Reform is generational
Kristalina Georgieva is the Chief Executive Officer (CEO) of the World Bank since January 2017. Georgieva was also the World Bank Group interim President in the leadership transition of 2019. As CEO of the World Bank, which comprises of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), Georgieva has mobilized resources for poor and middle-income countries and created better opportunities for the world’s most vulnerable people. Bulgarian national, Georgieva had a role to play in shaping the agenda of the European Union, starting in 2010, first as Commissioner for International Cooperation, Humanitarian Aid and Crisis Response. As European Commission Vice President for Budget and Human Resources, Georgieva also oversaw the European Union's €161 billion (US $175bn) budget and 33,000 staff across its institutions around the world, and tripled funding available to the refugee crisis in Europe. Recently, Kristalina was in Addis Ababa for an IDA19 replenishment meeting covering the fiscal years stretching from 2021 to 2023. Asrat Seyoum of The Reporter sat down with the CEO for a brief conversation. Excerpts:
The Reporter: In your recent IDA meetings, one of the issues that dominated your discussion was reported to be the issue of external debt sustainability. This was particularly the case since 34 out of the 68 IDA beneficiary countries have high external debt distress. How do you explain this phenomenon?
Kristalina Georgieva: Let me start by stating that this problem of rising debt levels is a universal problem. Increase in debt levels is observed globally with governments, private sector and households. The question is why it is happening? The primary driver is low interest rates that make borrowing affordable. This situation of low interest rates was fairly prolonged and was driven by the financial crisis that led to quantitative easing measures to make borrowing more affordable and easy. The US Federal Reserve and other central banks around the world held interest rates quite low, making financial resources available to generate the sort of growth needed to bring the world economy back to a sound footing. However, debt in itself is not necessarily bad; but low interest rate also means low yields for lenders. Because of lower yields, many lenders, both private and public, have turned to more high risk borrowers. And, it is this second level driver that specifically impacts low income countries. What we have observed is that, rising levels of indebtedness among low income countries and the debt repayment burden has started to take a toll on the financial resources of these nations in terms delivering education, health, social protection and investment in infrastructure. We also have observed a shift in the composition; accordingly, most of the debt stock in low income countries, recently, is owned by non-Paris club, sovereign and private lenders, which is a concern. What we are doing to respond to this is to work on a country-by-country basis to encourage debt transparency and enable governments make informed decisions. One thing that has to be underlined is that debt in itself is not bad; it becomes an issue when it is not affordable (non-concessional) and used for idle consumption and not for growth and projects with low return.
Knowing that IDA is inherently a lending institution, and half of your beneficiaries are indebted, I wonder if there is a push form IDA donor countries (Deputies) to exercise some restraint when it comes to lending?
What we are discussing is prudent lending policies. Specifically, we have discussed, in our IDA replenishment meeting, the importance of having high concessions and sufficient grant. Poor and fragile beneficiary countries will not be in the position to borrow, and hence, we prove grants and not loans. We have also looked into the productive use of resources that countries borrow from us. We have discussed the need to assess if our borrower countries are investing our resources on programs that maximizes the growth potential of the country such as investments in human capital and productivity. So, in general, what we have discussed as part of the IDA19 replenishment meeting is how to structure our lending facilities to fit the need of countries with different circumstances. We also value, very much, reform oriented programs, since growth is perhaps the most important driver of sustainable economic progress.
But it is also a conundrum isn’t it? Since most of your IDA beneficiary counties including Ethiopia are also the ones who are in risk of high external debt accumulation. How do you manage that delicate balance?
The first thing that needs to be underlined is the fact that we are not offering non-concessional loans to Ethiopia or any other low income country. It needs to be understood that concessional loans are lent on a zero or near-zero interest rates. We do hope we can see Ethiopia in a middle income country category one day, so that it can qualify for International Bank for Reconstruction and Development (IBRD) lending; even IBRD rates are way lower than market rates. On top of that, we try to make sure that all the lending we provide either to Ethiopia or any other low income country would in fact be growth and productive capacity enhancing lending. I have to restate that debt in itself is not a problem. In fact, we have ample evidence regarding IDA helping countries move up the income ladder. Just to name a few, we have the three well-known graduates of IDA: India, China and Vietnam. They all made very good use of IDA resources and they all came back immediately to IDA as donors since they know the benefit of IDA and how it can help the world economy.
How about on a policy level? Are you planning to engage on a policy level with IDA borrowers?
We do have it with every borrowing nation; in fact, we have been providing Ethiopia our analysis of its borrowing capacity. As a result, I am proud to say that, in our engagement with Ethiopia we have seen the authorities restraining non-concessional borrowing; and it is a very prudent step to take. We are also trying to do the same with other nations as well. Currently, with interest rates staying low and expected to remain low for the foreseeable future and knowing that interest rates are cyclical in nature, we want to take this opportunity to work with countries to improve their debt profile.
You said debt transparency will be one of the focus areas for IDA when engaging with borrowers with high degree of risk of external debt stress. Why transparency?
In fact, we are at the forefront of the global debt transparency initiative; we are not doing this only with developing or low income nations, rather with everyone. We are also working with the G20 in that regard. But, we believe that developing nations as well, have to be much more prudent in disclosing their liability. This is important because it will help them identify the magnitude of their debt problem. What we discover often is that their contingent liabilities are not reported in their debt balance sheets. This is just one aspect; in a world where lending practices are more sophisticated, countries ought to know what they have been borrowing from and under what term. And those they are borrowing from deserve to know who they are lending their resources to. This is essential for a more sustainable financial system. The last thing we want is the situation where interest rates go up; servicing cost of debt increases and panic hits because we lack the knowledge as to the exact size of the debt stock. Hence, in this sophisticated world transparency is citizens and governments’ best friend. So, we are determined to define the various categories of debt and help countries putout information and benefit from it for good policymaking.
But, for many years the indebted nations have been talking about transparency. So, what will IDA do different this time around?
Who do we serve? We serve citizens of our borrower nations. In general, transparency is the best friend of the ordinary citizen. This applies to debt, the state of the environment and the financial system. We believe transparency could be a very good tool especially in a world where technology allows for a disclosure of information in a very unique way. So, what we need to do is bring this technological solution to scale. We also strongly advocate for e-government since it is a good way to make governments more transparent to the public. It is also advantageous for the government since it will help earn the trust of the public. It is a good way to curtail misuse of public funds and corruption.
As it might have already come up in your discussions with Ethiopian authorities, Ethiopia is currently struggling with multifaceted macroeconomic problems. So, do you think the country is in the right economic standing to implement the highly publicized reform process?
What we are seeing in Ethiopia is a remarkable level of market reform that can contribute tremendously to growth and productivity in Ethiopia. If we see the sectors under reform such as telecom, energy and logistics, these are sectors where more competition is proven to bring service quality up and prices down. In the past, we have noticed that in spite of attention given to the telecom sector in Ethiopia, the quality of services were not really at the level one expects them to be; this is because there was a state monopoly over the services and lacked competition. Competition indeed brings service quality up and prices down. This basically applies to most sectors. What countries have learned is that the state has a role to play in providing services in areas where the private sector will not go. The state has a very important role to play in terms of leveling the playing field for everyone; but, the state is not necessarily the best provider of certain goods and services. What we see Ethiopia doing is, in careful and measured manner, moving towards creating a bigger role for the private sector and unleashing the entrepreneurial potential of Ethiopians. We have invested in projects linked to access to finance, entrepreneurship and skills for women in Ethiopia; the returns are simply outstanding. You give people the chance to unleash their capacity and they end up generating income for their families and create jobs for others. I have met women, men and even farmers who have benefited from such programs and what they have done is simply remarkable. However, this has to be done very carefully so that it will not leave some people behind. We work with the Ethiopian government, in this regard, on what we call the productive safety net program. It is important to address the need of people who are vulnerable to shocks and risks. This is what makes us hopeful about Ethiopia: there is a vision for the country, while measures are put in place and steps are taking in a deliberative manner. And we are there to advice on what worked well in other places and what did not. Look, Ethiopia has been registering a remarkable economic growth which could be an object of envy for many countries. On the other hand, Ethiopia is a country where every year some 2 million people are entering the workforce. So, there must be a space to create more meaningful employment to this labor force; and we know that such level of massive job creation is best achieved where there is space for small and medium enterprises. Some 90 percent of jobs are created by small farmers, small entrepreneurs and digital companies. This is why job creation should be the utmost priority of the government. That is why we are here for IDA replenishment to try raise from USD 72 to 86 billion for investment for the upcoming three-year IDA19. We plan to concentrate on five major thematic areas in the coming three years. Number one, by far is jobs and economic transformation, including digital transformation and connectivity, regional projects, skills and human capital development, and also focus on fragility for countries like Somalia and Eritrea, which require special attention. We also focus on climate change since it is becoming a big issue including here in Ethiopia. We also focus on women with aim of unleashing women in Africa. [I learned this recently: African women are far more entrepreneurial than African men but get 6 percent less financing by comparison]. Last but not least, we focus on governance and institutions as it is the foundation for economies and societies to work.
In spite of a dynamic reform outlook in Ethiopia in the past one year, the economic data hardly suggests positive progress. So, how do you balance between positive outlook and actual performance in the context of IDA lending policy?
We have to first recognize that the world is changing rapidly; and in that dynamism, policies need to be extremely agile. This very nature of policymaking is bringing about significant risks. So, the question is how we deal with that: we review and assess the results of our policies constantly. This kind of dynamic policymaking is something that everybody has to accept in order to stay relevant in these fast moving times. However, a very important lesson to be learnt in this situation is the importance of investing in people and human capital; not only for the knowledge they have accumulated but the special ability of people to learn and adopt in a changing environment. Human capital is a very important asset for countries. We look at countries and say that it is comprehensive to have policies and institutions; transparent and accountable governance and the rule of law; and of course connectivity. However, dynamic policymaking is a very important component. You can’t expect to formulate certain policies and for everything to remain the same for a longtime. This changing environment is not only a challenge for countries but also an opportunity since many countries now have the chance not only to catch up but also to leapfrog. The most popular example is mobile phones which has given countries the opportunity to leapfrog telephone infrastructure like poles. We also see this in the financial industry with the progress of fintech. My country, Bulgaria, for instance, did not have a banking system and a checkbook system when we leapfrogged to credit cards and electronic banking.
So, in this dynamic process, where do you think Ethiopia’s reform process is at this time? Are you optimistic?
Yes. We are still optimistic. Look, reforms are not easy. They need time to produce results. But, generally, we are optimistic about Ethiopia. We are optimistic about the reform in Ethiopia not only for Ethiopia but for its positive outlook for the entire region. What matters at end of the day is the ability to sustain improvements, a quality that is so hard to harness. It is about patience. My country transitioned to a market economy in 1999 and joined the EU in 2007, but there are still unfinished businesses in this transition process. Transformation needs time; and perhaps a generation to realize.