It should come as no surprise, given the organisation’s name, but in the 16 months since he took the helm of the World Bank Ajay Banga has visited countries of operation in all corners of the planet. “It’s a journey that has taken me across the globe, from Latin America to Africa, Asia, the Middle East, and now to the Pacific,” he said last month on a whistlestop trip to Sydney, Australia.
A former president of Mastercard, Banga took the same title at the multilateral lender on June 2, 2023 and has set out a host of targets — as most incoming presidents have before him.
He readily reels them off: directing 45% of funds towards climate management; providing quality, affordable healthcare to 1.5bn people by 2030; bringing clean and affordable energy to 300m Africans by the same date; and shortening the Bank’s project approval process by three months — to name just four.
But Banga has as many problems — rising barriers to trade, the ever-present threat of pandemics, climate change and the need to generate jobs for the young.
At the same time, he must get a firm grip on a vital issue for any bank: money. Banga says he has found ways to stretch the World Bank’s balance sheet to generate $120bn of extra lending over the next 10 years. This will rely on innovative financial measures such as lowering the equity to loan ratio, increasing bilateral guarantee limits and hybrid capital — but done in ways that do not jeopardise the Bank’s cherished triple-A credit ratings.
If these steps work as planned, they will create greater lending capacity for the International Bank for Reconstruction and Development, the core institution that provides loans and other financial products to middle income and creditworthy low income countries.
But observers such as Paul Cadario, a fellow at the Munk School of Global Affairs and Public Policy at the University of Toronto, are sceptical. “Whether there’s capital adequacy under reasonable assumptions about the bank’s AAA credit rating, and the willingness and ability of IBRD’s customers to borrow in that volume remain to be seen,” he says.
Replenishment time
At the International Development Association, which lends at zero or low interest rates to the poorest countries, money is certainly due.
This year IDA will reach the settlement of its 21st replenishment, the first since Banga unveiled the Bank’s redefined mission: to eliminate extreme poverty on a liveable planet.
At its Spring Meetings in April, ministers on the Bank’s Development Committee called for decisive actions to position IDA21 to help countries face crises.
The real test will come on Monday and Tuesday next week at a meeting meant to finalise the IDA21 financial framework, ahead of a final pledging session in December.
Banga has repeatedly said he wants total funding of $100bn, a jump from IDA20’s $93bn, at a time when donors are reluctant to spend more. Since IDA can leverage its capital, to break the $100bn barrier would require $28bn-$30bn of donor contributions, or a 20%-30% hike in nominal dollar terms, according to the Center for Global Development thinktank (see graph).
The burden is likely to fall on the largest economies. IDA20 had 52 donors, but over 90% of its contributions came from its 15 largest, according to CGD. The US was the biggest donor with $3.5bn, just ahead of China’s $3.4bn, with the UK third at $2bn.
Development specialists are concerned that many of IDA’s largest donors have reduced aid to low income countries so as to boost support for Ukraine and climate mitigation financing.
There is some good news. In September, Denmark unveiled a 40% increase in its contribution to Dkr3.3bn ($317m), and prime minister Mette Frederiksen called on all donors, old and new, to match it.
“Everything is interlinked now, and we have to be able to speed up and scale up on all the challenges in front of us at the same time,” she said in a press conference on the sidelines of the United Nations General Assembly in New York.
Allied to this are moves to enhance IDA’s capital adequacy framework, which is projected to increase its deployable strategic capital by $16bn in the medium to long term, and thus expand its financing capacity.
For Banga, the key is the leverage ratio. As he put it in the same press conference: “The big benefit of IDA is that every dollar that somebody like Denmark gives to IDA — because we enjoy a triple-A rating as an institution thanks to our donors — we’re able to go to the bond market and get private money to leverage that dollar up to three and a half to four times.”
Recipient countries for which IDA’s grants and concessional loans have proved vital in a high interest rate environment echo that. IDA is a “lifeline for fragile nations”, said Somalia’s prime minister Hamza Abdi Barre in a discussion on the Sustainable Development Goals at UNGA. “The financing has been critical in transforming our institutions, building resilience and restoring hope for millions of Somalis.”
The Munk School’s Cadario, who held several senior roles at the Bank in a 37 year career, says rich nations including the biggest shareholder, the US, have fiscal issues of their own. But he adds: “I remain confident that the Bank has sufficient friends on the [Capitol] Hill, even in a divided Congress, that an agreement would be reached on an increase for the US contribution to IDA.”
Climate non-finance
Even assuming that donors come up with $28bn-$30bn in December, IDA and the Bank will face difficult decisions about how to use it. Banga’s mission statement implies not only ending poverty, but controlling climate change.
The World Bank Group committed at last year’s COP 28 summit to devote 45% of its annual financing to climate by the end of its 2025 financial year next June.
Within that, it wants half of public sector climate financing by IBRD and IDA to support climate change adaptation and half mitigation. The International Financial Corp, its arm which lends to the private sector, and the Multilateral Investment Guarantee Agency are tasked with scaling up private sector climate finance.
Multilateral development banks were able to declare last month that their global climate finance had reached a record high of $125bn in 2023. But that is a tiny fraction of what’s needed.
The Global Infrastructure Hub, an international infrastructure body established by the G20 and supported by the World Bank, estimates the climate investment gap has quadrupled from a 2017 forecast of $700bn a year to around $3tr a year, worsened by the costs of reaching carbon neutrality, the pandemic and the war in Ukraine.
Achieving that will involve leveraging capital on a vastly larger scale than IDA could manage. Rather than turning Denmark’s $317m into billions, the ratio will have to be billions to trillions — in the words of the slogan coined by former Bank president Jim Yong Kim in 2015.
However, incentivising the private sector to pour trillions into developing countries for climate action and the UN’s Sustainable Development Goals has not worked, says Ulrich Volz, economics professor at SOAS London University.
Speaking at a summer event to mark the World Bank’s 80th anniversary, he said: “The trillions are nowhere to be seen. The total amount of blended finance was $16bn last year. Private finance will not save us.”
Banga is still trying. He insists the World Bank alone will not be able to provide the trillions required every year to address climate, fragility, education, hunger alleviation, health care and inequality. Speaking at the Lowy Institute in Sydney, he said he wanted governments, philanthropists and multilateral development banks to “put their shoulder to the wheel”, but echoed Kim, saying: “To close the financing and jobs gap, we also need the private sector.”
Banga has recruited 15 CEOs, including Macquarie Group’s Shemara Wikramanayake, Noel Quinn, lately of HSBC,
Hironori Kamezawa of MUFG, Tata’s Natarajan Chandrasekaran, and Dilhan Pillay Sandrasegara at Temasek, to help him harness private sector investment into renewable energy.
Meanwhile a High-Level Advisory Council on Jobs, set up by Banga and chaired by the presidents of Singapore and Chile, meets for the first time this week, with the aim of designing a strategy to create jobs for the 1.2bn young people set to move into the labour force in developing countries in the next 10 years.
Clouded agenda
Banga will have meaty issues to raise this week — there is no doubt of that. The question is what his reception will be.
There are likely to be protests — quietly within the Meetings and noisily on the streets outside — over the ongoing conflicts in Ukraine and the Middle East.
There will certainly be valid questions to ask about the Bank’s strategy towards
investing in post-war reconstruction of Ukraine, as well as Gaza and the West Bank, where it has been engaged for decades.
Last month’s UN General Assembly was meant to discuss climate change but was heavily distracted by those conflicts, points out Cadario. “There will be protests in Washington about the Bank in general and about debt relief, because it’s a nice season to protest,” he says. “It’d be nice to think that in the middle of October, two weeks before the US election, and with two active wars going on, people will come to Washington and talk about IDA and unsustainable levels of post-pandemic debt, and maybe backsliding on the role of women. Mr Banga will be saying what people want him to say. But no one’s going to be listening.”