Reduction of financial aid from rich countries to the World Bank
reported by Niger, a landlocked African country beset by successive military coups, lives in extreme poverty. 8 out of 10 people do not have access to electricity and the GDP per person is only $620. In contrast, every Bangladeshi is four times richer, and only one in 18 is among the world’s poorest people. The country’s policy makers do not need to worry about infrastructure such as electricity supply. They want to attract foreign capital to build renewable energy to reduce dependence on coal.
The task of the World Bank is to provide all 78 poor countries of the world, which are both based on income and sustainability Their debt is defined as loans through a single fund called the International Development Association, or IDA, which disburses generous grants.
This fund allocated 28 billion dollars in grants and loans in the last fiscal year, which was more than a third of the World Bank’s total financial resources and was enough to make it one of the largest lenders to low and middle income countries. However, it becomes more difficult to meet the needs of such a diverse range of countries each year, as rich countries contribute less to the fund each year than the year before, as revealed at the World Bank’s Dec. 6 meeting in Seoul.
IDA recycles repaid loans, but because its terms are so generous, it needs to top up the financing every three years. In South Korea, World Bank president Aji Banga announced a $100 billion budget that It has increased by 93 billion dollars compared to the previous time. Although he praised this amount as the highest possible amount, there was one important point to note. A small amount of the increase in the financial resources of the fund came from the donations of rich countries, which was about 24 billion dollars. In fact, according to inflation and conversion to dollars, rich countries have paid their least share in this century.
This will have consequences for the world’s poor. World Bank officials hope that economic growth across the developing world will pick up, meaning that countries will become so prosperous that they no longer qualify for support. With slow growth and relatively high interest rates, this hope may be disappointed.
The next option is to make up the difference by borrowing from the market. World Bank officials must now pay $3.22 for every dollar donated, up from the $2.96 agreed upon three years ago. Financial engineering, such as converting some loans to floating interest rates and offering hedging services, which are cheaper than offering fixed-rate loans, save some money. Other measures transfer the extra cost of borrowing directly to the poorest countries.
Currently, the poorest countries receive mostly grants instead of loans. Over the past decade, the value of these grants has tripled. Over the next three years, they are likely to depreciate in real terms. Meanwhile, the maximum amount of aid that any country can receive will be reduced from $1 billion to $650 million. After South Korea’s fundraising difficulties, more cautious reforms are likely. Some countries will face an unpleasant choice: receive less money or convert grants into loans.
The price of climate management
The World Bank sees these measures as paying a price for freeing up loans to other countries, many of which have recently fallen on hard times. Some wealthy IDA borrowers also want cash to tackle climate change. Solar panels and wind turbines are worthy reasons to borrow, and rich countries increasingly prefer to receive money to finance climate management instead of traditional aid. But this process can harm the poorest countries. IDA funding has historically fueled significant economic growth and allowed governments to invest without risking financial crises. But receiving financial resources from this fund under the pretext of climate management by rich countries may undermine a rare form of successful development.
In 2016, Stephen Kenck, who was working at the World Bank at the time, and his colleagues calculated that One percentage point of additional IDA disbursements relative to a country’s income generates 0.35 percent of additional economic growth per person per year. Such measures are the most effective way to combat extreme poverty, as they allow cash-strapped governments to invest without increasing the risk of financial crises. Research by Charles Kenny of the Center for Global Development think tank shows that IDA cash is particularly beneficial to the poorest countries. Even countries that would benefit from a change in the Fund’s approach are likely to be better served by receiving loans that are more affordable rather than more abundant.
Furthermore, the world’s poorest countries have nowhere else to turn to when they need money. Many of them are already struggling under the pressure of higher interest rates, or due to the potential of their default international markets are pushed out, a problem that wealthy IDA borrowers do not face. Accordingly, changes in the World Bank’s approach to helping poor countries may only harm the poorest countries in the world. While wealthy IDA borrowers focus on tackling climate change with projects like renewable energy, this diversion of funds may leave essentials like hospitals and schools for countries like Niger unprovable.
