IVI 1I' Q & A - IBRD Capital and Voting Structure Note on Capital Adequacy. Public Disclosure Authorized. Public Disclosure Authorized

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1 Public Disclosure Authorized 1I' Public Disclosure Authorized Public Disclosure Authorized Q & A - IBRD Capital and Voting Structure Note on Capital Adequacy Public Disclosure Authorized IJ IVI

2 1111 Q&A - IBRD CAPITAL AND THE VOTING SYSTEM A. PRINCIPLES What is the underlying principle that determines the allocations of shares in the Bank's capital structure? The underlying principle for the allocation of EBRD shares has been that members' relative shareholdings should reflect their relative positions in the world economy, subject, however, to the right of each member, on the occasion of any increase in the authorized capital to maintain its pro rata share in the capital. 2. How is this principle actually implemented? This principle was implemented, from the beginning of the Bank and the IMF, through the practice of parallelism of Bank capital subscriptions with IMF quotas. Since a country's IMF quota is meant to reflect the country's economic strength and its role in the world economy, parallelism has been the means for maintaining the basic link between a member's EBRD shares and its economic position. -jff} 3. How is the initial IBRD subscription determined? At the Bretton Woods Conference, it was decided that the initial subscriptions of the 44 original members of the Bank be equal to their Fund quotas, although some deviations from parallelism were accepted. For the countries that have joined the Bank later, the initial subscription has been determined by applying the "institutional ratio" to the country's IMF quota, so that their shareholdings would also parallel their IMF quotas. 4. What is the "institutional ratio"? The institutional ratio is the current ratio between all the cumulative general capital increases in the Bank and all the cumulative general quota increases in the Fund. It is used to determine the capital subscription of a new Bank member based on its quota in the IMF. In other words, a new Bank member is treated as if it had been an original member in both the Bank and the Fund with equal initial subscriptions in both institutions, and no selective increases later. (The calculations assume that after the equal initial subscriptions, the subscription in the Bank has been increased solely through general capital increases, and its IMF quota, solely through general quota increases, but no selective capital or quota increases. The ratio between its current Bank subscription and its current IMF quota then equals the institutional ratio.) S. Is the current IBRD share allocation strictly parallel with members' IMF quotas? No, because of (a) special IBRD share allocations not linked to IMF quotas, (b) exercise of the preemptive right (the right to subscribe a proportionate share in any increase in the authorized capital) by certain members, (c) release of shares by certain members, and (d) the allocation of 250 membership shares in the Bank in 1979 to protect voting power of small members.

3 -2 - B. ADJUSTMENTS IN IBRD SHAREHOLDINGS 6. How is the adjustment in shareholdings for IBRD members made? There are two ways that such adjustments can be made. The first is through traditional parallel selective capital increases (SCIs) after completion of a General Review of Quotas by the IMF. The second is through ad hoc adjustments. 7. What is the traditional parallel SCI? About every five years, the IMF undertakes the General Review of Quotas, after which it recommends quota increases for its members. A part of the overall quota increase is distributed to all members on a pro-rata basis (general component) and the remainder is distributed on the basis of the newly calculated quotas (special or selective component). The latter component captures the changes in countries' positions in the world economy. Until 1984, it was the practice that members accepting special increases in their IMF quotas also receive special increases in their Bank subscriptions parallel to the special quota increase. 8. When was the last parallel SCI? The Bank had been implementing parallel SCIs following the IMF quota reviews until the RIF Eighth Review in The SCI following the IMF Ninth Review in 1990 did not materialize because the consensus at the time was that there was no need for additional capital. The Tenth Review was completed in 1995 without an increase in quotas. This means that the Bank has not had a major realignment of relative shareholdings for 12 years. 9. What is the status of the IMF Eleventh General Review of Quotas? The IMF is scheduled to complete its Eleventh Review by March However, this might get accelerated. So far, the IMF Board has met several times to discuss preliminary calculated quotas, conversion factors for GDP for a limited group of countries, and ad hoc increases in quotas. During the 10th review of quotas, it was generally agreed that the issue of ad hoc increases in the quota for members need to be addressed in considering the overall size and distribution of quota increases under the Eleventh Review. 10. What is the implication of the parallel SCI? One implication of the continued use of proposed quotas could be a relatively slow pace of adjustment in Bank shareholdings to changes in countries' relative economic position. If, for reasons specific to its own quota negotiations, the IMF decides to devote only a small portion of the overall quota increase to the selective component, then there will be a relatively slow pace of adjustment of proposed quotas to changes in calculated quotas. 11. Why individual adjustments? Ad hoc adjustments have been made in consideration of members support for the World Bank Group and their contributions to development assistance as well as to address serious disparities between members' relative positions in the Bank and the in world economy. Some examples are the 1979 special share allocations for Japan and France in view of Japan's desire to have its Bank shares more comparable to its share in IDA --- W T IT

4 i~t contributions which had increased from 4.61% to 18.7%, and France's role as a major source of ODA anong the OECD countries. Other special allocations were made in the past in response to requests based on voting power or ranking considerations. Among them were the allocations to China in 1980 and 1981 and to India in ill I 12. Is there a link between IDA contributions and IBRD shareholdings? The Executive Directors have not endorsed any formal or direct link between IDA contributions and IBRD subscriptions. They have, however, recommended increases in the allocations of certain members based in part on considerations that included these members' support to the Bank Group and their contributions to IDA. In the IDA8 negotiations, the governments of Japan, Italy, Canada, the Netherlands, and Korea indicated that their support for 1DA8 replenishment would be strengthened if special IBRD share allocations for them could be agreed. While rejecting any explicit and direct link between IDA contributions and IBRD shareholdings, the Executive Directors recommended to the Board of Governors special share allocations to these members to better reflect their general position in the world economy and their support to the World Bank Group in various forms, including cofinancing and access to their capital markets, and their contribution to development assistance. As a result of these adjustments, Japan became the second largest shareholder in the Bank. In order to accommodate share allocations to these members, the US agreed in 1987 to release 15,722 shares (or 5.6% of its total allocation) that were allocated to it but were not yet subscribed. In the recent SCI for Japan (June 1996), shareholders again noted Japan's large and sustained efforts in IDA as a reason for approving a special share increase at this particular time, though they emphasized that the fundamental rationale for this share increase was Japan's economic position. 13. Has the pace of adjustment in IBRD shareholdings been satisfactory? The fact that ad hoc adjustments have been used a number of times in the past indicate dissatisfaction with the pace of adjustment in IBRD shareholdings which has lagged well behind adjustments in other measures of burden-sharing among donor countries. Countries such as Japan have seen their growing economic strength reflected quite promptly in the share they are expected to assume in IDA have been particularly sensitive to the slowness of adjustment on the IBRD side. Other countries such as Korea that are not yet important IDA donors, but that have grown rapidly in recent years, also find obvious disparity between their shares in the Bank and the world economy. 14. What drives the pace of adjustment? Not all members feel that the pace of adjustment to be too slow. Some members of the Bank are reluctant to see their role reduced through a shift in voting power or rank. They are prepared to support special share allocations to the extent these would not adversely affect their position in the Bank. The existence of preemptive rights has meant that these countries have been in a position to prevent adjustments through SCIs requiring an increase in the authorized capital that were unacceptable to them to the extent that it would adversely affect their respective pro rata share in the capital. So, in practice, special share allocations in the Bank have reflected a compromise among various shareholders.

5 -4 - C. CRITERIA FOR THE ALLOCATION OF IBRD SHARES 15. What are advantages and disadvantages of parallelism with IMF quotas? Parallelism has been convenient for the Bank, as it has avoided prolonged and difficult negotiations in the Bank on issues that were already dealt with in the IMF. However, questions have been raised from time to time on the practice of parallelism for two reasons. First, in determining quotas, the IMF takes into account calculated quotas, which are derived from macroeconomic variables that measure countries' economic strength. However, the actual quotas, which result from negotiations based on such calculated quotas, may not be adjusted fully to reflect changes in calculated quotas. Second, some of the variables in the formulae (GDP, reserves, current receipts, current payments, and variability of annual current receipts) for determining calculated quotas, though relevant for the IMF, may not be relevant for the Bank. Some variables that are important to the Bank may not be adequately reflected in the quota calculations. 16. Have we considered Bank-specific criteria? Attempts to establish a set of criteria applicable to special share allocations were made unsuccessfully in 1980 and The latest major attempt was in 1989 through the establishment of the Ad Hoc Committee of the Executive Directors on Criteria for the Allocation of Shares of the Bank Capital ("Shiratori Commnittee", named for its chairman, the Executive Director for Japan), which discussed the issues of parallelism and the use of Bank-specific criteria. However, after more than a year of discussions, the Committee could not reach consensus on a set of criteria to be used. As the parallel SCI following the IMF Ninth General Review of Quotas itself was postponed in 1990, the Committee also decided to defer further work until an SCI was imminent. (See "Ad Hoc Commnittee on Criteria for Allocation of Shares of Bank Capital: Progress Report", R90-207, dated October 23, 1990.) 17. What adjustment approaches did the Committee consider? First of all, after reviewing various considerations underlying parallelism, all Committee members supported the retention of parallelism with IMF quotas. The Committee then considered the use of calculated IMF quotas rather than the proposed IMF quotas currently being used as the basis for share adjustments. The Committee members were split between countries which would benefit from the use of calculated quotas for faster adjustments and countries who benefit from the use of proposed quotas. Accordingly, the management presented a two-stage adjustment approach where the first stage adjustment would use proposed quotas as the basis for share allocation and the second stage adjustment would use calculated quotas or GDP as a corrective to reduce the widest disparity between proposed quotas and members' position in the world economy. 18. What Bank-specific variables did the Committee consider? First, the Committee considered various ways of modifying quota calculations to eliminate the Fund-specific components. Specifically, the Committee considered the use of "modified" calculated quotas in the second stage adjustment whereby the variability of current receipts is eliminated from quota calculations. Then, as the third stage ~- ~ri n-

6 ti adjustments, the Committee considered IDA and ODA contributions as the basis for special share allocations confined to the Part I members. But, again, some supported counting all past contributions while others supported counting contributions made in more recent years. Also, the Committee noted a problem that these variables are only meaningful for a subgroup of members, i.e. donors and capital exporting countries. The Committee excluded from consideration other Bank-specific variables such as the total supply of resources to the Bank Group and disbursed and outstanding loans and credits because they inappropriately differentiated among members and tended to discriminate against those members that are in transition from borrower to donor status. 19. What other related issues did the Committee consider? The Committee considered issues in adjusting share allocations to agreed criteria. Specifically, it considered the pace of adjustment, eligibility conditions for adjustment (such as subscription to shares allocated in the past, release of " 18 %" currencies), allocations to subgroups (such as safeguarding the voting power of smaller members), and ranking changes. 20. How important is the collective voting power of smaller members? The issue of the voting power of smaller members has been important to many members. The 1988 GCI report states the general agreement reached at the time of the 1984 SCI that the reduction in the voting power of the developing member countries as a group (which, if defined as Part II members, had reached 42.36% prior to the 1984 SCI) should be addressed in the context of a future GCI. The Ad Hoc Committee on Voting Power of Smaller Members established in February 1988 as a result of the 1988 GCI discussions considered options of using membership votes, membership shares, or special shares as means to protect voting power of small members. The Committee was unable to reach an agreement on the treatment of membership votes. The Committee recommended that the issue be re-examined at the next appropriate opportunity. (See "Report on the Ad Hoc Committee on Voting Power of Smaller Members (COVP)", R89-193, dated September 25, 1989.) I z]j

7 I-'m NOTE ON IBRD CAPITAL ADEQUACY 1. The Articles require that the sum of outstanding loans and guarantees should not be increased if it would exceed the total value of subscribed capital, reserves and surplus. This defines the Bank's Statutory Lending Limit. The difference between the statutory lending limit and outstanding loans and callable guarantees at any point in time is known as the Headroom. It is a direct, short-term measure of the Bank's capital adequacy to support its lending operations. 2. The Sustainable Level of Lending (SLL) is the hypothetical level of annual commitments that could be sustained indefinitely without the need for additional capital. If new lending were maintained at the SLL, loans disbursed and outstanding would stabilize at the statutory lending limit, assuming that exchange rates and the patterns of disbursements and repayments remain unchanged. In this "steady state", the Bank's disbursements would be equal to repayments (i.e., zero net disbursements) and the headroom would be zero. Thus, the SLL is a broad measure of the Bank's long-term lending capacity for a given level of capital. The adequacy of the Bank's capital for supporting its lending and guarantee operations is reviewed periodically. The last review was done in 1994 (R94-100, "CapitalAdequacy of the Bank", dated May 31, 1994), and the next review is due in Current Situation 3. On June 30, 1996, the subscribed capital was USD billion and reserves and surplus came to USD 20.5 billion, amounting to a statutory lending limit of USD billion. Outstanding loans were USD billion and callable guarantees USD 0.1 billion, resulting in a headroom of USD 90.8 billion, or 45.2% of the statutory lending limit. 4. In the 1994 review, the Bank's SLL was calculated at about USD 30 billion, almost double the then current annual commitment levels of IBRD. Further, the calculations projected the SLL increasing to about USD 31 billion by FY2002 before stabilizing in the USD billion range thereafter. The additional capital from the SCI for Japan increases the SLL by about USD one half billion. 5. A Capital Increase may be indicated when the IBRD's operations reach a point where the capital is deemed insufficient to support the current and projected lending portfolio. Such capital increases are a subject of negotiation and agreement among IBRD members. The time required to put a General Capital Increase (GCI) in place has usually been two years. Given the current lending and capital situation, the Bank's capital is expected to be adequate to support the projected range of lending for many years to come, at least into the early part of the next decade. I01JrJ _ x I~~~~~~~~~~~~~~~~~~~~~~