By Mario Osava
MEDELLIN, Colombia, Mar 30 2009 (IPS)

The United States’ cautious backing has cleared up doubts about a new increase in the Inter-American Development Bank’s (IDB) capital, which has been called for by the multilateral lending institution’s governors as well as by the countries of Latin America.

But the additional credit will do little to ease the effects of the global crisis, officials say.

The IDB should boost its capital from 100 billion dollars to between 250 and 280 billion dollars, according to the president of the Bank, Colombian economist Luis Alberto Moreno, who based that estimate on a study by an independent committee headed by former Peruvian prime minister Pedro Pablo Kuczynski.

A consensus around the need for a hike in IDB capital is taking shape, but it will require a lengthy process of negotiations to actually bring to fruition, said Moreno.

The 50th meeting of IDB governors approved a resolution for the Bank’s management to “immediately initiate a review of the need for a general capital increase of the ordinary capital and replenishment of the Fund for Special Operations,” and to present, by April this year, alternatives that would help the bank increase funding for “short-term crisis response.”

The presence of U.S. Treasury Secretary Timothy Geithner at the IDB annual assembly in Medellín, Colombia over the weekend, and his address at the opening session on Sunday night, fuelled hopes that the institution will soon have the funds to expand loans to Latin America and the Caribbean, with the aim of compensating for the plunge in international flows of private capital.

“To help address the region’s demand for finance this year and next, we encourage the IDB to expand its existing resources,” said Geithner, after stating that the Bank has a “unique ability to help countries implement tailored programmes to restore sustainable growth.”

But the additional loans will be a mere “drop of water,” and will not offset the huge contraction of foreign investment in Latin America, Dominican Republic Finance Minister Vicente Bengoa told IPS.

However, “at least it will help mitigate the effects of the crisis, especially the social impacts,” by expanding public spending, he added.

In his view, bolstering the IDB’s capital to 280 billion dollars would enable it to increase its annual loans to the region to between 15 and 18 billion dollars. The record, reached in 2008, was 11.2 billion dollars, but the average over the last five years was seven billion a year.

Nevertheless, that is a small amount in relation to the fall in foreign investment in Latin America, which crashed from 184 billion dollars in 2007 to 89 billion dollars last year, and may be as low as 43 billion dollars this year, according to the Economic Commission for Latin America and the Caribbean (ECLAC).

The funds from the IDB, the World Bank, and the Andean Development Corporation combined “do not compensate for the spectacular fall in capital flows,” but it is important to expand the capacity of these institutions to “partly offset the loss in private investment,” said Uruguayan economist Enrique Iglesias, former IDB president and current secretary general of the Ibero-American Secretariat.

Bengoa said he was worried that the actual expansion of the IDB’s capital would be put off. “Setting up committees implies resistance and delays,” and the new funds are “urgently needed in the region, to prevent recession and a crisis of governance that could arise from a worsening of social problems that would trigger strikes and disturbances,” he said.

It would be “short-sighted” of Washington to stand in the way of an increase in the Bank’s capital, because a recession in Latin America would aggravate the U.S. crisis, since 40 percent of this region’s imports come from the United States, he argued.

It is in the United States’ interest for things to go well for Latin America, said Iglesias.

The increase in capital would not be a major burden for the Bank’s 48 members. The payments would amount to just four percent of the 180 billion dollar increase in capital – that is, 7.2 billion dollars – and the rest would be callable. To maintain its 30 percent share, the United States would have to provide 2.13 billion dollars.

In addition, the payments would be made in four annual quotas, said Kuczynski, who put the total value of loans that the IDB could “sustainably” grant in a year at 15 billion dollars, once its capital was boosted.

The IDB, which is celebrating its 50th anniversary at its Mar. 27-31 annual meeting, has increased its capital eight times, the last of which occurred in 1995, under Iglesias, when it was boosted by 40 billion dollars.

The amounts currently being discussed are “modest,” taking into account the inflation of the last 15 years and the needs imposed by the international financial crisis, said Kuczynski.

Poor countries like Bolivia and Haiti were seeking an expansion in the Fund for Special Operations, which provides them with low interest, long-term loans.

Another new development was China’s admission as the IDB’s 48th member, which will bring an additional 350 million dollars, to be especially earmarked for the poorest countries and investments in small companies.

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