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World Bank: Funding IDA's Assistance Program

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Abstract:

During the past decade, the World Bank's concessional loan facility, the International Development Association (IDA), has relied increasingly on loan repayments (''reflows'') to fund its assistance program. By committing future reflows to fund current projects as they are disbursed, the World Bank and its member countries have raised to nearly 40% the share of IDA's current loan program funded with reflows. In future years as the stock of future anticipated reflows becomes increasingly obligated to pay for projects approved earlier, IDA will be relying more on its reserves to fund its future lending program. Under current policies, IDA's cash balance will decline from $11.78 billion (2001) to about $1.4 billion (2013) and then will roughly stabilize for several decades. The World Bank and its member countries anticipate that loan repayments will account for 70% of the resources needed to fund IDA's loan program between 2032 and 2041.

This effort is complicated by the parallel effort of the World Bank and its member countries to provide debt forgiveness to heavily indebted poor countries (HIPCs). To date, the World Bank has forgiven over $9 billion in IDA debt owed by HIPC countries. It has booked most of this debt but - because most of the repayments are not due for many years - it has not yet realized most of the loss. The World Bank's plan to make IDA mostly self-sustaining in the future assumes that donor countries will reimburse its HIPC debt forgiveness in full. If the forgiven loan reflows are not restored, IDA will deplete its cash balance in 2009 and need to start shrinking its aid program. The cost of funding the lost reflows will be roughly $500 million to $600 million a year for the next 20 years. The United States typically has provided about 20% of the money to fund HIPC multilateral debt relief, thus making this an important issue for Congress.

Likewise, the Administration and others have proposed that IDA adopt a major grant program for poor countries. The scope and details of the plan are currently under negotiation by donor countries. A grant program will need to be funded by contributions from donor countries or IDA will need to start reducing the size of its future program in anticipation of lost reflow income. Estimates of the size of the cost of the Administration's proposed grant program differ. Much of the difference in the estimates is due to the methods used for presenting the estimates rather than to major differences in the size of the expected costs. CRS and GAO both estimate that the cost of the Administration's grant program could be funded in full if donors contributed between 1.6% and 1.8% more each year (compound interest). As such, they would need to contribute between $64 billion and $71 billion more during the next 40 years. This would be a 40% to 45% increase in the donors' overall contributions to fund the IDA program. Based on prior practice, the United States would likely be asked to provide 20% of that total.

Basically, the goal of making IDA more self-funding through reflows and the goal of reducing recipient countries' repayment obligations are incompatible. The United States and other donor countries may need to decide which goal to favor - whether to fund IDA debt forgiveness and grants with increased contributions or to allow the overall size of IDA's assistance program diminish in future years.