Multilateral Development Banks: Basic Background

Multilateral Development Banks: Basic Background

Order Code RS20793
January 22, 2001
CRS Report for Congress
Received through the CRS Web
Multilateral Development Banks:
Basic Background
Jonathan E. Sanford
Specialist in International Political Economy
Foreign Affairs, Defense and Trade Division
Summary
As a group, the multilateral development banks (MDBs) are the largest source of
development assistance to middle- and low-income developing countries. This report
discusses the organization and operations of the MDBs. It shows the share of their
lending by region and by economic sector. The report is based on preliminary data for
2000. (The fiscal years for the regional banks ended on December 31.) It uses data for
1999 (to mid-2000 for the World Bank) in several sections. It will be updated when
newer data become available.
Overview
The United States is a member of five multilateral development banks (MDBs) as well
as two similar agencies. The five MDBs include the World Bank and four regional banks
– the Asian Development Bank, African Development Bank (AFDB), European Bank for
Reconstruction and Development (EBRD), and Inter-American Development Bank (IDB).
The two other organizations are the North American Development Bank (NADB) and the
International Fund for Agricultural Development (IFAD). The latter differ somewhat from
the standard MDB model, though they perform similar functions.
This report provides information about the structure and operations of the MDBs.
Current issues and Congressional action concerning MDBs are discussed in CRS Issue
Brief IB86008, Multilateral Development Banks: Issues for the 107th Congress.
Information on the procedures governing U.S. involvement can be found in CRS Report
RS20791, Multilateral Development Banks: Procedures for U.S. Participation.
Information concerning U.S. contributions can be found in CRS Report RS20792,
Multilateral Development Banks: U.S. Contributions, FY1990-2001.
The MDBs are the largest single source of finance for development projects and
economic reform in developing countries. In 2000, they made loans, equity investments,
grants and guarantees totaling $34.26 billion. As Figure 1 shows, this was down prior
Congressional Research Service ˜ The Library of Congress

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Figure 1. Annual MDB
years. The World Bank and IDB reduced their
Assistance, 1995-2000
lending in 2000 after several years of heavy
lending in response to the Asian financial crisis
and its global aftermath.
The World Bank is the largest MDB. As
Figure 2 indicates, it provided more than half of
all MDB assistance in 2000. It also provided
more than 62% of all MDB concessional aid that
year. (See Table 1, page 6.) Concessional loans
accounted for about 22% of all MDB assistance.
(See Figure 3.) Near-market or commercial rate
loans, guarantees or equity investments
comprised the other 78%. MDB near-market
Figure 2. Assistance from
rate loans accounted for 61% of the total. The
Each MDB, 2000
private sector facilities provided the other 17%.
Organization
Structure. The MDBs are autonomous
international agencies that finance development
programs in low- and middle-income countries
using borrowed money or funds contributed by
donor countries. The International Monetary
Fund is a similar body. Since 1979, it has lent
mainly to developing countries. Its operations
affect economic conditions in its borrower
countries. However, The IMF is a monetary
Figure 3. Forms of MDB
institution and it does not fund development
Assistance, 2000
projects. It is not included in this report.
Run by their own management and staffed
by international civil servants, the MDBs are
supervised by Boards of Governors and Boards
of Executive Directors representing their member
country governments. Voting shares are
weighted on the basis of countries’ contributions.
The governing boards meet annually. Each
country has its own governor. The executive
boards are smaller bodies – 22 members in the
case of the World Bank, fewer for some MDBs.
They meet weekly to consider MDB loan and
policy proposals and oversee bank activities.
(The IFAD board meets thrice annually.) The
governors have delegated much of their power to the EDs. For example, the executive
boards can hire (or fire) the president of their bank. The MDBs do not use money
contributed by their donors to fund their operating costs. Rather, these are paid for with
income earned from the MDBs’ reserves or from their loans. (See CRS Report RS20413,
IMF and World Bank: U.S. Contributions and Agency Budgets.)

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History . The IBRD1 was the first MDB. It was founded soon after World War
Two to help finance post-war reconstruction and to promote growth in developing areas.
It lends mainly to middle-income countries. In 1960, at the suggestion of the U.S., IDA
was created to make low-cost loans to the poorest countries. IBRD and IDA loans
require government repayment guarantees. The IFC was created in 1955 to make non-
guaranteed loans to and equity investments in private firms in developing countries.
MIGA was created in 1988 to encourage investment in developing countries thorough
insurance and guarantees protecting foreign investors against non-economic risk.
The IDB was created in 1959 in response to a strong desire by Latin American
countries for a bank that would be attentive to their needs. The AFDB was created in
1964 and was (until 1983) an African-only institution. The AFDF was created in the early
1970s to provide concessional loans using contributions from non-regional countries. The
ADB was created in 1966 to promote regional cooperation. The EBRD was established
in 1991 to promote market-oriented reform in the former communist countries of Eastern
Europe and the former USSR. IFAD was created in the late 1970s to fight hunger and
promote food security. The NADB is a joint Mexican-U.S. agency created by NAFTA
to address border environmental issues and trade-related community adjustment problems.
Except for the EBRD and NADB, all MDBs have market-rate and concessional loans
“windows.” IFAD provides both types of loans through its main account. Most also
provide some of the more specialized forms of assistance. The World Bank and IDB have
separate affiliates which provide assistance (on commercial terms) to private sector firms.
The ADB and EBRD make private sector loans through their market-rate loan windows.
MIGA is the only institution focusing on investment insurance and guarantees, but several
of the banks also make loan guarantees through their main loan windows.
MDB Members and Stockholders. The World Bank is now nearly a universal
institution. Only Cuba, North Korea, Brunei, Taiwan, and some micro-states do not
belong. Countries must be members of the IMF to join the World Bank; they need not
be IMF members to join the regional banks or IFAD. Taiwan is a member of the ADB.
North Korea has applied to join the ADB. Neither belongs to the IMF. Cuba and North
Korea are members of IFAD (as are most other UN member countries.) Countries must
be members of an MDB to borrow from it.
MDB Sector/Regional Activities. The MDBs finance a variety of activities. In
the past two decades, the World Bank has lent about 25% of its IBRD and IDA funds
annually for economy-wide (“structural adjustment”) or sector-wide (“sector adjustment”)
reform programs. The AFDB and IDB now also make adjustment loans. These provide
balance of payments support to countries, conditioned on their governments’ agreement
to undertake major policy reforms. Most MDB loans fund development projects or
programs, however. The project cycle involved in the preparation of these loans may take
1 Other abbreviations used in this report include four World Bank affiliates: the International Bank
for Reconstruction and Development (IBRD), the International Development Association (IDA,
the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency
(MIGA). They also include the regional banks’ concessional facilities: the Asian Development
Fund (ADF), the African Development Fund (AFDF), the IDB’s Fund for Special Operations
(FSO), and the Inter-American Investment Corporation, its private sector affiliate.

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several years before a proposal is ready for presentation to an MDB executive board.
After a loan is approved, full disbursement of the proceeds may take up to eight years or
more. The MDBs do not release funds to the borrower immediately. Rather, they
disburse funds only as the work progresses and approved invoices from suppliers are
received. MDB loans generally cover about one-third of a project’s cost. Goods and
services purchased with MDB loans are subject to open international competitive bidding.
Initially, the MDBs lent mainly to finance the construction of infrastructure or directly
productive activities (e.g., industry or commercial agriculture.) In the 1970s and 1980s,
they expanded the share of their aid targeted for poverty alleviation or economic policy
reform. This trend has continued. In the past decade, the World Bank halved the share
of its loans going for infrastructure, oil and mining while it more than doubled the share
going for social programs. With U.S. encouragement, it increased 10-fold the share
allocated for population, health, or nutrition programs. The IDB in particular has emulated
this trend. During the recent international financial crisis, while the amount of MDB
adjustment lending increased, the share going to fund social protection programs (which
protect vulnerable people and continue social services) also increased.
Figure 4. MDB Assistance to
Figure 4 shows the sectoral pattern of
MDB assistance in 1999 (mid-2000 for the
Economic Sectors, 1999
World Bank). Overall, the MDBs channeled half
of their funds into loans, guarantees and equity
investments for infrastructure, industry, and
finance. The social sectors received 23% of all
MDB funds. Substantial amounts (18%) also
went to finance reform of governmental
institutions (improvements in the effectiveness of
court systems or customs procedures, for
instance) or for economic policy reform. About
7% went for agricultural projects, a major
decline from the shares in earlier decades. Many
rural poverty projects are included in the social
category. The rapid urbanization of many
developing countries has brought more MDB emphasis on non-agricultural issues. About
3% of MDB assistance went to fund direct environmental projects. This does not include
the environmental aspect of projects in other
sectors. Table 2 shows the amount which each
Figure 5. Regions Receiving
MDB channeled into each sector that year.
MDB Assistance, 1999
Figure 5 shows the global distribution of MDB
assistance in 1999. Latin America was the
largest recipient of MDB aid. South Asia and
East Asia, regions which together contain over
one-half the world’s population, received 11%
and 18%, respectively. Sub-Saharan Africa
received the most MDB concessional aid, with
41% of the total. (See also Table 1.) South Asia
was the next largest recipient, with 26%. Sub-
Saharan Africa received $4.41 per capita for the
year. South Asia received $1.34 per capita. The

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per capita GNP of South Asia is lower ($440) than that for Africa ($500.) East Asia got
about 14% of all MDB concessional aid, while Latin America – a region with a much
smaller population and higher per capita annual income – received 11% of the total.
Proposals for Restructuring. There have been proposals, in recent years, that
the World Bank should be essentially closed and its functions transferred to the regional
banks. In Asia and Latin America, the regional banks now lend more to regional countries
than does the World Bank. However, three issues of concern have been noted. First,
there is no regional bank for the Middle East. The countries of the region seem unready
to cooperate in mutual development. Second, the African Bank has serious administrative
and operational weaknesses, though it has made improvements in recent years. (See CRS
Report RS20329, African Development Bank and Fund.) Most analysts agree that many
years will elapse before it is ready to supplant the World Bank in Africa. Third, the MDBs
differ considerably in their loan emphases. Table 2 shows that the World Bank lent 23%
of its funds for social programs. The IDB lent 38% for these activities, while the ADB
lent 18% and the AFDB allocated only 13%. Most experts agree that it is much easier for
donor countries to work within a global institution to expand its worldwide emphasis on
particular activities than it would be for them to seek coordinated action and comparable
priorities in the separate regional banks.
MDB Finances
Loan Terms. The MDBs lend three-quarters of their funds on market-based terms,
using money borrowed commercially in world capital markets. These are usually variable
rate loans, charging about one-half percent more than an MDB pays on the average to
borrow funds. Generally, depending on the project, loans are repayable over 12 to 25
years. The banks can borrow at advantageous terms (slightly more than the U.S.
Government pays to borrow funds) because they have the financial backing of the capital
subscribed by their member countries. Part of this (often 10% or less) is paid-in capital.
The rest is callable, payable if (as a last resort) an MDB is bankrupt and needs funds to pay
its creditors. There has never been a call on callable capital. Except for the AFDB, most
MDBs have substantial reserves. MDB concessional loans have long repayment periods
– up to 40 years – and very low interest costs. The MDB concessional loan programs are
funded with money contributed by their more prosperous member countries.
Debt Owed to MDBs. Cumulatively through 1999 (2000 for the World Bank), the
MDBs have made loan commitments totaling $780 billion. Some $360 billion has been
repaid. Of the rest, $315 billion was currently outstanding; another $105 billion had been
approved but not yet disbursed. About 0.7% of the former, some $3.1 billion, was
overdue. Countries that had suffered massive civil conflict – the former Yugoslavia, the
former Zaire, Liberia, and Somalia – owed 60% ($2.8 billion). Much of the rest was owed
by countries – Syria, Iraq, and Myanmar – having major disputes with the international
system. Except for loans to private creditors, the MDBs do not reschedule loans or
participate in debt restructuring plans. If countries fall 6 months behind on payments, the
MDBs stop disbursing on existing loans or reviewing new proposals. Recently, in
response to the debt crisis in Heavily Indebted Poor Countries (HIPCs), the World Bank
is writing off debt owed by 20 HIPC countries. It is also raising funds to reimburse some
regional banks so they can write-off some virtually unpayable debts owed to them. The

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AFDB and some sub-regional banks (in Central America and East Africa, for example)
cannot forgive these debts without putting their own solvency at risk.
Table 1. Amounts Lent by Each MDB to Specific Regions 2
Total
Africa
Latin
Europe
Middle
Central
S Asia
East
America
East
Asia
Asia
IBRD
10,919
98
3,898
2,564
760
169
935
2,495
IDA
4,358
2,061
165
144
160
165
1,178
484
IFC
3,505
359
1,238
679
228
87
399
515
ADB
3,908
1,040
2,859
ADF
1,071
102
563
406
AFDB
1,059
392
667
AFDF
1,233
1,404
10
EBRD
2,186
1,649
537
IDB
9,802
9,802
IFAD
433
198
76
54
51
53
Total
37,821
3,678
15,179
5,036
1,879
1,060
4,176
6,813
(Concessional)
6,979
2,829
793
144
224
267
1,778
944
Table 2. Amounts Lent by Each MDB
for Specific Economic Sectors 2
Industry&
Infra-
Agri-
Social
Public
Environ-
Other
Finance
structure
culture
Sectors
Sector
ment
IBRD
10,919
1,887
3,343
768
1,901
2,566
454
IDA
4,358
384
976
357
1,598
983
60
IFC
3,505
2,589
817
165
ADB
3,908
380
1,494
300
689
570
475
ADF
1,071
96
530
142
207
25
70
AFDB
1,059
251
277
254
6
272
AFDF
580
141
205
216
18
EBRD
2,186
1,333
853
IDB
9,802
1,662
1,800
121
3,757
2,344
82
37
IFAD
433
389
44
Total
37,821
8,582
10,231
2,536
8,517
6,776
1,142
37
(Concessional)
6,979
480
1,647
1,093
2,602
1,026
131
2 In Tables 1 and 2, figures are in millions of U.S. dollars. Middle East includes North Africa.
Infrastructure includes water and sewerage and urban development. Social lending includes
disaster assistance. Public sector includes adjustment lending and policy reform.