Unlocking Domestic Capital and Tackling Currency Risk: The Key to Sustainable Development in IDA Countries

Martin Wolf emphasizes the need for a significant replenishment of the International Development Association (IDA) to support progress towards eliminating extreme poverty and promoting social and economic development. While concessional finance plays an important role in this, there are two key points in Wolf’s assessment that need to be addressed.

Firstly, it is important to challenge the assumption that IDA countries lack domestic capital pools. Countries like Nigeria and several east African nations have significant domestic pension assets totaling billions of dollars. These capital pools are growing rapidly but require scalable solutions to be channeled into productive investments. The World Bank Group should take a leadership role in supporting private-sector led investment solutions rather than solely focusing on foreign capital flows.

Secondly, currency risk is associated with IDA funding, even though the terms may be concessional in terms of pricing and loan tenure, the currency risk of the loan component still falls on the recipient country. This can lead to difficulties in servicing debts over the long term. The upcoming IDA replenishment must address this mismatch to ensure that countries receiving funding are not burdened by unaffordable debt servicing in local currency terms.

In conclusion, it is crucial for the World Bank to take a leadership role in promoting domestic investment solutions and addressing currency risk in IDA funding. By focusing on these issues, the next replenishment round can better support the world’s poorest countries in their efforts to achieve sustainable development and poverty reduction.