Discourse: WB shifts from aid to development financing model

Fri, 05/09/2008 12:28 AM  |  Headlines

The World Bank has often been criticized for acting more as a preacher than a partner to its developing country members.

Even in Indonesia, which for more than four decades has been one of its major borrowers, the World Bank was often attacked as a nanny bank, preoccupied with detailed conditionality and structural reforms instead of concentrating on supporting healthy local economic and political conditions.

However, after the decentralization of its decision-making process, the disbandment (at Indonesia's decision) of the World Bank-coordinated creditor consortium or Consultative Group on Indonesia (CGI) last year and Indonesia's graduation into a middle-income country (per-capita income US$1,800), Indonesia-World Bank relationships have changed.

The bank's lending policy and operations now focus on supporting and rewarding policy reforms and development results.

The change also has enabled the Indonesian government to borrow more from the World Bank, especially now when the costs of its borrowings in both the domestic and international markets have increased sharply due to the country's higher sovereign risks as perceived by the market.

Foreign creditors now ask for much higher yields on Indonesian international (dollar) bonds, charging a premium of as high as 3 percentage points above the London Interbank Offering Rate (Libor), which currently ranges from 2.70 to 2.77 percent.

World Bank country director for Indonesia Joachim von Amsberg talked with The Jakarta Post's Vincent Lingga about the new landscape of Indonesia-World Bank partnership. Excerpts from the discourse follow.

Question: How has the disbandment of CGI and Indonesia's status as a middle-income country changed its relationship with the World Bank?

Answer: The relationship is changing from an aid model to a development partnership and development financing model. As Indonesia has firmly grown into the ranks of middle-income countries it now has many choices in financing for its investment needs, including access to domestic and international markets at reasonable rates.

In financial terms, Indonesia does not "need" official development assistance, but it can very much benefit from it when it provides lower cost financing than other sources and when it adds to the quality of public policies and programs.

As a result of its success, Indonesia is now graduating from the IDA (International Development Association), the World Bank window for interest-free loans for low-income countries. In return, it is gaining the flexibility that comes with financing from the IBRD (International Bank for Reconstruction and Development, the official name of the World Bank).

How does this change in the partnership influence Indonesia's borrowing from the World Bank?

This provides more flexibility in how much investment (loans) Indonesia is receiving from the World Bank (there are fixed country allocations for the IDA but not for the IBRD) and what the investment is used for (IBRD financing responds more closely to country demand).

Under the new partnership, the World Bank finances: (a) general budget support (development policy lending) in support of government policy reforms and (b) financing for specific priority sectors and programs within the Indonesian budget. In both cases, we are supporting government-led reforms or government-led spending programs. The relationship is thus led by the Indonesian government, as it should be.

Senior officials at the Finance Ministry and National Development Planning Agency said Indonesia would borrow from the World Bank up to US$2 billion this year. Why has the borrowing risen so sharply, compared to only around $1.5 billion last year, $1 billion in 2006 and only between $420 million and $660 million a year from 2002 to 2005?

Our role is to lower the cost of financing compared to other sources. For example, we now charge only around Libor while particular markets put a risk premium of as high as 3 percentage points on particular borrowers. So the Indonesian government can come to us anytime if it thinks the borrowing costs from other sources are much higher.

For this year, for example, we are willing to lend up to $2 billion through program loans and project aid but it is entirely up to the government whether it will use it or not. There is no risk at all if the government does not draw loans from the World Bank because it (the WB) has abolished the commitment fee.

Since Indonesia's public debt has been declining rapidly (currently less than 35 percent of gross domestic product) and is now very manageable and our financing contributes to lowering financing costs and replaces more expensive market financing, we are very comfortable increasing investments in Indonesia at this time.

Indonesia uses World Bank financing within its financing and borrowing plan, thus increased use of World Bank financing is consistent with continuing decline in public debt.

How can the World Bank still help accelerate reform measures in Indonesia?

The World Bank, through its development policy loans (included in the category of program loans), helps improve the quality of public spending (increasing effectiveness, improving procurement and financial management, lowering corruption risks, etc.). Most program loans are related to the implementation of development policies and reform measures.

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