Multilateral lenders, led by the World Bank, are set to boost support for the world’s poorest countries

Multilateral lenders like the World Bank are absolutely critical to the world’s poorest countries.

Since its founding in 1960, the World Bank’s International Development Association (IDA), which serves these nations, has provided US$533 billion to 115 low-income countries. It has lifted entire communities out of poverty, protected children from disease, connected homes to electricity, and brought water access to villages.

Even today, there are widespread calls on multilateral institutions like the World Bank to do even more to support the financial needs of IDA-eligible countries.

The needs of IDA countries are vast, and for years multilateral lenders have been the mainstay of their external financing. For its part, the World Bank is by far the most important creditor for IDA-eligible countries. Of the US$322 billion owed to multilateral creditors at end-2022, the World Bank (both IDA and the International Bank for Reconstruction and Development, or IBRD) accounted for 47 percent.

This dependence on multilateral lending became even more pronounced with the onset of the COVID-19 pandemic in 2020. The International Monetary Fund, the World Bank, and regional development banks stepped in with large-scale budget support to help low-income countries weather the economic and social costs of the pandemic and the downturn in the global economy. Between 2020 and 2022, external debt owed to multilateral creditors rose on average 11.6 percent each year. This increase in multilateral lending helped offset a slowing of lending by bilateral and private creditors, which rose on average only 5.8 percent annually in this period.
 

Multilaterals provided net inflows of US$96 billion from 2020 to 2022, and in one-quarter of IDA-eligible countries multilateral lenders now account for over 70 percent of external public debt. In some countries the share is much higher and is likely to rise further. Fifty-four percent of IDA-eligible countries owed more than half their external public debt stock to multilateral creditors at end-2022. That share surpassed 80 percent in 17 percent of countries, and in two countries, Kosovo and Liberia, it was over 90 percent.

Fortunately, most loans from multilateral institutions were extended on highly concessional terms (with zero or very low interest rates and long repayment periods), so a public debt portfolio heavily concentrated on multilateral creditors is not necessarily a bad thing. The most recent debt sustainability analyses found that two-thirds of countries owing 70 percent or more of external debt stock to multilateral creditors are at low or moderate risk of debt distress.

Still, an elevated concentration of the public debt portfolio in a single creditor group reduces debt managers’ flexibility, may severely impede debt restructuring options in the event of unexpected shocks, and heightens risks for borrowers and multilateral creditors alike.
 

Rising debt service payments

In addition, IDA-eligible countries’ debt service payments to multilateral creditors have increased sharply and are set to rise further. Disbursements from multilateral creditors averaged US$43 billion per annum in 2020-2022 compared to US$24 billion per annum in 2016-2019, but debt service payments to multilateral creditors also rose exponentially.

They averaged US$17 billion annually in 2020-2022, 65 percent higher than an average of US$10 billion paid annually in 2016-2019. Increased debt service costs are driven by both the rise in lending and by higher global interest rates, as loans from multilateral creditors are increasingly tied to variable interest rates. Higher debt service costs are further exacebated for some IDA-eligible countries that have tapped non-concessional IMF financing after reaching the limit of access to non-concessional resources.

 
Also, outflows to other creditors are taking a large bite out of the financing multilaterals provide. Net inflows (disbursements to countries minus principal payments they make) from multilateral creditors between 2020 and 2022 totaled US$96 billion and interest payments US$13.6 billion, resulting in a net transfer of US$27 billion each year on average.

The annual net transfer from other external creditors averaged US$11 billion, and in 2022 IDA-eligible countries paid out US$4 billion more to bilateral and private creditors than they received, sending the net transfer that year into negative territory.
 

 
So, with other creditors stepping back from lending to IDA-eligible countries, the role of multilateral creditors must expand to serve their ongoing needs. And the World Bank has plans for this. The challenge, however, is how to ensure that development goals are met, public debt levels are sustainable, and burden-sharing with other official and private creditors is equitable.