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Emerging Markets

World Bank capital increase tied to reforms

The World Bank’s largest donor countries yesterday gave it six months to carry out reforms of the way it does business, ahead of a final decision on whether to agree to the first capital increase in 20 years.

The Development Committee of 24 finance ministers who oversee the bank yesterday called for a report on options for recapitalization to be produced by the Spring Meetings in 2010 “for a decision”.

The bank yesterday proposed a capital increase of between $3 billion and $5 billion for the International Bank for Reconstruction and Development, its lending arm for emerging and credit-worthy middle-income countries.

It has also indicated it will call for a replenishment of the resources of the International Development Association, the division that lends to the world’s poorest countries, at a review in November.

However the UK government, the biggest donor to IDA, has made it clear that it might boycott any capital increase unless the bank improves the speed of its aid operations.

Senior US politician Barney Frank has threatened to withhold the US’s contribution pending reform of its accountability. France and Italy have also voiced opposition.

Agustin Carstens, the Mexican finance minister and chair of the committee, told Emerging Markets that there was a “strong case” to recapitalise the World Bank in the face of heavy demand for loans from affected countries.

Some countries recognise that a capital increase would “make sense”, he said, but see this as “a good opportunity to do some reforms of this institution, in a way that makes sure taxpayers’ money is well spent”. “The World Bank is more than ready and prepared to raise that reform process provided that it can move on both fronts quickly because time is of the essence.”

The depth of the economic crisis across middle- and low-income countries has forced the IBRD to triple its commitments to $33 billion in the year to June while IDA’s hit a record high of $14 billion.

The Bank expects to provide a total of $100 billion between 2008 and 2010, which officials say will put the bank’s capital base under pressure.

Robert Zoellick, the World Bank’s president, said: “We know that it is going to be natural as we work with shareholder countries, that they are going to have aspects that they want to change [in] the nature of the Bank. We are in the world of politics here.”

He said that Australia, the Netherlands, Spain, Germany and Greece had lent their support to the Bank, while developing countries had sent a “strong message” of the need to be prepared for uncertainty in 2010.

“So what this meeting does by giving a hard decision point [is] we will be able to move beyond reviews and studies and try to work through these issues.”

The proposed increase of $3-5 billion is relatively small because the Bank has historically been able to use its AAA credit rating to raise leveraged loans. The IBRD has already raised the cost of its loans to middle income countries by 0.2% to increase the amount of money it can pass on to IDA.

The committee also backed a proposal by the G20 to shift voting power in the bank by at least 3% to developing countries from rich nations to give them more say in the global institution. The communique said it was important to “move towards equitable voting power in the World Bank over time”.

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