To address the pressing challenges of climate change and strengthen the institution’s capacity to aid developing countries, World Bank President Ajay Banga has announced a series of visionary proposals during a meeting of finance officials from the Group of 20 major economies in Gandhinagar, India. These groundbreaking reforms cited by Reuters, designed to ‘make balance sheet work harder,’ can potentially increase World Bank lending by an impressive $50 billion over the next decade. Banga, the former CEO of Mastercard who assumed his new role on June 2, has been mandated to accelerate the evolution of the 70-year-old institution and implement changes to support sustainable development efforts.
The United States, the bank’s largest shareholder, initiated the push for reforms in October and later nominated Ajay Banga to lead the institution. U.S. Treasury Secretary Janet Yellen has been vocal about the need for multilateral development banks, including the World Bank, to prioritise climate action and other global challenges before considering capital increases. The new proposals, still under discussion with shareholder countries, build upon initial steps approved in April to enhance World Bank lending capabilities.
Banga’s vision is multifaceted, aiming to enable the bank to generate $6 in new lending for every $1 in loan guarantees over a 10-year period. This would equate to an impressive $30 billion for every $5 billion invested. One of the key strategies to achieve this goal is by allowing shareholders to guarantee loans, thus mitigating risks for countries that may face difficulties in repayment. By offering this assurance, the World Bank can significantly expand lending capacity, supporting nations in their endeavours to combat climate change and achieve sustainable growth.
Another innovative measure involves issuing a new hybrid capital instrument, allowing shareholders to invest in bonds. This move is projected to unlock up to $6 billion in additional lending, contributing further to the World Bank’s expanded financial resources.
Moreover, the institution plans to absorb more risk by widening conditions for callable capital, which is money pledged by governments but not yet paid in. By leveraging this resource strategically, the World Bank can extend financial assistance to more countries, particularly those with urgent development needs.
The institution has also proposed increasing very low or zero-interest lending, including establishing a $6 billion crisis facility dedicated to supporting the world’s poorest countries through the International Development Association. This measure aims to provide crucial financial lifelines during times of crisis, enabling vulnerable nations to respond effectively to emergencies while fostering long-term resilience.
President Banga emphasises that while these progressive reforms are essential for building a better bank, a capital increase will eventually be necessary. The proposals represent a significant step towards aligning the World Bank’s operations with the global climate agenda and fostering a more inclusive and sustainable future for all member nations.
(With Inputs from Reuters)
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