Why supplemental budget for World Bank IDA is critical to children

Today the World Bank is meeting with donor governments who contribute to its international Development Association (IDA), which provides grants and low interest loans to 74 of the World’s poorest countries. One important item on the agenda will be the Bank’s request to supplement IDA’s current budget (IDA 19) of US$82bn by an additional US$25bn up to June 2023. It is fair to say getting broad agreement from donors to contribute to the supplemental will be challenging. But as we outline in a new briefing paper, it is something we believe has the potential to unlock a financial lifeline for the poorest children in the world at a time of unprecedented crisis.

Why IDA is important

Although the COVID-19 pandemic has created a global crisis, the impacts are, and will continue to be felt most in the poorest countries in the world, particularly amongst the most marginalised children. This is in part because the poorest countries did not have sufficient resources at the onset of the crisis to manage the shock, and because of historical underinvestment in basic services and high rates of poverty. The continued economic downturn has further reduced government revenue and household savings have dwindled, a picture that is set to continue in the coming years. In addition, other sources of finance have reduced, including aid budgets in many high-income countries, causing further declines in the amount available for investment in essential services such as health, education and social safety nets.

One of the only sources of affordable funding that has increased for the world’s poorest countries at this time has been from multilateral institutions, such as from the IMF and the World Bank’s IDA. Even before the crisis, IDA was the second largest provider of aid to low and lower-middle income countries, accounting for 16% of total aid to sub-Saharan Africa in 2018. In response to the crisis, the World Bank has frontloaded IDA spending. We estimate that IDA will use almost half ($36bn) of its $82bn budget in the first of its current three-year funding cycle (from July 2020 – June 2021), which has been vital in providing timely and much-needed support for countries.

However, this frontloading also means that funding will face a large deficit in the summer of 2021, falling to $12.7bn less per year than this financial year. Children will bear the brunt of the resulting funding shortfall, with an estimated $3.4 billion less likely to be spent on education and $3.5 billion less on social protection in the final two years of IDA19 than in the current financial year.

Why a supplemental budget to IDA makes sense right now

A $25bn supplement to IDA would enable the World Bank to not only cover the $8.4bn deficit created by the frontloading of resources this year, but also enable it to maintain the enhanced level of crisis funding it has provided this year into the next two, at a time when other resources to support the world’s poorest children will continue to be constrained.

Figure 1 – The US$25bn supplement would enable IDA to continued scaled up support to the poorest countries

IDA is a cost-effective and catalytic way to deliver aid. Donor countries would only have to provide grant funding of $10bn to enable IDA’s budget to increase by $25bn. This is because the World Bank blends donor contributions with money borrowed privately at very low interest rates, which it can access using its triple A credit rating. This means that IDA offers the opportunity for donor countries to have their own aid contributions scaled up to support the world’s poorest countries, at a time when their own budgets are constrained, and the world’s poorest countries desperately need additional resources to support livelihoods.
 

We believe that the proposed IDA supplement is affordable for most donors. For illustrative purposes, we can assume that the supplement would be split between donors proportional to the original contributions they made to the IDA19 envelope. Of the largest nineteen contributors, fifteen would have to commit less than 5% of their yearly aid budget for the supplement, and none would have to contribute more than 10%. The costs could of course be shared in other ways, but this suggests it is not beyond donor means, even with aid budgets falling.

The $25bn supplement would likely have a significant, positive impact on funding in sectors critical to the fight against COVID-19, supporting livelihoods and basic services for children. Figure 2 shows that, with the supplement, these sectors could have $12bn extra in funding from IDA.

Figure 2 – A supplement to IDA could have a significant impact to sector spending relevant to children

Source: Based on scenarios in Figure 1 and on proportions of sectoral allocations in the World Bank Financial year 2020 in the latest Annual Report.

Supplementary IDA funding will not by itself fill the global financing gap for children – a gap that existed pre-COVID, and that has been widened dramatically by the crisis. It is, however, a critical part of the puzzle, with the potential to leverage billions to help protect children from the worst impacts of the crisis. If there was ever a time for donors to step up and offer a lifeline to the children who need it most, it is now.