2010 will be a very challenging and important year for global development. Nearly every multilateral development bank simultaneously has requested billions of dollars of new donor money at a time when donor countries are grappling with staggering economic challenges. It's a perfect storm for aid budgets.
Donor governments and multilateral aid agencies don't have the funds to maintain the business as usual approach to development, but that's not an excuse to do less for poor people. It's an opportunity for development institutions to create innovative ways to maximize existing funds.
I have one such idea that would free $7.5 billion for the poorest countries without changing existing budgets.
I propose that the World Bank's two lending arms, the International Development Association (IDA) and the International Bank for Reconstruction and Development (IBRD), rebalance how they finance aid programs in a select group of low-income countries.
IDA typically issues low-interest loans and grants to the world's poorest countries and the IBRD typically issues market-term loans to middle-income countries. But some countries, the so-called IDA-blend countries such as India and Vietnam, receive loans from both IDA and IBRD.
I propose that the IBRD assume responsibility to provide those countries with the same volume of loans traditionally dispersed by IDA. This would free IDA to use the money otherwise committed to these IDA blend countries for their poorer clients, such as Bangladesh and Tanzania.
Granted, the IBRD would now have to issue more loans which means they need more money. As it happens, the World Bank shareholders just agreed to an $86-billion capital increase for the IBRD in April. So, it has the capacity to take over IDA's share of loans without limiting the IDA-blend countries' access to finance.
Rebalancing the World Bank's loans in this manner would change the source -- but not the volume of lending to countries like India and Vietnam. To ensure that they receive roughly the same terms as IDA currently provides them, IDA would provide grants to cover their interest payments and loan fees.
By better leveraging the IBRD's balance sheet, IDA then could re-allocate the resources that it otherwise would have lent to these credit-worthy countries. The savings come out to roughly 75 cents for every dollar of lending shifted to the IBRD. The other 25 cents would be used to cover the interest payments and loan fees.
If the proposal had been applied to IDA's current three-year funding period, it could have mobilized up to an additional $7.5 billion for education, health and infrastructure projects in the world's poorest countries. That's the equivalent of a 30-percent increase over existing funding levels, which is on par with some of the most historic increases in donor aid budgets. Of this amount, African countries could have received about $5.5 billion. This is serious money in a seriously challenging time.
One of the World Bank's sister organizations -- the Inter-American Development Bank -- already successfully utilizes a similar approach for its lower-income clients.
It is time for World Bank shareholders to seriously consider the same resource-maximizing model. And they have a brief window of opportunity to take action. This week donor governments are assembling in Bamako, Mali, to negotiate a new funding framework for IDA, which will span the next three years. In addition, World Bank shareholders still have to secure legislative approval for the agreed IBRD capital increase.
By pursuing this creative approach, donor governments will be able to turn this perfect funding storm into a manageable, passing rain shower that neither inundates their budgets nor poor countries' hopes for a prosperous, sunny future.