade without experiencing a credit rating downgrade. Additionally, the IDA, which focuses on lending to the world’s poorest countries, could boost lending by $21 billion to $27 billion. In fiscal year 2023 alone, the IBRD committed $38.6 billion in net new lending, while the IDA committed $34.2 billion.
The report suggests that by modifying the allowance they make for callable capital – commitments by shareholders to provide additional resources during financial crises – rating agencies could adjust their processes to reflect the unique status of development institutions. As a result, the two lending arms could potentially increase lending to nearly $900 billion.
World Bank President Ajay Banga has already highlighted the bank’s efforts to increase lending, including leveraging additional resources to unlock an extra $50 billion. He has also expressed hope that international contributions could potentially double that amount.
The study commissioned by the Rockefeller Institute confirms that there is still room for the World Bank to further increase lending capacity. Eric Pelofsky, Vice President at the Rockefeller Foundation, emphasized the transparent and math-based analysis conducted by Risk Control, stating that it provides evidence that additional lending is possible. Pelofsky added that taking action now to increase lending capacity is crucial as it addresses the immediate pressing needs faced by developing countries.
Some experts argue that developing and emerging economies require as much as $2.4 trillion per year to tackle global climate challenges. The World Bank, along with other regional development banks, is considered a preferable alternative to China’s overseas lending, which is often criticized for its lack of transparency and the risks associated with collateralized loans.
The findings of this study fuel discussions around the World Bank’s role in combating climate change and promoting development. With the ongoing reforms and potential for increased lending capacity, there is hope that the World Bank can play a vital role in addressing the urgent needs of developing countries and contributing to global efforts to tackle climate change.
