Inside the IFC's Portfolio: The IFC Responds

IFC Spokesman Frederick Jones has replied to our blog (and paper) on the IFC’s risk appetite. Here it is in full:

We would like to take this opportunity to respond to the Center for Global Development’s recent analysis of IFC’s work, which looked at our investment in the poorest countries.

Among international financial institutions, IFC is by far the largest investor in fragile and conflict-affected countries and IDA countries, which are the world’s poorest. Including funds mobilized from others, IFC’s commitments in IDA countries have grown nearly fivefold since 2005, totaling $4.6 billion last year—nearly a quarter of our total annual commitments. In fragile and conflict-affected areas, our commitments grew to $886 million in 2017 from $638 million in 2014. Over the past 10 years, IFC has invested roughly $7 billion in FCS, and today, one out of every three dollars that major international finance institutions invest in FCS countries comes from IFC.

We fully agree with the objective to increase IFC’s investments in the poorest countries. With our new Creating Markets strategy, which will address inherent obstacles to private investment in the most challenging markets, our goal is to have one-third of our projects in the low-income IDA countries, and for fragile and conflict-affected countries to represent at least 6 percent of our investment portfolio by 2020, up from 0.2 percent a decade earlier. That is a far higher level of ambition than a simple comparison over time would suggest—today there are 31 low-income countries (LICs), mostly small, whereas in 2003, which serves as reference year for much of the CGD trend analysis, there were 66 LICs, including very large countries such as India, Indonesia, Nigeria, and Pakistan.

While the shift towards the poorest countries is IFC’s key strategic priority, it is important to note that two-thirds of the world’s poor live in middle-income countries. Investment in these countries is critical to reaching the Sustainable Development Goals and fighting key challenges, such as climate change. IFC projects in middle-income countries do not simply replicate what the market does anyway. They innovate, push boundaries and take risks in ways that the private sector alone would struggle to do. 

Many factors can determine the risk of individual projects—sector-specific factors, the strength of sponsors, the financing instrument, product cycle, market developments, currency, governance and policy risks. The country composition of IFC’s portfolio, which is the focus of CGD’s analysis, does not in itself reflect IFC’s risk profile, nor our willingness to take risks. CGD concludes that IFC is not taking enough risks by looking at geographic trends. That approach incorrectly conflates country composition and portfolio risk. The majority of IFC’s projects have a risk profile below investment grade—consistent with IFC’s mandate and strategy in emerging markets.

We’re proud of what we’ve accomplished over 61 years. More than any other international finance institution, we’ve invested in private sector development in the poorest countries and those affected by conflict. It’s true that we need to do much more. And we will. 

First off, thanks to Fred and the IFC for replying. The Corporation has a unique role to play in global development finance and we’re keen for that role to grow, so we’re happy that the report has generated so much conversation about IFC’s portfolio, both within and outside IFC. And second, we commend IFC for its plans to do more in poor countries and those that are classified as fragile states—it is where the Corporation can have the most impact and where it is most needed.

Third, we agree that the IFC has an important place in middle income countries, but we would argue for a greater focus on the countries that are home to two-thirds of the world’s poor—lower-middle income countries. We are disappointed to see (as reported in Figure 8 in our paper) a declining share of IFC investments as a percentage of recipient country GDP in both low-income and lower-middle Income countries. That is matched by data suggesting a declining share of total IFC commitments going to those countries compared to others: in 2006, $4.2 billion out of $6.9 billion of IFC commitments (three fifths) went to low and lower-middle income countries, in 2016 $2.6 billion out of $7.4 billion of IFC commitments (a little more than one third) went to low and lower-middle income countries (Figure 7 in our paper). Meanwhile, we estimate Turkey, China and Brazil between them, all upper middle income, received just shy of $10 billion in IFC investment between 2013 and 2016 alone.

Finally, we’re sure that IFC projects in middle-income countries do not replicate what the market does anyway and (so) that the country composition of IFC’s portfolio, which is the focus of our analysis, does not fully reflect IFC’s risk profile. We focused on country risk because that was what we could look at by collating and analyzing the information currently available on IFC’s website. But if overall IFC risk has stayed the same while country risk has declined, it does imply the Corporation has decided to take on projects in countries like China and Turkey that are risky compared to most investments in those upper-middle income countries rather than projects in low and lower-middle income countries that are comparatively safe compared to most investments in poorer countries—and we wonder about the tradeoff in terms of meeting development objectives.

And that discussion brings us back to our key point about transparency: the IFC now publishes the data we scraped in a more usable format, which is a great first step. And we would be very pleased to carry out a separate and more detailed analysis of IFC’s portfolio risk if the right data were publicly available. For an institution that relies on public funding (and is now involved in disbursing aid), the lack of user-friendly public data on its activities is a growing issue. But the good news is we think the IFC has the capacity—and perhaps even the willingness—to fix the problem.