The IMF/World Bank gave its backing for more rapid infrastructure development yesterday as its governors called for developing countries to be allowed 'fiscal space' to build up power, transport, communications and other basic services. Sadakazu Tanigaki, finance minister of Japan - which is pushing hard for new international initiatives to boost infrastructure provision - led the call for fiscal concessions.
This adds momentum to calls a day earlier by developing country finance ministers, including Brazil's Antonio Palocci, for the World Bank to increase its role in infrastructure lending. Development Committee Chairman Trevor Manuel backed their call and IMF Managing Director Rodrigo Rato promised that the Fund would consider ways to increase fiscal flexibility on infrastructure building.
According to an IMF spokesman this would allow developing countries to deduct infrastructure spending from their budget without upsetting the 'primary balance' regarded as a seal of good fiscal housekeeping. The argument is that by investing in infrastructure, countries are improving their income generating potential. Debt services payments on infrastructure loans from multilateral development banks would also be deductible, he said.
This would be a significant concession to emerging market economies at a time when there has been a massive shortfall in hoped for private-sector investment in infrastructure, leaving governments bearing around 70% of the total cost. Those governments that invest most claim they are penalized in the way that their primary budget balance is calculated by the IMF.
The problem was highlighted by Palocci who told the Development Committee that "had Latin America augmented investment in infrastructure assets by 10% in the 1990s, it would have increased [the region's economic] growth by 1.5% a year." The World Bank estimates that developing countries need to double infrastructure investment to around 7% of GDP if they are to meet economic growth and poverty reduction targets, he noted.
The World Bank has stepped up its lending under a newly introduced Infrastructure Action Plan and will commit $6.5 billion in new loans this year.