MercoPress. South Atlantic News Agency

World Bank softens credit conditions

The World Bank's decision to cut fees and boost limits for its biggest borrowers should help the lender cement a role in fast-growing nations such as China and Brazil said development analysts.

The sweetened terms raise the maximum amount the World Bank can lend a single country by one billions US dollars to a total 14.5 billion, and cut front-end fees by 25 basis points or 0.25% point of the loan amount.

With some middle-income countries questioning the relevance of the global lenders to their economic affairs, analysts said the move comes at an opportune time.

John Williamson, a senior fellow at the Institute for International Economics, said the changes will make the lender more attractive to big emerging countries, many of which can tap private lenders or financial markets.

"It's going to make it marginally easier for the bank to retain a role in middle-income countries," said Williamson, a former World Bank chief economist for South Asia.

"The bank is now facing much more competition than it used to," he said, adding that monitoring and policy criteria linked to World Bank loans can make them seem onerous.

"Although it is still a low-cost borrower from a financial point of view, in some other ways it's a high-cost borrower. It's much more trouble to borrow from the World Bank than some of the other lenders."

China is the World Bank's biggest borrower, with 11 billion US dollars in loans outstanding at the end of the 2005 fiscal year, followed by Mexico, Indonesia and Brazil.

While none of these countries are bumping up against the current loan limit, and none requested the increase announced last week, the World Bank said it wanted to create some breathing room.

"The change in the single large borrower limit simply gives the bank the flexibility to increase exposure to a large borrower if the country's performance is sufficiently robust and the need should arise," said John Wilton, the World Bank's acting chief financial officer and vice president for strategy, finance and risk management.

"Our view is that such policy changes should be based on (the bank's) financial capacity and not the pressure of a pending case," Wilton said.

The World Bank's borrowing limit increase is the first since a 13.5 billion ceiling was set in 1997. Its fee cut repeals part of a 100 basis point fee imposed in 1998.

A former World Bank vice president for financial policy and resource mobilization, Johannes Linn, said cutting fees made sense, given lending risks had fallen and the bank's financial health had improved.

"It's only appropriate that you share the reduced need for charges with the member countries," said Linn, now a visiting fellow at the Brookings Institution, adding raising the borrowing limit was also a prudent move.

"It will create some head room for the Indias and Chinas to keep borrowing" he added.