Post-Crisis High Seen for World Bank Loans Amid Global Weakness

  • Bank to lend more than $25 billion to middle-income nations
  • Lender is reviewing capital levels, No. 2 official says

The slowdown in emerging markets is set to push demand for World Bank loans to the highest level since the financial crisis, as countries cope with low commodity prices and flagging productivity growth.

The World Bank projects that for the fiscal year ending in June, it will commit to more than $25 billion in loans from its main funding vehicle, the International Bank for Reconstruction and Development, which primarily lends to middle-income countries. In the previous year, it lent $23.5 billion, already the highest outside a financial crisis, according to the Washington-based institutions. Loan commitments reached $44.2 billion in 2010.

Developing countries are facing a host of challenges, including China’s slowdown and the slump in commodity prices, World Bank Group chief operating officer Sri Mulyani Indrawati said. Meanwhile, productivity growth is slowing in emerging economies, and many are seeing a shrinking labor supply because of an aging population, she said.

“We see it in many of the conversations we have with our client countries,” Indrawati said in an interview in Washington, as finance chiefs and central bankers prepared to gather for the World Bank and International Monetary Fund’s spring meetings. “It’s not just in the lending but also on the knowledge side, the technical assistance that they’re asking for in terms of how to adjust their growth model.”

The IMF this week cut its global outlook again, warning that the world risks slipping into stagnation. The IMF projects emerging-market economies will grow 4.1 percent this year, down from a forecast of 4.3 percent in January and little changed from last year’s pace of 4 percent.

‘Urgent Need’

“Many developing countries are facing both external weakness and domestic challenges, in terms of their policy space, in terms of their ability to maneuver and their urgent need to find a new source of growth,” Indrawati said.

The World Bank issued $57.1 billion in medium and long-term bonds in fiscal 2015, up from $50.5 billion in 2014. Indrawati declined to provide a borrowing target for this fiscal year, saying that the lender will be able to finance the increased lending within the limits set by its finance officials.

In 2010, the World Bank’s 180-plus member nations agreed to increase the IBRD’s capital by $86 billion, of which $5.1 billion was paid in. Indrawati said the bank is reviewing its capital levels, with member countries expected to discuss the matter later this year.

“The problem can’t wait, so we will have to respond,” she said. “Then we’ll have to make a case to our shareholders and say, this is what we have to do, this is what we tried to do using our existing resources and balance sheet, and then it’s up to them to decide if they’re OK with the size or we should have a bigger size.”

She said one of the bank’s priorities will be to help commodities producers diversify their economies and eliminate the “distortions” caused by energy and food subsidies.

“In the most extreme case, like in Saudi Arabia, when you’re dominated by one commodity, it distorts your wage level, your incentive to work, your incentive to educate, your incentive to create a new level playing field for any economic activity outside the dominating sector,” Indrawati said.

Before it's here, it's on the Bloomberg Terminal.