The World Bank, just six years after it warned of a “long-term declining trend” in its income, has amassed the largest trove of financial resources in its history – so much that it is starting to lower the fees it charges borrowers, reports the Banks press review Monday.
Since 1998, the Banks usable equity capital has swelled by 7 billion US dollar to an all-time high of 31,3 billion, its financial statements show. But many borrowers are turning away: Bank loans are being repaid faster than new ones can be disbursed.
Outstanding loans, as a result, dropped to a six-year low of 109,6 billion US dollar as of June 30. The Bank, as a result, is offering easier terms to new borrowers – partly to ensure its loans remain attractive to developing nations that are able to tap other sources of financing.
It recently cut in half the 1 percent origination fee it had charged borrowers since 1998. It also increased its contributions to debt-relief funds reserved for the worlds poorest nations.
– We are in a good place, said John Wilton, the Banks Vice President for strategy, finance and risk management. – When we discuss this with the (credit) rating agencies… they think the actions we have taken are totally appropriate. They think the Bank now is in a much stronger financial position going forward. We think we have managed the place very well over the past four or five years.
A few critics, however, say the turnabout is less impressive than it seems. James Barbieri – a senior financial officer at the Bank who quit in 2002 after disagreements with his superiors – says the Bank “greatly overstated” its financial risks in 1998 as it sought to raise fees.
The Banks dire assessment then, he said, naturally made its current performance look stellar. Max Lawson, a policy adviser to the aid organization Oxfam International, also contends the Bank painted an unduly grim portrait of its financial outlook in 1998.
Bank officials deny there was any exaggeration. Wilton says the Banks fears at the time were based on the expectation that it would be called upon to make big increases in lending in the wake of the financial crises in East Asia, Russia, Brazil and Argentina – an expectation that was borne out by events, he says.
– In 1998, we went from lending commitments of about 12 billion US dollar to about 20 billion, he says. – Net disbursements quadrupled. Plus you had a number of countries that were in serious crisis. From a financial-management point of view, it was clear that we had to take some actions, added he.
Cutting the Banks 1 billion dollar administrative budget was not a serious option, Bank officials argued at the time. – Pure arithmetic…would suggest that a 10 percent cut in the budget would be worth about 100 million dollar,” they said in an internal report.
“This, however, is simply not possible during the enormous changes that are going on within the Bank in restructuring and redirecting its business…” Instead the Bank focused on raising revenue from borrowers. “With current contractual loan charges, the Banks earnings from its lending activities cover only a portion of the cost of putting the loans on the books,” the report said.
That was unsustainable in the long run, the report said, carrying “potentially serious implications for the Banks financial integrity and capacity to support high-priority development objectives.”
The Banks shareholders followed the recommendations and, starting in 1999, began to charge a one percent origination fee on loans. That had boosted the Banks income by about 300 million dollar. Along with other financial-management changes, that helped put the Bank back on a solid financial footing, Wilton says.
The fees, however, rose just as some developing countries were discovering they could tap international capital markets on easier terms. Moreover, as global interest rates declined, older fixed-rate loans issued by Bank began to seem unduly costly.
Countries that could afford to began to prepay their loans, deciding they would be better off doing so even though they would incur a prepayment penalty of about two percent, according to Bank officials.
The steep decline in loan demand after 2000 surprised the Bank, Wilton says. Having prepared for an expanding loan portfolio, the Bank now watched it shrink rapidly. In the fiscal year that ended in June, the Bank collected a record 8,4 billion US dollar more in repayments than it disbursed in loans. Much of that involved prepayments.
– They have had difficulties making all the loans they would like to, and it reflects the fact that the World Bank has, in some ways, become a high-cost lender because it has built so many conditions into its loans, said John Williamson, a senior fellow at the Institute for International Economics.
John Herlihy, the Banks director of corporate finance, said the decision to cut loan-origination fees partly reflected a desire to boost lending.
The Bank expects to increase its annual loan commitments by about 4 billion to 15 billion US dollar over the next three years, internal documents show. But repayments are expected to exceed disbursements throughout those years.
Nancy Birdsall, president of the Center for Global Development, a think tank, said she applauded the Banks decision to cut loan fees. But she said the Bank also should make the conditions attached to its loans less onerous. – It is good they are reducing the price of loans. But they ought to reduce the hassle too, said she.
Kilde: www.worldbank.org
