Multilateral institutions are turning away from the poorest countries

Mr Banga’s announcement left out some important details. Because most donor countries are tightening their belts, and the few small increases in contributions have been eroded by a strong dollar, the bank will have to borrow the extra money on financial markets instead. Those borrowing costs will, however, eventually be passed on.

The IDA provides help to countries that range from large middle-income states, such as Bangladesh and Kenya, to Niger, where half the population is in extreme poverty. It offers countries access to finance through a mix of cheap loans and grants (which do not need to be repaid). Because the bank itself is borrowing on the financial markets, and because it is encouraging a shift away from grants, the concessions that the poorest countries receive are becoming less generous.

The IDA illustrates a troubling trend in international finance. The bank is seeking a bigger pot of money, at a higher price, in order to help countries combat debt distress, as well as to fight climate change. That delights rich countries, which want their aid dollars to help cut more emissions. But it will eventually hurt the neediest, because the poorest cannot afford to borrow as much as they did.

Similarly, in October the IMF said it would reduce surcharges, the extra interest that is meant to discourage indebted middle-income countries from borrowing more from the fund. By itself that would not be a problem. But the fund will partly make up for its lost revenue by charging low-income countries interest for the first time. Half of them will now have to pay interest on their loans.

Places such as Bangladesh and Pakistan do indeed need more windmills, electric buses and solar panels. But the fashion for climate dollars will squeeze out the finance that is most effective at poverty alleviation. Cheap money from the IDA lets indebted governments make crucial investments without sliding into fiscal chaos. Although the bank worries that some of the poorest countries might spend its funds irresponsibly, research shows that, for every increase in IDA loans equivalent to 1% of national income, a borrowing country’s GDP per person rises by 0.35% after a year. Its most effective funding is grants to the poorest countries. The best way to speed up poverty alleviation would be to reduce the price of the World Bank’s assistance, even it that means a smaller IDA overall.

However, a reduction in concessions for the poorest countries means that borrowing will instead probably flow towards the richest eligible places, such as Bangladesh or Kenya. But whereas these can borrow on international markets, the poorest have few other options. The cost of external finance for low-income countries has quadrupled since 2012, and the poorest 40 are completely shut out of global markets. Niger relied on IDA loans worth more than 8% of GDP in 2023. Global bond investors will not give it the time of day.

Rises in effective interest rates for the poorest countries of even a percentage point or two could prevent governments from building roads and hospitals and making other basic investments. Moreover, poor borrowers could be pushed further into the arms of China, something that Western countries say they want to avoid. China has already overtaken the World Bank as the most generous lender to the developing world.

Losing interest

If global institutions are both to lend more for climate finance and to help the poorest countries develop, they must be more open about the trade-offs they face. That way, rich-country shareholders will knowingly make choices about expanding their financial commitments—and be expected to answer for what happens should they demur. For three-quarters of a century the World Bank has been a lifeline for the world’s poorest people. It should not desert them now.

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