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Archived - Report on Operations Under the Bretton Woods and Related Agreements Act 2005 : 2
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Benefits of Membership
Membership in the World Bank (the Bank) affords Canada an important voice on key development issues in the world’s premier multilateral development institution. In addition, it provides a key forum for policy advice and financial support crucial to improving borrowing members’ longer-term development and poverty reduction prospects, including the achievement of the Millennium Development Goals. It also assists members by providing concessional loans and grants and by improving access of developing and transition countries to world financial markets.
Canada’s capital share of 2.85 per cent gives it a seat on the Bank’s Executive Board and on the Development Committee of the Boards of Governors of the Bank and the IMF. Canada has the opportunity to provide direct input into the formulation of Bank policies and operational decisions. Canada and other shareholders help to guide the Bank in improving developing countries’ economic, social and environmental performance. Through its engagement with the Bank, Canada’s influence in developing countries can be leveraged beyond what can be achieved through bilateral programs. For example, Canada has played a leading role in the Bank’s implementation of the Heavily Indebted Poor Countries Initiative and Multilateral Debt Relief Initiative, in shaping the institution’s response to post-conflict countries, as well as in its efforts to assist developing countries to combat terrorist financing and money laundering.
Bank membership also provides the Canadian Government with access to the institution’s research and policy work, which enriches our own understanding of international development. The Canadian International Development Agency (CIDA), for example, is able to draw on Bank analytic and technical expertise in order to gain a more comprehensive understanding of the social and economic policy environments that are conducive to effective development results. CIDA is also able to leverage its own resources with those of the Bank through participation in a growing number of partnerships with, and in global programs led by, the Bank. Finally, the Bank provides substantial procurement opportunities for Canadian companies and individuals. In FY 2005, Canadian firms were awarded contracts worth more than US$90 million under Bank-financed contracts associated with investment lending.
In FY 2005, the Bank committed loans, grants and credits of US$22.3 billion to 103 developing and transition countries (see Annex 2). The International Bank for Reconstruction and Development (IBRD) committed US$13.6 billion in new loans in FY 2005, up substantially from US$11.0 billion in FY 2004. The Bank provided concessional loans and grants through the International Development Association (IDA) valued at US$8.7 billion in FY 2005, or roughly US$400 million less than recorded in FY 2004.
Geographic and Sectoral Focus of Lending
Reflecting significant adjustment lending to large South American emerging market borrowers, new IBRD lending commitments in FY 2005 were highest in the Latin America and Caribbean region, which accounted for 37 per cent of all IBRD lending. The Europe and Central Asia region had the next highest lending share at 26 per cent. Lending to the South Asia region, at 15 per cent, increased dramatically over FY 2004 largely due to the IBRD’s response to the tsunami and the flooding in Bangladesh. Lending to the East Asia and Pacific region held reasonably stable at 13 per cent, and the Middle East and North Africa region at 9 per cent. Given its non-concessional lending terms, the IBRD is not a major lender to African countries.
In FY 2005, Africa accounted for 45 per cent of IDA lending although this was below IDA’s indicative 50 per cent target for the region. South Asia accounted for 33 per cent of IDA commitments and the East Asia and Pacific region and Europe and Central Asia region accounted for 12 per cent and 6 per cent respectively. Latin America and the Caribbean accounted for 3 per cent of IDA lending.
The Bank’s strong commitment to investing in people is reflected in the sectoral breakdown of both IBRD and IDA operations. Support for social sector investments, in particular, remains a high priority. The areas of social protection, social development and human development accounted for 30 per cent of total World Bank commitments in FY 2005. Approximately 27 per cent of IBRD commitments and 32 per cent of IDA commitments supported investments in the education, health and other social services, and water, sanitation and flood protection sectors. There is also a renewed emphasis on growth, including infrastructure, agriculture and rural development.
In FY 2005, the Bank continued its strong focus on non-lending services in order to enhance the developmental effectiveness of its operations. The Bank provides a wide range of advisory, analytic, training and knowledge-related services in support of building domestic capacities. Through its non-lending activities, the Bank provides valuable policy advice that can bolster the effectiveness of its investment and adjustment lending.
How the World Bank Group Works
The World Bank Group is made up of five complementary but distinct entities: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID).
The IBRD and IDA (together commonly known as the World Bank) provide funding for investment projects and for adjustment—or economic and sector reform—operations. The IBRD lends on non-concessional terms (charging an interest rate that is slightly above its own borrowing costs) to better-off borrowing members, while IDA provides 35- and 40-year interest-free credits and grants to the poorest borrowers. IDA is the largest source of development finance for the world’s poorest countries. The IBRD raises its funds primarily on international markets on the strength of its triple-A credit rating. In effect, the IBRD on-lends to borrowing countries at a rate of interest much lower than the rate they could secure on their own borrowings. IDA, on the other hand, receives grant funding from donors, loan repayments and annual allocations from IBRD net income. As of June 2005, outstanding IBRD loans and IDA credits amounted to US$104.4 billion and US$120.9 billion respectively.
The IFC supplements the activities of the IBRD and IDA by undertaking investments on commercial terms in productive private sector enterprises in developing countries. The IFC provides services such as direct private sector loans, equity investments, resource mobilization and technical assistance. As of June 2005, the total committed loan and equity portfolio was equivalent to US$24.6 billion. MIGA’s mandate complements that of the IFC: it promotes private foreign direct investment in developing countries, primarily by providing insurance against non-commercial risk, such as the risk of currency inconvertibility during civil conflict. MIGA’s outstanding portfolio as of June 2005 amounted to US$5.1 billion. ICSID provides facilities for the conciliation and arbitration of investment disputes between firms from member countries and investors. Canada is not currently a member of ICSID.
Each of the 184 shareholders has a seat on the Board of Governors of the World Bank. Most decisions on policy, operational and administrative issues, however, have been delegated to the 24-member Executive Board. Membership on the Executive Board is evenly split between developed and developing countries. A number of Executive Directors from developed countries represent constituencies with borrowing country members. The voting power of each Executive Director is based on the shareholding they represent. The five largest shareholders, France, Germany, Japan, the United Kingdom and the United States, appoint an Executive Director, while other countries are represented in constituencies. Canada leads a constituency shared with Ireland and the Commonwealth Caribbean countries.
Strengthening the Effectiveness of Poverty Reduction
The Bank has sharpened its support for the development agenda through a two-pillar strategy for reducing poverty that is based on building the climate for investment, jobs and sustainable growth, and on investing in poor people and empowering them to participate in development. In FY 2005, the Bank’s work remained closely aligned with this framework. The Bank recognized the need for it to intensify its efforts in implementing the framework by sharpening the tools and procedures for meeting the development challenges set forth in the Millennium Development Goals. Executive Directors reviewed a number of progress reports on ongoing efforts at harmonizing operational policies, procedures and practices among donors; on increasing the effectiveness of programs such as the poverty reduction strategies and Bank conditionality; on meeting the needs of low-income countries, including heavily indebted poor countries and low-income countries under stress; and on strengthening partnerships with middle-income countries.
Focusing Operations on the Millennium Development Goals
The recognition that achievement of the Millennium Development Goals (MDGs) depends heavily on empowerment of the poor underpins the Bank’s approaches to countries and sectors. The MDGs now form the cornerstone of the Bank’s strategic planning and operational priority setting. The Bank is also working closely with the United Nations (UN) system and the Development Assistance Committee of the Organisation for Economic Co-operation and Development in strengthening international monitoring of the progress being made towards achieving the MDGs. To date, progress has been mixed, with the overarching poverty goal being met globally (due to progress in India and China), but with many other goals (e.g. health, gender equality in education, environment) unlikely to be met either globally or on a country basis. Without further progress, achieving the MDGs will be seriously jeopardized—especially in Sub-Saharan Africa, which is off track on all the MDGs.
A key task for the Bank in the monitoring exercise is to develop a framework for benchmarking performance among developing countries, donor agencies and multilateral institutions. The Bank, together with the IMF and the UN system, is strengthening its country and thematic databases. Publicly available data will be posted on the Bank’s Development Gateway website (www.developmentgateway.org). As national capacity in gathering and assessing statistics is critical to efforts for monitoring progress towards the MDGs, the Bank has developed and begun to implement the Statistical Capacity Building Program to help developing countries strengthen statistical systems, institutional capacity and planning.
Millennium Development Goals
At the Millennium Summit in September 2000, world leaders adopted specific development goals that can be monitored. Subsequently, the United Nations published 8 Millennium Development Goals and 18 associated targets in the September 2001 report of the UN Secretary General as part of a road map to implement the UN Millennium Declaration. The eight goals are:
At the request of the Development Committee, the World Bank has also been working closely with the UN—which has the lead responsibility for tracking progress towards the MDGs—and the IMF to develop a framework to monitor the implementation of policies that are necessary to promote the attainment of the MDGs and, on this basis, to produce the annual Global Monitoring Report (GMR). This report underpins the Development Committee’s regular monitoring of progress on the policy agenda and reinforces the accountabilities of the key actors—developing and developed countries, as well as multilateral institutions.
The Development Committee discussed the second GMR in April 2005. The report put forward a five-point agenda for accelerating progress towards the MDGs: (1) anchoring actions to achieve the MDGs in country-led development strategies; (2) improving the environment for stronger, private-sector-led economic growth; (3) scaling up delivery of human development services (health, education); (4) dismantling barriers to trade; and (5) substantially increasing the level and effectiveness of Official Development Assistance.
The Bank is also working in partnership with developing countries, other aid agencies and civil society more directly to design and implement initiatives to support developing countries in their efforts to reach specific MDGs. These efforts include "fast-track" initiatives that will target Bank and donor resources to countries demonstrating strong commitment to good governance and improving social sector programs.
Economic Prospects for Developing Countries
Real gross domestic product (GDP) in developing countries is estimated to have grown by 6.4 per cent in 2005, down from 7.3 per cent in 2004, reflecting the impact of oil and other commodity price changes, exposure to global manufacturing and trade, as well as country-specific factors. Economic prospects, however, vary substantially both across and within regions. In 2006, growth is expected to decline slightly.
Following solid growth of 5.6 per cent in 2004, real GDP growth in Latin America is expected to have moderated to 4.1 per cent in 2005. Strong export growth and improved macroeconomic policy performance should help to sustain growth going forward, while widespread pre-financing of future debt repayments will help reduce the risk of financial market volatility in response to current political uncertainties and forthcoming elections. Moreover, strong oil production and prices have continued to support growth.
East Asia remained the world’s fastest-growing region for the year as a whole. Growth in the region was largely boosted by real GDP growth of 9.0 per cent in China. In South Asia, prospects remain solid, with growth in India and Pakistan estimated at 7.1 and 7.4 per cent, respectively.
The December 26, 2004, tsunami had minimal lasting economic impact on the hardest-hit countries of Indonesia, Sri Lanka, Maldives and India. Part of the reason for this was the fact that damage generally did not occur in key economic centres. Furthermore, governments of the affected countries received a substantial amount of aid for rebuilding. Recovery is well underway in most affected areas, with the exception of the Aceh province of Indonesia, where many continue to be out of work. Growth in Africa is expected to have slowed to 4.5 per cent in 2005, following the 5.3-per-cent expansion in 2004. The economies in the region have been supported by strong global demand, improved domestic macroeconomic policies, progress on structural reforms and fewer armed conflicts. However, growth continues to be lower than the 7-per-cent annual growth necessary to achieve the MDGs.
Disaster mitigation is at the core of the Bank’s mission of fighting poverty. Since its establishment, the Bank has been a leader in providing post-disaster recovery and reconstruction assistance. The Bank also leads with efforts to promote more effective disaster risk management, including through training and technical assistance.
The Bank has been promoting a comprehensive risk management framework. This framework includes developing a better understanding of the risks facing a country and the scale of potential losses, taking steps to mitigate the potential effects of disasters, and examining the potential to use existing lending products more creatively to support ex ante recovery financing mechanisms.
Over the past year, the Bank has been active in supporting countries affected by natural disasters, including those countries affected by the Asian tsunami and the South Asian earthquake.
In the aftermath of the Asian tsunami, the Bank, in collaboration with the Asian Development Bank, the Japan Bank for International Cooperation and the United Nations, helped to prepare assessments of damage and reconstruction needs and provide substantial analytic and advisory support for preparation of reconstruction and recovery programs. In addition, the Bank provided emergency support of US$14 million to the Maldives, US$150 million to Sri Lanka and US$528.5 million to India.
Likewise, in the aftermath of the South Asian earthquake that devastated parts of Pakistan, the Bank helped to prepare assessments of damage and reconstruction needs in cooperation with the Asian Development Bank and the United Nations. The Bank has pledged to provide Pakistan with US$1 billion in support to assist with earthquake recovery and reconstruction.
Stronger Focus on Country Ownership
The Bank continues to base its operations on the principles of country ownership. "Homegrown" Poverty Reduction Strategy Papers (PRSPs) are being developed by an increasing number of poor countries as the driver of their national development plans and poverty reduction policies. PRSPs are increasingly becoming the focus of donor coordination, with the Bank’s Country Assistance Strategies based on the country’s own PRS framework.
Currently, 49 countries have prepared national poverty reduction strategies. Just over half of these are in Sub-Saharan Africa, and a similar proportion are heavily indebted poor countries.
PRSPs are a continuous and evolving process, and many developing country governments have relied on extensive Bank support in this initial stage of design and implementation.
In FY 2005, the World Bank and IMF undertook a comprehensive review of the PRSP process. Findings of this review call for attention in two areas to enhance the effectiveness of the PRS approach. First, to reinforce mutual accountability for development results, the PRS approach needs to support a balance in accountabilities between governments (to their constituents for improved policies, governance and development results) and donors (to provide more and better aid in ways that support rather than detract from domestic accountability). Second, the PRS approach needs to provide a platform for scaling up aid and demonstrating tangible results at the country level.
In FY 2005, the Bank undertook a comprehensive review of the policy and practice of conditionality in World Bank development policy lending. This stock taking was of critical importance in the Bank’s effort to scale up its contributions to the achievement of the MDGs, as well as its commitment to harmonize approaches with partners.
The survey of clients and stakeholder consultations provided useful insights into areas of strength (economic management, human development, financial and private sector development) and areas of weakness (rule of law and rural development). The external consultations indicated that most of the Bank’s policy operations are well aligned to recipients’ medium- and long-term strategies, and have a positive impact on the countries’ development. However, several areas requiring further attention were identified. These include the Bank’s investment/business climate work and its impact on poverty reduction and environmental sustainability. The consultations also underscored the need to improve strategic communications and transparency in order to enhance public understanding of the Bank’s role.
Trends in World Bank Conditionality
Policy-based conditionality linking the release of funds to the implementation of a desired action or policy is a central element in the aid relationship between international financial institutions and recipient countries. The Bank increasingly made use of such conditionality with the introduction of policy-based lending in the 1980s.
The Bank conditions disbursements on positive assessments in three areas: critical program conditions, adequacy of the macroeconomic framework and satisfactory program implementation. There are conditions and benchmarks in these three areas. Conditions are policy actions that are deemed critical for achieving the intended outcomes of the program and that are required in the legal agreement in order to disburse a loan, credit or grant. Benchmarks are essentially milestones that can be either actions or outcomes expected to be achieved over the period of the program. Benchmarks, used more in the context of IDA programs, are not legal conditions for disbursements of Bank loans or grants and cannot hold up Bank disbursements if not carried out. Typically, conditions focus on policy design, decision, implementation, outcomes and the macroeconomic policy framework.
The use of conditions in policy-based lending has declined over the past decade from 33 conditions on average in FY 1995 loans to 12 conditions on average in FY 2005 loans. The use of benchmarks increased from 14 on average in FY 1995 to 23 in FY 2005. As well, there has been a shift in the focus of conditionality from short-term economic adjustment (including privatization) to medium-term public governance and social sector reforms.
Low-Income Countries Under Stress
More than one-third of the Bank’s borrowers are affected by conflict. The World Bank has taken a leading role in helping these countries to strengthen their capacity to use international assistance effectively to meet immediate needs, rebuild essential services and provide security. The Bank increasingly uses tools sensitive to conflict situations in its operational work, with 15 countries using conflict analysis frameworks and completing post-conflict needs assessments and recovery plans. The poorest conflict-affected countries are supported through the Low-Income Countries Under Stress (LICUS) Initiative. The LICUS Initiative is the World Bank’s response to improving development aid effectiveness in fragile states.
Work continued this year on increasing the effectiveness of aid, with the Bank providing oversight of progress in the 25 fragile states. To improve links between security and development, the Bank and the United Nations Development Group developed the Transitional Results Matrix, a planning tool that helps countries prioritize and enhance the coherence of international support across the economic, development, humanitarian, political and security arenas.
In FY 2005, the Bank implemented several institutional reforms to improve its response in LICUS. The Country Policy and Institutional Assessment (CPIA) system was amended to recognize performance improvements in these countries. Also, since its inception in 2003, the LICUS Trust Fund has committed $23.8 million to support the re-engagement of the most fragile countries in non-accrual status with the Bank. In January 2006, the Bank presented a LICUS update paper showing that renewed international attention, along with increased institutional efforts within the Bank, is starting to show signs of impact on the ground. CPIA ratings have improved more strongly in LICUS than in other countries, and the percentage of the Bank’s commitments and projects at risk has declined. However, challenges remain to (1) strengthen country strategies and operational engagement; (2) share best practices between regions and country teams with a focus on effectively linking Bank activities to peace-building and state-building goals; (3) strengthen international partnerships; and (4) strengthen organizational support and staffing systems to ensure that new approaches and partnerships can be implemented.
The World Bank has a key role to play in the development of middle-income countries (MICs), home to 70 per cent of the world’s poor. In FY 2005, Bank lending to MICs declined to roughly US$13 billion. This marks the continuation of a downward trend that has resulted in a more than a 25-per-cent decrease in MIC lending over the past decade. This decline in demand for IBRD financing is a measure of success in the development process. However, there is concern that overly complex Bank procedures may have created an incentive for some countries to explore other sources of financing.
To support the development efforts of MICs, the Bank began implementing an action plan in FY 2005 designed to strengthen the ability of its staff to respond to these countries’ borrowing needs. Initiatives include piloting the use of countries’ own environmental and social safeguards and fiduciary systems, where applicable; streamlining policy conditionality; and making greater use of the flexibility of Country Assistance Strategies (CASs) to customize support to country circumstances, respond quickly to emerging opportunities, and realign investment lending instruments and disbursement mechanisms with the evolving needs of clients.
Monitoring and Evaluation
The Bank continues to adjust its system of project monitoring and evaluation. At Development Committee and other international meetings, Ministers have highlighted the importance of an enhanced focus on results in helping both developing countries and donors design and implement poverty reduction strategies. In response, Bank management has embarked on a process of developing a more comprehensive approach to measuring and monitoring development results. The Bank’s approach is focused both on tying its own performance benchmarks more closely with the development priorities of individual Poverty Reduction Strategy Papers and on increasing Bank support for statistical and public sector institutional capacity within developing countries. By the end of 2003, the Bank had launched a number of "results-based" CAS pilots. An assessment of the lessons learned from these pilots is now underway, and the results will inform how to mainstream results into all future CASs. Going forward, the Bank will monitor the poorest countries’ progress towards reaching the Millennium Development Goals and its own contribution to this progress.
Enhancing Development Effectiveness Through Evaluation
The Independent Evaluation Group
The Independent Evaluation Group (IEG), formerly the Operations Evaluation Department, is an independent unit within the World Bank; it reports directly to the Bank’s Board of Executive Directors. IEG assesses what works and what does not; how a borrower plans to run and maintain a project; and the lasting contribution of the Bank to a country’s overall development. The goals of evaluation are to learn from experience, to provide an objective basis for assessing the results of the Bank’s work and to provide accountability in the achievement of its objectives. It also improves Bank work by identifying and disseminating the lessons learned from experience and by framing recommendations drawn from evaluation findings.
Quality Assurance Group
The Quality Assurance Group (QAG) is an internal unit reporting to Bank management. QAG’s primary objective is to promote excellence in Bank performance by increasing accountability and enhancing learning. QAG’s strategy for achieving its objective involves two complementary approaches: first, providing staff and managers with credible, real-time feedback on operational performance and identifying, in a transparent fashion, systemic issues affecting operational performance; second, identifying and highlighting skills and resources needed by the operational staff for high-quality work and using lessons learned to support staff training.
To ensure that poverty reduction remains at the heart of the institution’s operations, the Bank’s Poverty Reduction and Economic Management Network (PREM) undertakes country-specific poverty assessments and advises Bank country teams on the poverty reduction impacts of policies, programs and individual projects. The quality of poverty data, however, is uneven, and PREM continues to work to improve the consistency of its assessments.
The World Bank’s Response to Fighting Disease
HIV/AIDS is not just a public health issue; it is a development crisis. Of the approximately 40 million people around the globe who are living with HIV/AIDS, 95 per cent are in developing countries. The high infection rates in developing countries are killing or incapacitating many of the most productive individuals and threaten economic and social stability. AIDS is now the leading cause of death in Sub-Saharan Africa and among males in the Caribbean. In the hardest-hit countries, HIV/AIDS threatens to reverse the development gains achieved over the past 30 years.
Most of the Bank’s HIV/AIDS programming is delivered through IDA, which has mainstreamed HIV/AIDS into its work. In all, the Bank has committed more than $2.5 billion to fighting HIV/AIDS in 67 countries. The Bank is heavily involved in international efforts to combat the disease. The Bank is one of eight co-sponsors of UNAIDS (which spearheads the UN’s response to the crisis). The Bank is also fostering private-public partnerships designed to accelerate the development of an HIV/AIDS vaccine for use in developing countries. The Bank is an active partner in the Global Fund to Fight AIDS, Tuberculosis and Malaria that was launched at the Group of Eight (G8) Summit in Genoa. The Bank, along with UNAIDS and the World Health Organization, holds ex officio (non-voting) seats on the Board of the Global Fund. The Bank is also the trustee of the Global Fund, with responsibility for the collection, investment and management of funds, disbursement of funds to countries and programs, and financial reporting. In April 2004, the Bank entered into a partnership with the Global Fund, UNICEF and the Clinton Foundation to make it possible for developing countries to purchase high-quality AIDS medicines at low prices.
Every year, more than 500 million people contract malaria, and 1.1 million die from the disease. Recognizing that progress in fighting malaria has been too slow and uneven, the World Bank announced a new Booster Program for Malaria Control in April 2005. The program will make funding available to countries to enhance programs to combat the disease. A commitment of US$500 million to US$1 billion is planned over the next five years.
Avian and Human Influenza
In January 2006, the World Bank co-sponsored the International Pledging Conference on Avian and Human Influenza in Beijing, which successfully mobilized pledges of US$1.9 billion against this potential pandemic. The Bank pledged US$500 million in loans, grants and credits that will be used to support country-specific initiatives and possibly leverage additional funds from other countries.
Negotiations on the volume of financing and operational priorities for the 14th replenishment of IDA (IDA14) began in February 2004. In early 2005, 40 donor governments, with strong participation from borrower representatives, concluded negotiations on IDA14. The IDA14 period runs from July 2005 to June 2008. The IDA Deputies’ Report, which serves as the IDA14 policy framework, was approved by Bank Governors in April 2005 and is available on the Bank’s website.
Donors substantially increased funding for IDA to ensure its strong participation in the international effort to scale up poverty reduction efforts to reach the Millennium Development Goals. Total IDA14 donor contributions reached SDR 12,062.64 million, and Canada has maintained its 3.75-per-cent donor share with a commitment of SDR 534.4 million (C$1,043.25 million) during the IDA14 period.
IDA’s operational priorities include:
- Significantly increase grant resources available to recipients from 18 to 21 per cent of IDA13 to 30 per cent of IDA14.
- Adopt a grant allocation framework based on debt sustainability and Country Policy and Institutional Assessment ratings to ensure that additional resources are effectively targeted within a performance-based allocation framework.
- Link its operations more closely to country-owned poverty reduction strategies.
- Invest in people, especially through education, health and basic infrastructure, to promote growth through private sector development, and to monitor measurable results.
- Maintain the objective of having Africa account for half of IDA allocations.
- Recognize the debt vulnerability of many low-income countries, in IDA14 donors agreed to link the provision of grants to debt distress.
- Be more selective in its operations and to work closely with other development partners, on the basis of comparative advantage.
- Recognize the importance of IDA’s performance-based allocation mechanism, and especially the high weight it assigns to governance.
- Show greater flexibility with respect to allocations to post-conflict countries without policy track records and to vulnerable countries such as Haiti.
Other Priority Issues
Canada’s positions are based on our international development goals, foreign policy priorities and strong interest in maintaining the financial integrity of the World Bank.
Poverty Reduction and Human Development
Canada has long been a key player in international efforts to assist the poorest countries and strongly supports poverty reduction as the overarching objective of the World Bank. As such, Canada endorses the Poverty Reduction Strategy Paper process, under which developing country governments develop and implement broad-based poverty reduction strategies in partnership with the donor community. The Bank has increasingly recognized that poverty reduction cannot be addressed in isolation. Private sector development, good governance, the strengthening of public expenditure management and the monitoring of non-productive expenditures (especially military), external debt and environmental sustainability are just a few of the factors that need to be considered in designing strategies to help improve the living standards of the poor. In the case of small states, the Bank has to take into account additional factors of economic and physical vulnerability and limited capacity.
Canada strongly supports the Bank’s efforts to increase the prominence of social sector issues in macroeconomic stabilization programs. Good macroeconomic policy is key to boosting growth and reducing poverty. At the same time, adequate attention to social issues must be an essential part of macroeconomic stabilization and sustainable development goals.
Infrastructure Action Plan
In July 2003, the Bank’s Executive Board approved an Infrastructure Action Plan to revitalize the Bank’s work in this area. Infrastructure is about providing basic services that people need for everyday life—water, sanitation, energy, roads and other aspects of transport, and access to modern information communications technology. The overarching premise of the action plan is to ensure efficient, affordable and sustainable delivery of infrastructure services by leveraging funds from the entire spectrum of public and private sources, supported by IBRD, IDA, IFC and MIGA products. Significant progress was made in FY 2005 toward implementing the Infrastructure Action Plan. Infrastructure lending grew from $5.4 billion in FY 2003 to $6.5 billion in FY 2004 to $7.3 billion in FY 2005—about a third of total lending commitments. Transportation projects received the largest share of commitments, followed by energy and mining, water supply and sanitation and information and communications technologies. The Bank is making substantial investments in new areas. Together with the IFC, it is exploring opportunities for engaging with clients more effectively at the subnational level through the Municipal Fund pilot program. It is also partnering with the IMF to find ways to address the lack of adequate fiscal resources for infrastructure investment once ongoing expenditure commitments in country budgets are met. The Bank will continue to engage other development partners, including the private sector, in this work.
Poverty Reduction and Sub-Saharan Africa
Canada is a leading advocate for poverty reduction and development in Africa, home to some of the poorest countries in the world. In 2005, Canada channelled much of its support through several initiatives:
Canada’s Voting Record
World Bank Executive Board decisions are traditionally taken on a consensus basis, without resorting to a formal vote. On occasion, however, individual Executive Directors have been unable to join the Board consensus. In 2005, the Canadian Executive Director opposed an IFC investment in Tata Iron and Steel Company Limited, in light of concerns about global overcapacity in the steel market. He also abstained from voting on the IFC’s investment in Embraer-Empresa Brasileira de Aeronautica S.A. based on lack of evidence of additionality.
Canada considers education to be a critical factor in development and supports recent efforts by the Bank to increase support to this sector as part of the global Education for All (EFA) framework. Commitments to education in FY 2005 amounted to US$1.95 billion. The Bank also provides important non-lending support for education through its analytic and advisory work. Globally, the EFA Fast-Track Initiative (FTI)—developed by the Bank in cooperation with a special G8 Education Task Force in 2002—has become the key vehicle to drive donor cooperation and progress on the EFA and Millenium Development Goal (MDG) of universal completion of primary school. To date, through our bilateral programs, Canada has pledged C$135 million from 2003 to 2008 for FTI proposals from Honduras, Mozambique and Tanzania, over and above current commitments. In addition, in 2005 the Canadian International Development Agency made a new commitment of $16 million in Nicaragua and also supported education programming in other FTI countries such as Burkina Faso, Niger and Vietnam.
Looking ahead, the World Bank’s work will be guided by the following three principles:
- Increases in education supply must go hand in hand with improvements in quality. The World Bank is reviewing its own education strategy to ensure that supply and quality are given equal importance.
- EFA objectives and financing requirements must be integrated within a country’s broader education sector strategy and budget frameworks.
- The FTI should be scaled up as a demonstrated effective instrument.
On funding, aid resources for basic education in low-income countries have not been increasing fast enough. The Bank estimates that only about 3 per cent of Official Development Assistance (ODA) goes to basic education within low-income countries—of the US$61.8 billion in ODA in 2002, only US$6.5 billion went for education, of which about US$2 billion was for basic education in low-income countries. Currently, there are 18 countries with appraised and endorsed education country plans as part of the FTI. It is expected that another 28 countries could become eligible for the FTI between 2006 and 2008 (including 14 Sub-Saharan African countries), each having developed sound plans for scaled-up investment in basic education consistent with the agreed-upon FTI framework and criteria. Estimates of external donor financing for all developing countries to achieve universal primary education by 2015 range from between US$5.6 billion and US$10 billion annually. At present, donor assistance for basic education amounts to approximately US$2 billion per year, of which Canada contributes roughly 7 per cent.
Ensuring the effectiveness of the Bank’s operations has long been a key Canadian objective. This entails more than just reducing costs and saving money. Effectiveness requires selectivity, clear priority setting, coordination and harmonization among development partners, responsiveness to client country needs and efficient service delivery. The Bank needs to operate in those areas where its assistance can be productively used and where it has a clear comparative advantage.
The Bank is exercising greater selectivity by focusing on reforming states and good performers. In the case of IDA credits, allocations are based on performance criteria. In order to monitor country performances in a meaningful manner, the Bank is focusing on incorporating outcome indicators on poverty and the MDG to measure real results, including such indicators as child malnutrition and child and maternal mortality.
The Bank continues to strengthen its efforts to improve development effectiveness through a renewed emphasis on the quality of its project portfolio. More vigilance is now exercised at the project preparation and supervision stages, and this has led to an improvement in the number of projects that are meeting their development objectives. For FY 2004, the Operations Evaluation Department estimated that 82 per cent of Bank projects had satisfactory ratings in terms of meeting their development objectives. This represents a steady increase since 1997, when only 73 per cent of projects were rated satisfactory. Nonetheless, in a report on the Bank’s effectiveness released in October 2005, the new Independent Evaluation Group suggested that approximately one-third of Bank country programs were rated unsatisfactory. Countries expressed a desire for the Bank to provide "less generic knowledge and more help in finding solutions to their specific problems." At the same time, the Bank’s strategy for global programs was described as "poorly defined." The new Strategy for Global Programs and Partnerships (GPP) adopted in May 2005, in conjunction with the new allocation framework for the Development Grant Facility, provides a basis for the Bank to enhance the linkage of GPPs to its country strategies to increase the impact of its programs. At the IFC, progress continues to be made on tracking and measuring development effectiveness of IFC investments and technical assistance.
Coordination and harmonization of donor programs is another critical element of effective development assistance. In February 2003 in Rome, the World Bank, together with other multilateral development banks and the Development Assistance Committee of the Organisation for Economic Co-operation and Development, co-sponsored an international High-Level Forum on Harmonization, which resulted in the Rome Declaration on Harmonization. The Declaration set out an ambitious program of activities to ensure that harmonization efforts are adapted to the country context and that donor assistance is aligned with the recipient’s priorities. The Declaration also promoted country-led efforts to streamline donor procedures and practices, and urged the adoption of policies, procedures and practices to ease harmonization. A High-Level Forum on Aid Effectiveness followed these efforts in March 2005 in Paris, which led to the Paris Declaration on Aid Effectiveness. Participants reconfirmed their commitment to the global agenda on harmonization, alignment and results and agreed to provide more predictable and multi-year commitments on aid flows. They also reached agreement on 12 indicators for monitoring reforms in aid delivery and management, and set targets for achieving these by 2010. These indicators include: having in place operational development strategies, reliable public financial management systems, aid flows aligned to national priorities, strengthened capacity through coordinated support, untied aid, common program-based approaches, joint missions to the field, joint country analytic work, results-oriented frameworks and mutual assessment reviews for all partners.
The World Bank is firmly committed to the donor harmonization efforts as a key institutional priority. The Bank sees itself as a participant, facilitator and leader in these efforts. The Bank is continuing a major internal reform and modernization of its operational policy framework, for which one key objective is better harmonization and alignment. During FY 2005, along with reviews on the Poverty Reduction Strategy Paper and Bank conditionality, the pilot phases of the results-based Country Assistance Strategy methodology were completed, and a stock taking paper was reviewed by the Board. Efforts to strengthen country-level statistical capacity continued, and the IDA14 Results Measurement System was developed. At the global level, the Bank coordinated the preparation of a sourcebook on managing for development results, using Canadian International Development Agency (CIDA) funds, with the Joint Venture on Managing for Development Results. With the goal of further improving the effectiveness of the institution, the Bank has also enhanced the voice of developing countries at the Board by providing additional resources to the two African Executive Directors’ Offices, has established a mid-career secondment program for officials from developing countries, and is decentralizing decision making to the field.
Canada actively promotes gender issues as a priority for World Bank operations. World Bank lending in almost all sectors includes activities that specifically benefit women and girls. Following a review of its gender strategy, management committed to integrate gender issues into Bank Country Assistance Strategies and to work with developing countries and external partners to identify appropriate strategies to promote gender equality. In 2005, Bank staff analyzed the effects of gender-based barriers to development, and will use the knowledge gained in this exercise to help countries address gender issues. The Bank also held its first workshop on gender-based violence, and monitored and evaluated its progress in promoting gender equality. To further knowledge exchange with its development partners, the Bank provides a number of statistical indicators on gender on its website.
While the gender strategy and the bank’s implementation plan are well formulated, CIDA continues to monitor implementation and mainstreaming of its objectives throughout the Bank’s operations, as this has been inconsistent to date.
Private Sector Development
The private sector plays an important role in virtually all development challenges, from protecting the environment to assisting in privatization in transition economies. Canada has maintained that the Bank Group’s fundamental priority for private sector development is to create an enabling environment for investment and sound regulatory frameworks for the private sector to develop in a sustainable fashion. The Bank’s strategy in private sector development relates to two broad themes: extending the reach of markets and improving the delivery of basic services. The key elements of the strategy include fostering a sound investment climate; providing direct support for private firms; supporting private participation in infrastructure; increasing the role of the private sector in assisting public sector efforts to achieve universal and affordable access to social services; and creating a new approach to more effectively target subsidies to the poor to improve service delivery. Canada has encouraged this increasingly coordinated approach to private sector development.
Commitments for 109 new projects with private sector development components in FY 2005 amounted to more than US$3.8 billion. With 23 country investment climate assessments completed this year, country assessments are now being used to guide reforms or support Bank projects in over 40 countries.
Now in its second year, the Doing Business project provides objective, quantifiable indicators of business regulation in 145 countries. This year’s report, Doing Business in 2005, focuses on removing obstacles to growth. Like the inaugural report, the new report presents indicators in five main areas: starting a business, hiring and firing workers, enforcing contracts, getting credit and closing a business. It also adds another two sets: registering property and protecting investors. The indicators are used to analyze economic and social outcomes such as productivity, investment, corruption, unemployment and poverty, and identify what reforms have worked.
The report draws on surveys of over 30,000 firms in 53 developing countries, the Bank’s Doing Business database, country case studies and other new research, and usefully highlights opportunities for governments to improve their investment climates by expanding the opportunities for firms to invest productively and create jobs. Canada ranked fourth on ease of doing business after New Zealand, Singapore and United States.
World Development Report 2006: Equity and Development
The World Bank’s annual World Development Report (WDR), prepared in consultation with stakeholders, provides in-depth analysis of a specific aspect of development. Past reports have considered such topics as the role of the state, transition economies, labour, infrastructure, health, the environment, poverty and investment climates. The reports are the Bank’s best-known contribution to thinking about development.
The 2006 WDR concludes that inequality of opportunity, both within and among nations, results in wasted human potential and often weakens prospects for overall prosperity and economic growth. To correct this situation and reduce poverty more effectively, the WDR recommends ensuring more equitable access by the poor to health care, education, jobs, capital, and secure land rights, among others. It also calls for increasing equality of access to political freedoms and political power, breaking down stereotyping and discrimination, and improving access by the poor to justice systems and infrastructure. To level the playing field among countries, and thereby reduce global inequities that hurt the poor in developing countries, the report calls for the removal of trade barriers in rich countries, flexibility to allow greater in-migration of lower-skilled people from developing countries, and increased—and more effective—development assistance.
The 2006 WDR is available online at www.worldbank.org.
An important example of the private sector’s role in development is the growing impact of microfinance. By providing financial services to those excluded from formal financial systems, such as small loans, deposit services, money transfers and insurance, microfinance institutions have been successful in improving the living conditions of the poor—particularly women—in developed and developing countries. Microfinance has proven to be an effective and powerful tool for poverty reduction, enabling the poor to take advantage of economic opportunities, as well as build assets, stabilize consumption, deposit money and protect themselves against risk. The Consultative Group to Assist the Poorest (CGAP) plays a critical role in helping to develop sustainable microfinance sectors. CGAP, a consortium of donors that includes the World Bank, the Canadian International Development Agency and 20 other multilateral and bilateral agencies, international financial institutions, and private organizations, was established in 1995 to help expand the poor’s access to a range of reliable financial services. In FY 2005, CGAP committed US$9.5 million in new grants and initiatives to expand microfinance operations in the world’s poorest countries. Canada strongly supports CGAP’s efforts to expand the poor’s access to reliable financial services and provides C$500,000 in annual contributions.
In 2005, CGAP continued to promote the importance of and best practices in microfinance through several new initiatives:
- It developed country-level savings assessment tools to provide donors, governments, international networks and technical service providers with a systematic methodology for analyzing opportunities and constraints to savings mobilization at the country level. To date, country-level assessments have been completed in Benin, Bosnia, Mexico and the Philippines—all meant to road-test the methodology before publication of the tool in 2006.
- CGAP awarded the second Annual CGAP Financial Transparency Award, working with world-class auditing firms, to recognize microfinance providers that comply with international disclosure guidelines, including the International Financial Reporting Standards.
- It sponsored the Pro-Poor Innovation Challenge, which awards funds to smaller institutions that demonstrate effective models and methodologies for deepening poverty outreach and impact, while working toward sustainability.
- Through its Retail Advisory Service, CGAP has begun to work with several commercial banks that intend to downsize their services to include low-income clients.
- CGAP launched the Technology Resource Center, an online portal to help microfinance institutions select the best information system, learn how to implement it, share experience on the use of new technologies such as automated teller machines, PDAs and credit scoring, and find funding for their technology or innovation.
Good Governance and Anti-Corruption
Canada is an advocate of strong Bank support for improved public and corporate sector governance. Over the past decade, governance has been mainstreamed into the Bank’s adjustment and investment lending, and more recently into its country analytic work. In FY 2005, Bank lending for governance totalled US$2.6 billion, or 12 per cent of new lending.
Promoting Good Governance
The Bank’s governance strategy, Reforming Public Institutions and Strengthening Governance, stresses the need for the Bank to strengthen its tools for evaluating the quality of a country’s institutions and for assessing a country’s readiness to initiate specific governance reforms. The Bank routinely produces a set of core diagnostic reports that include poverty assessments, country economic memoranda, public expenditure reviews, country procurement assessment reviews and country financial accountability assessments. The World Bank Institute (WBI) helps policy makers from client countries develop the knowledge, skills and abilities that will enable them to improve governance and stem corruption. The WBI and the Bank’s Development Economics Group produce the worldwide Governance Indicators, which assess more than 200 countries and territories on key dimensions of governance.
In its efforts to promote better governance practices, the WBI has established close working relations with the Parliamentary Centre of Canada and with international organizations. The IMF and World Bank also continue to support the work of the Toronto International Leadership Centre for Financial Sector Supervision to build capacity in the areas of financial sector supervision.
Promoting Good Governance
In early 2006, the World Bank suspended all new lending and disbursements, worth about US$125 million, to the Government of Chad. This action followed passage of amendments to the country’s Petroleum Revenue Management Law by the Chadian National Assembly. These changes substantially weakened programs to improve the lives of poor people, which the World Bank has been supporting, and violated the Government’s loan agreement with the Bank.
The World Bank had offered to assist the Government of Chad to address its financial difficulties by analyzing how the country’s public finances have been managed. It had also proposed a review of how the Petroleum Revenue Management Law has been implemented to identify which, if any, amendments to the law might be warranted. In February 2006 the World Bank and the Government of Chad entered into a dialogue on the best ways to address its current financial crisis while protecting poverty reduction programs.
In January 2006, the Bank approved a US$25-million Institutional Reform and Capacity Building Project to support the Government of Kenya’s fight against corruption. Five other operations, totalling US$260.5 million, are scheduled for Board consideration by the end of June 2006. Several of these are pending completion of a review by the Bank’s Department of Institutional Integrity.
The Bank is a leader among international institutions in resources committed to fighting fraud and corruption in its own operations and in client countries. Since 1997, anti-corruption activities have been integral components of the Bank’s public sector management portfolio. Annual anti-corruption action plans have helped to increasingly mainstream anti-corruption in the Bank’s internal procedures, as well as country strategies, country dialogue and assistance. Between fiscal years 1997 and 2000, the Bank had undertaken more than 600 specific anti-corruption programs and governance initiatives in 95 borrower countries. In these years, the Bank debarred over 300 firms and individuals from receiving Bank contracts because of their involvement in corruption or the misuse of Bank funds and obtained 25 criminal convictions in multiple jurisdictions. At the start of 2006, 203 companies or individuals were ineligible from benefiting from contracts under World Bank-financed projects. In addition, the Bank issued 9 letters of reprimand to companies or individuals doing business under Bank-financed contracts.
The Bank’s program to fight money laundering and the financing of terrorism focuses on helping countries strengthen the integrity of their financial systems. In 2005, the Bank more than doubled its assistance in this area, providing training programs and long-term expert mentors for regulators, organizing global dialogues with public and private sectors, conducting assessments of country compliance with international best practices, and publishing reference guides and practical manuals.
Environmentally Sustainable Development
The Canadian Government, alongside Canadian civil society, has long advocated the need for the Bank to better integrate environmental considerations into its operations. Along with gender, this is an area that needs to be more strongly emphasized in Country Assistance Strategies and World Bank assessments of Poverty Reduction Strategy Papers. The Bank has estimated the economic costs of environmental degradation in many developing countries to be in the range of 4 to 8 per cent of GDP. Under its environmental strategy, the Bank is moving to improve its environmental safeguard system and to mainstream environmental policies and issues into its loan and policy dialogue work. The Bank also works closely with clients to help them introduce and implement their own environmental safeguard systems to help them manage their resources in a sustainable manner.
While the Bank is mainstreaming environmental considerations into the broad range of its operations, the number of direct environmental investments it supports varies from year to year. The share of overall Bank lending directed to environmental and natural resource management increased significantly to 11 per cent in FY 2005 from 6 per cent in FY 2004.
Together with the United Nations Development Programme and United Nations Environment Programme, the Bank is an implementing agency of the Global Environment Facility (GEF). Through the GEF, the Bank supports projects in four key areas: climate change, biodiversity conservation, phase-out of ozone-depleting substances and protection of international waters. Since the inception of the GEF, the World Bank Group has mobilized nearly US$2.8 billion in GEF funding associated with an additional US$13.9 billion in public and private funds to support action in key areas. In FY 2005, 32 new GEF projects were approved for US$255 million in GEF financing and additional Bank financing of US$565 million.
The Bank has been particularly active in the area of climate change. The total World Bank Group/GEF climate change portfolio includes 62 projects, for which $6.2 billion has been mobilized: $730 million from the GEF and the balance from the World Bank donors and private investors.
For the last 10 years, the Bank has been among the largest investors in alternative energy in developing countries, investing more than $6 billion since 1990 in energy efficiency and renewable energy projects and programs and mobilizing more than $10 billion for the same purposes from private and public sources. Fourteen per cent of the Bank’s energy portfolio is in alternative energy compared to 4 per cent in 1990. The Bank is committed to increasing its lending for renewable energy technologies by 20 per cent per year over the next five years.
Over the past few years, the World Bank has expanded its carbon finance business. These activities include the Prototype Carbon Fund, Community Development Carbon Fund, BioCarbon Fund and Pan-European Carbon Fund.
In FY 2005, the Bank further expanded its carbon finance operations with the introduction of an Umbrella Carbon Finance Facility (UCF). The purpose of the UCF is to aggregate multiple sources of funding, including from the Bank’s existing carbon funds, to purchase large volumes of carbon emissions from pre-identified projects on behalf of governments and private firms. In January 2006, two projects, both in China, were funded through the UCF.
Investment Framework for Clean Energy and Sustainable Development
On July 8, 2005, Leaders at the G8 Summit in Gleneagles released a communiqué recognizing the importance of climate change as an environmental and development issue. Leaders highlighted the need for multiple policies, technologies and tools to address global climate change issues, including further World Bank action and leadership.
Specifically, leaders called on the World Bank to create a new framework for clean energy and development by: further integrating climate change and development policies by creating a framework for investment in clean energy and sustainable development; increasing dialogue with borrower countries; integrating options for lowering greenhouse-gas-intensive growth into Country Assistance Strategies; developing local commercial financing capacity; and expanding and extending the Global Gas Flaring Reduction Partnership.
The World Bank responded by establishing working groups to coordinate efforts on enhancing country dialogue, technology, financial products and communications. The Bank coordinated meetings with experts, partners, large emitters, key developing countries and international financial institutions to work towards developing an investment framework, appropriate insurance schemes and lending strategies to support low-carbon energy, infrastructure development and activities that are expected to reduce the risk to the poor of climate change.
The Bank will be providing an update of its investment framework in April 2006.
The World Bank continues to strengthen its approach to ensuring sustainable development. Safeguard policies are a subset of World Bank operational policies that require that potentially adverse environmental and social impacts of Bank investment projects be identified, avoided or minimized, where feasible, and monitored. Bank management first articulated the concept of safeguard policies in 1997 to stress the importance of this specific set of operational policies for achieving its environmental and social objectives and enhancing the quality of its operations. In 2003, the implementation of safeguard policies was strengthenened. In addition, disclosure of safeguard documents has increased now that the application of the Policy on Disclosure of Information is fully mainstreamed. The higher number of projects subject to environmental scrutiny, and the larger number of documents disclosed, reflect the increased mainstreaming of environmental and social concerns in the Bank’s lending portfolio.
Trade and Development
Canada recognizes that the capacity of small nations, emerging economies and other developing countries to participate effectively in the global trading system is an important component of a comprehensive approach to growth and poverty reduction. Canada has stressed the need to incorporate trade sector capacity building in Bank Country Assistance Strategies and nationally developed Poverty Reduction Strategy Papers, as well as encouraged the Bank’s participation in the discussions related to Aid for Trade. Aid for Trade aims to provide additional assistance to developing countries to strengthen their trade-related capacity and to facilitate adjustment to trade reform.
The objectives of the Bank’s work in the trade area cover three distinct but complementary areas:
- At the global level, promotion of change in the world trading system to support development, including activities to promote a pro-development Doha outcome.
- At the regional level, promotion of effective cooperation, through both analytic work and active support for cross-cutting issues such as standards and trade liberalization.
- At the national level, promotion of trade issues in country strategies, including targeted country analysis and technical support.
During the Hong Kong Ministerial Conference in December 2005, World Trade Organization members reaffirmed the decisions and declarations that were adopted at Doha and renewed their resolve to complete the Doha work program. To support the process, the World Bank continues to aid developing countries to increase their capacity to participate in world trade. Such assistance finances government trade reform programs, including income maintenance, worker retraining, investments in ports and roads, and reform of trade-related institutions. As Doha negotiations continue, the Bank will work with countries to quantify ways they might be affected individually and will help tailor reform programs to their needs.
In addition, the Bank is actively participating in shaping Aid for Trade related discussions. The enhanced Integrated Framework (IF) for Trade-Related Technical Assistance, where the World Bank plays the role of lead institution, is currently recognized as a central element of an Aid for Trade initiative. The IF assists least developed countries to mainstream trade in national poverty reduction strategies and to secure the delivery of coordinated and targeted trade-related technical assistance and capacity building. Canada is a strong supporter of the IF and, in addition to providing policy advice, contributed $3 million to the IF Trust Fund. Canada is Chair of the Geneva-based Task Force on the Enhanced IF.
Transparency and Accountability
Recognizing that transparency and accountability are fundamental to ensuring the longer-term sustainability of the Bank Group’s operations and that the "demonstration effect" of the Bank’s own policies is important for developing country governments, Canada has been a major proponent of increased openness at the Bank.
Canada and other donors have also pushed the Bank and borrowing countries to improve consultations with local people—civil society organizations (CSOs) and non-governmental organizations (NGOs)—in borrowing countries, not only in the design and implementation of projects, but also in the preparation of key policy documents, such as Country Assistance Strategies. The Bank has responded to concerns from shareholders by making public a growing number of documents. Following extensive Bank consultations with governments, civil society, the private sector and the media, the Bank’s revised disclosure policy came into effect in January 2002.
In FY 2005, substantial headway was made in the Bank’s transparency and disclosure agenda. In March 2005, the Executive Board approved a number of revisions to the Bank’s disclosure policy that will extend and simplify information disclosure. These changes included adopting a unified Country Assistance Strategy disclosure policy for the IBRD and IDA; disclosing Board minutes, the staff manual, the budget paper and the staff compensation paper; and simplifying the disclosure clearance procedures.
Further progress was made during the IDA14 replenishment meetings in 2004 and early 2005. Borrower participation and publication of IDA14 documents continued. In September 2004, the World Bank agreed to the publication of individual country ratings under the annual IDA Country Policy and Institutional Assessment (CPIA) exercise to assess economic, social and governance indicators of IDA countries, starting in IDA14. This will provide client countries and other stakeholders with transparent information about CPIA methodology, findings and ratings for all IDA countries, which should enhance the quality and robustness of the ratings, as well as public confidence in IDA’s performance assessment.
Transparency also requires better consultation with those affected by projects that the Bank supports. The Bank was the first multilateral organization to establish an independent panel to consider outside complaints. Any group that may be affected by a Bank-supported project has the right to request that the Inspection Panel investigate whether the Bank has abided by its policies and procedures. Canada has been one of the major supporters of the work of the Inspection Panel. In FY 2005, the Panel received three new requests for inspection involving projects in Honduras (Land Administration Project), Democratic Republic of Congo (Transitional Support for Economic Recovery Credit and Emergency Economic and Social Reunification Support Project) and Cambodia (Forest Concession Management and Control Pilot Project). Panel recommendations, reports and management recommendations can all be accessed at www.worldbank.org/inspectionpanel.
The Bank engages with civil society across a broad range of activities, including providing input for poverty assessments, national environmental action plans and other key Bank analytic tools. Particular emphasis has been placed on expanding partnerships with outside groups as more Bank operations are framed in the context of Poverty Reduction Strategy Papers, which embody participatory approaches at the macro level. CSO and NGO representatives from developing countries are now consulted regularly in the preparation of Bank Country Assistance Strategies. Information on the participation of CSOs and NGOs is now included in Bank project appraisal documents.
Within Canada, NGOs have participated in a regular series of government meetings and conferences on such issues as multilateral debt, the environment, safeguard policies, IDA and Africa. The Canadian Government has benefited greatly from the expertise and advice offered by Canadian NGOs on a broad range of development issues. Through this collaborative process, the views of Canadian NGOs have helped shape Canada’s position in Bank project and policy discussions.
Business Plan and Administrative Budget for 2005
Recognizing that its corporate planning needs to be more closely aligned with efforts to achieve the Millennium Development Goals, the Bank has moved to a three-year budgetary and corporate-planning cycle. In June 2005, Executive Directors approved a net FY 2006 administrative budget of US$1,543 million, representing a nominal increase of 3.0 per cent over the approved budget for FY 2005. Given growing resource pressures and the need for the Bank to prioritize its operations, Executive Directors have recently increased their focus on the Bank’s strategic planning and budgetary processes. Executive Directors’ offices are now involved in the budget formulation process much earlier than they have been in the past. Going forward, the Bank will work with the Executive Directors to make the budget process more results-based and linked to well-defined key performance indicators within a multi-year framework. Aside from being consistent with its shareholders’ desire to make the allocation of aid more results-based, the Bank anticipates that the new process will reduce the cost of preparing the budget itself and increase flexibility.
IBRD Financial Results in 2005
As a development institution, the IBRD does not maximize profit. Instead, it aims to earn a return on its assets that is sufficient to ensure its financial strength and sustain its development activities on an ongoing basis. The IBRD usually earns a net return on its assets of about 1 per cent per annum. In FY 2005, the IBRD managed to achieve a net return on assets of 2.79 per cent. The IBRD’s main financial risk rests with the credit quality of its disbursed loan portfolio. At the end of FY 2005, the IBRD’s equity-to-loans ratio, which is a summary measure of the institution’s risk-bearing capacity, was 30.3, compared to 29.4 in FY 2004. These levels are considered sustainable.
Principal and charges totalling US$829 million from four IBRD borrowers were recorded in "non-accrual" status at the end of FY 2005. No IBRD borrower entered into non-accrual status during the fiscal year. During FY 2005, the IBRD held provisions equivalent to about 3.2 per cent of its outstanding loan portfolio against anticipated losses. The Bank follows very conservative investment and hedging policies. In FY 2005, the IBRD raised US$13.0 billion in medium- and long-term debt on international capital markets to fund its operations, roughly the same as in FY 2004. All proceeds from new funding are initially invested in the IBRD’s liquid asset portfolio until they are required for IBRD operations. The IBRD strategically repurchases, calls or prepays its debt to reduce the cost of borrowing and to reduce the exposure to refunding requirements in a particular year or to meet other operational requirements. In FY 2005, the IBRD repurchased or called US$5.1 billion of its outstanding borrowings. The IBRD enters into currency and interest rate swaps to convert US-dollar and non-US-dollar fixed-rate borrowings into US-dollar variable rate funding for its loans. The IBRD does not enter into derivatives for speculative purposes.
The process and procedures under which the IBRD manages its financial risk profile continue to evolve as its activities change in response to market, credit, product and other developments. The Executive Board and its Audit Committee periodically review trends in the IBRD’s risk profiles and performance as well as any significant developments in its risk management policies and controls.
Allocation of FY 2005 Net Income
IBRD net income supports its development objectives. In July of each year, Executive Directors recommend to Governors specific allocations from the previous year’s net income. IBRD "allocable" net income, after reserves, was US$662.5 million in FY 2005. In addition to providing funding for IDA operations and heavily indebted poor country (HIPC) debt reduction, net income allows the IBRD to respond to unforeseen humanitarian crises and to provide grants, from time to time, for other development causes. Governors approved allocations from FY 2005 net income of US$400 million to IDA, US$210 million to the HIPC Trust Fund, and US$52.5 million to the Bank’s surplus account. In FY 2005, Executive Directors approved the transfer of funds from the Bank’s surplus account for disaster mitigation in Pakistan (US$5 million), Indonesia (US$25 million) and India (US$2.5 million).
How to Access Information at the World Bank
The World Bank’s Public Information Centres, in Washington and in many of the Bank’s regional offices, provide a wide range of Bank documents, including the following:
These materials and a variety of World Bank and World Bank Institute special studies are available through the Bank’s InfoShop located at:
701 18th Street N.W.
Additional up-to-date information is also available on the Internet at www.worldbank.org/infoshop.
International Finance Corporation
The International Finance Corporation (IFC), created in 1956, complements the activities of the IBRD and IDA by providing financing on commercial terms for productive private sector enterprises that lack access to private capital markets. The institution is the largest multilateral source of loan and equity financing for the private sector in the developing world. The institution provides both loans and equity investments; loans represent 74 per cent of the IFC’s disbursed portfolio. Through its co-financing arrangements, it leverages substantial private financing for development purposes. By investing alongside the IFC, investors gain valuable access to potential new customers, attain a high-yielding asset and, given the IFC’s good relations with developing country governments, benefit from a degree of implicit political risk coverage. Canada maintains a 3.44-per-cent share of IFC capital. It has paid in US$81.3 million to the IFC’s capital stock. Given the risks associated with its financial operations, all of the IFC’s authorized capital is paid-in.
In FY 2005, the IFC signed investment commitments totalling US$6.5 billion for 236 projects in the developing world, compared to US$5.6 billion in FY 2004. Of this amount, US$1.1 billion was mobilized through loan syndications, compared to US$800 million in FY 2004. Of the US$5.4 billion of the IFC’s own financing, US$4.5 billion was provided in the form of loans, US$216 million in the form of structured finance products (including guarantees), US$612 million as equity investments and quasi-equity investments, and US$4 million for risk management products. The IFC earned net income of US$2.0 billion in FY 2005, compared to US$993 million in FY 2004.
While the bulk of the IFC’s financing is provided to middle-income countries, under its 2004 Strategic Directions paper, the institution is increasingly targeting frontier markets (countries such as those in Africa and frontier regions of larger emerging economies that are traditionally of limited interest to private investors). Moving forward, the IFC proposes significant growth (35 per cent by 2008) in these commitments.
Canada supports this stronger focus on frontier markets, while recognizing the difficulties posed by higher business costs and financial risks. It will also be important to monitor the proposed commitment growth to ensure the maintenance of project quality and the institution’s long-term financial stability.
Technical Assistance and Advisory Services
The IFC also supports private sector development by providing technical assistance and advisory services that strengthen businesses. Technical assistance helps strengthen small and medium-sized enterprises, financial institutions, large companies, and the government entities involved in the private sector, in areas ranging from business capacity to management practices and strategies for growth. Much of its technical assistance work is conducted through facilities managed by the IFC, but funded through partnerships with donor governments and other multilateral institutions. This is a fast-growing part of the IFC’s business: in FY 2005, nearly one-third of the IFC’s staff worked in 24 operations, while donor-funded operations accounted for about $108 million in expenditures, including more than $57 million in funding from the IFC.
Canada supports a number of these initiatives, including the Foreign Investment Advisory Service, which helps countries implement investment climate reforms, and the Strengthening Grassroots Business Initiative, which is a new approach to providing business development services and financing needed by small and medium-sized enterprises whose operations provide clear social benefits.
Global Trade Finance Program
Launched in FY 2005, the IFC’s Global Trade Finance Program is aimed at supporting trade with emerging markets worldwide. It extends and complements the capacity of banks to deliver trade financing by providing risk coverage in difficult markets. The US$500-million program targets banks in Africa, Asia, Latin America and the Middle East.
The IFC will provide partial or full guarantees on the payment risk of banks in over 70 developing and transition countries, with the objective of increasing developing countries’ share of global trade and promoting the "South-to-South" flow of goods and services. The guarantees will be used primarily to support short-term trade, but will accommodate longer terms of up to three years for capital good imports.
Updating the IFC’s Policies and Guidelines
To ensure that its environmental and social standards remain relevant to a rapidly evolving marketplace, the IFC undertook an integrated review process to update its Safeguard Policies, Policy on Disclosure of Information, and Environmental Health and Safety (EHS) Guidelines.
The review involved a broad consultation process with stakeholders around the world, including governments, clients and partners, and representatives of civil society.
The outcome, accepted by the Board in February 2006, is a new policy framework. The new draft Disclosure Policy speaks to the IFC’s commitments and responsibility to disclose information about itself as an institution. A new policy framework for managing environmental and social risks is being introduced. The existing Safeguard Policies have been recast as the IFC Sustainability Policy and the Performance Standards. The IFC Sustainability Policy outlines the IFC’s roles and responsibilities in ensuring project performance in partnership with clients. The Performance Standards detail the requirements necessary for clients to receive and retain IFC support and clarify what is expected of clients. Public disclosure requirements for clients are found in the Performance Standards as an integral part of directives to ensure early and ongoing engagement with communities that are affected by projects. The EHS Guidelines are technical reference documents that address the IFC’s expectations regarding the industrial pollution management performance of its projects.
Canada was an active participant in the consultation process. In November 2005, Canadian Government officials from the Department of Finance Canada, the Canadian International Development Agency, Foreign Affairs Canada, Natural Resources Canada and Environment Canada met with representatives from the IFC to discuss the new policies. Canadian civil society also had the opportunity to provide feedback to the IFC, both directly through the IFC’s own outreach process and through meetings with Canadian officials.
The International Finance Corporation’s Social and Environmental Sustainability Performance Standards
The IFC applies the Performance Standards to manage social and environmental risks and impacts and to enhance development opportunities in its private sector financing in its member countries eligible for financing. The Performance Standards may also be applied by other financial institutions electing to apply them to projects in emerging markets. Together, the eight Performance Standards establish a principles-based approach, which requires clients to consider, consult on and address the impacts of their operations throughout the life of an investment by the IFC or other relevant institutions.
|Performance Standard 1:||Social and Environmental Assessment and Management System.|
|Performance Standard 2:||Labour and Working Conditions.|
|Performance Standard 3:||Pollution Prevention and Abatement.|
|Performance Standard 4:||Community Health and Safety.|
|Performance Standard 5:||Land Acquisition and Involuntary Resettlement.|
|Performance Standard 6:||Conservation of Biodiversity and Sustainable Natural Resource Management.|
|Performance Standard 7:||Indigenous Peoples.|
|Performance Standard 8:||Cultural Heritage.|
Multilateral Investment Guarantee Agency
The Multilateral Investment Guarantee Agency (MIGA) was created in 1988 to encourage foreign investment in developing countries by providing viable investment insurance against non-commercial risks (e.g. expropriation, transfer restrictions, breach of contract, and war and civil disturbance), thereby improving or creating investment opportunities. MIGA’s Canadian clients include Barrick Gold Corporation, Hydro-Québec International and The Bank of Nova Scotia.
In FY 2005, MIGA approved 62 guarantees totalling US$1.2 billion for 33 projects, of which 20 were in IDA-eligible countries. IDA-eligible countries also benefited in FY 2005 from 20 MIGA technical assistance efforts. During FY 2005, MIGA also increased its support for investors from developing countries, frontier markets and fragile states: it supported 4 South-South investments, 20 investments in frontier markets and 12 investments in conflict-affected countries.
Managing Canada’s Interests
The Honourable James Michael Flaherty, Minister of Finance, is Canada’s Governor to the World Bank and is responsible for the management of Canada’s interests at the Bank. The Minister exercises his influence through exchanges of views at the Development Committee and annual meetings of the Board of Governors of the Bank, and through discussions with the President of the Bank. Within the Development Committee, Minister Flaherty represents the interests of Canada and all other members of the Canada/Ireland/Commonwealth Caribbean constituency.
Governors have delegated decision making for a wide variety of day-to-day operational, policy and administrative matters to the Bank’s Executive Board. The Executive Board formally approves all loans, credits, projects and World Bank policies, discusses Country Assistance Strategies, and provides strategic advice to Bank management as appropriate. Of 24 Executive Directors on the Board, 12 are from developing and transition countries and 12 are from developed countries. Marcel Massé, who was elected Executive Director in September 2002 and re-elected in October 2004 by constituency Governors, represents Canada and the 12 other members of the constituency.
The Department of Finance Canada leads on World Bank issues and consults closely with the Canadian International Development Agency (CIDA) and Foreign Affairs Canada in formulating Canadian policies related to Bank issues. Robert Greenhill, the President of CIDA, is Canada’s Alternate Governor for the World Bank.
Canadian Executive Director’s Office
One of the key roles of the office is to provide advice and assistance to Canadian individuals and businesses on doing business with the Bank. Over the past two decades, the Executive Director’s office has helped introduce roughly 1,000 Canadian businesses to opportunities through seminars and workshops held across the country and by organizing direct contacts in Washington. Beyond its formal work, the office provides a valuable bridge between the Bank and Canadian constituents—individuals, NGOs, federal and provincial agencies, associations, the academic community and parliamentarians, among others.
In addition to the Canadian Executive Director’s office, the Canadian Embassy in Washington has established an Office of Liaison with International Financial Institutions that can advise Canadians on how to participate in Bank-financed projects. The office can be reached at (202) 682-7788.
Another point of contact for Canadian businesses is the Bank’s Business web page at www.worldbank.org/opportunities. Canadian firms, organizations and institutions that are interested in pursuing opportunities created by Bank-financed projects should consult the Bank’s website on a regular basis. Information on CIDA’s cooperation with and support for World Bank and World Bank-supported programs can be found at www.worldbank.org/canada.
|Members of the Executive Director’s Office|
|Executive Director||Marcel Massé (Canada)|
|Alternate Executive Director||Gobind Ganga (Caribbean)|
|Senior Advisor||Terry Winsor (Canada)|
|Senior Advisor||François Pagé (Canada)|
|Senior Advisor||Brendan Ryan (Ireland)|
|Senior Advisor||Stephen Free (Canada)|
|Advisor||Sharmila Prakash Khare (Canada)|
|Advisor||Timothy Antoine (Caribbean)|
|Executive Assistant||Monique Piette|
|Program Assistant||Monica Morris|
|Team Assistant||Danielle Pierre|
|Phone/fax||(202) 458-0082/(202) 477-4155|
|Address||MC-12-175, 1818 H Street N.W.
Washington, DC 20433, USA
Canada’s Financial Participation
As a shareholder of the IBRD, Canada has a capital share of 2.85 per cent and a voting share of 2.78 per cent. A relatively small proportion of this capital is required to be "paid-in"—about 6 per cent overall. The remainder is "callable" in the unlikely event that the IBRD needs it from member countries. Callable capital represents a contingent liability for shareholders. The IBRD leverages paid-in capital to raise financing in international capital markets for its lending program. The IBRD’s capital adequacy is regularly reviewed and its capital is replenished through occasional general capital increases. The last general capital increase was in 1988.
Canada’s Total IBRD Subscriptions and Contributions Committed
|Of which paid-in||Of which callable|
|(in millions of US dollars)|
As IDA concessional financing does not generate a financial return, its operations are financed entirely from donor contributions, loan fees and repayments of principal on its outstanding loans, as well as allocations from IBRD net income. To meet Canada’s $1,043.25-million obligation under IDA14, the Government will issue demand notes in fiscal years 2006–07, 2007–08 and 2008–09, each valued at $347.75 million.
Canada’s Contribution to IDA14 (July 2005–June 2008)
|Canada’s IDA14 donor share||Canada’s IDA14 voting share|
|(in millions of Canadian dollars)||(per cent)||(per cent)|
Canada’s Financial Participation in the IFC
|Total||(% of total)||(% of total)|
Canada’s Financial Participation in MIGA
|Total||(% of total)||(% of total)|
|Of which paid-in US$10.7 million|
|Of which callable US$45.8 million|
Canadian Procurement at the World Bank
Canadian firms benefit from access to procurement opportunities under World Bank-financed loans. Canadian expertise in the power, environmental, engineering, public service reform, health, education, financial and transportation sectors has led to procurement opportunities for Canadian firms for developing country projects around the globe.
In FY 2005, Canadian firms were awarded approximately 143 contracts. Canadian firms were most successful in the areas of public administration and governance, transport, education, mining and energy, health, and finance. Several firms won multiple contracts including Tecsult, Hydro-Québec, Geomar, FreeBalance, and Développement International Desjardins. For Bank-financed procurement, the World Bank only reports contracts awarded above the "prior review" threshold. Therefore, the overall procurement value for Canadian firms is much higher since small contracts are not recorded.
The Executive Director’s office, the Office of Liaison with International Financial Institutions (IFIs) at the Canadian Embassy, and the Canadian Private Sector Liaison Officers (PSLOs) to the World Bank undertook a range of outreach and training sessions with the Canadian private sector in 2005. Twenty Bank experts spoke at a series of events across Canada that engaged more than 1,000 private sector participants. Key events included International Development Days (Halifax, April 2005), the Conférence de Montréal (May 2005), and IFI Bootcamp (Kananaskis, October 2005). In addition, the PSLOs led trade missions to Washington with a total of 59 firms, and one PSLO organized a field mission to East Africa with two firms. The PSLO network has broadened its understanding of World Bank policies and in 2005 moved beyond basic procurement training with targeted activities to assist Canadian firms in writing proposals and winning contracts.
Trust Fund Activities
The Bank has adopted a set of reforms that will effectively see the closure of all tied trust funds by the end of FY 2007, including consultant trust funds. In line with our aid effectiveness commitments, Canada supports these reforms and is now in the process of winding down our own consultant trust fund. With current resource levels, it is expected that the Canadian consultant trust fund will close by the end of July 2007. Going forward, Canadian consultants will be able to access a much wider range of opportunities by becoming eligible for contracts funded by any trust fund. Access to procurement opportunities is also expected to become much easier with the launch of the eProcurement system for the selection of consultants and the further development of the Canada-wide PSLO Network, which aims to be a link between the Bank and the Canadian private sector.
Five years ago, world leaders laid out a development vision with the Millennium Development Goals (MDGs), which set clear targets for eradicating poverty. This was followed in 2002 by the Monterrey Consensus, which stressed the mutual accountability of developed and developing countries in achieving these goals. With only a decade left to meet these MDG targets, current stock taking exercises suggest their achievement will require a significant scaling up of actions. Donors, conscious of the uneven results of decades of Official Development Assistance, want to ensure that scarce assistance resources produce measurable results. This requires stronger efforts by developing countries to create sound policy and institutional environments. The Bank, as the world’s largest provider of development financing, plays a crucial role in providing advisory and financial assistance to countries to help strengthen their economic, social and governance policies. Going forward, this will remain one of the Bank’s more pressing challenges.
On March 31, 2005, the Executive Directors unanimously selected Paul Wolfowitz to become the Bank’s 10th President. President Wolfowitz is committed to continuing to strengthen the Bank’s primary focus on poverty reduction and sustainable growth in developing member countries, as well as the emphasis on partnerships and donor coordination and harmonization.
More effective measurement and monitoring of development results is a critical element of the development effectiveness agenda, and Canada will continue to stress the importance of results-based indicators. While the Bank has embarked on a program to improve its results measurement and monitoring, adapting and refining the Bank’s results measurement work to different developing country poverty reduction strategies will be a substantial challenge over the medium term.
Recognizing the importance of country-owned development strategies, the major challenge for the future will be to orient the Bank’s operations towards those clients that have strong economic and governance frameworks in place and to help convince countries with weak policy frameworks of the need to alter their policies. As the Bank moves increasingly to support nationally owned development strategies, a key challenge will be to work with developing country governments and civil society to ensure that there is sufficient capacity on the ground to develop and implement these strategies. This is particularly the case with fragile states. The Bank will also have to work increasingly with other partners, both multilateral and bilateral, on the basis of their comparative institutional strengths, to improve the quality and effectiveness of development assistance within individual countries.
The Bank will continue to provide support to developing countries facing a broad range of economic, institutional and social challenges. The Bank’s strategy for contributing to capacity building and poverty reduction in low-income countries under stress will continue to evolve based on its operational experience. However, the Bank’s future challenges are not limited to the world’s poorest countries. A majority of the world’s poor live in middle-income countries and, over the coming year, the Bank will be looking at how best to address the problems facing this particular segment of the world’s poorest.
Establishing clear development priorities and being more selective in its operations will be critical to future success. Canada will continue to stress the need for the Bank to be increasingly selective and transparent in its operations.
The IMF and the World Bank are important institutions for Canada, each playing a unique role in the international economic and financial system. Nevertheless, there are key areas where the mandates of the two Bretton Woods institutions overlap, or where there is a requirement for close cooperation and coordination of activities. The heads of both institutions have put considerable effort into increasing cooperation. Most notably, this year, the Bank and Fund were key players in the Multilateral Debt Relief Initiative.
Multilateral Debt Relief
In September 1996, the IMF and World Bank launched the Heavily Indebted Poor Countries Initiative (HIPC Initiative) to reduce the unsustainable debt burdens of the world’s poorest countries. After a review of the HIPC Initiative in 1999, a number of modifications were approved to provide faster, deeper and broader debt relief and to strengthen the links between debt relief, poverty reduction and social development policies. Currently, 38 countries are being considered for assistance under the HIPC Initiative. Guyana, a member of Canada’s constituency at the World Bank, completed the HIPC process in December 2003.
Good progress has been made. As of the end of December 2005, 28 countries were benefiting from debt relief under the HIPC Initiative. Eighteen of them (Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia) have completed the HIPC process and have received irrevocable debt relief. For these countries, US$56 billion in debt relief has been committed under the HIPC Initiative and they will benefit from an average reduction of two-thirds in their debt burdens. Importantly, for these countries, social spending has dramatically increased, and debt ratios have declined to levels similar to many other poor, but initially less indebted, countries.
In 2004, both the Bank and the Fund agreed to extend the sunset clause of the HIPC Initiative for another two years (to end-2006) in order to give countries that have yet to enter the HIPC process more time to take the necessary steps. A preliminary list of potential new HIPC Initiative entrants was compiled in 2005. A short list is bring finalized and is expected to be ready in early 2006.
To provide additional support for these countries’ efforts to reach the United Nations’ Millennium Development Goals (MDGs), in June 2005, G8 countries put forward a multilateral debt relief proposal that would cancel 100 per cent of the debts owed to the IMF, IDA and the African Development Fund (AfDF). This would be available to countries that complete the HIPC Initiative. The debt cancellation would provide further significant support for countries’ efforts to reach the MDGs, while ensuring that the financing capacity of the international financial institutions is not reduced.
In September 2005, the Governors of the World Bank and IMF indicated their support for the G8 proposal at the Annual Meetings of these institutions. Since then, substantial progress has been made towards completing the process of debt relief for the world’s poorest countries. In January 2006, the IMF began implementing the G8 debt proposal, which is now called the Multilateral Debt Relief Initiative (MDRI), by cancelling the debts of 19 countries. In early December 2005, IDA and AfDF donors met to finalize MDRI funding. The remaining implementation details are being worked out, and the debt cancellation by IDA and the AfDF is expected to take effect by July 2006.
Canada’s Actions in Support of Debt Relief
Long-Term Debt Sustainability in Low-Income Countries
Debt sustainability is an essential condition for economic stability, which is a foundation for economic growth and development. Many low-income countries have struggled to maintain their external debt at sustainable levels while also trying to meet development objectives such as the MDGs. The economic weakness of many poor countries leaves them vulnerable to exogenous shocks, such as a fall in primary commodity prices, which could alter their debt sustainability prognosis. Excess lending, even on concessional terms, could lead to unsustainable debt burdens going forward.
In the spring of 2004, the World Bank and IMF introduced a new Debt Sustainability Framework (DSF) in low-income countries, which seeks to make that challenge less difficult by providing guidance on new lending to low-income countries whose main source of financing is official loans. The DSF was finalized and adopted under IDA14 in 2005.
The DSF offers a more thorough and appropriate analysis of debt sustainability and takes into consideration country specific circumstances. The new framework is forward-looking, focusing on long-term debt sustainability and preventing future debt crises. It has significant implications for how debt vulnerability is assessed and how donors provide resources to low-income countries. Under the framework, countries with limited capacity to carry debt (countries that have weak governance, for example) would receive a higher percentage of financing in the form of grants than countries with better debt management capacities.