By Karen Mathiasen , Clemence Landers and Nico Martínez
Abstract
In a resource-scarce environment coupled with high and growing demand for aid, the multilateral development banks (MDBs) need to direct grants and concessional finance to the countries that need it the most. Nowhere is this principle more important than IDA, the largest global financing facility for low-income countries. Operationalizing this principle requires that the World Bank prioritize allocating grants and concessional loans to the poorest countries whose access to alternative funding sources is extremely limited. But trends have been moving in the opposite direction. Currently, a majority of IDA countries surpass the income threshold, and many enjoy regular access to capital markets, the two criteria for IDA eligibility. These countries—many of which have exceeded IDA's income threshold for years or even decades—are consuming a disproportionate share of concessional resources, crowding out IDA-only countries with the greatest need. At the same time, IBRD funding for lower-middle-income countries has been on the decline since 2018 and IDA transfers have not kept pace with record profits. Both IDA and IBRD need to course correct.
In this paper, we argue that IDA's current financing structure disadvantages the world's poorest countries because an overly flexible graduation process enables better-off countries to remain IDA-eligible for too long. We also make the case that IBRD’s creditworthiness assessments are too conservative and that it has the headroom and prudential space to bring more IDA countries onto its balance sheet.
We advance three reforms to address these shortcomings. First, IDA's graduation policy should become more rules-based, with clearer milestones, facilitating transitions rather than leaving them to borrower initiative. Second, IBRD should revise its creditworthiness assessments to better reflect new credit rating agency methodologies and sovereign default and recovery rates. And third, IBRD should introduce a new semi-concessional lending instrument for lower-middle-income countries, funded through its net income, to smooth the graduation transition and expand the overall concessional envelope. Together, these reforms would rebalance burden-sharing between IDA and IBRD and help the most vulnerable countries receive the financing they need as global aid budgets contract, without putting their AAA ratings at risk.
Read the original post on CGD’s website.
