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World Bank urged to channel shareholder money to cut poor country debt

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The World Bank says it cannot follow its own advice to member countries to cancel debts to poor economies for fearing of losing its AAA status, but a new report says it can bypass that by setting up a new vehicle

The World Bank should establish its own vehicle to channel money from rich shareholder countries to pay off the debts that poor states owe to the multilateral lender, according to a leading development thinktank.

The move would bypass the threat that the bank would lose its cherished AAA credit rating status if it participated in the G20’s Debt Service Suspension Initiative (DSSI), the Center for Global Development said.

The bank has refused to take part in the DSSI under which members of the G20 agreed to allow 73 poor countries to suspend their payment of debt interest this year that could deliver relief of $8bn-$11bn.

It has cited warnings from Fitch Ratings, Moody’s and Standard & Poor’s that debt suspension would mean the bank was no longer treated as a “preferred creditor” putting it first in line for repayment. It says the loss of that status would force up its borrowing costs that would in turn “drain large volumes of resources, impacting all clients”.

But Scott Morris, a senior fellow at CGD and a former assistant deputy secretary at the US Treasury, said the rating agencies had added a caveat that the AAA rating would not be affected if “most of the losses were compensated” by their shareholders.

He said that for client countries that were not being reached adequately through new commitments and disbursements by the bank, there was a strong case for donor-funded loan repayments in a way that provided relief to the borrowers and protected the bank’s balance sheet.

“Given where we are with interest rates in advanced economies, which underpin the bank’s AAA, I tend to be sceptical about fears that a more aggressive World Bank would pay a heavy cost in the form of much higher borrowing costs,” he told GlobalMarkets.

It was “unclear” why the World Bank had not prioritised a donor-supported debt service facility akin to the IMF’s Catastrophe Containment and Relief Trust, he said. In March the IMF revamped the CCRT and launched a fundraising effort to enable it to provide relief on debt service.

“Such a fund would be straightforward — it is a matter of putting the request in front of the bank’s donors,” he said. “The institution owes it to its donors, and even more to its client countries, to lay out a clear picture of how, and how well, donor money is flowing through the bank to reach IDA countries.”

‘Not on the table’

The move was backed by Costa Rica whose central bank governor said many countries were looking at creating special purpose vehicles (SPV) at the multilateral level.

“Costa Rica has been proposing the creation of an SPV within the World Bank, where creditors would actually provide funding, that will be on-lent to low income and emerging market countries at concessional rates to deal with a pandemic,” said Rodrigo Cubero, president of the Banco Central de Costa Rica.

On Monday Bank president David Malpass said new statistics produced by the bank showed that up to the end of 2019 some 60% of all poor country loans were owed to Chinese creditors.

Asked whether an agreement by the bank to forgive its debts could be part of a deal for China to extend its debt forgiveness, he said that was not “on the table”.

“The multilateral banks provide highly concessional grants and low interest rate loans,” he said. “The first step for relieving the debt burden for the countries is from other creditors and that is the direction of the initiative so far.”

The call by the CGD comes a day after it warned the bank could fall $81bn short of its $160bn target for emergency funding to help developing countries deal with the effects of Covid-19.

The study found that at its current rate, the bank’s new commitments would fall $31bn short of its target of $160bn by June 2021. More importantly, they found that just $79bn of the target would flow to developing countries by June 2021.

The World Bank said the CGD had not “accurately characterised” its response to the pandemic. “We are making good progress toward our announced 15-month target of up to $160bn in surge financing, much of it to the poorest countries,” said a spokesperson.

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