World Bank shelters itself against bad loans to Nicaragua. Plan calls for $200 million cut in income over five years
New York — The World Bank is reducing its income by $40 million because of bad loans to Nicaragua - the first time in its history it is taking this step against loans to a member. On Wednesday, the bank, whose mission is to lend to poorer nations, disclosed that the Sandinista government is two years late paying back $200 million in loans made for agricultural, water, and sewage projects and to repair earthquake damage to Managua, the capital.
The Nicaraguan economy is widely considered to be in shambles because of the 1979 revolution that brought the Sandinistas to power and their ongoing war against the contra rebels. Unless Nicaragua pays the interest and principal due on its loans, it cannot borrow again from the bank.
As a result of the Nicaraguan provision, the bank reduced its 1987 fiscal-year results by $40 million. The bank plans to provide for the entire Nicaraguan loan over a five-year period. The bank also said Nicaragua is $17 million in arrears in paying interest. This reduces the bank's income. On Wednesday, the bank said it had a net income of $1.11 billion compared with $1.24 billion in fiscal year 1986. Because the bank is not a commercial company, its earnings go into general reserves.
Nicaragua is not the only deadbeat. The bank, in releasing its annual report, says Liberia is late paying off $100 million in loans; Syria is late on $400 million, and Guinea on $18 million. All three are at least 180 days overdue. The bank, however, does not provide against income loss until the loan is at least two years late.
Ernest Stern, senior vice-president for finance, says the Nicaraguan provisioning will prevent the bank from overstating its income, since it does not formally write off loans unless a member withdraws its membership in the bank. The bank assumes it will eventually be repaid because loan recipients are also bank shareholders.
Mr. Stern says the bank is beginning to ask members to pay in more capital, which stands at $82.1 billion. The last time the bank increased its capital was seven years ago. There is a limit to the bank's lending. The disbursed and outstanding loans cannot exceed its subscribed capital plus its reserves.
An increase in the general capital of the bank would permit it to step up its lending. This will become necessary as commercial banks slow down traditional lending to debtor nations.