On 4 February, President Donald Trump signed an executive order for a review of all intergovernmental organisations in which the US is a member and to withdraw from some United Nations organisations. This comes after the administration announced plans to shut down the US Agency for International Development, withdraw the US from the World Health Organisation and pause all US government foreign development assistance for a 90-day period in late January.
The orders raise questions about the risk of a marked change in US policy towards multilateral development banks. The US is a key shareholder in a number of rated MDBs, so it would be credit-negative if it materially reduced its commitment to them.
However, while it is too early to come to definite conclusions, it is unlikely that the US would take drastic steps regarding its participation in key MDBs.
Large shareholdings give the US significant influence over MDBs’ policies (Figure 1). During the first Trump administration, the US government advocated for an increased focus at the Inter-American Development Bank on private sector lending, which supported the expansion of the group’s private-sector arm, IDB Invest.
Figure 1. The US is a large shareholder in many MDBs and supranational entities
US share of subscribed capital, latest available, %
Source: Moody’s Ratings
The US is also the single-largest shareholder in the various World Bank Group institutions, with a share of around 19% of subscribed capital in the International Development Association and International Finance Corporation. The US shareholding in the International Bank for Reconstruction and Development, the largest entity in the World Bank Group, is somewhat smaller at 16%.
But the US is not the only highly rated shareholder with a large stake in these MDBs and other shareholders are expected to remain strongly committed to these institutions (Figure 2). It is also worth noting that the last – and largest – capital increase for the IBRD was agreed in 2018, during the first Trump administration, including $7.5bn in paid-in capital and an increase in callable capital of $52.6bn.
Figure 2. Other large, investment-grade shareholders are important, besides the US
Subscribed capital, latest available, %
Source: Moody’s Ratings
Most of the large MDBs are focused on increasing their lending capacity without the need for a capital increase from shareholders, and mobilising private capital instead. This should in principle be broadly aligned with the Trump administration’s focus on improving government efficiency. MDBs will most likely make this argument forcefully in their interactions with the Trump administration.
Withdrawing will not be straightforward
Withdrawal from MDBs is feasible, but it is a lengthy and potentially costly process that would open the door to others to gain more influence.
The statutes of agreement of most MDBs allow for an orderly withdrawal of a shareholder from the institution. The statutes of the IBRD and IADB clearly state that when a government withdraws it will remain liable for its direct and contingent liabilities to the MDB as long as any part of the loans and guarantees contracted before it ceased to be a member are outstanding. In IBRD’s case, the US paid in capital of around $3.7bn and has callable capital commitments of $49.2bn, compared to disbursed and outstanding loans and guarantees of around $263bn.
The average maturity of its loan portfolio is 8.4 years, but there is a wide divergence in loan terms, with some having maturities of up to 50 years. Similar to the UK’s withdrawal from the European Investment Bank as a consequence of Brexit, the US would remain on the hook for IBRD’s lending portfolio for many years to come. Also, the withdrawing member is likely to only be entitled to get its share of paid-in capital back, but not the accumulated reserves, which are substantial for many MDBs and serve as a material financial disincentive.
Political implications
A key political argument against any US withdrawal is that other shareholders may seize the opportunity to increase their own stakes. Those shareholders include China, which has long coveted a larger share in the IBRD, a desire strongly opposed by consecutive US governments.
Despite the high uncertainty around the administration’s policies towards MDBs, some entities are currently in the process of a general capital increase or rely on regular contributions from donors. The Trump administration’s stance towards those could give first indications of the risk of a broader disengagement of the US from MDBs.
Kathrin Muehlbronner is a Senior Vice President and Global MDB Lead at Moody’s Ratings.
This is an edited version of the article first published by Moody’s on 10 February.
