World Bank member nations split over plans to expand balance sheet

Developing nations have warned against reshaping the World Bank in the aftermath of David Malpass’s departure as its head in a way that would imperil the institution’s ultra-high credit rating.

The early exit of Trump-appointed Malpass, announced last week, is expected to hasten reforms — pushed by US Treasury secretary Janet Yellen — under his yet-to-be chosen successor that are designed to more effectively help poorer countries mitigate and plan for climate change.

Malpass said he would leave his role at the bank early, by June 30, and the US, the largest shareholder, is now racing to draw up a list of potential successors. The bank’s board will soon announce a timeline for member states to propose candidates.

Shareholders and economists have argued that the bank could provide more climate finance by expanding its balance sheet and taking on more risk. But developing countries have warned against doing anything that would jeopardise the bank’s triple-A rating and thereby increase its funding costs.

The G11 group of developing nations recently distributed a note — seen by the Financial Times — in which they argued that it was important to “avoid measures . . . that might not be understood by rating agencies in positive light.”

The World Bank’s high rating was “necessary to be able to raise funds at a cost that would enable lending at below-market rates”, it said. “This is the very rationale underlying the [multilateral development bank] concept.” 

The note was signed by countries including Brazil, Argentina, Chile and Peru in South America, as well as by Pakistan, Iran, Bahrain, the United Arab Emirates, Qatar, India, Indonesia, Singapore, Vietnam, China, Saudi Arabia and Russia, plus Egypt and more than two dozen African nations.

The World Bank has traditionally emphasised the importance of holding a triple-A designation from all three big credit rating agencies, allowing its borrowers to benefit from the institution being able to access low-cost funding from bond markets.

But a review commissioned by the G20 last year said the world’s multilateral development banks, which include the World Bank, could boost their lending capacity by “several hundreds of billions of dollars over the medium term”, via reforms such as redefining their approach to risk, while preserving their current credit ratings.

The World Bank’s main lending arm, the International Bank for Reconstruction and Development, approved about $33bn in loans in the financial year ending June 2022.

Multilateral development banks “manage themselves to a level of risk appetite that can effectively be even lower than that represented by a triple-A rating”, the review said, meaning they could take on more risk without being downgraded.

Changes to World Bank rules would need to be approved by its shareholders, with the US controlling the most votes.

There were “differences” between shareholders about “whether or not you need to keep [the triple-A rating]”, said one government representative.

“We don’t want to put at risk the triple-A rating of the bank,” said a senior government official from Germany’s development co-operation ministry, adding that the lender should instead “be smarter” about how existing funds were used.

Chris Humphreys, a member of the G20 review panel and senior research associate at think-tank ODI, said the concerns were understandable but the proposed changes would not endanger the triple-A rating. “These are incredibly solid institutions,” he said.

One development finance expert close to the discussions said it was “hard to know where the red line” was that, if crossed, would mean the bank would be downgraded, adding that following a downgrade it could be “hard to cross back”.

The debate is likely to spill into the upcoming meetings of the IMF and World Bank in April.

The US Treasury is assembling a shortlist of potential Malpass successors that is expected to include: Samantha Power, head of the US Agency for International Development; Rockefeller Foundation president and former US Aid boss Rajiv Shah; and World Trade Organization director-general Ngozi Okonjo-Iweala.

Rating agency S&P said last year that it could lower the bank’s rating “if management — contrary to our expectations — adopts more aggressive financial policies.”

Additional reporting by Jonathan Wheatley in London

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