What is the financial future of the World Bank?

by on January 14, 2016 at 12:25 am in Current Affairs, Economics, Political Science | Permalink

The Bank once comfortably earned enough to be self-sustaining. Today, it is rapidly becoming welfare-dependent. Periodic contributions from wealthy governments have propped up lending to poor countries, but these are unlikely to be increased, and some may be discontinued as donors redeploy aid budgets to refugee programs.

The problem is not that emerging economies have no desire to borrow; they desperately need funds for infrastructure and other investments. The problem is that the Bank is too slow to process loans, which has increasingly made it the last choice for many of its potential clients.

Whereas a commercial lender might take three months to prepare and disburse a loan, the Bank takes more than two years. And its efforts to speed up the process, which began in 2013, have reduced the average time only slightly, from 28 months to 25.2 months; in some regions (accounting for a third of the Bank’s lending), the wait has actually increased.

One clear indicator of the Bank’s performance is how high a premium governments are willing to pay to avoid it. A 20-year loan from the World Bank has an interest rate of about 4%, and the poorest countries can borrow for less than 1% (“International Development Association loans”). Nonetheless, many countries are choosing much more expensive commercial loans or bond issues. For example, Ghana, despite being eligible for IDA loans, recently chose to raise money from the bond market, from which it received an interest rate several times higher.

That is by Ngaire Woods.

1 Luis Enrique January 14, 2016 at 4:46 am

there are less creditable reasons why govnments (politicians) might pay a premium to borrow elsewhere. See the first item here: http://allafrica.com/stories/201601112290.html

2 rayward January 14, 2016 at 6:52 am

While commercial loans and bonds may have higher costs (interest rates), those costs are lower than what they would otherwise be absent the World Bank. The mere existence of the “public option” helps keep commercial costs lower than what they otherwise would be.

3 mulp January 14, 2016 at 1:41 pm

Commercial bank loans can be defaulted on without most other governments imposing sanctions demanding cuts in welfare and higher taxes like happens with IMF and World Bank loans.

And commercial bankers will rush in to provide high fee debt using other people’s money after you default on commercial debt until the other people withhold their money by buying US Treasuries to fund tax cuts.

4 Inshant January 28, 2016 at 9:41 am

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