2018 World Bank Capital Increase Proposal

2018 World Bank Capital Increase Proposal

Updated December 14, 2018
2018 World Bank Capital Increase Proposal
On October 12, 2018 World Bank members, including the
international capital markets on favorable terms because of
United States, approved a $60.1 billion capital increase for
their AAA ratings, which in turn reflect their strong capital
the World Bank’s main lending facility, the International
positions, their record of obtaining loan repayment, and the
Bank for Reconstruction and Development (IBRD), which
additional backing of callable capital. Funds not deployed
would raise the IBRD’s capital from $268.9 billion to $329
for lending are maintained in IBRD’s investment portfolio
billion. World Bank members also endorsed a $5.5 billion
to supply additional liquidity for lending operations.
capital increase for the International Finance Corporation
(IFC), the World Bank’s private-sector lending arm, which
Figure 1. IBRD Business Model
would more than triple the IFC’s capital base from $2.57
billion to $8.2 billion. Congress would need to fully
authorize and appropriate funds for any U.S. participation
in the proposed capital increase. In testimony before the
House Financial Services Committee in December 2018,
Treasury Undersecretary David Malpass committed to work
with Congress over the coming months to prepare the
necessary legislation to move forward with the U.S.
contribution to the capital increase.
According to the Bank, the capital increase would allow the
Bank to provide an annual average of $100 billion in

development support. Over the past five years (2013-2017),
Source: The World Bank, Adapted by CRS.
total World Bank annual support averaged $59 billion.
Bank leadership is aiming for final approval of the capital
IDA was established in 1960 to complement the IBRD by
increase package at the October 2018 annual meetings.
extending zero or low-interest loans to developing and least
The Trump Administration supports the capital increase,
developed countries. IDA loans are mainly supported by
which will be accompanied by reforms designed, in part, to
annual contributions by World Bank member countries, but
address a longstanding concern for many U.S.
increasingly, IBRD is also making transfers to IDA, as well
policymakers: high levels of World Bank lending to upper-
as several World Bank trust funds. In addition to its lending
middle income countries, especially China. In a statement at
operations, the World Bank provides financial management
the 2017 IMF and World Bank spring meetings, U.S.
services for funds such as the Afghanistan Reconstruction
Treasury Secretary Steven Mnuchin stated that, “the
Trust Fund, the Global Fund to Fight AIDS, Tuberculosis
relationship between the World Bank and more
and Malaria, and the Global Environment Facility. As of
creditworthy countries [such as China] should mature over
the end of FY2017, the World Bank managed $31.6 billion
time, with the absolute level of borrowing declining as
in multi-donor trust funds.
countries become better able to finance their own
Three other World Bank-affiliated organizations are
development objectives.” Mnuchin also highlighted the
dedicated to supporting the private sector. The IFC
issue of shifting World Bank lending to poorer countries
promotes private sector development in poor and
through income-based country lending allocation targets
developing countries by making loans and investments in
and differentiated loan pricing.
small- and medium-sized companies. The Multilateral
What is the World Bank?
Investment Guarantee Agency (MIGA) provides private
investors insurance coverage against non-commercial risk
The World Bank is a multilateral development bank
in developing countries. The International Center for the
(MDB), established in 1945, that offers loans and grants to
Settlement of Investment Disputes (ICSID) facilitates
low- and middle-income countries to promote poverty
investor-state dispute settlement.
alleviation and economic development. The World Bank
has near-universal membership, with 189 member nations.
2018 Capital Increase Proposal
Technically, the term, “World Bank” refers to two entities:
The 2018 capital increase proposal is only for the IBRD and
the IBRD and the International Development Association
the IFC (Table 1). The capital that the United States and
(IDA), which lend directly to governments to finance
other shareholders contribute to the IBRD comes in two
development projects and policy programs in member
forms: (1) “paid-in capital,” which requires the transfer of
countries. The IBRD’s primary activity is providing near-
funds to the Bank; and (2) “callable capital,” which are
market rate, long-term loans (up to 35 years) to eligible
funds that shareholders agree to provide, but only when
member countries. IBRD loans are financed through its
necessary to avoid a default on a borrowing by the World
equity and from borrowing in the international capital
Bank itself. (A member country defaulting on a World
markets (Figure 1). MDBs are able to borrow from
Bank loan would not cause the Bank to draw on its callable
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2018 World Bank Capital Increase Proposal
capital.) The IFC does not use callable capital and relies on
shareholder and the only country with veto power over the
its own earnings ($22 billion as of the end of FY2017) for
most important World Bank voting decisions (i.e., those
the majority of its capital. Neither the World Bank, nor any
requiring an 85% majority). At 5.71%, China remains the
other MDB, has ever had to draw on its callable capital.
third largest shareholder, behind Japan, which would have
Unlike the IBRD, the IFC only has paid-in capital.
6.83% of total voting power if the reforms go in effect.
The IBRD request is technically a combination of a general
Despite its increase in voting power, China’s World Bank
capital increase (based on the increases proportionate to
voting power remains well below its share of the global
existing shareholder) and a selective capital increase, which
economy—18.7% (based on purchasing power parity (PPP)
would increase the share of some countries more than
according to the IMF’s April 2018 World Economic
others in order to alter the relative voting power of member
Outlook. By contrast, the U.S. share of world GDP (PPP) is
countries.
15.12% compared to voting power of 15.87%. Under the
current proposal, the U.S. share at the IFC after the capital
Table 1. Proposed World Bank Capital Increase
increase would decrease and its voting power would decline
from 20.99% to 16.39%.
Proposed Increase
Amount ($ in billions)
The proposed capital increase comes eight years after the
IBRD
previous World Bank capital increase ($87 billion) in 2010.
General Capital Increase

With the exception of small selective capital increases to
adjust relative shareholding, the Bank has raised its capital
Paid-In Capital
$5.6
base four times: 1959, 1979, 1988, and 2010 with U.S.
support.
Callable Capital
$22.2
Selective Capital Increase

The United States and the World Bank
The United States is the largest contributor to the World
Paid-In Capital
$1.9
Bank; accounting for the largest share of the IBRD’s
Callable Capital
$30.4
subscribed capital, $46.4 billion (17.25%) of a total of $270
billion. Of the U.S. contribution, $2.9 billion is paid-in
IFC
capital. This amount has been fully authorized and
Paid-In Capital
$5.5 billion
appropriated by Congress in several appropriations
measures over the years. The balance of the U.S.
Source: World Bank
subscription, $43.5 billion in callable capital, has been fully
authorized. However, only a portion, $7.7 billion, has been
If approved by the World Bank’s membership, the capital
appropriated and could be used by the World Bank without
increase package includes several reforms.
need for further congressional action.
 Further enhancing the voice and participation of so-
Since the 1982 foreign operations appropriations bill was
called “developing and transitional economies,”
adopted, Congress has authorized but not appropriated
including increasing China’s voting power.
callable capital. U.S. law (22 U.S.C. 286c) requires that
 New guidelines for the World Bank lending portfolio in
Congress give its assent before the United States can vote in
order to reduce lending to middle-income countries and
favor of a new IBRD funding plan that increases U.S.
direct more funding (70% of total lending) to lower
contributions According to its Articles of Agreement, an
IBRD capital increase requires approval by members
income countries.
holding at least 75% of total voting power. Since the United
 Introduction of differentiated pricing based on country
States has voting power of 15.98%, it cannot veto an IBRD
income status, with higher income countries paying
capital increase. At the IFC, a capital increase requires an
more than the Bank’s other borrowers;.
80% majority of the total voting power. Since the U.S.
voting share at the IFC exceeds 20%, U.S. support is thus
 Separate funding for the World Bank to engage on
required for the IFC capital increase to proceed, regardless
“global public goods,” such as climate risk, global
of whether the United States decides to financially
pandemics, tax information sharing, agriculture, etc.
participate in the IFC capital increase.
The main beneficiary of the rebalance is China, which
The U.S. government is seeking as a a pre-condition to
would see its voting power increase from 4.45% to 5.71%.
voting for the entire World Bank capital increase, that the
Following China, the next largest increase in voting power
IFC Articles of Agreement be amended to increase the
is Sweden, whose voting power increases from 0.85% to
share of voting power required from 80% to 85% for any
0.89%. According to analysis by the Wall Street Journal, a
future IFC capital increase to preserve U.S. veto over any
total of 52 countries took small cuts to their voting shares to
future IFC capital increases.
effectuate China’s increase; for 50 of them, the cut was less
than 0.1% percentage points.
Martin A. Weiss, Specialist in International Trade and
Finance
The United States would see a small decline in voting
power, from 15.98% to 15.87%, but remains the largest
IF10895

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2018 World Bank Capital Increase Proposal

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