The World Bank is cutting interest on loans to middle-income countries by about a quarter of a percentage point to compete with private capital markets.
Thursday’s announcement by Robert Zoellick, the bank president, simplifies the fee structure and nearly halves the interest rate “spread” – the gap between the rates at which the bank borrows and lends to these countries
It takes the lending rate back to where it was before the Asian financial crisis prompted the bank to raise rates in 1998.
Mr Zoellick said the bank would have to become easier to deal with and more innovative in responding to these countries’ needs.
The bank would contribute $3.5bn (€2.5bn, £1.7bn) from its own retained earnings to the current fundraising round for the International Development Association, the fund that offers concessional loans and grants to poor countries.
Half the money will come from the International Bank for Reconstruction and Development, the bank arm that lends to middle-income countries, and half from the International Finance Corporation, which supports private sector projects.
The IDA commitment more than doubles the contribution the bank made from its resources in the last fundraising round. Mr Zoellick hoped this “stretch goal” would spur donor nations.
The two moves were bundled together to satisfy governments that want the bank to remain active in middle-income countries and those that want it to focus on the poorest nations.
Mr Zoellick said 70 per cent of the poorest people in the world lived in middle- and lower middle-income countries. Involvement with these nations would help the bank influence their dealings with Africa.
“It is a key strategic judgment that the role of the World Bank is to play a constructive part of pulling together all the countries of the world economy towards some common missions and goals.”
He wanted the IFC to scale up its operations, in particular in the poorest countries, and bring private finance to work in partnership with IDA-funded schemes.
He announced the creation of two trust funds financed with IFC resources, one to fund infrastructure, particularly “regional and subregional”, the other to provide equity for small businesses.
The IFC’s reserve position was so strong it could contribute more to the IDA without limiting its growth.
As for criticism that the bank has not done enough for microfinance projects, Mr Zoellick said he was open to ideas in this area.
