World Bank Legislation Before the 99th Congress

The 99th Congress has before it several proposals to authorize additional U.S. contributions to multilateral development banks. These include potential subscriptions or contributions to the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the African Development Fund (AFDF), and the special African aid facility of the International Development Association (IDA). There is no legislation now before Congress to authorize new contributions to the International Monetary Fund (IMF), the regular budget of the IDA, or any of the other regional development banks. These have been dealt with in previous years. This paper provides some background on the World Bank and a summary of the pending legislation.

f' r' 0 z Congressional Research Service The Library of Congress 3 Washington, D.C. 20540 WORLD BANK LEGISLATION SEFORE THE 99TH CONGRESS Jonathan E. Sanford, Analyst in Intsrnational Political ?conomy Foreiqn Affairs and Nacronai 3 e f e n s e 3 i v i s ; o n J u i y 2 5 , L985 , , WORLD BANK LEGISLATION BEFORE THE 99th CONGRESS The 99th Congress has before it several proposals to authorize additional U.S. contributions to multilateral development banks. These include potentral subscriptions or contributions to the International Bank for Qeconstruct~on and Development (IBRD), the International Finance Corporatron (IFC), the African natronal Development 4ssoc~atron(IDA). There is no legislation now befor? Congress to authorize new contrrbutions to the International Monetary Fund (IYP), the regular budget of the IDA, or anv of the other r e g ~ o n a ldevelopment banks. These have been dealt with in previous years. This paper provides some background on the World Bank and a summary of the pending legislation. Background Information on the World 8ank The World Bank and the 1°F were establ~shed as a result of a international conference held r n 1944 in Bretton voods, New 'dampsh~r?. Unlrke the iYF, w h ~ c 5 loans money to help countries cope with their overall balance of payments problems, the World Bank !ends economlc development. its operations. to help frnance actlvrtres and ? r o i e c ~ s whic"pr~rn0~2 The 3ank has :hree " ~ ~ n d o w s 2"n r ; u g h ynrcn ~t 2onduccs The IBRD, the original World Bank, makes loans on near-market terms, rnalnlv to mrddle-income developing countrres, r?!endlng funds (at rates 1 / 2 of a percent over the Rank's cost) borrowed Ln c o m e r c ~ a lc a p ~ t a lnarkecs. The IDA aakes Loncesslonal loans ( n o interest. '/& 3f 1 Tercrnt ;ery>*~cl :?.ar;e) co :he vorld's 2ooresc z o u n t r ~ e s :slnq fiinas :oncr'~oute~ :v ES The IFC aakes Loans or squltv Lnvescments Ln new 7rzvacs E:ns countrres, usrng Eunds borrowed from tne I B R D Jr -2ntri3uced l o n o r :oun:r:es. -2 3v ieve~o~lng LCS aonor coun- t r i e s , i n o r d e r t o promote t h e growth o f t h e p r i v a t e s e c t o r i n t h e d e v e l o p i n g world. I n 1984, t h e IBRD l e n t n e a r l y $12 b i l l i o n , w h i l e t h e I D A l e n t a l m o s t $3.6 b i l l i o n and t h e IFC made a b o u t $700 m i l l i o n i n new c a p i t a l i n v e s t m e n t s . The World Bank i s owned j o i n t l y by i t s member , c o u n t r y g o v e r n m e n t s , w i t h each country's vote being proportional t o i t s share i n the t o t a l contributions. The U n i t e d S t a t e s c u r r e n t l y h a s a u t h o r i t y t o c a s t 20 p e r c e n t o f t h e v o t e i n :Pe I B W , 2 5 p e r c e n t i n t h e I D A , and 2 5 p e r c e n t i n t h e IPC. The U n i t e d S t a t e s , J a p a n , C a n a d a , and t h e W e s t e r 1 E u r o p e a n c o u n t r i e s c o n t r o l a b o u t 60 p e r c e n t of t h e v o t e i n t h e IBRD, 6 1 p e r c e n t i n t h e I D A , and 6 5 p e r c e n t i n t h e IFC. The S o v i e t Union i s n o t a member o f t h e C o r l d Bank, a l t h o u g h t h e P e o p l e s ' R e p u b l i c o f C h i n a and s e v e r a l s m a l l e r communist c o u n t r i e s a r e . Approximately 4.27 percent o f t h e IBRD's l o a n s had gone t o c o u n t r i e s w i t h communist g o v e r n m e n t s , a s of J u n e 30, 1984. The compar.able f i g u r e s f o r t h e LDA and IFC w e r e 2 . 3 6 and 6 . 9 2 p e r c e n t . A l l o f t h e I F C ' s c o m m i t m e n t s , i n t h i s c a s e , w e r e co Y u g o s l a v i a . The World Bank l e n d s f o r new p r o j e c t s and p r o g r a m . It does not lend t o r e f i n a n c e e x i s t i n g f a c i l i t i e s , t o a s s u m e c o m m e r c i a l bank d e b t s , o r t o p u r c h a s e t h e e q u i t y of f o r e i g n i n v e s t o r s . World Bank l o a n s a r e g e n e r a l l y t h e p r o d u c t o f a l e n g t h y r e v i e w p r o c e s s , d u r i n g which t h e s t a f f i n v e s t i s a t e s t h e economic a n a t e c h n i c a l f e a s i b i l i t y of t h e proposed p r o j e c t . Once i t s Board o f E x e c u t i v e D i r e c t o r s a p p r o v e s t h e l o a n , t h e Bank o p e n s a l i n e o f c r e d i t f o r t h e b o r r o w e r . The f u n d s a r e n o t d i s b u r s e d a s a lump sum. Rather, they a r e generally released ( o f t e n a s d i r e c t payments t o t h e c o n t r a c t o r s ) a s t h e p r o j e c t i s i m p l e m e n t e d a n d t h e b i l l s come i n f o r c o m p l e c e a work. The k o r l d Bank r e q u i r e s t h a t cne n a t i o n a l government ? f :he ?orr3ver c3un~r:: g u a r a n t e e t h e r e p a y m e n t o f a l l i t s XBRD and I D A L o a n s , c e g a r d l e s s ~f v h e r n e r r5.e i m e d i a t e b o r r o w e r i s a p r i v a t e e n t i t y o r a n o f f i c i a l q r ~ a n i z a t i o n . <ZPC loans and rnvestments d o not require such government guarantees.) The World Bank has never experienced a default nor has rt rescheduled payments on any of rts outstanding loans. From time to time, some borrowers have been tardy wrth therr loan payments, but the Bank has a schedule of escalating penaltres whrch dlscourage serrous arrearages. Such arrearages rarely run beyond 75-90 days. Nicaragua, with arrearages In the ne~ghborhood of $10-12 ?l!!ron on a tstal I3?3 -- dett of about S135 mrllron, rs more tha srx months overdue In ~ t sreDaynents the longest arrearage the Bank has experrenced to date. the frrst tlTe, :he As a cgnseauence, for IBRD has had to lrst the affected loan as berna on a ngn- accrual basrs. When countries make new caprtal contrrbutions to the IBRD, only about 10 percent (or less) of therr subscrrptron takes the form of pard-rn capltal, that is, direct payments from their treasuries. callable caprtal -- The remainder takes the form of pledges to provrde the money later rf the rnternatronal agency needs the funds to cover ~ t sown frnancral oblizatrons. The World Bank usually treats rts pard-rn caprtal as reserves, to strengthen rts frnancral base. Its callable caprtal serves as backrng for the Bank's borrowrngs on world capital markets, helprng assure the access to funds and c h e 3ref2rentlal Interest rates the Bank needs rf rt rs to successfullv conduct ~ t srelend~ng operations. U.S. Government Lrabrlrty to the World Bank The Unrted States takes on a callable caortal zna therefore rts subscrrptron. it contingent LS llabrlrtv vnen ~otentrally !laole LC for :he iuoscr~res 13Rn 'all +xceF.t On a case-by-case basrs, nowever, :he Cnlced States only for rts proportronal snare of any shortfall the Tank through ~ t sown resources. 1s unaole :o LS ,E l-a~le c~ver be r e p a i d , b u t i t d o e s n o t g u a r a n t e e t h e Bank a g a i n s t a n y l o s s e s i t m i g h t s u s t a i n i f i t s borrower c o u n t r i e s f a i l t o repay t h e i r loans. The Bank i s r e s p o n - s i b l e f o r t h i s , w i t h i n t h e limits of 'its i n c o m e , a s s e t s , a n d r e s e r v e s . ,Only i f s o many b o r r o w e r s d e f a u l t e d t h a t t h e Bank no l o n g e r h a d t h e f u n d s t o r e p a y i t s o v n c r e d i t o r s would t h e Bank b e a b l e t o c a i l upon i t s i n e m b e r c o u n t r i e s f i r d i s b u r s e m e n t s on t h e i r c a l l a b l e s u b s c r i p t i o n s . A s of J u n e 3 0 , 1 9 8 4 , t h e World B a n k , h a d o v e r $ 3 . 7 4 b i l l i o n a v a i l a b l e i n F t s , . g e n e r a l and s p e c i a l r e s e r v e s , as w e l l a s $4.97 b i l l i o n i n p a i d - i n capital stock. I n e a c h y e a r f o r t h e r e m a i n d e r of t h e d e c a d e , t h e I B R D ' s e x p e c t e d i n c o a e fr37 p r i n c i p a l r e p a y m e n t s on p a s t l o a n s i s s c h e d u l e d t o b e g r e a t e r t h a n i t s medium and long-term d e b t s which mature 'during t h e y e a r . The t o p s i x IBRD b o r r o w e r s p a i d t h e World Bank $1.2 b i l l i o n i n p r i n c i p a l on t h e i r e x i s t i n g l o a n s d u r i n g t h e I f , . o n a w o r s t c a s e b a s i s , a l l s i x were t o s u s p e n d t h e i r Bank's f i s c a l 1985. l o a n r e p a y m e n t s a t t h e same t i m e , t h e World Bank w o u l d s t i l l h a v e t h e f u n d s t o c o v e r i t s o b l i g a t i o n s f o r s e v e r a l y e a r s w i t h o u t a n y c a l l s on c a l l a b l e c a p i t a l . D e f a u l t s of t h i s m a g n i t u d e w o u l d , o f c o u r s e , b e s y n p t o m s of m a j o r d i s t r e s s i n t h e world f i n a n c i a l system. '&ether t h e World Bank, t h e IXF, t h e c o m m e r c i a l b a n k s , and t h e n a j o r l e n d e r a n a d e b t o r c o u n t r i e s c o u l d work 9 u t t h e i r l a r z e r d i f f i c u l t i e s b e f o r e t h e ISRD d e p l e a t e d i t s r e s e r v e s would d e p e n d on t h e s i t u a t i o n a n d t h e w i l l of t h e p a r t i e s c o n c e r n e d . Current Legislative Proposals I 3 R D i e z i s l a ~ i o n . The .A.dninistracLon h a s r e q u e s t e d c h a t C o n g r e s s a u t h o r L s e 3.5. 3 a r t i c L o a ~ i o n in ihe iipcominq s e l e c t i v e c a p i t a l . I : ~ c r e a s e ( S C I ) of t h e IBW. . . The c o t a i s i z e o r t n e SCI i o n . LS 58.- j i l l i o n , 2 f w h i c h t h e U.S. s h a r a would be $ 1 . 5 Some 9 1 . 2 5 ? e r c e n t o r c h i s w o u i a be c a l l a b l e c a p i t a l a n d t h e r e m a i n - CRS -5 i n g 6.75 p e r c e n t would b e p a i d i n , e n t a i l i n g a payment f r o m t h e T r e a s u r y o f about $131 m i l l i o n . The A d m i n i s t r a t i o n a n t i c i p a t e s t h a t t h e p a i d i n p o r t i o n would b e a p p r o p r i a t e d o v e r two y e a r s , b e g i n n i n g i n f i s c a l 1 9 8 6 . The main p u r p o s e o f t h e SCI i s t o a d j u s t m e m b e r s h i p s h a r e s i n t h e IBRD. Raising funds i s a secondary purpose. The SCI w i l l p r o v i d e f o r l e s s t h a n o n e y e a r ' s r e g u l a r l e n d i n g by t h e I 3 W . The U n i t e d S t a t e s w i l l b e t a k i n g a somewhat l e s s t h a n p r o p o r t i o n a l s h a r e i n t h e S C I , t h u s b r i n g i n g a b o u t a small r e d u c t i o n i n i t s o v e r a l l s h a r e i n t h e a a n k . J a p a n i s s c h e d u l e d t o s u b c r i b e $ 7 5 0 m i l l i o n , o n t h e o t h e r h a n d , r a i s i n g i t from t h e f i f t h t o t h e second l a r g e s t stockholder i n t h e i n s t i t u t i o n . Lf t h e i n i t e d S t a t e s c h o s e s n o t t o p a r t i c i p a t e i n t h e S C I , i t s v o t i n g s h a r e i n t h e IBRD would s h r i n k f u r t h e r and i t would no l o n g e r b e a b l e t o s t o p c h a r t e r amendments f r o m becoming e f f e c t i v e w l t h o u t i t s p e r m i s s i o n . The House B a n k i n g C o m m i t t e e and S e n a t e F o r e i g n R e l a t i o n s Committee h a v e b o t h v o t e d t o a p p r o v e t h e a u t h o r i z a t i o n (H.R. 2253 and S. 6 8 4 ) , but a s y e t no a c t i o n h a s b e e n t a k e n by t h e f u l l House o r S e n a t e . IFC l e g i s l a t i o n . A l s o b e f o r e C o n g r e s s i s l e g i s l a t ~ o nr e q u e s t e d by t h e A d m i n i s t r a t i o n w h i c h would a u t h o r i z e U.S. participation i n a p l a n f o r r a i s i n g t h e I F C ' s c a p i t a l b a s e from S b J d m i l l i o n t o $ 1 . 3 b i l l i o n . The U n i t e d S t a t e s would s u b s c r i b e 2 7 p e r c e n t o f t h e $ 6 5 0 m i l l i o n i n c r e a s e , p r o v i d i n g $ 1 7 5 a i l l i o n i n f i v e a n n u a l payments o f $ 3 5 m i l l i o n e a c h b e g i n n i n g i n f i s c a l 1986. The c a p i t a l i n c r e a s e would h e l p f u n d a a a j o r e x p a n s i o n o f LFC a c t i v i t y d u r i n g t h e 3 e x t f i v e y e a r s , , ~ l t k a. s p e c i z i ? m u h a s i s o n s r i v a t e e n t s r ~ r i s ein A f r i c a and L a t i n knerlca. :nsomucn 3s c 3 u n c r l e s a t l i r , >- p e r c e n t a p p r o v e t h e IFC i n c r e a s e , :t 7 2f tb.e v o t l n g z a n n o t go i n t o e f f e c t x i t h o u t U . S . S ~ O C K> U S E participation. CRS -6 The S e n a t e F o r e i g n R e l a t i o n s Committee e n d o r s e d t h e A d m i n i s t r a t i o n p l a n ' on A p r i l 25, 1 9 8 5 , when i t r e p o r t e d t h e omnibus b i l l ( S . , t a i n s t h e IBRD . a u t h o r i z a t i o n . 6 8 4 ) which a l s o con- The House Banking Cornmi t t e e ' s v e r s i o n oi t h e PIa n , r e p o r t e d o n May 1 5 , , 1 9 8 5 ,' ,a i s o a s a p a r t o f i , t s omnibus l e g i s l a t i o n , Go1d.3 I , a l l o w t h e U n i t e d ' ~ t , a t e st o v 0 t . e f o r t h e e n t i , r e IFC i n c r e a s e , ' b u t would a u t h o r i z e o n l y $144 m i l l i o n f o r U.S. amount t o a r e d u c e d U.S; IDA l e g i s l a t i o n . p a r t i c i p a t i o n i n the plan. I? e f f e c t , t h i s ~ o u l d s h a r e i n t h e IFC r e p l e n i s h m e n t . T h e r e i s no a u t h o r i z a t i o n l e g i s l a t i o n b e f o r e C o n g r e s s t h i s y e a r f o r ' r e g u l a r r e p l e n i s h m e n t s o f t h e I n t e r n a t i o n a l Developnenc Ass3ci;tion. The House Banking Commit t e e h a s a p p r o v e d l e g i s l a t i o n , however, a u t h o r i z - i n g a $225 m i l l i o n U.S. contribution to the IDA'S special f a c i l i t y for Africa. \ The c o n t r i b u t i o n would be made o v e r t h r e e y e a r s , b e g i n n i n g i n f i s c a l 1 9 8 6 . The House A p p r o p r i a t i o n s Committee h a s a l s o v o t e d t h a t $ 7 5 m i l l i o n from i t s f i s c a l 1986 a p p r o p t i ' a t i o n f o r ' t h e U.S. b i l a t e r a l Economic S u p p q r t Fund s h o u l d b e used a s a payment t o w a r d s t h i s c o n t r i b u t i o n . The l e g i s l a t i 3 2 a p p r o v e d b y t h e S e n a t e F o r e i g n R e l a t i o n s Committee i n c l u d e s no s u c h a u t h o r i z a t i o n s f o r 2.S. contribu- tions t o the IDA special f a c i l i t y for Africa. The s p e c i a l f a c i l i t y i s i n t e n d e d t o h e l p supplemen: t h e IDA'S r e g u l a r i e n d - i n g program and c h e r e b y i n c r e a s e i t s o v e r a l l e m p h a s i s on A f r i c a . The s p e c i a l I D A f a c i l i t y would put s p e c i a l e m p h a s i s o n p r o j e c t s which e n c o u r a g e economic p o l i c y r e f o r m and improved n a t i o n a l economic p o l i c y i n :he A f r i c a n c o u n t r i e s . The s p e c i a l I D A A f r i c a n f a c i l i t y h a s c u r r e n t l y r e c e i v e d c o m m i t s e n t s t o t a l l i n g $ 1 . 2 b i l l i o n From 15 c o u n t r i e s . The b d m ~ n i s c r a t l o n h a s s a l d that ~t s u D p o r t s :he f o r A f r i c a and i t b e l l e v e s :hat -tea 3f a sDeclzl fx:;ltp s ~ e c l a la t r e n t i o n n e e d s :o 3e s a i d co Lrnorovlng CRS -7 t h e economic p o l i c y environment i n A f r i c a . The A d m i n i s t r a t i o n h a s n o t p r o p o s e d t h a t t h e U n i t e d S t a t e s c o n t r i b u t e t o t h e new I D A f a c i l i t y , h o w e v e r . t h e A d m i n i s t r a t i o n s a y s t h a t a new U.S. Instead, b i l a t e r a l p r o g r a m , t h e Economic P o l i c y I n i t i a t i v e f o r A f r i c a ( a l s o c a l l e d t h e A f r i c a n Economic P o l i c y Xeform P r o g r z a ) i s a s u f f i c i e n t U.S. r e s p o n s e t o t h e problem. It 6ncourages o t h e r s t o c o n t r i - b u t e , however, t o t h e s p e c i a l I D A f a c i l i t y . A f r i c a n D e v e l o p m e n t Fund. The A d m i n i s t r a t i o n h a s recommended, and t h e House Banking a n d t h e S e n a t e F o r e i g n R e l a t i o n s C o m m i t t e e s h a v e e n d o r s e d , a p l a n f o r U.S. p a r t i c i p a t i o n i n t h e f o u r t h r e p l e n i s h m e n t o f t h e A f r i c a n Development Fund. (The a u t h o r i z a t i o n i s i n c l u d e d i n t h e omnibus L e g i s l a t i o n c i t e d a b o v e . ) The AFDF i s t h e c o n c e s s i o n a l l o a n a f f i l i a t e t o t h e A f r i c a n Development Bank. Operationally, i t i s very similar t h e IDA. -- i n t h e t e r m s and t y p e s o f i t s l o a n s -- -0 ' The AFDF i s a s e p a r a t e o r g a n i z a t i o n , h o w e v e r , n o t a f f i l i a t e d w i t h t h e World Bank. Under t e r m s o f t h e p l a n , t h e U D F ' s r e s o u r c e s would i n c r e a s e b y $1.46 b i l l i o n . The U n i t e d S t a t e s would p r o v i d e a t o t a l o f $ 2 2 5 m i l l i o n (15.A p e r c e n t ) i n t h r e e a n n u a l payments b e g i n n i n g i n f i s c a l 1 9 8 6 .