The World Bank is braced for a surge in demand for its loans that will leave its financial resources severely strained as the economic slowdown hits middle income and poor countries, its president has warned.
Jim Yong Kim also said that the clock was ticking for those countries that have not pushed through much-needed structural reforms and that they should take advantage of the “reprieve” given by the US Federal Reserve when it decided not to raise rates last month.
Kim insisted the Bank would continue to find “creative” ways to extend its balance sheet and said he had no plans to ask shareholders for another injection of capital unless the downturn turned out to be “much more severe”.
He told Emerging Markets he was “very worried” about the impact that the plunge in commodity prices and imminent hike in interest rates in the United States would have on some of the poorest countries in the world.
He said the expected jump in demand for World Bank assistance from countries hit by the crisis would come after the sharp increase in lending seen in the past few years. In the year to June 2015 the Bank committed $63bn, up 21% from the $53bn it loaned two years earlier.
“We are very worried,” Kim said in an exclusive interview. He said that regions such as Latin America had made “tremendous” progress in lowering inequality — one of the Bank’s two goals — because of the surge in commodity prices.
“But because it was so dependent on the commodity super-cycle now there is a huge challenge from the low prices of commodities,” he said.
“Already access to capital is getting more difficult so we are seeing the demand for our products going up and up and our sense is that demand will increase for at least the next couple of years.”
He said he was “particularly worried” about countries with balance of payments problems who had little room to respond with fiscal policy — JP Morgan recently highlighted Colombia, Indonesia, Mexico, South Africa and Turkey as the most vulnerable emerging markets. He said some countries that should have gained from lower prices had failed to invest in sectors such as electricity and transport to take advantage of the windfall.
In a detailed review of the Bank’s finances to go to the Bank’s development committee this week, officials warned that its finances will become “stretched”, adding: “The [Bank’s] ability to meet growing demand is stretched to capacity. Demand might soon outstrip financial capacity.”
However the Board has ruled out returning to shareholders for more capital in the wake of its 2010 recapitalisation until 2017. But asked whether the Bank would be able to cope if the downturn became even more severe, Kim told Emerging Markets: “If something like that happens then of course all the conversations will get a lot quicker.
“Everyone knows that if the downturn is much more severe and we have to play a much larger counter-cyclical role then of course we will have those discussions sooner than scheduled.
“But the important thing is that [shareholders] know this is a conversation we have to have. But given the expected demand over the next couple of years we will have enough capital so by the time we really run into problems of insufficient capital we would have all the discussions we have had.”
REFORM NOW!
He urged emerging and developing countries to take advantage of the “reprieve” given by the US Federal Reserve when it decided not to raise rates last month to undertake much-needed structural reforms.
“It is critical that countries undertake the reforms they need to right now to send a positive signal because once interest rates start to go up we are going to see lots of movement. We are telling countries ‘you may have better macroeconomic fundamentals than the country next to you but you might all be painted with the same brush unless you make signals right now that you are serious’.”
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