United States General Accounting Office

GAO Briefing Report to the Chairman,

Committee on the Budget, House of

Representatives

April 1995 MULTILATERAL

DEVELOPMENT BANKS

Financial Condition of the

African Development

Bank

GAO/NSIAD-95-143BR

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-261157 

April 21, 1995

The Honorable John Kasich

Chairman, Committee on the Budget

House of Representatives

Dear Mr. Chairman:

Multilateral development banks occupy an important position in

development assistance strategies. They provide loans at concessional

rates to their lower income borrowing members and extend near

market-rate loans to meet the project financing needs of other member

developing countries. Recently, however, the effectiveness of the aid

channeled through multilateral development banks and the efficiency of

their operations have come into question.1

 In this regard, the financial

condition and policies of the African Development Bank (AFDB) have been

a growing source of concern to the United States.

As you requested, this report, one of a series on multilateral development

banks, provides information on (1) the financial condition of the AFDB and

(2) issues relevant to that condition.

We limit our focus to the operations of the AFDB’s hard-loan window, the

near market-rate lending window for which member countries have

pledged to honor AFDB debts if necessary. (In AFDB’s other window, the

soft-loan window, highly concessional loans are made to poorer African

countries. This window is financed largely by grants from non-regional

members.) On March 24, 1995, we briefed your staff on these issues. This

report summarizes the information provided at that briefing.

Background AFDB has 76 member countries; the 52 African regional members includes

the Bank’s borrowers. The remaining 24, such as the United States, Japan,

Germany, and France are non-regional members. They do not borrow from

the Bank.

To help finance operations, regional and non-regional members provide

the Bank with paid-in capital, generally payable in hard currencies, such as

dollars, marks, or yen. Members also pledge callable capital—essentially a

promissory note—that amounts to much more than the paid-in capital.

1

For example, see: The Quest for Quality. Report of the Task Force on Project Quality, African

Development Bank, April 1994. (Generally known as the Knox report).

Page 1 GAO/NSIAD-95-143BR Multilateral Development Banks
B-261157 

AFDB uses the callable capital as collateral to borrow funds on the world

capital markets. AFDB’s borrowings are then used to make loans to

members, and the members’ repayments are used to help pay off AFDB’s

debts. Because callable capital backs up AFDB debt, all members have a

stake in the Bank’s financial condition. If a call were made, Congress

would have to appropriate the funds because U.S. callable capital has been

authorized but not appropriated. The United States presently has about a 6

percent share ($944 million) of the Bank’s callable capital. Members

periodically negotiate increases in their contributions to the Bank through

capital increases.

Results in Brief AFDB is financially solvent but vulnerable. It has sufficient liquidity (cash

plus short-term investments such as treasury bills) to finance its lending

operations in the near term and adequate funds to meet its operating costs.

Moreover, it has a AAA credit rating; this rating is based primarily on the

expectation of continued support by the non-regional members.

However, AFDB faces several significant problems.

• It has experienced persistent levels of arrears (non-payment of loans)

since 1988, and its policy is not to write off non-performing loans.

• Of 46 borrowing countries, 29 are severely indebted and several are

experiencing political and civil strife.

• Nearly one-third of AFDB’s outstanding loan portfolio ($3 billion of

$9.7 billion)is held by countries not sufficiently creditworthy for hard

loans from the World Bank.

These conditions reflect the poor economic performance of the Bank’s

borrowers. But two other factors within the Bank’s control further

contribute to its vulnerability. First, AFDB’s existing credit policy considers

regional members eligible for loans without due regard for their

creditworthiness. Second, the Bank’s non-regional members provide the

financial strength of the Bank, but have limited influence over policy

decisions. This is exemplified by the impasse over the current credit

policy, which has led to a suspension of negotiations over further

financing for the Bank. This situation continues as of this report.

To improve its financial situation, AFDB recently limited new lending and

borrowing, strengthened arrears polices, and increased reserves. In early

1995, the Board of Directors also approved an internal management

reform plan, which shifts operations to a country lending focus, cuts

Page 2 GAO/NSIAD-95-143BR Multilateral Development Banks
B-261157 

senior staff, and consolidates offices.2 These are steps in the right

direction. However, if the current trend in member’s economic

performance continues and arrears are not controlled, steps beyond

management reforms may be necessary to ensure the long-run financial

viability of the Bank.

Scope and

Methodology

In conducting our review, we had the full cooperation and assistance of

the AFDB, the Department of the Treasury, and the U.S. Executive Director.

The Executive Directors representing member countries are responsible

for the conduct of the general operations of the Bank.

To determine the financial status of AFDB, we obtained and analyzed AFDB’s

financial statements for the years 1988 through 1994. This time period was

chosen because it followed the last general capital increase in 1987. As

part of our analysis, we examined the Bank’s balance sheet, income and

expenditures, and the cash flow statements. We also reviewed the Bank’s

policies and data on lending and borrowing operations, arrears and

reserves, country exposure, and members’ capital subscriptions. To

analyze AFDB’s portfolio risk exposure, we used the September 1993

criteria for eligibility to borrow near market-rate and concessional loans

from the World Bank and also examined country debt in terms of the

World Bank’s definitions of per capita income and severity of country

debt. Appendix I provides some of the key tables we developed in

conducting our analysis.

To review AFDB’s financial and management reforms, we examined Bank

plans, documents, and files on Bank efforts to date. We also discussed

AFDB’s policies and management with AFDB officials in Abidjan, Cote

d’Ivoire, and with AFDB’s Executive Directors from the United States and

other countries. We also interviewed and obtained reports on AFDB from

officials responsible for overseeing U.S. interests in the AFDB from the

Departments of Treasury and State and the U.S. Agency for International

Development.

We obtained comments on a draft of this report from the Department of

Treasury, the U.S. Executive Director, and the AFDB and revised the report

as appropriate. Our review was conducted between November 1994 and

March 1995 according to generally accepted government auditing

standards.

2

Management reforms were undertaken in response to growing concerns about the effectiveness of the

operations, management, and policies of AFDB. The Knox report provided a review of many of these

concerns.

Page 3 GAO/NSIAD-95-143BR Multilateral Development Banks
B-261157 

We are sending copies of this report to other appropriate congressional

committees; the Secretaries of Treasury and State; the Administrator, U.S.

Agency for International Development; the Director, Office of Management

and Budget; and the U.S. Executive Director, AFDB. Copies will also be

made available to others upon request.

If you or your staff have any questions about this report, please call me on

512-4128. Major contributors to this report are listed in appendix II.

Sincerely yours,

Joseph E. Kelley

Director-in-Charge

International Affairs Issues

Page 4 GAO/NSIAD-95-143BR Multilateral Development Banks
Page 5 GAO/NSIAD-95-143BR Multilateral Development Banks
Contents

Letter 1

Briefing Section I 

Financial Condition of

AFDB

8

Key Findings 8

Background 10

AFDB Is Solvent, but Vulnerable 11

AFDB Borrowing 13

Dollar Amount of Portfolio in Higher Risk Countries 15

Non-Performing Loans Increase 17

Arrears and Recoveries 19

Donor Aid, Beyond Paid-in Capital, Helps Finance AFDB 21

AFDB Financial and Management Reforms 23

Non-Regional Members’ Influence Is Limited 25

Stalemate in Credit Policy Illustrates Decision-Making Impasse 27

U.S. Policy 29

Appendix I 

Tables on AFDB

Financial Status

32

Appendix II 

Major Contributors to

This Report

38

Abbreviations

AFDB African Development Bank

IBRD International Bank for Reconstruction and Development

IDA International Development Association

USAID U.S. Agency for International Development

Page 6 GAO/NSIAD-95-143BR Multilateral Development Banks
Page 7 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

GAO Key Findings

AFDB is solvent, but vulnerable.

Donor aid, beyond paid-in capital, helps 

borrowers repay AFDB.

AFDB is taking steps to address financial 

weaknesses.

Borrower control of decision-making is a 

key issue of AFDB's current condition.

Page 8 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

Page 9 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

GAO Background 

Members provide paid-in and callable 

capital.

Regional members--African countries-- 

provide 65 percent of capital; 

non-regionals provide 35 percent.

U.S. has 6-percent share of Bank's 

capital (largest among non-regionals).

Page 10 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

AFDB has $22.2 billion in subscribed capital, composed of $2.7 billion or 12

percent paid-in capital, and $19.5 billion or 88 percent callable capital.

Callable capital is like a promissory note which can be called upon by the

Bank as a last resort to repay its creditors.

The 52 regional members have the controlling share of the Bank’s capital.

They hold about $14.4 billion of the total subscribed capital (65 percent),

including $12.7 billion callable capital and over $1.7 billion of paid-in

capital. The 24 non-regional countries account for nearly $7.8 billion of

subscribed capital (35 percent), including $6.8 billion callable capital and

$1 billion paid-in capital.

The United States holds about 6 percent of the Bank’s capital, the largest

share among non-regional members, including $135 million in paid-in

capital and $944 million in callable capital.1

 If AFDB made a call to repay

creditors, Congress would still have to appropriate the U.S. share because

U.S. callable capital has been authorized, but not appropriated.

1

These are the subscribed capital amounts approved by Congress and are the limits of U.S. obligations.

Amounts recorded in AFDB financial statements based on year-end currency conversion rates would

be $163 million for paid-in capital and $1.1 billion for callable capital.

Page 11 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

GAO AFDB Is Solvent, but Vulnerable

Bank is able to meet requirements with 

existing funds for the near term. 

Most hard-loan borrowers are severely 

indebted.

Bank is experiencing a mounting arrears 

problem.

Decline in net income causes Bank to fall 

below key ratio targets.

Page 12 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

The AFDB is a solvent institution with assets of about $13 billion, including

some $9.7 billion in outstanding loans, about $1.1 billion in net reserves,

and $2.3 billion in net paid-in capital. As such the Bank can meet its

near-term operating and financial costs including disbursements on

approved loans. The Bank has lowered its liquidity requirements in recent

years in order to reduce its borrowing requirements. Growth in borrowing

and lending has exceeded the Bank’s growth in equity and the risk to

member countries and creditors has increased commensurately. This is to

be expected since AFDB’s last capital increase was in 1987.

The economic performance of the Bank’s clientele is at the heart of its

vulnerability. In 1994, 29 of AFDB’s 46 borrowing members were classified

by the World Bank as severely indebted and 31 were classified as low

income.

Although the proportion has decreased, the amount of loans held by

higher risk countries stood at about $3 billion at the end of 1994—about

one-third of the Bank’s $9.7 billion outstanding loan portfolio. The gross

level of income lost to arrears has also increased from about $32 million in

1990 to about $110 million in 1994.

In 1994 the AFDB was below two key financial ratio targets watched closely

by the international rating agencies. First, the level of reserves to

outstanding loans fell below the 15 percent target set by the Bank. This is a

key indicator of the Bank’s ability to meet loan defaults. Second, AFDB has

fallen below its interest coverage ratio target of 1.25 (net income plus

financial charges as a proportion of financial charges alone). This ratio is

an indicator of the Bank’s ability to service its debt. Rating agencies,

however, are aware of these shortfalls and have retained the Bank’s AAA

rating mainly because of the expectation of continued strong member

support primaily in the form of a general capital increase for the Bank by

1997.

Page 13 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

GAO AFDB Borrowing 

Borrowings against callable capital 

provide funds for AFDB loans.

Non-regionals' callable capital is the key 

to borrowing at preferred rates.

Bank is within borrowing ceilings.

Debt at 46% of all callable capital 

At 95% of highly rated callable capital

Capital increase is expected in order to 

fund future operations.

Page 14 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

Callable capital—pledges by member countries to honor AFDB’s debts if

necessary—allows AFDB to borrow from the world capital markets.

According to credit rating agencies, however, it is primarily the continued

commitment of the non-regional members as well as their callable capital

that gives AFDB its AAA credit rating. This credit rating allows the Bank to

borrow from the world capital markets at preferred rates, and

subsequently to lend to AFDB borrowing members at near-market rates.

Many of the Bank’s borrowers would otherwise have to borrow at much

higher rates, if at all. Leveraging high quality callable capital into loans to

poorer borrowers at affordable rates is a fundamental role of the

multilateral development banks.

Although AFDB’s borrowings outstanding ($8.9 billion as of the end of

1994) are still within its policy limits, the level has doubled in relation to

member’s callable capital since 1988, demonstrating the increased

exposure of its member countries. Partly, this is because the Bank’s last

capital increase was in 1987. AFDB officials expect another capital increase

by 1997 in order to continue the Bank’s borrowing and lending operations.

At the end of 1990, AFDB’s outstanding borrowings were 23 percent of the

total callable capital of regional and non-regional members. At the end of

1994, outstanding borrowings were at about 46 percent of this level. A

more widely watched measure is the Bank’s outstanding borrowings as a

percent of the callable capital of the most highly rated member

countries—essentially the non-regionals—plus the AFDB’s hard currency

paid-in capital and reserves. By the end of 1994, AFDB’s outstanding

borrowings had reached a level of about 95 percent of this total.

Page 15 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

GAO Dollar Amount of Portfolio in Higher

Risk Countries 

1984 1989 1994

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Millions of dollars

a

aNot eligible for World Bank hard loans.

Page 16 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

Since 1984, the dollar amount of loans to countries rated in

September 1993 by the World Bank as ineligible for hard loans has

increased, although their proportion has fallen.2

 In 1984, $490 million of

outstanding loans were accounted for by such countries. At the end of

1994, about $3 billion of outstanding loans were held by such higher risk

countries. An additional $4.5 billion of the portfolio was held by other

members rated by the World Bank as highly indebted. Thus, members

rated as either higher risk or severely indebted held $7.5 billion of the

outstanding loans—over 75 percent of AFDB’s portfolio. In response to the

overall riskiness of the loan portfolio, AFDB began to more closely monitor

country exposure in late 1992. According to AFDB documents, this was

deemed necessary due to the expanding list of the Bank’s borrowing

member countries experiencing difficulties in servicing their debts.

During 1994 almost all new loans were made to a relatively small number

of lower risk, more creditworthy countries. However, by the end of 1994

one of the countries (Nigeria) accounting for 22 percent of the loans made

during 1994 was removed from the list of countries eligible to borrow hard

loans from the World Bank. This highlights the vulnerability of AFDB’s

portfolio.

2

We used the World Bank’s criteria for lending to countries, as of September 1993. We termed

countries eligible to borrow from the “soft loan” or concessional rate window as higher risk and

countries eligible to borrow from the near-market rate loan window as lower risk. Because eligibility

for these loans changes over time, our analysis is not a direct measure of the risks taken by AFDB

when the loans were actually approved.

Page 17 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

GAO Non-Performing Loans Increase

1988 1989 1990 1991 1992 1993 1994

0

200

400

600

800

1,000

Millions of dollars

Note: Amounts above refer to the principal (face value) of non-performing loans. Loans were

placed in non-performing (non-accrual) status when they were 12 months overdue until July 1994,

when the period was shortened to 6 months.

Page 18 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

Non-performing loans have been the cause of the Bank’s more serious

financial problems in recent years. The principal amount of such loans

(loans in arrears for a specific period of time) has ranged from a low of

about $105 million in 1989 (3.1 percent of loans outstanding) to a high of

over $950 million in 1993 (11.4 percent). At the end of 1994, the principal

of non-performing loans declined to $835 million (8.6 percent of loans

outstanding).

According to an analysis by the Bank, the problem of serious arrears and

non-performing loans is due to (1) already highly indebted countries

failing to adopt appropriate policies to foster economic growth and

(2) political and civil strife in some countries. This results in an

accumulation of arrears over time. For countries enduring conflict, civil

and political strife, the concern is that even if they were to return to peace

and political and economic stability, some of them would probably not

have the necessary resources to pay off their arrears.

Page 19 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

GAO Arrears and Recoveries

1988 1989 1990 1991 1992 1993 1994

0

40

80

120

160

Millions of dollars

Net Income

Arrears Recoveries 

Page 20 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

Although income from loans has grown, a general pattern of increased

arrears, particularly between 1988 and 1993, has adversely affected the

Bank. The decline in net arrears (the difference between arrears and

recoveries) in 1994 was almost totally financed by the Bank’s reallocation

of undisbursed funds from prior year loans. AFDB and Congo agreed to

clear its arrears by reallocating funds from eight previously approved but

non-performing loans. The Bank and Cameroon similarly agreed to

reallocate funds for the same purpose. The result of these transactions

was to clear the $101.4 million in arrears of Congo and Cameroon, restore

the eligibility of these countries to borrow from the Bank, and to increase

the total amount of their loans in good standing with AFDB to $554 million.

However, this is, at best, only a temporary solution if these countries are

not creditworthy.

At the end of 1993 there were 27 countries in arrears but about 83 percent

of those arrears ($550 million) were accounted for by only 5 countries. By

the end of 1994, 22 countries were in arrears but only three countries

accounted for about 87 percent of total arrears ($552 million). According

to Bank officials, some countries experienced arrears due to temporary

cash flow problems or technical transaction delays. However, there are

about ten countries, many experiencing serious civil strife, accounting for

the most serious and long overdue arrears, including Angola, Liberia,

Somalia, Sudan, Zaire, and others.

Bank efforts to restructure non-performing loans are consistent with

efforts to improve overall Bank operations. However, as the Bank has

noted, recent initiatives to restructure the lending portfolio, such as for

Congo and Cameroon, provide only a temporary and partial solution to the

arrears problem.

Page 21 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

GAO

AFDB lending entails additional costs to 

donors.

Direct donor aid helps borrowers

 pay arrears.

International aid and bilateral debt 

rescheduling facilitates borrower 

repayments. 

Donor Aid, Beyond Paid-in Capital, 

Helps Finance AFDB

Page 22 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

AFDB operates in a risky environment which includes numerous highly

indebted low-income countries. Some of the associated costs of AFDB

lending are paid for by donor assistance to the Banks’ borrowers. In some

instances, bilateral donors and other international financial institutions

provide aid to AFDB’s borrowers to help pay arrears. According to two

Executive Directors, their governments paid the arrears of several

countries as part of bilateral aid packages. According to an AFDB

document, donor contributions were used to eliminate or reduce the

arrears of Central African Republic, Niger, Uganda, and Sao Tome. The

restructuring of the Congo portfolio, and the clearing of its arrears, was

part of a $2.4 billion dollar recovery package, that included financing by

the International Monetary Fund, the World Bank, the European Union,

and international rescheduling of loans.

Page 23 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

GAO AFDB Financial and 

Management Reforms

Reduction in lending and borrowing

Increases in reserves

Stricter arrears policies

Reduced liquidity but can cover 

near-term needs

Restructuring proposals to 

shift to country focused operations

reduce top heavy management

Page 24 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

In 1993 and 1994, AFDB implemented a number of management and

financial reforms. These are steps in the right direction, but their full

implementation and impact are yet to be realized. For example, the

Executive Directors agreed to reduce 1995 lending to AFDB members to

$1.2 billion and AFDB net borrowings from capital markets to $526 million.

The Bank also tripled its reserves, including loan loss provisions, from

about $300 million to about $1.1 billion at the end of 1994. However, the

Bank still fell below its target of 15 percent of reserves to outstanding

loans.

The Bank has also taken steps to deal with its arrears. Non-accrual status

now starts at 6 months after the due date instead of 12. Billings are more

frequent and penalties have been strengthened. It has also initiated having

other international financial institutions, such as the World Bank, include

penalties under their loans when borrowers are in arrears to the AFDB.

From 1988 through 1992 the Bank’s liquidity—cash and short-term

investments such as Treasury bills—available at the end of the year grew

from $1.7 billion to $2.7 billion. By the end of 1994 liquidity had declined to

$2.2 billion, partly because of a decision to retire some AFDB debt ahead of

schedule (see appendix I, cash flow analysis). To further reduce future

borrowing, AFDB lowered the liquidity ratio from 2 to 1.5 times the

following year’s anticipated loan disbursements, which were about

$927 million in 1994. The planned draw down in liquidity was initiated in

1993 because of the Bank’s worsening financial situation and the need to

limit further borrowing and lending.

In early 1995, AFDB’s Executive Board approved a set of management

reforms to (1) shift to a comprehensive country focused operating

structure, (2) reduce top heavy management by eliminating senior

management positions, and (3) consolidate staff and offices. AFDB is also

taking steps to improve oversight and monitoring of its activities. The

Bank states that it has improved performance monitoring by implementing

a program of country-level portfolio reviews and increasing compliance

with project completion reporting.

Page 25 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

GAO Non-Regional Members' Influence 

Is Limited

Regional members, the Bank's 

borrowers, have the most influence over 

policies, procedures and operations.

Non-regional members are the financial 

strength behind the Bank.

Non-regionals are outvoted.

Page 26 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

Regional members retain two-thirds share of the capital subscriptions and

voting shares, which gives them control over Bank policies and lending

operations. While this approach was established to ensure the Bank

remained an African institution after non-regional members were admitted

beginning in 1982, it limits the influence of non-regional members who are

the principal financial strength behind the Bank. Rating agencies

emphasize the continued commitment and support of the non-regional

members in giving AFDB its AAA credit rating. The world capital markets

also look primarily to the non-regionals to back up the Bank’s borrowings.

This is demonstrated by the Bank’s maintenance of its borrowings within

the total callable capital of higher rated non-regional members, plus

paid-in capital in convertible currencies, and reserves.

Non-regional members, however, hold only about one-third of the voting

shares. Because of this minority share, non-regionals cannot prevent loan

approvals they consider economically unsound. Since 1992, the United

States has attempted unsuccessfully to block 11 loans, worth $953 million,

based on economic and financial concerns. The United States as well as

other non-regional members expressed concern over the need for clear

and unambiguous criteria for determining country eligibility to borrow

hard loans from the Bank and the need to address related governance

issues within that institution.

Page 27 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

GAO Stalemate in Credit Policy Illustrates 

Decision-Making Impasse

Regional and Non-regional Bank 

Governors agree to new lending 

guidelines (Oct. 94).

Regional executive directors contravene 

agreement by passing liberal policy 

unanimously opposed by Non-regional 

Directors (Nov. 94).

Non-regional members respond by 

withholding replenishment (continuing at 

Apr. 95).

Page 28 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

The current dispute over the Bank’s lending policy offers a telling

illustration of how the imbalance between risk and voting power plays out

in the Bank’s decision-making process. In October 1994, in Madrid, Spain,

the United States and other donors achieved an accord with regional

members to curtail near-market rate lending to less creditworthy

countries. In November 1994, however, the Bank’s Board of Executive

Directors passed a resolution concerning a credit policy that was not only

more liberal than the one agreed to by the Governors, but that was also

unacceptable to every non-regional executive director. The non-regional

executive directors shared the U.S. position that the more liberal policy

would allow less creditworthy countries to borrow from the Bank’s hard

window, thus weakening the financial viability of the Bank. This position

was taken despite the reduced, but still continuing, lending to such

borrowers in recent years. The dispute between regional and non-regional

executive directors had not been resolved as of mid-April, 1995.

The continuing stalemate over the credit policy has serious implications

for the Bank. The United States and the other non-regional shareholders

responded by conditioning the replenishment of the African Development

Fund, the Bank’s soft loan window, (currently under negotiation) on

adoption of a credit policy consistent with the October 1994 accord

reached in Madrid. Representatives of non-regional shareholders have also

stated that future discussions concerning the Bank’s capital adequacy can

not be started until conditions improve.

Page 29 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

GAO U.S. Policy 

Bank's weaknesses must be addressed 

before U.S. participates in negotiations 

for a general capital increase.

Page 30 GAO/NSIAD-95-143BR Multilateral Development Banks
Briefing Section I 

Financial Condition of AFDB

According to Treasury Department officials and correspondence the U.S.

position is that there must be a satisfactory resolution of the credit policy

issue that faithfully reflects the Madrid understanding before concluding

negotiations on the replenishment of the African Development Fund.

Further, the United States will not participate in future general capital

increase negotiations in the absence of fundamental reforms in the Bank’s

operations and governance.

Page 31 GAO/NSIAD-95-143BR Multilateral Development Banks
Appendix I 

Tables on AFDB Financial Status

Page 32 GAO/NSIAD-95-143BR Multilateral Development Banks
Appendix I 

Tables on AFDB Financial Status

Page 33 GAO/NSIAD-95-143BR Multilateral Development Banks
Appendix I 

Tables on AFDB Financial Status

Page 34 GAO/NSIAD-95-143BR Multilateral Development Banks
Appendix I 

Tables on AFDB Financial Status

Page 35 GAO/NSIAD-95-143BR Multilateral Development Banks
Appendix I 

Tables on AFDB Financial Status

Page 36 GAO/NSIAD-95-143BR Multilateral Development Banks
Appendix I 

Tables on AFDB Financial Status

Page 37 GAO/NSIAD-95-143BR Multilateral Development Banks
Appendix II 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Donna J. Byers

Mae F. Jones

Bruce L. Kutnick

Julio A. Luna

Tetsuo Miyabara

Joseph F. Murray

Berel Spivack

Celia J. Thomas

Douglas P. Toxopeus

Accounting and

Information

Management Division,

Washington, D.C.

Roger R. Stoltz

(711091) Page 38 GAO/NSIAD-95-143BR Multilateral Development Banks
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