World Bank Set To Relax Guarantee Conditionalities

The multilateral institution is hoping to set up a $250 million private sector guarantee facility, which could begin functioning as early as next year.

The World Bank is also seeking to devise a guarantee that will cover low-income International Development Association (IDA) countries. The Bank's management is veering towards recommending a $250 million development grant facility to help the poorest nations.

Neither facility is on the official agenda for the annual meetings, but Wolfensohn is vowing to make them available as soon as possible.

Existing World Bank guarantees, which cover both partial credit and partial risk, are available only to IBRD borrowers. An earlier plan to set up a private sector guarantee arm was reportedly dropped by IDA deputies who felt it would be inappropriate for a fund meant for the poorest countries.

The relatively new World Bank guarantees are unpopular with host governments who resent being asked to furnish counter-guarantees. Further under the Bank's rules, the guarantees are counted as part of the institution's total exposure to a country. The countries, obviously, prefer to tap IBRD financing instead.

Indian officials, who are currently discussing the guarantee programme with the World Bank, said they would prefer IBRD loans, particularly for social sector projects.

We are not clamouring for the guarantees, chief economic advisor Shankar Acharya said, noting that the country had succeeded in attracting private investment even without offering sovereign guarantees.

Finance minister P Chidamba-ram, who has ruled out fresh counter-guarantees in the power sector, was critical about the instrument. Short-term guarantees can very easily be used as a substitute for longer-term sectoral reform, he said in a speech Tuesday.