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A study by the Rockefeller Foundation has indicated that revising the World Bank’s risk management strategy could free up nearly $190 billion in much-needed loans for developing countries, without affecting its AAA credit rating.
The research was conducted by Risk Control, an international finance analytics firm.
The Rockefeller Foundation engaged Risk Control to evaluate and quantify recommendations initially made in 2022 by an independent G20 panel. The panel had suggested that relaxing the World Bank’s stringent capital adequacy rules could unlock hundreds of billions in extra loans to tackle climate change and promote development.
Scheduled for publication early on Wednesday, the report arrives as shareholders of the World Bank, including the United States and China, are set to convene next month in Marrakech, Morocco. The meeting aims to assess and further the initial reforms already in progress at the institution.
According to the study, the International Bank for Reconstruction and Development (IBRD) could increase its lending by $162 billion over a period of ten years or less before prompting a downgrade from global credit rating agencies.
Meanwhile, the International Development Association (IDA), which focuses on the world’s poorest countries, could augment its lending by $21 billion to $27 billion.
In the fiscal year ending on 30 June 2023, the IBRD committed to new net lending of $38.6 billion, while the IDA committed $34.2 billion.
The study also posited that if rating agencies adjusted their procedures and the allowance for “callable capital,” both IBRD and IDA could potentially extend their lending to nearly $900 billion.
The report concluded that innovative financial mechanisms, such as hybrid capital, could offer additional funding. Furthermore, securitising 10% of IBRD and IDA’s loan portfolios could create an extra lending capacity of $29-$41 billion.
World Bank President Ajay Banga stated on Tuesday that the bank had already raised its leverage ratio to secure an extra $50 billion in loans over a decade. He added that this amount could potentially be doubled with contributions from the international community.
Eric Pelofsky, Vice President at the Rockefeller Foundation, said, “This is the math, absolutely as detailed and transparent as you could possibly get, that says there’s more room.” He added, “It very clearly says that there are actions that can be done now while we consider other more long-term reforms to the bank.”
Hans Peter Lankes, a Professor at the London School of Economics and a member of the G20 panel, mentioned that the study offers “timely benchmarks” for both shareholders and the World Bank’s management in exploring ways to increase lending.
Experts have argued that developing and emerging economies require $2.4 trillion annually to address global climate issues. Pelofsky stated, “We need this because the developing world is pitching off a cliff in terms of debt, available climate finance, development needs. And from a geopolitical standpoint, the Bank, the Fund, the regional development banks are infinitely more transparent than some of the obvious alternatives.”
The Biden administration is advocating for the World Bank as a “credible alternative” to China’s overseas lending practices, which are often criticised for lacking transparency and posing risks through collateralised loans.