World Bank President A. W. Clausen has informed the bank's board of directors that he is postponing an earlier plan to expand its lending potential because of a sharp and unexpected drop in Third World loan demand, bank sources said yesterday.
Clausen, whose efforts to expand the bank's lending ability have been opposed by the Reagan administration, told the board that the institution's loan commitments in fiscal year 1985 will fall about $2 billion below projections. The projections were made last fall at the annual joint meeting of the bank and the International Monetary Fund.
The bank's loan commitments this year of approximately $11 billion also will fall about $1 billion under the actual total for the year before. This is the first time since 1967 that there has been a reversal in the bank's year-to-year growth in regular lending activity.
Bank sources said that in response to a suggestion from board members disappointed with Clausen's plan, the bank staff is preparing a paper for the February board meeting explaining in detail the reasons for the unexpected loan surplus.
Clausen reportedly plans to put off any suggestion for a capital increase at least until the annual joint meeting with the IMF in Seoul in October. His original scenario called for launching the project in April at a joint meeting here of the policy-making IMF Interim Committee, and the IMF/World Bank Development Committee.
Sources said that the still-confidential document cites several reasons for the slippage in the loan total, notably the inability of some countries to meet the bank's tests for creditworthiness; and a retrenchment by others anxious to learn a lesson from Third World nations that are now mired in debt after borrowing too much money.
"Some of these countries are simply cutting back their own plans for development and economic expansion," a World Bank official said. He also suggested that with slippage in international interest rates, a few countries that ordinarily would have turned to the World Bank "found they could get money elsewhere without the usual World Bank hassle."
Bank sources said that Clausen would have found it awkward to propose a capital increase at a time when loan demand is falling off sharply. Originally, the rationale for a capital increase was that it was urgently needed to sustain an annual 5 percent to 10 percent annual increase in bank lending.
For the bank management, which has steadily battled for more resources, the declining loan commitment figures are politically embarrassing. The U.S. government has questioned the need for a capital increase all along.
In effect, Clausen now has been forced to admit that the existing $60 billion capitalization can sustain the present level of loans -- and something more -- for a longer period.
Just how long the World Bank can get along without a capital increase is a matter of debate within the bank. One source said that the existing $60 billion capital base -- loans outstanding are about $40 billion -- "can sustain annual commitments of $12 billion to $13 billion in perpetuity." The rule is that outstanding loans may not exceed the bank's capital. With money earned by the bank's investments -- profits are at a record -- and repayment of old loans, a $12 billion to $13 billion lending level can be maintained without a new infusion of capital, this source said.
Another high official, however, said the bank's commitments for fiscal 1986 will move up again, and that to get past the $13 billion level, a capital increase certainly will be needed.
Bank officials had not settled on a precise figure for the desired capital increase, but $20 billion or more had been discussed. Only a tiny portion of such a capital increase would have to be paid in by member governments: The rest would stand as a callable obligation, but would nonetheless enable the World Bank to expand its loans.
Clausen reported to the board at the end of December that loan commitments that had been projected at $12.6 billion to $13.3 billion for the fiscal year ending June 30, 1985, would more likely be in the $10.5 billion to $11.5 billion range.
The bank's commitments in the prior fiscal year had dipped to $11.95 billion, compared with an earlier projection of $12 billion to $12.6 billion. Thus, World Bank loans this year will be down as much as $1 billion from fiscal 1984.
These figures relate only to the regular lending operations of the International Bank for Reconstruction and Development, and not to the subsidized loan program through the affiliated International Development Agency.
At the February board meeting, it is expected that directors representing many borrowing nations will urge the management to relax the conditions that the bank now sets for making loans. This is likely to trigger an intense discussion: Not only are the United States and other major lenders insistent on maintaining present strict rules, but also the bank management itself is hanging tough on this issue.
According to sources at the bank, when the unexpected dip in loan commitments was first reported to the board, Senior Vice President Ernest Stern said, in effect, "we are not going to give away the money."
On the other side of the argument, there is a strong feeling that it is highly important for the international lending agencies such as the IMF and World Bank to increase their loans because commercial bank funds are drying up in some parts of the world.