THE SOVEREIGN DEBT CRISIS FEATURED HIGH ON THE AGENDA OF THE LAST WORLD BANK/IMF SPRING MEETINGS, WITH INCREASED concerns for THE INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA), THE BANK’S LENDING ARM FOR THE LOWEST-INCOME COUNTRIES.
IDA is a large and growing financier of development
Amid growing demands from its clients, its commitments have almost doubled since 2012 and will continue to grow even further in future as financing adaptation to climate change in most developing countries requires a significant increase in concessional flows, of which IDA is the main provider. To fulfil this role, IDA will have to tackle a number of hefty challenges in the foreseeable future, mainly due to the combined effects of growing debt in client countries and an outdated financial model.
The present note by the Finance for Development Lab looks at the consequences of growing indebtedness on IDA: not only does it put the Association’s long-term sustainability at risk whilst providing a “soft bailout” to other lenders, but its support to highly indebted countries also leaks out in the form of debt service to other creditors, thus subsidising them over time and undermining the effectiveness of IDA’s countercyclical role in the long run.
Net transfers from all sources to IDA countries
IDA is the largest provider of financing to the world’s poorest countries, representing a third of total development assistance to the public sector. For countries eligible to its loans, IDA represents in aggregate half of all net transfers for debt. In addition to its magnitude, these flows are countercyclical: they rise when others stop lending, as was the case in 2020.
IDA's clients risks are increasing
More tha half of 69 client countries are assessed at "high risk" of debt distress, or in debt distress. For countries below the income threshold set by IDA ($1255 of GNI per capita), country allocations switch from loans to grants.
This means that IDA's future income decreases, and that the assets against which it can borrow are declining.
How can iDA contribute to reduce debt vulnerabilities of its clients?
IDA's outlays are financed by three thirds: regular replenishments, reflows from past loans, and market borrowing. Clients in debt means that grants are increasing, weakening its balance sheet and future income. To put IDA back on a more stable footing, debt vulnerabilities should be reduced. But how? And how can IDA contribute?