Even before officially taking up the role as 14th president of the World Bank, Ajay Banga embarked on a world tour to gain first-hand knowledge of what is happening on the ground in many of the bank’s 189 member countries. The tour continued after starting his five-year term on June 2 and, to date, he has met around 90 governments, 100 civil society organisations and 20 CEOs of various asset managers and pension funds.
In an interview with The Banker in late November, Mr Banga outlined three major themes he observed during his travels. First, while the World Bank had been effective in focusing on poverty for the past four decades, multiple crises — the Covid-19 pandemic, worsening climate events, the war in Ukraine, and conflict in parts of Africa and the Middle East — have intersected to set back the gains that had been made.
He used the example of a Kenyan farmer who hasn’t had proper rainfall for four or five years. Instead of being able to grow two crops, the farmer now has just one. With just one crop, they can’t afford to keep cattle and their dairy income disappears. As a result, they can no longer afford to pay farm labourers, so their children are taken out of school, starting with the girls.
“If you think about the poverty narrative, that’s the exact opposite of what is needed. Girls should go to school,” Mr Banga says. “These intertwined challenges have increased poverty over the past three to four years.”
The second theme is that the developing world has begun to “lose faith” in the developed world, particularly when it comes to addressing climate change.
“First, from their perspective, the funds promised to them — for example the $100bn [climate pledge] — has taken too long to appear,” says Mr Banga. “Second, the energy rules don’t seem to apply equally, and they feel like they’re paying for the developed world’s prosperity. Third, they were told the money wasn’t available [to help them], but money showed up during the war in Ukraine. This means that there are choices being made and they would like to be part of the process.
While many countries get money from the World Bank, over time the money becomes a smaller part of their budget.
“Now, there are good answers from both sides for each of those points, but this is their net perception. So we need to work hard to change that,” he adds.
The third theme that Mr Banga gleaned from his travels is that many countries are keen to access the World Bank’s expertise. “While many countries get money from the World Bank, over time the money becomes a smaller part of their budget as they prosper and need less money. But what they really want is our knowledge, which is something that I hadn’t completely understood when I joined the bank,” says Mr Banga. “So, now I think of us as a money bank and a knowledge bank.”
Renewed purpose
Mr Banga’s experiences informed his rethinking of the World Bank’s purpose. While the multilateral development bank (MDB) has focused mainly on confronting poverty since 1968, at the October annual meetings in Marrakech, Morocco, he presented an ambitious new mission: to create a world free of poverty on a liveable planet.
In the interview with The Banker, he explains: “We can’t think about dealing with poverty and sharing prosperity without understanding that climate change, pandemics, healthcare, fragility, conflict, violence and food insecurity all impact poverty every day. The idea [of the new vision] was to allow us to look at issues through a wider aperture. Hence, the idea of adding ‘liveable planet’ to the vision.”
As part of this renewed focus, the World Bank is looking at how to repurpose the more than $1.25tn in subsidies which are today used for agriculture, fossil fuels and fisheries to encourage more sustainable practices.
“To focus on changing and fighting climate change, estimates are all in trillions. There are pools of money out there — in MDBs, government coffers, private sector and philanthropies — and we should exploit those. But there are other pools as well, such as the $1.25tn a year that goes into subsidies for fossil fuel, agriculture and fisheries. While not all of it is wasted, the World Bank estimates that $6tn every year is the cost of the environmental damage from that $1.25tn.”
He highlights the EU’s change of policy where, instead of giving farmers subsidies for using fertilisers, the bloc incentivises farmers to deploy less fertiliser and use more sustainable methods. “That changes the way a farmer thinks about the chemical runoff from their fertiliser usage and encourages them to using better crops, better seeds and better crop rotations, which allows for higher yields and productivity without fertilisers,” he explains.
At the annual meetings, the World Bank also launched the Liveable Planet Fund, which expands the Global Public Goods Fund to allow sovereigns, philanthropists and other donors to contribute. “Therefore, the capital that it could attract is growing,” Mr Banga tells The Banker.
In addition, Mr Banga is focused on building up liquid, transparent voluntary carbon markets, an objective that he promoted at COP28 in Dubai, alongside International Monetary Fund managing director Kristalina Georgieva. He believes that it will be possible to raise 126 million of “high integrity and highly valuable” carbon credits by 2028.
IMF managing director Kristalina Georgieva and Mr Banga at the annual meetings of the IMF and World Bank in Marrakesh in October. Image: Getty Images
He told The Banker: “The idea of a voluntary carbon market comes from the principle of trying to find a way to channel money from certain countries where consumption is higher — where companies and institutions would be searching for ways to buy offsets for the carbon they use — to places where there are natural carbon sinks, and the effort that goes into enhancing their carbon sinks can be valued.”
Some 15 countries are already set to earn income from the sale of carbon credits generated from preserving their forests. He highlights Indonesia, which is repurposing mangrove plantations and adding 700,000 hectares of mangroves, which could create a 60 million tonne carbon sink over the coming decade or two. The Democratic Republic of Congo, Ghana and Mozambique are also making efforts to expand carbon sinks.
In the forestry space, specifically with projects that the World Bank is actively involved in, the bank could do a jurisdictional audit around each project to make sure that these are good quality carbon credits — for example, they are not credits where they are deforesting and reforesting in the same jurisdiction.
“We also want to ensure that the money doesn’t just go to the government’s coffers, but goes to the community in that area, so that they aren’t incentivised to go back and attack the same resource,” says Mr Banga.
“After all, if you don’t give people a livelihood, then they will go back to what they were doing before. So, we have to find a way to get out of the cycle.”
I recognise that we may make mistakes along the way, but we’re going to do it as transparently as possible.
Today, five projects are ready for audits and another 10 are in the pipeline, with a total of 47 agreeing to work with the World Bank. “If the carbon credits could be valued on a carbon exchange at $15–20 and that money starts flowing to these countries, then we change the conversation about creating the right incentives for those communities,” he says.
It is unchartered territory, Mr Banga acknowledges, adding, “I recognise that we may make mistakes along the way, but we’re going to do it as transparently as possible. We’re going to involve as many individuals as possible to see how this can work better. Because the answer is not to back away from the issue — the right answer is to figure out a way to make it work.”
Repairing trust
Returning to the issue of the Global South’s growing mistrust of the Global North, Mr Banga explains how climate change means different things to each group. For example, while climate change is not only about emissions and mitigation, that remains the developed world’s main narrative.
However, the developing world thinks more about access to water, irrigation, rainfall, soil degradation, loss of biodiversity, climate events and catastrophes. “It is all about adaptation and survival,” he says. “We have to change the way we speak to each other to be inclusive of these two points of view.”
The World Bank has renewed its focus on this issue. In 2021, as part of its Climate Change Action Plan, it made a commitment to put up to 35% of its portfolio into fighting climate change by 2026 — half of this will be allocated to mitigation and half to adaptation. Impressively, the group reached an average of 38% this year and will be closer to 40% in 2026. To make a bigger impact, Mr Banga plans to commit to 45% by 2026 and expand the commitment to also include nature.
In addition, he is determined to adhere to the commitment of 50% mitigation and 50% adaptation, so it moves from being “an emissions-only conversation to one that includes soil, forests and water”.
Mr Banga emphasises his point about being a knowledge bank. “I want to take the World Bank’s amazing knowledge in these different fields and break it up into five verticals: people, prosperity, planet, infrastructure and digital. The planet vertical is about mitigation, adaptation, forestry, water, biodiversity, etc. The people in that vertical are very qualified, deeply knowledgeable.”
He argues that every country’s three-year rolling plan, or country partnership framework, should be agreed upon with these experts in the room. “We can have a concrete conversation with the prime minister or finance minister about how we can help both in terms of knowledge and capacity building, so that they can create bankable projects and then we can even help to implement them,” he explains.
With this step, according to Mr Banga, the World Bank moves from being an adviser to being constructively helpful, not just with money, but with its ability to craft these projects.
Unsustainable debt
Despite the World Bank’s efforts in poverty reduction, many point to the unmanageable level of indebtedness among developing countries. According to its International Debt Report 2023, the World Bank estimates that developing countries spent a record $443.5bn to service their external public and publicly guaranteed debt in 2022, with debt-service payments increasing by 5% over the previous year.
And if interest rates stay higher for longer than originally thought, developing countries with debt overhangs — which were exacerbated by rising interest rates and the strength of Western currencies — will face a “serious challenge”, Mr Banga explains.
While the G20’s Common Framework for Debt Treatment, launched in 2020, is a functioning mechanism to address sovereign debt issues, moving countries through the process has been slow. And although subsequent countries are going through faster than previous ones, they’re still slow because it has taken time to get the new creditor ecosystem off the ground, according to Mr Banga.
Mr Banga and his wife Ritu Banga (left) at a mangrove rehabilitation and restoration site in Indonesia. Image: Getty Images
“We all need to work on getting them through that framework faster,” he adds. “Until we get them out the other side, they’re hamstrung in what they can do for their people.”
The four countries in the framework — Chad, Ethiopia, Ghana and Zambia — have received $12bn of funding from the World Bank over the past three years: $6bn in grants and $6bn in deeply concessional loans. “We can help tide them over until they get the settlement in debt that they sorely need,” Mr Banga adds. “The effective functioning of that debt framework is important in a slowing economic growth scenario.”
In addition, the World Bank is looking to replenish the International Development Association (IDA), which is aimed at the least developed countries. The IDA, which provides grants and deeply concessional finance, comes up for replenishment in 2025.
Speaking at the midterm review of IDA20 in Tanzania on December 6, Mr Banga delivered a strong message: “The truth is we are pushing the limits of this important concessional resource and no amount of creative financial engineering will compensate for the fact that we need more funding.
“This must drive each of us to make the next replenishment of IDA the largest of all time. We need everyone — donors, shareholders and philanthropies — to step up, join us, and bring their ambition to this fight, otherwise the potential for IDA will never be realised.”
Power of partners
Mr Banga believes that the challenges facing the world are fairly large and intractable “if we don’t get all shoulders to the wheel”. As such, he is a strong proponent of MDBs working more closely together. “There isn’t enough money in governments, which are faced with challenging fiscal circumstances and domestic political compulsions. So, we have to look at the additional activities we can do together, where two and two makes five,” he told The Banker.
Within the first month of his presidency, Mr Banga travelled to Peru and Jamaica with Ilan Goldfajn, the president of the Inter-American Development Bank, which is focused on Latin America and the Caribbean. In addition to meeting with several governments, the two MDBs identified three areas where they can work closer together: Amazonian bonds, climate preparedness in the Caribbean and digital access to education across the region.
The issue is that there isn’t enough money in government coffers, MDBs or philanthropies to address the multitude of challenges that we’re facing.
In another example, the World Bank is collaborating with the European Bank for Reconstruction and Development, the Council of Europe Development Bank and European Investment Bank on harmonising procurement practices in Ukraine. Other MDBs are now also able to access the World Bank’s Multilateral Investment Guarantee Agency (Miga), which issues political risk guarantees for the private sector when they invest in countries where they can’t comprehend the political risk.
The World Bank is also working closely with the private sector to unlock capital. “The issue is that there isn’t enough money in government coffers, MDBs or philanthropies to address the multitude of challenges that we’re facing. So, the private sector has to bring its capital, ingenuity, people and technology to the table,” says Mr Banga.
In renewable energy, for example, the World Bank has created the Private Sector Investment Lab, led by former governor of the Bank of England Mark Carney and Shriti Vadera, chair of insurance company Prudential, with 15 CEOs of asset management firms, pension funds and banks. “We’re trying to learn about the real challenges from them,” he says. “Why is it that, despite solar and wind power being less expensive per unit compared to fossil fuels, there aren’t more projects coming up in the emerging markets and developing economies? So, if we were to turn the tide on mitigation on emissions-heavy growth in the top 10–15 middle-income growing countries, that could change the road to [net-zero emissions by] 2050.”
However, he identifies four issues. The first is that many investors need clarity on policy. “If a country is able to lay out a 10-year vision on solar energy, even though governments may change, a private investor gets great reassurance from a 10-year ‘true north’,” Mr Banga explains, pointing to Indian prime minister Narendra Modi’s clear vision of 30% of power coming from solar by 2030 as an example.
Again this is a role for the knowledge bank. “We understand how policy can be crafted in different countries and have expertise in helping governments. We can also put money to work. So if a government is going to make reforms over the next three years, we can help with technical assistance fees, but also buy-downs on other loans,” he explains. “As such, the government is incentivised to stay firmly on a pathway of reform that allows these private investors to see where its true north is.”
Keeping girls in school will help break the poverty cycle. Image: Getty Images
The second issue is other political risks, such as tariffs. “If a downstream utility is going to renegotiate tariffs every time the government changes, that’s not helpful to a private sector investor, as they don’t know how to compute the risk,” he says. “This is where Miga is helpful.”
The third issue is having the capacity on the ground to help these projects become bankable. “A private sector investor can invest in solar manufacturing and distribution, but they need to connect to the grid and also need the government’s capacity to help with that,” he adds. “Our knowledge bank people can help countries build capacity.”
Foreign exchange (FX) risk and how to hedge exposure in illiquid, non-G10 currencies is the fourth issue. Mr Banga believes this is the hardest to address, due to a lack of deep enough or wide enough FX hedging markets in many countries.
“Obviously, the long-term solution is better local capital markets and domestic resource mobilisation. That’s what we have to work on, but they tend to be five- and 10-year solutions, whereas the requirements are more urgent than that. We are trying to help with issuing local currency bonds, and perhaps it is possible to subsidise the bond in a way that makes it attractive to help develop a local currency market.
“While that may be a quicker solution and we’re trying to find other ways, to be honest, I don’t have good answers there yet,” acknowledges Mr Banga. “I can understand the first three and create ways that the private sector can help, but the last one is very difficult.”
Watch The Banker’s recent interviews with Mr Banga:
