US poised to support $13bn capital increase for World Bank

The Trump administration is poised to back a $13bn capital increase for the World Bank in a package that would see significant lending reforms and an increase in China’s shareholding.

Barring last-minute hiccups, US Treasury secretary Steven Mnuchin is set to tell fellow World Bank shareholders at next week’s spring meetings in Washington that he will support an increase in the bank’s capital, a senior Treasury official confirmed to the Financial Times on Friday. The move would be a significant shift in the US administration’s attitudes towards multilateral institutions. 

“I think we are moving in that direction. We have been working for months on reforms at the bank and they have made a lot of progress,” the senior official said. 

The turnround in White House views on the World Bank marks a major win for its president, Jim Yong Kim, who was first nominated for the role by former President Barack Obama. He has worked hard to build a relationship with the new administration and aligned himself with Ivanka Trump, the president’s daughter, who was behind a $150m women’s empowerment fund launched by the bank last year. 

The administration, which expressed reservations about World Bank lending to China and other middle-income countries at last October’s annual meetings, had been wary of the plans for a capital increase and expectations for an agreement at next week’s meetings were muted. 

However, Scott Morris, a former Treasury official now at the Center for Global Development, a Washington think-tank, said: “I’m hearing a lot of positive sentiment both from the Bank side and the US side. That’s pretty remarkable.” 

The Treasury official said the goal was to have the bank be self-sustaining. “The World Bank will be moving to a sustainable lending model that is not reliant on future capital injections,” the official said. 

Mr Trump’s “America First” agenda has fostered a more sceptical approach towards international dialogue and established mechanisms for global co-operation. The president has, for example, called the World Trade Organization a “disaster” for the US as the administration embarks on tit-for-tat threats of tariffs with leading trading partners including China. 

The increase in paid-in capital will be split into two with $7.5bn going to the International Bank for Reconstruction and Development, the bank’s main arm, and $5.5bn to the International Finance Corporation, its private sector lender, the official confirmed. The US is set to provide $1.3bn to the IBRD capital increase, the official added, but has not yet decided whether it will inject new capital into the IFC. 

The IBRD last saw a capital increase in 2010 when shareholders agreed to inject $5.1bn in new capital. At the end of the last fiscal year it reported having $41.7bn in equity made up of paid-in capital and retained earnings and reserves. 

As part of the deal China will see its voting power in the IBRD rise from 4.45 per cent to around 5.7 per cent, people familiar with the matter said. 

The deal is expected to be endorsed in principle by World Bank shareholders at the spring meetings, according to people familiar with the discussions. Final approval is expected before this year’s autumn meetings. 

A World Bank spokesman declined to confirm details of the agreement. “The decisions on financial capacity are up to our member countries,” he said. 

In return for US backing the World Bank will be establishing a new pricing structure for its loans to upper middle-income countries such as China. It also will be prioritising lending to poorer countries and committing to reining in costs and compensation for World Bank staff. 

David Malpass, the Treasury undersecretary for international affairs, last year highlighted his office’s participation in 100 international working groups and organisations, and that he wants to examine which ones could be scaled back or closed down. He has also criticised the World Bank for lending large amounts of money to countries with higher per capita incomes and access to financial markets in a veiled jab at China. 

But the administration has been changing its tone.

Asked during a congressional hearing on Thursday about China’s increased lending as part of its Belt and Road Initiative, Mr Mnuchin pointed to the administration’s support for the World Bank and other multilateral development banks. 

“We’re looking for more efficiency at these institutions,” he said. “But we very much support these development banks.” 

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