• THE WORLD BANK AND THE STERLING AREA By W. A. B. ILIFF Vice-President, International Bank for Reconstruction and Development Reprinted from the February, 1958 issue of National Provincial Bank Review 1' .. K. S. Venkatrarnan THE WORLD BANK AND THE STERLING AREA By W. A. B. ILIFF Vice President, International Bank for Reconstruction and Development N a period when severe limits have been placed circumstances, and in view of the strain imposed I on both public and private capital expenditure and Bank rate has stood at the highest level for a generation, special importance attaches to by the urgent need for domestic reconstruction and expansion, it is not surprising that the export of British capital outside-and even within-the the contribution of every available source, whether sterling area and the Commonwealth has been old or new, of finance for development. In the severely curtailed. Other countries that are old- eleven and a half years since it began operations. established sources of capital find themselves suf- the International Bank for Reconstruction and fering from similar difficulty in sparing resources Development (the World Bank) has been offered a for investment abroad. There has been a corres- significant part to play among the newer sources ponding increase in the need for the Bank to fill of finance, both in non-sterling countries and with- part of the gap. in the sterling area. It has so far lent a total, For the sterling area the United Kingdom has equivalent to approximately £1,250 million, in 46 remained the predominant source of capital, with countries and territories throughout the non- London the undisputed financial hub of the sys- Soviet world, and lending during the past six tem. In spite of the stringencies of recent years, months has risen to the record semi-annual rate the United Kingdom's exports of long-term capital of over £130 million. The Bank's lending has, to other countries in the area have been main- moreover, provided reinforcements mainly in tained at the very substantial rate of more than financing public utilities in the poorer countries- £ 150 million annually, accounting for nearly three- a field where traditional sources of funds have quarters of the total capital imports of those largely dried up, but where further investment is countries. But the World Bank has meanwhile an indispensable condition of economic growth. been helping to supplement these resources and so Two-thirds of the Bank's lending has been for to relieve part of the strain upon London by lend- roads, railways, power and other basic services ing on an increasing scale in the area. By the end which, both in the last century and in this, have of 1957 the total committed-although so far only unlocked the door to rich, unused resources partly disbursed-in the area had risen to the around the world. equivalent of nearly £420 million, representing ap- The delegates of the Allied Nations who met at proximately one-third of all the loans made by the the Bretton Woods Conference in 1944 and who Bank; a total equivalent to £65 million has been there laid the foundations of the Bank and the lent in the last six months alone. International Monetary Fund were convinced that The largest sterling area borrower-and in fact one of the major problems of the post-war era the largest of all Bank borrowers-is India, where would be a general lack of internatjonal liquidity the total lent now amounts to £133 million. Next leading to difficulty in restarting the flow of long- come Australia with £114 million, South Africa term capital across international frontiers. Cer- with £57 million and Pakistan with £40 million. tainly in the case of the traditional capital export- Burma, Ceylon, Central Africa, East Africa, Iraq ing countries of Europe this belief has been and Iceland have received smaller amounts. The justified. While the value of world trade has risen lending in Central and East Africa, totalling £52 to unexampled heights, even with the help of many million, carries the British Government's guaran- new kinds of special transactions, the foreign ex- tee; the remainder, being made in independent change reserves available to meet the current and member countries of the Bank, carries the capital account transactions of these countries guarantee of the government concerned. have, in general, lagged seriously behind. In these The Bank's loans are long-term, with a life I ranging from five to 25 years and with amortiza- Expanding Productive Capacity tion payments spaced out in semi-annual instal- A few examples from the variety of sterling area ments. Charges are geared to those of the world's projects supported by the Bank will serve to illus- capital markets, principally the New York market, trate the contribution which these are making to and interest rates have varied from around 4 per the productive capacity of the borrowing countries cent. on some of the earlier loans to Si per cent. and thereby to the foreign exchange potential of ·in the opening weeks of this year. the area as a whole. These loans have been one of the most impor- A loan of $14 million for the Rhodesia Rail- tant sources of outside finance available for invest- ways has provided a new route over which the ment in the overseas sterling area since the war. copper, asbestos, tobacco and other exports of Additional sums have also been drawn from the the land-locked Federation of Rhodesia and United States and, in smaller amounts, from Nyasaland can reach the ocean. Since the com- Canada, Germany and Switzerland. Reliance on pletion in 1956 of the 200-mile South-east Con- outside resources such as these did not, of course, nection, an increasing percentage of the foreign indicate that United Kingdom investors were trade of the Federation has been passing through being supplanted in their traditional fields. On the the Mozambique port of Louren90 Marques; the contrary, the postponements and the pruning- new line is now carrying half or more of some of down required by the Capital Issues Committee the major export products and has relieved serious made it clear that the limiting factor was the congestion at Beira, the main alternative outlet to shortage of British savings available_for invest- world markets. The general efficiency of the net- ment abroad. work has also been increased by the purchase, with The Bank does not tie its loans to purchases in Bank assistance, of freight cars and diesel particular countries. and it can lend, according to locomotives. the needs of its borrowers, any of the currencies Large sums have also been lent for the railways used in international payments. In fact, in addi- in South Africa, which are playing a vital part in tion to United States and Canadian dollars, it has the expansion of mining and other exports as well lent sterling, Australian pounds, South African as in the development of local industries. A total pounds, and 15 other currencies. But, at the re- equivalent to $100 million is being used to increase quest of the borrowing countries, the greater part the fleet of steam locomotives, to introduce diesel of the Bank's lending in the sterling area has been traction, to buy new rolling-stock and to improve in United States dollars. These dollars have been the permanent way. mainly used for the import of essential American Land clearance in India has increased grain out- equipment and supplies that could only with dif- put in a weed-infested district of Madhya Pradesh. ficulty be paid for out of existing dollar resources. With the help of ploughs and heavy tractors, Where, as in South Africa and East Africa, they financed by the Bank. deep cultivation began in have been used for imports from other sources 1950 to clear the land of a crop-strangling weed (mainly from the United Kingdom) they have known as kans grass. Altogether, about one and a served the double purpose of meeting develop- half million acres have now been deep-ploughed, ment needs in the borrowing country and of and the additional output of wheat and other replenishing the sterling area's central reserves. grain on the land so far treated has been estimated Since Bank loans have to be serviced in the at about 200,000 tons a year. Although the tractors currency lent, its lending has, of course. added bought for this programme are now nearing the appreciably to the future dollar obligations of encl of their useful life, clearance is still going for- the sterling area. Dollar service payments on these ward at the rate of about 100,000 acres per year. loans are at present running at between $25 and . In Pakistan the Bank has lent $58·2 million to $30 million a year and will, of course, increase as help to adapt the · railway networks both to the disbursements grow. But it is reasonable to expect changed political pattern of the subcontinent and that the completion of projects financed by the to the growing industrial activity. The first loan Bank will yield a return in terms of increased for this purpose, made in 1952.. was mainly used economic strength and enlarged dollar resources for the import of diesel locomotives. Nearly one that will amply cover these additional commit- hundred of these are now in service in both East ments • and West .Pakistan; apart from their increased speed and reliability, the new locomotives have a breakdown in the supplies of food, fuel, raw much higher fuel efficiency than those they re- materials and essential equipment in France, the placed, with the result that Pakistan is saving the Netherlands, Denmark and Luxembourg. But the equivalent of approximately $2 million annually scale of the reconstruction needs proved much in fuel imports for the railways. A further loan greater than had been estimated and, after the of $31 million made in October last year will enactment of the Marshall Plan by the United mainly be used for new goods wagons and for im- States Congress in 1948, the Bank felt free to provement of the track, most of which is no longer devote itself exclusively to the longer-range task equal to the demands of today's heavy traffic. of stimulating new economic growth in its member The Bank's lending in Australia bas paid for countries. tractors and other agricultural equipment needed Much the largest component in the Bank's lend- to increase farm productivity and to speed pro- ing for development is electric power; a total of gress on important projects such as the reclama- $869 million has been lent for this purpose-a tion of desert lands, the improvement of existing third in Latin America and most of the remainder pasture and irrigation work such as that on the in Africa and Asia. Transport and communica- Goulburn River in New South Wales. It has also tions have accounted for $739 million, about half helped to improve road networks, and to pay for for railway improvement and the remainder chiefly jet and piston-engine aircraft for QANTAS Em- for road construction and maintenance and for pire Airways. The introduction, with Bank funds, ports and inland waterways; the $57 million lent of diesel locomotives on Australia's railways has for air transport has been almost entirely for long- brought remarkable reductions in operating costs distance passenger aircraft needed by the airlines on many important lines. On the Commonwealth of Australia and India. Agriculture and forestry Railway between Adelaide and Perth-on oppo- have taken $276 million, mainly for imports of site sides of the continent and separated by the farm machinery and for a number of large irriga- southern Australian desert-the percentage of tion and flood-control projects. Loans made the payload needed to carry fuel and water has directly for industry and mining total $439 mil- been cut from about 30 per cent. to 8 per cent. lion; these have financed major iron and steel The Bank's lending has also contributed machine investments in India and Japan, pulp and paper tools and other equipment needed for industrial plants in Finland, Pakistan and Peru, fertilizer growth. Thus, one major locomotive manufac- production in Iceland and Italy, and newly-estab- turer, formerly dependent on imports for about lished development banks in several countries. A 80 per cent. of the components, now produces total of $205 million lent for all-round economic diesel locomotives that are almost entirely made expansion has been principally for the develop- in Australia. The large and growing market for ment of Southern Italy, for the Ten-year Plan in motor cars is also being partly supplied by the the Belgian Congo, and for the Seven-year Plan in first completely Australian-made car, produced in Iran. a plant on which work was only started in 1949 but The currencies in which a particular loan is to which is now producing at the rate of 300 a day. be disbursed are not normally determined in ad- vance, but are decided upon as disbursements are The Pattern of Lending actually made-which may not be until several These loans in the sterling area indicate the years after a loan is granted. Of a total of $2,415 pattern of operations that has evolved since the million disbursed by the Bank up to September Bank began to make loans. At the time of Bretton last year. more than three-quarters had in fact Woods there was a general belief that the resources been in United States dollars. In the sterling area available to it, together with other funds then in it is expected that, to meet the wishes and needs prospect, would be sufficient to cover the needs of of individual borrowers, more than $700 million the transition from war-time emergencies to nor- out of the loan total equivalent to $1,166 million mal peace-time production and trade. The Bank will be disbursed in United States dollars. made a sizeable contribution toward solving some The extensive use of dollars in the Bank's dis- of the post-war reconstruction problems of bursements is in part a reflection of the post-war Europe; within a little over a year of starting dollar shortage and of the urgent need of bor- operations, it had lent $497 million to prevent rowers to increase their supply of that currency. 3 But it also reflects the readier access of the Bank United States dollars, Canadian dollars, Nether- to dollar sources of finance-particularly in the lands guilders, Swiss francs and £9 ·6 million in United States, where investible resources are sterling. Moreover, United States dollar bonds are larger than in any other country. The United extensively bought by investors in many countries. States provided more than one-third of the Bank's In fact, two issues of these bonds have in recent subscribed capital; and four-fifths of the additional years been sold entirely outside the United States; borrowings. although financed in large part by the most recent of these, an amount of $75 million investors outside the United States, have been in issued in September 1956, was sold to investors United States dollars. Reflecting the increased in 22 countries. demand for other currencies, however, there has Over the last .18 months the Bank has also tap- in recent years been a marked increase in the ped other sources of borrowed funds. In Septem- Bank's non-dollar disbursements. In the fiscal ber 1956 the Swiss Government agreed to lend 200 year ending last June they amounted to the equiva- million Swiss francs (about £16 million) to the lent of $165 million. This was almost as much as Bank. Similar direct borrowings. totalling $175 the total of United States dollar disbursements million, have recently been made from the central during that year, and contrasted sharply with the bank of Germany, thus helping to absorb part of pattern in the Bank's earlier years. when practi- the very large accumulation of foreign exchange cally the whole of the total disbursed consisted of in the hands of the Deutsche Bundesbank. These dollars. direct borrowings from official sources have been The ability of the Bank to lend in a variety of of relatively short life; the longest maturity was to currencies has proved particularly valuable in 1965, whereas the Bank normally borrows at long situations where the borrower has been planning term and at present has an average life of around to make purchases in currencies other than dollars 10 years on its total funded debt. But they illus- and where the assumption of additional dollar trate another of the ways in which the Bank is ful- debt might have unduly strained repayment capa- filling its purpose of providing a channel through city. Disbursements in currencies other than which capital from many different sources can flow United States dollars include approximately £35 into foreign investment. million each in sterling and in Canadian dollars, Meanwhile the Bank's resources have beenen- and smaller sums in Netherlands guilders, larged by additional amounts made available Deutsche marks, French francs and other curren- from its subscribed capital. Of member countries' cies. In addition, the equivalent of about £45 mil- total subscriptions of $9,333 million. 80 per cent. lion has been disbursed in Swiss francs; the size provides backing for the Bank's bond issues and of this sum reflects not only the general confidence may not be used in its lending. Only 2 per cent., of Swiss investors in Bank bonds but also the amounting to $184 million paid up by members in readiness with which the Swiss Government (al- gold or United States dollars. is made available though not a member of the Bank) has permitted to the Bank without restriction. The remaining 18 Bank borrowing in Switzerland. per cent., totalling $1,680 million. is paid up in each member country's own currency and may not Supplementing the Bank's Resources be used for lending without its permission. In the The main method whereby the Bank is adding early years, only the United States. later followed to its resources to keep pace with the growth of by Canada. made this part of its subscription these lending operations is by selling its bonds in freely available to the Bank. But the total made the world's capital markets. The sums available available by other countries has increased, at first from this source have increased continuously since slowly but in the last two years quite rapidly; it made its first bond issue ten and a half years releases have now been made by 34 countries, ago. In 1957 alone. public issues totalled $275 including not only those in the traditional capital million, the largest annual figure yet reached, and exporting regions but also some in Latin America, by the end of the year the total of the Bank's bond Asia and Africa. In the fiscal year to June 1957 issues and other borrowings outstanding had risen the additional amounts made available by such to the equivalent of $1,270 million. The market for releases amounted to the equivalent of $134 mil- the Bank's bonds has expanded across the world. lion, bringing the total released thus far to $1,027 Bank bonds are now available in five currencies- million. 4 The United Kingdom has made a notable con- Suppliers in 57 countries have now received tribution to substantial further progress that has orders under ·Bank loans. The extent to which the been achieved in the last few months in making United Kingdom has won business in this keenly the Bank's capital available for lending. At the competitive field is indicated by the fact that, by Annual Meeting in Washington last September, June 1957, sums spent in the United Kingdom the United Kingdom announced that she would amounted to more than £80 million out of a cumu- release a further £20 million of her 18 per cent. lative total, for which relevant information was subscription for use under specified conditions available, equivalent to £720 million. This has within the Commonwealth countries of the ster- made the United Kingdom, after the United States, ling area. Together with a total of £63·6 million the largest supplier of equipment and services already made available, the new release, which is required by Bank borrowers. But the figures for expected to be used within the next few years, the last fiscal year show the recent headway made frees the whole of the United Kingdom's 18 per by German exporters. Taking 1956-57 alone, Ger- cent. subscription (equivalent to $234 million). man suppliers obtained nearly 19 per cent. of the In addition to seeking ways of expanding the business.compared with 44 per cent.for the United resources available for its own lending and thus States and 11 per cent. for the United Kingdom. increasing the total flow of capital across frontiers, As a result of the "shopping round" by the Bank is continually looking for ways in which borrowers through international bidding, the it can encourage capital to flow abroad at its own typical Bank project depends on a wide array of risk. Such flow takes place, of course, whenever suppliers rather than on those of a single country. the Bank sells parts of its loans to other investors In the case of the Kariba Gorge project in without its guarantee. The total of these sales is Rhodesia, the consulting engineers are a group of now running at more than $50 million a year. In one British and two French firms. The main con- recent years the Bank has also found that, in some struction contract was awarded on the basis of situations, a Bank loan can pave the way for competitive bidding to an Italian group, most of borrowing in a foreign capital market by a mem- the electrical equipment came from British sup- ber country. Instances of lending that served this pliers, while other supplies are being provided purpose in 1957 are the railway loan in South from Italy, France, Germany and the United Africa and the loan for Air India International; in States. Orders for the expansion of the Tata Steel both cases a credit was raised from commercial plant in India are being placed mainly with Ameri- banks in New York simultaneously with the can, German, British and Japanese suppliers, with Bank's loan. smaller amounts being spent in other countries. The natural gas pipeline from Sui to Karachi was Putting Loan Proceeds to Work built under supervision of the Burmah Oil Com- The supplies required under Bank loans, like pany using mainly British equipment but with con- the funds with which they are sustained, are drawn tractor services provided by an American concern. from many countries. The Bank is precluded by its Articles of Agreement from "tying" the use of Advisory Services loan proceeds to individual member countries. In It has been the Bank's experience that countries matters of procurement its main concern is that in the process of economic development usually borrowers should receive good value for their require much more than the provision of capital. money. This result can usually be best achieved if The outcome of investment enterprises is deeply the borrower calls for international bids and coloured by the technical, social and political thereby takes maximum advantage of competi- background against which they are carried out, tion between suppliers. The Bank therefore asks and it is now generally recognized that improve- the borrowers to adopt this procedure in all cases ments in this field, and in the detailed arrange- where special factors, such as a desire to stan- ments for a project, can play a vital part in dardize equipment or to take advantage of other ensuring success. For this reason, whenever the local circumstances, do not make it unsuitable. Bank makes a loan it stands ready to provide Apart from this general stipulation, the Bank guidance to the borrower on the best way of carry- leaves to the discretion of its borrowers all ques- ing the project to fulfilment. But it goes farther in tions concerning the placing of orders. that it also offers to provide member countries with advisory assistance, in fields in which it is The International Finance Corporation qualified to do so, even where no lending operation At quite an early stage in the Bank's history it is at stake. became clear that there were certain types of useful Much of this advisory work-for which the project that fell somewhat outside its own sphere Bank now budgets more than $500,000 annually of activity and might better be handled by a new -has been concerned with answering calls to help institution. In particular, the Bank's ability to governments in solving development problems in finance young or comparatively small-scale ven- particular sectors. Thus it has collaborated in set- tures in industry was reduced by the fact that all ting up an Institute of Scientific and Industrial Bank loans ·must receive a guarantee from the Research to serve both government ventures and government of the country in which they are made private industry in Ceylon, and has made available and· that they are all made at fixed interest rates. one of its senior staff members to serve as the first To help in filling this gap, the International Director. It has given a staff member leave of Finance Corporation, an affiliate of the Bank, was absence to act as chief of a Technical Bureau in set up in July 1956. Membership of the Corpora- the Seven-year Plan Organization in Iran, and tion is open to any member government of the another as Economic Adviser to the Development Bank and now numbers 53; subscribed capital Board in Iraq. It is collaborating with the Italian amounts to $93 million. Government in a study of some of the economic The Corporation, which is an investing rather and technical factors concerning a 150,000-kilo- than a lending institution, has so far made five watt nuclear power station that the Government commitments totalling the equivalent of slightly has decided to build in Southern Italy. less than $6 million but contributing to total invest- A number of member countries have asked the ments of about $34 million. Corporation funds Bank to carry out a general survey of their econo- have been committed for a German-owned mic potentialities and of the broad lines of policy electrical equipment concern operating in Brazil; that they should adopt in order to realize them a copper mining and smelting company owned by more fully. In such cases the Bank gathers together Latin-American and other interests in Chile; ex- a mission, consisting partly of Bank staff members pansion of a lumber business and introduction of and partly of outside experts, to conduct a first- lumber impregnation in Australia; an engineering hand study of the country concerned and to pub- company in Mexico owned by Mexican and lish a report. These reports have been prepared American stockholders; and an aircraft repair on 15 countries, seven of them in the sterling area workshop set up in Mexico City by the Canadian -British Guiana, Ceylon, Iraq, Jamaica, Jordan, affiliate of the Bristol Aeroplane Company. The Malaya and Nigeria. Bristol investment provides a striking illustration A comparatively recent addition to the Bank's of the way in which the Corporation can supply advisory work is the Economic Development Insti- capital in dollars and also in other currencies at tute. The Institute was set up in Washington three this time of acute capital shortage in the United years ago, with financial support from the Ford Kingdom. The Corporation's investment of and Rockefeller Foundations, to provide a staff $520,000 (half in United States dollars and half college to help in raising the standard of govern- in Mexican pesos) helped the parent company to ment economic management in the less developed establish itself in a new dollar market in the face of countries. It pursues this objective through extremely keen competition from other concerns. discussions and lectures on subjects directly con- The operations of the Corporation to date have nected with the problems of economic develop- carried interest at about 7 per cent. They have with ment, and through case studies of Bank-financed one exception also included an option to acquire and other projects. The present six-month course shares in the company, and the right to participate is made up of 22 senior officials, 11 of whom come up to an agreed percentage in profits if these from countries in the sterling area-Burma, exceed a specified figure. Final maturities fall Ghana, Iraq, Malaya, Nigeria, Pakistan, the within a range of 9 to 15 years. Sudan, Trinidad and Uganda. Initiated on an ex- Although it is hoped that the International perimental basis, the Institute has recently been Finance Corporation will play a significant part established as a permanent part of the Bank's in its own field, it is clear that neither it nor the activities. Bank can provide more than a fraction of the 6 many-sided effort required to bring the benefits of improvement of health, sanitation, education and modern production techniques and higher living training services in less developed countries, for standards within reach of the hungry and ill-clad which additional grant funds from abroad could masses that make up two-thirds of the world's be used with marked effect both upon living stan- population. In the last few years, with post-war dards and upon economic strength and borrowing shortages overcome and with increased awareness capacity. Any contribution that the recent pro- of the importance of economic factors in the posals could make to this end would be of great rivalry between East and West, various sugges- value. But the ability of the less developed coun- tions have been put forward for new ways in which tries to service loans repayable in foreign exchange the flow of capital could be encouraged. Last year is limited. Efforts to expand the amount of such the scope of the United States' foreign aid pro- borrowing, whether from new or existing institu- gramme was enlarged by the establishment, with tions, must therefore always be so directed that an initial appropriation of $300 million, of the they will have the effect of strengthening the Development Loan Fund. Within the last few borrower's service capacity. weeks the setting up of a Special Fund, looking toward an increase in the amounts of grant aid Maintaining the Momentum from governments for technical assistance to In view of recent changes in the economic underdeveloped regions, was unanimously recom- climate, energetic action will clearly be required if mended after extensive debate in the United the momentum of economic development, both in Nations. Other proposals have been linked with the overseas sterling area and in other less smaller groupings of countries. These include the developed countries, is to be maintained. Such investment funds set up as part of the arrange- action includes, of course, all measures to increase ments for the European Economic Community, productivity and the rate of investment in borrow- and plans for funds to be provided by members of ing countries. It also includes, so as to open the the proposed European Free Trade Area and by gates to service payments on a larger volume of the four Scandinavian nations. foreign investments, reduction by lending coun- The Bank is, of course, in full sympathy with tries of barriers to imports. Recent steps in the the broad objective of such initiatives. It is alive direction of freer trade in various parts of the to the need, provided that adequate safeguards world-such as the present movement toward a can be furnished against waste of scarce resources, European Free Trade Area-are therefore of to enlist the largest possible reserves of capital for great significance to the Bank in its present aim not the formidable tasks involved. For example, it only to maintain its recent scale of operations but believes that there are many purposes, such as the to increase it substantially. 1 ~~~~~~~~~~~~H~~~~~~~~~M~~~~a~~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ t ~ ~ NATIONAL t ~ ~ ~ ~ PROVINCIAL ~· ~ ~ ~ ~ ~ BANK t i LIMITED E ~ ~ ~ ~ ~ . . . was established in 1833-the ~ ~ ~ ~ first bank to be formed in London for t i ~ the express purpose of providing a E~ ~ banking service throughout the length ~ ~ ~ ~ and breadth of England and Wales t ~ ~ !ii ~ • t ~ ~ ~ ~ ~ EVERY BANKING SERVICE AVAILABLE AT ANY ONE OF 1496 BRANCHES AND I: ~ ~ ~ OFFICES IN ENGLAND AND WALES ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~: Published by National Provincial Bank Ltd., 15 Bishopsgate, E.C.2. Printed by the Sidney Press Ltd., London and Bedford 5775-58: