Can IDA Weather the Development Finance Storm?

The 21^st replenishment of the International Development Association (IDA), the concessional lending arm of the World Bank, concluded last December, with donors pledging $23.7 billion for a replenishment totaling $100 billion. A month later, President Trump took office, and his administration implemented a series of dramatic aid cuts—including the shuttering of the US’s aid agencies—that upended the global development world.

The question of whether the United States would honor the $4 billion pledge it made in the final days of the Biden administration has loomed large, with profound ramifications for the viability of the $100 billion package. So, the release of the White House’s “skinny budget” request, with a $3.2 billion request for IDA, was a rare piece of positive news (and cognitive dissonance) in an otherwise devastating budget request for global development. If the United Kingdom—the only other IDA donor whose initial pledge is under review—does not cut dramatically, IDA will be on track to sustain its goal of a $100 billion program of loans and grants over the next three years.

So, is IDA out of the woods? Yes and no. Over the medium term, IDA faces headwinds that need to be proactively managed. On the upside, IDA clearly is perceived by donors as a funding priority, even in an era of global aid austerity. Still, since 2016—which was a high watermark for IDA—donor contributions have slowly gone down. IDA’s financial model has been a source of resilience. It has enabled the organization to benefit from a diverse base of funding sources, including loan reflows and market borrowing, allowing it to grow despite declining donor contributions. But its financial model is increasingly strained in a high-interest-rate environment which makes borrowing expensive. As a result, the model is more and more at odds with the economic circumstances of its client countries, many of whom struggle with high debt burdens.

Deputies report: Do donor pledges add up?

Let’s start with the good news: donors have largely reaffirmed the pledges that they made in December to IDA, with the exception of the UK and US. The UK pledge, according to the Deputies Report, is “under review,” suggesting that the UK government could reduce their pledge as part of the Starmer government’s effort to reduce official development assistance (ODA) from 0.5 percent to 0.3 percent of GNI by 2027. While the United States’ $800 million cut could be compensated for by more market borrowing, a major UK cut in addition could put pressure on the $100 billion package.

Increasing contributions from donors such as Denmark, South Korea, and Spain means that IDA21 is less dominated by the top donors than any IDA replenishment since 2000, but these increases did not fully make up for the decline among the largest donors. Instead, IDA21 will likely have the smallest donor contributions since at least IDA18 (2017–2019), and possibly since IDA14 (2005– 2007), depending on the extent of the UK cuts. The headline figure has continued to grow only because of increased market borrowing to leverage those decreasing contributions.

Indeed, IDA’s largest donors generally fell short of their IDA20 contributions. Pledges from Japan, Germany, France, and Sweden all declined in dollar terms (the latter two decreased their contributions even when measured in national currency).

Foreign exchange fluctuations

At the time of pledging, in December 2024, the strong US dollar meant that countries making contributions in currencies such as euros or yen had to make large increases just to match their pledges from previous cycles, when measured in dollars. For example, the Japanese yen depreciated against the dollar by more than 20 percent between IDA20 and IDA21, such that a 13 percent increase in Japan’s IDA21 pledge in yen terms represented a cut to their IDA20 pledge in dollars. For a country making its contributions in euros, an 11 percent increase was necessary simply to maintain parity in dollar terms.

However, since the imposition of tariffs from the United States, the picture has changed dramatically with the weakening dollar. Today, the euro buys 8 percent more dollars than it did in December 2024.

The rising euro and yen mean a larger IDA, in dollar terms. We calculate that since December 6, 2024, the change in exchange rates across IDA donors amounts to an increase of approximately $830 million (excluding the UK). Of this, approximately $460 million is due to appreciation of the euro, $150 million is due to appreciation of the yen, and $90 million is due to appreciation of the Swedish krona. The currencies of a few countries, including South Korea and China, are down over this period, but only by small amounts. This increase is not reflected in the Deputies Report, because the report uses six-month-average exchange rates from March–August 2024. Going forward, big exchange rate fluctuations will continue to influence the IDA funding package.

Can IDA’s financing model absorb cuts?

To reach $100 billion with fewer donor resources, IDA has had to adjust its financial model. In practice, this means more concessional lending, fewer grants, and more market borrowing.

But the current financing conditions will make these changes difficult. As of December 2024, IDA had roughly $47.3 billion in available deployable capital. But the frontloading of IDA’s market borrowing program in IDA21 will mean IDA will have less borrowing space in future replenishment years.

As IDA becomes more expensive

Moreover, conditions for market borrowing have become increasingly more expensive, due to heightened interest rates globally. This means that IDA must pay significantly more to borrow from the market than it would have four or five years ago. In 2025 so far, IDA has borrowed from the market at 3.25 to 4.5 percent, depending on the currency. Meanwhile, during 2019, 2020, and most of 2021, IDA borrowed from the market at between 0 and 1 percent. While IDA can still sustain borrowing at these rates, it effectively means that IDA has to subsidize a dollar in market borrowing by over 30 cents if it wants to lend the money on concessional terms (compared to around 10 cents when interest rates were near zero).

Borrower debt levels continue to mount

Today, nearly half of IDA-recipient countries are rated by the World Bank-IMF Debt Sustainability Analysis (DSA) as either at high risk of debt distress or currently in debt distress, just as IDA is seeking to cut back on grants. In IDA21, countries at high risk of debt distress will be offered the possibility of a smaller package of grants—a 10 percent reduction on their annual volumes—or full volumes but of highly concessional loan terms. This move underscores how much pressure IDA’s grant policy has placed on its financial model, and more broadly the incompatibility of IDA’s hybrid financial model with the intensive and increasing use of grants. Ten years ago, around 10 percent of IDA’s total commitments were going out as grants; now, that number is closer to a quarter.

Reverse graduation means more claims on IDA resources

Historically, IDA has been able to rely on a steady stream of countries graduating out of IDA and into non-concessional lending, thereby reducing the number of countries across which resources are spread. However, in recent years, more countries have returned to IDA eligibility than exited it. Both Sri Lanka and Eswatini have “reverse graduated” back into IDA this cycle, and Syria could also become eligible if it normalizes relations with the World Bank (which would include clearing its arrears to the institutions). We estimate that Syria, Sri Lanka, and Eswatini could receive up to $1.25 billion per year from IDA. Even the graduation of a country such as Bangladesh, which received an average of $853 million per year for the last three years, would not make up for the needs of these re-entrants.

A gathering storm?

As many other multilateral institutions are faltering, IDA is still on track to mobilize its largest replenishment ever. But the tight external funding environment, both on the donor and market side, combined with a high-debt, low-growth environment in recipient countries, will tamper IDA’s financial firepower. IDA can weather today’s storm, but in the long term, it will require renewed donor commitments to maintain the base of contributions which underlies its financial model. IDA can endure these austere times if it can demonstrate the efficacy and value of its financial model. The Trump administration’s “skinny budget” shows that cuts to aid are not going to be evenly distributed across the board; instead, donors may decide some institutions are no longer worth funding, while others continue to receive support. After an era where the volume of multilateral institutions ballooned, the pendulum is swinging back. It's too soon to tell if IDA can survive the receding tides, but so far, the signs are not so bad.