The IDBs annual gathering in Cancún could be a
make-or-break moment for the 51-year-old institution as its
shareholders consider expanding its capital base.
While the mood was almost unanimously sympathetic to the
idea when it was formally proposed a year ago, a number of
dissenting views have since surfaced, principally among the
banks governors. Even supporters of a capital increase
the vast majority argue that any deal must
accompany deeper changes in bank governance and management.
The stakes are high for the bank. Its president, Luis
Alberto Moreno, presents the dichotomy bluntly: without a
capital increase, bank lending will hit a wall fast
and at a time when the region can ill afford losing the
firepower of a key development financier.
This is the time for decision making, he tells
Emerging Markets in an exclusive interview. Failure to
secure a capital increase would put us in a very
Simply put, we are coming to our lending limits. We would
be able to disburse around $11 billion this year, but in 2011
this would fall to $5.5 billion, and we would have to stop
approving new projects.
Such a drop in the banks disbursement capacity would
mean not only a reduction of 25% in real disbursements compared
to the 19942010 average, but also negative net flows to
the region, the bank says.
The personal stakes are also high for Moreno himself: the
outcome of the capital increase is likely to determine whether
he stands and is elected in July to a second five-year term as
In a report last year that set out the rationale for a
recapitalization, the arguments were twofold: first, the bank
had not had a capital increase since its $100 billion boost in
1995; second, the deepest international financial crisis in
generations highlighted the urgent need for development lenders
to channel more resources to Latin America, to help countries
ward off impending doom.
IDB lending in the past 12 months was $15.5 billion, double
what it was lending annually in the last decade.
Moreno and other senior bank officials refuse to discuss the
details of the banks funding request, but last
years report set out various scenarios, with an increase
ranging from $100 to $300 billion. Since then, the figure most
often cited by those familiar with the discussions is $180
billion, a sum which proponents of the plan say would be enough
to cover the projected increase in the banks regional
Around 4% of the final amount would be paid in capital based
on shares member countries have in the bank, while the rest
would be in callable capital.
Perus finance minister Mercedes Aráoz tells
Emerging Markets: Capitalization is important
and we support it. But we need mechanisms so all the member
countries are on the same page, which is why we are also
supporting the idea of better operating practices for the bank,
better standards to ensure the quality of loans.
We have not reached an agreement, but there is a trend
However, an increasing number of major shareholders are
demanding deeper reforms at the bank before agreeing to stump
up more cash. Among them are the banks biggest
shareholders, the United States and Brazil.
A senior Treasury department official tells Emerging
Markets that while the US recognizes the IDBs
contributions to regional economic growth, it needs to see
changes at the bank for the capitalization to be
Reforms to make the institution a more effective tool for
reducing poverty in the region are essential prerequisites for
US support for a capital increase, says the official.
Among the reforms the US Treasury is calling for are better
mechanisms for controlling project quality and measuring
results, as well as greater focus on climate change and lending
to the private sector.
CRITICS OF ALL STRIPES
Watchdog groups claim the bank has weakened procedures for
loans and is not doing enough to fulfil its basic mandate of
poverty reduction and regional integration. Other critics have
slammed the banks so-called realignment for having robbed
the bank of some of its best and most experienced
And some say the institution was lax when it came to its own
investment policies. The banks management was blasted
after the institution took a major hit in 2008 from $1.9
billion in losses on its investment portfolio as US
senator Richard Lugar put it, some 10 to 100 times higher
than the losses of the other development banks. Although
those losses have since been recouped, many believe they still
point to a failure of responsibility among senior
But a more damning charge is that the bank has lost its way
and failed in its mission at the height of the crisis.
Brazilian finance minister Guido Mantega tells Emerging
Markets in an interview: We are not very happy with
the IDBs performance over the past couple of years. The
bank had no role during the last crisis. It could have offered
greater help and given more incentives.
Mantega says the capitalization plan would only be approved
if there is a programme for change in governance and in
management. This is a requirement.
Similar criticisms are echoed by business people and
politicians in the region, many of whom would ordinarily see
eye to eye on very little.
Juan de Dios Olaechea, who runs Perus private Central
Andean Railroad, says the best thing about the countrys
recent investment-grade rating Moodys was the last
agency to upgrade Peru to investment grade last December
is that it frees companies from having to look to the IDB for
The IDB is totally out of touch with the region. Its
experts do not understand what it takes to make nations
competitive, says Olaechea.
Also in Peru, Ollanta Humala, head of the left-wing
Nationalist Party, tells Emerging Markets a
recapitalization would only be justified if important
transformations were made in management and the tools used by
the bank to measure development. The IDB continues to commit
the original sin of measuring development based on
Given that the banks funding request would require
approval in Perus Congress, Humalas party could
potentially sway the vote if reforms to the bank are not
forthcoming as part of the capitalization process.
DEFENDING THE RECORD
Moreno argues the bank has already implemented a long list
of changes under its so-called better bank initiative
that has made it a much more solid institution, prepared
to deal with the rapidly changing realities in Latin
He addresses the charges against the bank by pointing to its
results. I go to the facts. The reality is that few
institutions can show net flows to the region at $7 billion,
which we achieved last year, he says. We were very
quick to respond to governments, very quick to do as much as we
could in terms of our lending to accommodate many of the
countries needs in the crisis.
The bank disbursed $11.5 billion in loans in 2009, whereas
approvals hit a record $15.5 billion. Financing for the poorest
countries in the region also jumped significantly. Without
front loading its existing financial capacity, the bank could
disburse $11.1 this year, and approve a further $5.3, while
approving $5 billion in 2011.
Moreno says the bank has also slashed its loan-approval time
to seven months, half the time it took in 2007. It also
reversed its 2008 operating loss ($972 million) and posted
$1.29 billion in income last year.
Moreno defends the IDBs so-called realignment
the banks restructuring process which aimed to boost its
development effectiveness and organizational efficiency
claiming that it was precisely the changes he set in motion
that allowed the bank to ramp up lending drastically, reduce
the time needed for loan approval and disbursement and has kept
administrative costs in line.
Last year we increased the amount of projects
significantly with the same amount of staff. Since we began
this process of realignment, we have been able to do a lot of
projects in country offices, which has reduced costs. But also,
as you try to do more on development effectiveness and other
reforms, there is a cost there. There has to be a balance
between the two.
He says he is confident the changes undertaken so far will
allow for agreement on the capital increase: everything is
pointing towards closing the deal in Cancún, he
The banks leadership laid out its plan for the capital
increase in a document prepared for the March 2 meeting of
finance ministers. The rationale included a review of the last
capitalization in 1995 and how the bank met the two mandates
that conditioned that increase lending to improve
equality and lower poverty, and a concentration of loans to the
regions poorest nations.
The document reports that 50.4% of lending went to
equality-poverty reduction, with poverty in the period between
1994 and 2008 dropping from 45.7% to 33.2% in the region. The
bank provided 36.8% of loans to the poorest countries, slightly
more than the 35% the governors established when approving the
capital increase. Overall, the bank approved 1,230 loans for a
total of $108.6 billion in the 19942008 period.
The bank maintains that it will go far beyond just the two
goals established in the 1995 increase. This time it will
include five general categories to make sure it is hitting
targets, including: priorities for financing, regional
objectives, indicators to measure progress, operational
effectiveness and efficiency, and a results-based budget.
The document sets up five major strategic priorities for the
coming years, including social policies for equality and
productivity, infrastructure for competitiveness and social
well-being, strong institutionality, international integration
and environmental protection and climate change response.
THE HAITI FACTOR
But there is another element to the banks appeal for a
capital hike: Haiti and the need for reconstruction after the
massive earthquake in January that killed more than 200,000 and
left the country destitute.
It is important to have more paid in capital, to have
more callable capital, and to have the possibility of giving
more grants to Haiti, which will be a very important piece of
what we do in the final analysis, says Moreno.
Without a capital increase, grants to Haiti would drop from
$128 million in 2010 to $40 million between 2011 and 2015. The
banks concessional window would also become
Moreno says additional debt relief for Haiti would be
discussed within the context of the capital increase. On the
table will be proposals to alleviate $441 million in debt Haiti
owes the IDB. The bank already provided more than $500 million
in debt relief last year for loans incurred prior to 2004.
Perus Aráoz agrees that Haiti should factor
into the debate on the capital increase, noting the IDBs
role in the immediate aftermath of the earthquake. The
banks ability to react to emergency situations is
important. It is a consideration in the consensus that had
developed for the capital increase, she says.