The GCI Q&A
What is a GCI?
A General Capital Increase (GCI) is a periodical increase in the ordinary capital base of a multilateral development institution. The African Development Bank (ADB) has already benefited from General Capital Increases; its 4th increase, or GCI IV, was in 1987 while its 5th increase, GCI V, was in 1998.
What is the difference between an ADF 12 replenishment and a GCI VI increase?
ADF, the “soft” window of the Bank Group, provides concessional lending to African Low Income Countries (LICs) and is replenished by donor countries every three years. ADF loans are repayable over a 40 year period, following a 10 year grace period, and carry minimal service charges. Countries with moderate to high risk of debt distress are eligible for ADF grants.
A GCI increases the Bank’s “hard” lending window, know as ADB lending, from which the Group on-lends funds to eligible Regional Member Countries (RMCs). In essence, the Bank Group taps international capital markets and raises development and project finance competitively, providing financing to RMCs that might not reach the continent otherwise. The Bank can obtain such rates because of its prudential capital adequacy ratio, a factor that accounts for its AAA rating. As lending increases, so to must the Bank Group’s resources. A GCI increases the Bank’s ordinary capital, which helps it sustain the prudential limits which allow it to obtain preferential rates.
Why does the Bank Group need a GCI now?
Africa was badly hit by the Financial Crisis, which threatened to set back the progress of improved economic growth that the last decade witnessed. When member countries came to the Bank for support in the midst of the Financial Crisis, the Bank stepped up to the plate – it frontloaded commitments, restructured portfolios to release additional resources, and quickened its operational processes. In addressing a demand that did not trickle but surged in, the Bank utilized its resources much more quickly than envisioned, making a GCI necessary in 2011, two years earlier than anticipated by the Bank’s Medium Term Strategy.
This has happened at a moment where Africa faces significant hurdles, such as financing gaps in excess of US$ 117 billion in 2009 and US$ 130 billion in 2010 just to meet the Millennium Development Goals. Looking ahead significant long-term challenges remain – like climate change and energy generation. The financial crisis has already added to the increasing burden in Africa of coping with climate change, which is estimated to reach at least US$10 billion – and more likely US$30 billion – every year by 2030.
What does the GCI mean for Middle Income Countries?
Due to their close integration into the world economy, Middle Income Countries (MICs) were the first to be hit by the crisis through financial markets and exports. MICs face decreasing levels of foreign investment and difficulties in accessing foreign capital. As a result, their path to recovery has been slow. A GCI will therefore be crucial in supporting MICs’ counter cyclical programs and generating resources for significant public sector investment in areas such as infrastructure, transport, and energy.
A strong GCI will enable the ADB to foment Private Sector Development in MICs and meet growing demand at a time of reduced risk appetite. In Morocco, the Bank has promoted financial sector reforms, strengthening the micro-credit sector and improving access to finance for women, who comprise 66% of micro-credit beneficiaries.
A strong GCI will also allow the Bank to continue supporting poverty reduction efforts in MICs, which are home to 40% of Africa’s poor. ADB projects in MICs have had tangible impact on the poor. In Mauritius a single Bank project improved sewage capacity for more than 20% of the population and reduced waterborne diseases by 50%. In Egypt, the Bank helped to provide credit in agricultural development for roughly 12,000 men and women in rural areas.
What do African countries think about GCI?
At the Bank’s Regional Member GCI Consultation meeting in Tunis, held on February 12, 2010, African countries expressed unanimous support for a 200% GCI increase – and the need for collective solidarity to make such an increase possible.
What is the target GCI?
For GCI VI, the ADB Group seeks a 200% increase with a 6% portion to be paid by shareholders, a target that has been fully endorsed by African Governors in the Tunis Consultations meetings. As the contribution will be made over an 8 to 12 year spread, it will provide affordability to shareholders.
What are the next steps?
Following the February Regional and Non Regional Consultation meetings in Tunis and Cape Town, respectively, forthcoming steps in the GCI process include a Civil Society Consultation Meeting in Tunis, March 1, 2010 and Governors’ Consultative Committee (GCC) meeting in Washington, D.C. on April 22. The Governors expect to reach a final decision on the GCI increase by the Bank’s annual meeting in Abidjan, Côte d’Ivoire on May 27 – 28 of this year.
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