World Bank turns to capital markets to boost aid

The World Bank will turn to capital markets to raise more than $20bn to fund an increase in grants and loans to the world’s poorest countries in a major shake-up of its funding model designed to compensate for contracting aid budgets in donor nations.

The bank said on Thursday it had assembled more than $75bn in pledges and other financing for the International Development Association, the bank arm that makes low-interest loans and grants to countries such as Ethiopia, Bangladesh and the Democratic Republic of Congo. 

The funds are meant to help finance efforts to reach a series of ambitious development goals set at the UN last year such as eradicating extreme poverty. They will also help cover the cost of developing countries meeting targets set as part of the Paris climate change accord. 

The bank’s plans to issue bonds for the first time in the 56-year history of IDA, which secured AAA credit ratings in September, are intended to increase funding to record levels from the $52bn raised in the previous round in 2013, despite no increase in pledges from wealthy donors.

The move illustrates how the World Bank and other donor-funded agencies working in the developing world are forced to be inventive to raise funds because of aid budgets still constrained by austerity almost a decade after the global financial crisis. 

It also comes as World Bank officials privately express doubts over whether the incoming Trump administration in the US will back plans for a capital increase, which Jim Yong Kim, the World Bank president, has been planning to push in 2017.

Axel van Trotsenburg, the World Bank official in charge of the IDA replenishment, said that at a two-day donor meeting in the Indonesian city of Yogyakarta that ended on Thursday donor countries had lived up to a promise to match their 2013 pledges measured in their own currencies. 

While in many cases those pledges were down in either dollar or inflation-adjusted real terms, holding the line represented a victory amid what in many countries were falling budgets for overseas development assistance. 

“This is extremely good news for working with the poorest countries,” he told the Financial Times in an interview. “That is the more important message rather than whether you have adjusted a goal for inflation.” 

Roughly a third of the $75bn financing package would come from donors, with another third from repayments of loans extended by IDA. The final third would be raised mostly from international capital markets. 

The bank does not disclose individual country pledges. But Mr Van Trotsenburg said a number of big donors had increased their pledges while three new developing countries had become donors. 

The World Bank’s plans call for $15bn of the IDA money raised to be allocated for grants and loans to so-called fragile states such as the DRC, with a further $2.5bn allocated to private sector projects in such countries. An additional $2bn is being set aside to help countries affected by a growing refugee crisis. 

Funds are also being allocated for work on climate change and helping poor countries to navigate shocks ranging from natural disasters to epidemics such as the 2014 outbreak of Ebola in west Africa and economic crises.