Washington, DC
April 26, 2009

Global Economic Scenario

We are meeting at a time when the global economy is passing through a phase of exceptional difficulties and extreme uncertainties. The problems facing the world economy are well known and need no elaboration. The point to note is that the downturn is much deeper than we would have thought even six months ago, and the prospects of a recovery have receded to 2010 at best. The forecasts on economic growth or recession outlook may vary but there is a general acceptance that this is the worst recession since the Great Depression and the first ever contraction of Global GDP in the post war period. It is generating negative expectations which threaten a downward spiral, if not corrected. The pain is being felt both in industrialised countries and in developing countries.

Emerging market economies were not the cause of this crisis, but they are amongst its worst affected victims. Recession has hit the export performance of developing countries and the choking of credit, combined with elevated risk perception, has led to lower capital flows and reduced levels of foreign direct investment. The combined effect has been to slow down economic growth in developing countries, casting an ominous shadow on prospects for rapid economic growth, eradication of poverty and achieving MDGs in a reasonable time frame. This crisis, on top of the food and fuel crisis of the past year, has jeopardized the progress made by the developing countries towards achievement of MDGs.

The human dimension to this crisis is more frightening, as we look at the estimates of an additional 53 – 65 million people to be pushed back into extreme poverty. As governments are trying to counter the immediate effects of the crisis, the fiscal space for investments in critical social sectors like education, health and infrastructure is getting reduced. The loss in exports, fall in remittances and the consequent loss in output and employment have all put pressure on governments’ fiscal balances which have to now finance much larger social safety nets. 

The crisis being global, it demands global solutions, backed up by our collective will to use every possible resource, instrument and mechanism to ensure that the poor are not further impoverished and in a way that growth prospects are sustained across countries and across generations. 

We appreciate the response of the Bank as the crisis has unfolded. A number of new lending windows and mechanisms have been put in place to assist countries in distress. Commitments of IBRD this year have shown a remarkable jump. The President has repeatedly asserted the readiness of the Bank to play its role in helping countries tide over the crisis. We welcome the Bank’s coordinated response to the crisis and its efforts to create a Vulnerability Financing Facility to generate additional resources for the poorest countries. These are all steps in the right direction and will certainly mitigate some of the adverse effects of the crisis. They need to be taken forward to their logical conclusion by generating additional and adequate resources for development, disbursable on fast track, unhindered by complex and delaying procedural formalities.

The G-20 Summit and its follow up

The efforts of the Bank have got a major boost from the deliberations and consensus amongst the leaders of the G-20 countries. These leaders have charted a global plan for recovery and reiterated their support for our efforts. They recognized that the current crisis has a disproportionate impact on the vulnerable and that it is our collective responsibility to mitigate the social impact of the crisis and minimize long-lasting damage. They reaffirmed our historic commitment to meeting the MDGs and to achieving our respective ODA pledges, including to sub-Saharan Africa. Recognizing that developing countries, which have been the engine of recent world growth, are also now facing challenges which are adding to the current downturn, they have supported a substantial increase in lending of at least $100 billion by the MDBs to a total of around $300 billion over the next three years and ensuring that all MDBs have the appropriate capital.

We need to consider and act on the decisions of the G-20 leaders. There are three essential points of action that are there – (i) a substantial increase in lending, (ii) a review of the Bank’s lending capacity and capital adequacy and (iii) enabling large developing countries to access required levels of finance through increased lending limits so that they can support recovery in their regions. All the three issues are important and we need to direct the Bank to start work on all fronts.

Sustained lending

The lending needs of the developing world are enormous. If the MDBs are to deliver on the $300 billion of lending over three years, the Bank would certainly need to lend more than the $100 billion it is currently targeting. Even prior to the crisis, while the developmental needs of its target group were increasing, there was a declining trend in World Bank lending relative to its resources. This certainly underlines the necessity of an all out effort on the part of Bank management to reverse this trend and keep up to its promise of additional US $ 60 billion of commitment over next three years. The Bank needs to be strong enough to play this leading role expected from it. A weakened Bank would not be able to play the transformational role it needs to play. 

We are concerned that the capital of the Bank may not be able to sustain this high level of lending. According to some estimates, lending after FY11 would be severely constrained, shrinking to a level lower than in the past few years with little or no growth in lending commitments for a decade afterwards. Net disbursements would in fact end up being negative. We need to examine whether this financial position of the Bank is sustainable. IFC is already in a capital constrained situation. At a time when it is expected to play a counter-cyclical role, compensating for the fall in private capital flow, IFC is restricted to a flat level of activity. This issue, therefore, needs to be given utmost priority so that the Bank does not falter in fulfilling its mandate. No less important is the urgency to review the Single Borrower Limits so that they do not hinder the accessibility of funds by countries which have the need as well as the absorption capacity for such additional flows from the Bank. 

We need an assessment of the Bank’s lending capacity and capital adequacy vis-à-vis alternative scenarios with concrete proposals on addressing the constraints, including the country borrowing limits and dynamic provisioning. These should be in the context of realistic demand projections and prudent planning for the worst possible case. We feel that raising the capital base – either through a General Capital Increase or a Special Capital Increase - is an important measure which should be examined seriously. It has an immediate impact in relaxing constraints and demonstrates shareholder commitment to the rest of the world. The right time for expanding the capital base of the Bank and the IFC is now when the entire world is focused on the crisis and its impact on the poor and the vulnerable. We should not miss this opportunity. 

Voice & Participation 

When we last met for the Annual Meetings in October, we agreed on Voice and Representation reforms in two steps. The first step was agreed and decided for immediate implementation and we appreciate the progress on its implementation. We are particularly happy to note that there will now be a third Board chair for Sub-Saharan Africa, a vastly under-represented continent and whose development challenges are immense. We are also happy that the increase in Basic Votes gives greater representation to smaller members. 

Progress on the second step, i.e. shareholding review is much slower. A timetable was agreed in the Annual Meeting according to which the task of reviewing the specific development mandate of the Bank vis-a-vis the Fund and the possible implications for realignment of IBRD shareholding, and setting out the principles for shareholding at IBRD, should have been completed by now. To a large extent, external economic events have overtaken developments here and we acknowledge that the Bank has been working hard to respond to the challenges posed by the crisis. We also understand the need to factor in developments at the G-20 Summits which have a bearing on our own efforts here.

The London Communique of the G-20 expressed their collective determination “to reform and modernise the international financial institutions to ensure they can assist members and shareholders effectively in the new challenges they face. We will reform their mandates, scope and governance to reflect changes in the world economy and the new challenges of globalisation, and that emerging and developing economies, including the poorest, must have greater voice and representation.” 

We strongly believe that the World Bank should heed the call of these leaders and work on an accelerated timetable for completing the shareholding review. It is necessary that the Bank begins work urgently on the process of working out the options for realignment immediately if we are to meet the accelerated deadline of Spring 2010. We need to have clear agreed steps and milestones for this purpose. Knowing that capital is a severe constraint at IBRD, we need to tie in capital enhancement with any move ahead on Voice reform. The two can be resolved simultaneously.

In the case of IFC, this would perhaps be the first Voice reform. The easiest way would be to increase the number of Basic Votes for all members, but a more lasting and permanent solution would be to link it with realignment of shares on the same lines decided for IBRD. This would simultaneously increase the voice of DTCs and also enhances the capital base of the IFC which is admittedly constrained. We suggest that, to the extent possible, the options for IBRD and IFC be examined together to see how Voice reform and capital enhancement in both these organizations can be taken forward together.

As we proceed with the shareholding review, we must keep in mind the goals of this exercise. The goal is to make the Bank a more responsive, credible and relevant organization so that it continues to play a vital developmental role in global economic affairs. The changing dynamism of the global economy and the evolving weights of developing economies need to be reflected in the governance structure of the World Bank. This is also necessary if they have to see a role for the Bank in addressing new challenges emerging across the globe, be they climate change, energy or food. Today, a significant portion of incremental global economic growth is being contributed by developing countries who have the potential to be important drivers of future global economic growth. This fact needs to be recognized in the structure of the World Bank. 

The realignment of shares, therefore, should be based on a formula or criteria that are specific to the mandate of the Bank and should lead to a substantial and real enhancement of the voice of DTCs, individually and collectively, keeping in view the aim of achieving parity, without diluting the voting power of individual DTCs. Any parallelism with the IMF needs to be given up, in view of the completely different mandates of the two institutions. While identifying new criteria for a realignment framework, relative weight in the world economy should be given primacy. This is best captured by GDP- PPP which is simple, real and easily understandable. Therefore, this should be the primary criterion for realignment. The Bank uses GDP PPP data rather than GDP at market exchange rates for determining poverty levels and the IMF too has introduced this as a relevant variable in its quota formula.

The current crisis has refocused global attention on IFIs including the World Bank. The World Bank is a global institution which can have great relevance in future, as it has had in the past. We must use this opportunity and strive for an ambitious Voice reform outcome, which will strengthen the Bank and make it a truly dynamic international organization.