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- - V Public Disclosure Authorized 2 X. V7 U~. $1 . , i Public Disclosure Authorized . ~~~~~~.. MW~U Public Disclosure Authorized 25225 Volume 2 Public Disclosure Authorized Volume 2 Financial Statement and Appendixes The World Bank Annual Report 2001 Volume 2 Financial Statements and Appendixes The World Bank Washington, D.C. Note The World Bank's Volume 1, Year in Review is published as a separate volume. Both volumes are available on the Internet at www.worldbank.org/annualreport. Copyright C 2001 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, N.W Washington, D.C. 20433, USA All rights reserved Manufactured in the United States of America ISSN 0252-2942 ISBN 0-8213-4972-4 Contents Letter of Transmittal v Management's Discussion and Analysis 1 International Bank for Reconstruction and Development Financial Statements 33 Special Purpose Financial Statements of the International Development Association 75 IBRD/IDA Appendixes 105 Letter of Transmittal This Annual Report, which covers the period from July 1, 2000, to June 30, 2001, has been prepared by the Executive Directors of both the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) in accordance with the respective bylaws of the two institutions. James D. Wolfensohn, President of the IBRD and IDA, and Chairman of the Board of Executive Directors, has submitted this Report, together with the accompanying administrative budgets and audited financial statements, to the Board of Governors Annual Reports for the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the International Centre for Settlement of Investment Disputes are published separately. Executive Directors Alternates Abdul Aziz Mohd Yaacob Nguyen Doan Hung Girmai Abraham Richard H. Kaijuka Khalid M. Al-Saad Mohamed Kamel Amr Yahya Abdulla M Alyahya Abdulrahman M Almofadhi Andrei Bugrov Eugene Miagkov Yuzo Harada Masanorl Yoshida Neil F Hyden Lewis D. Holden Finn Jonck Anna M. Brandt Matthias Meyer Jerzy Hylewski Jean-Claude Milleron Emmanuel Moulin Terrie O'Leary Sharon Weber Franco Passacantando Helena Cordeiro Philippe M Peeters Emin Dedeoglu Stephen Pickford Rosemary B Stevenson Jan Plercy (vacant) Moises Pineda Jose H. Machillanda Jaime Ruiz Luis Antonio Balduino Ahmed Sadoudi Inaamul Haque Helmut Schaffer Eckhardt Biskup Balmiki Prasad Singh Mahbub Kabir Mario Soto-Platero Roberto Garcia-Lopez Pieter Stek Tamara Solyanyk Bassary Toure Paulo F. Gomes Zhu Guangyao Chen Huan As of June 30, 2001 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2001 Section 1: Overview 3 Section 2: Basis of Reporting 3 Section 3: Development Activities 7 Loans 7 Derivative Products 13 Guarantees 14 Other Activities 15 Section 4: Liquidity Management 15 Section 5: Funding Resources 17 Equity 1 7 Borrowings 19 Section 6: FinancialRisk Management 20 Credit Risk 20 Market Risk 23 OperatingRisk 2 7 Section 7: Results of Operations 28 Glossary of Terms 31 Throughout Management's Discussion and Analysis, terms in boldface type are defined in the Glossary of Terms on page 31 The Management Discussion and Analysis contains forward looking statements which may be identified by such terms as "anticipates", "believes", "expects", "intends" or words of similar meaning. Such statements involve a number of assumptions and estimates that are based on cur- rent expectations, which are subject to risks and uncertainties beyond IBRD's control. Conse- quently, actual future results could differ materially from those currently anticipated. 2 THE WORLD BANK ANNUAL REPORT 2001 1. OVERVIEW The International Bank for Reconstruction and Devel- augment reserves, waivers of loan charges to benefit opment (IBRD) is an international organization estab- eligible borrowers, and grants from net income to sup- lished in 1945 and is owned by its member countries port developmental activities IBRD's main goals are promoting sustainable eco- FY 2001 net income was $1,489 million, $502 million nomic development and reducing poverty It pursues lower than the precedin year This reduction in net these goals primarily by providing loans, guarantees lom e resodingly reducytn on and related technical assistance for projects and pro- micome coraet respondin reduced IBRD's return on grams in its developing member countries IBRD's e anne re tur on average eaninmg assets The ability to intermediate funds from international capital major reason for the dechlnesn net income was an markets for lending to its developing member coun- inacrsei the loan loss provision expense as a result tries is an important element in achieving its develop- of nonaccrual events, and deterlorationin the quality metoasIBD' bjctvei nt omaimz of the accrual loan portfolio This Increase in expense ment obectivoalsIBRDs is ot t maxmizewas partially offset by income of $345 million recog- profit, but to earn adequate net income to ensure its was as y offsety mcome of$345cil Accog-g financial strength and to sustain its development activ- n as a result of the adoption of Fancial Account- ities Box I presents selected financial data for the last ing Standard No 133 and International Accountig five fiscal years The financial strength of IBRD is based on the support On August 2, 2001, the Executive Directors approved it receives from its shareholders and on its array of the allocation of $618 million of FY 2001 net income financial policies and practices. Shareholder support to general reserves, and recommended to IBRD's for IBRD.is reflected in the capita.backing l it for IBRD Is reflected in the capital backing It hashs Board of Governors the transfers of $371 million from received from its members and in the record of its bor- unallocated net income and $31 million from Surplus rowing members In meeting their debt-service obliga- to other development purposes For FY 2002, rowingmemb rsin meigtir detsric bia decrease from 15 basis points to 5 basis points ain the tions to it IBRD's financial policies and practices have led it to build reserves, to diversify its funding sources, interest waiver was approved for old loans For new to hold a large portfolio of liquid investments, and to loans, the interest waiver of 25 basis points was main- limit a variety of risks, including credit, market and tained FY 2002 waivers of 50 basis points on commit- liquidity risks ment charges were also maintained at the FY 2001 level IBRD's principal assets are its loans to member coun- tries The majority of IBRD's outstanding loans are 2. BASIS OF REPORTING priced on a cost pass-through basis, in which the cost Financial Statement Reporting of funding the loans, plus a lending spread, is passed through to the borrower IBRD prepares its financial statements in accordance with generally accepted accounting principles To raise funds, IBRD issues debt securiies in a varety (GAAP) in the United States of America and Intema- of currencies to both institutional and retail investors tional Accounting Standards (together referred to in These borrowings, together with IBRD's equity, are this document as the 'reported basis') Effective July used to fund its lending and mvestment activities, as 1, 2000, IBRD adopted Statement of Financial well as general operations Accounting Standard (FAS) No 133, "Accounting for IBRD holds its assets and liabilities primanly in U S Derivative Instruments and Hedging Activities", along dolarsts euoatina (nd cureny uits, ad Jp- with its related amendments Concurrently, IBRD also dollars, euro (and its national currency units), and Jap- early adopted International Accounting Standard No anese yen IBRD mitigates its exposure to exchange 39, ancial Intrnts Recogntin andare- rate risks by matching the currencies of its liabilities ment"F These standards are cRoletognlton and Measur and equity with those of its assets However, the 133" for purposes of this document reported levels of its assets, liabilities, income and expense in the financial statements are affected by FAS 133 requires that all derivatives be recorded on exchange rate movements of major currencies com- the balance sheet and reported at fair value IBRD has pared to IBRD's reporting currency, the U S dollar marked all derivative instruments, as defined by FAS The fluctuations captured in the cumulative transla- 133, to fair value, with changes in the fair value being tion adjustment for purposes of financial statement recognized immediately in earnings reporting do not impact IBRD's risk-bearing capacity Although these standards allow hedge accounting for Lending comrnitments in FY 2001 stabilized at $10.5 certain qualifying hedging relationships, when these billion, slightly below the FY 2000 level of $10 9 bil- criteria are applied to IBRD's financial instrument lion, after a period of high demand for adjustment portfolios, certain of the hedged instruments would be loans in FY 1999 and 1998 carned at fair value, while other similar hedged instru- In the context of assessing changes in IBRD's operat- ments would be carried at amortized cost Upon adop- ing environment, it is management's practice to rec- tion of the new standards, IBRD elected not to defie ommend each year the allocation of net income to any qualifying hedging relationships While IBRD IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30,2001 3 beheves that its hedging strategies achieve its objec- Loan Portfolio tives, the application of FAS 133 qualifying hedge cri- teria would not make fully evident the nsk All of IBRD's loans are made to or guaranteed by management strategy that IBRD employs countries that are members of IBRD. IBRD does not currently sell its loans, nor does management believe Management Reporting there is a market for loans comparable to those made by IBRD The current value amount of loans incorpo- For management reporting purposes, IBRD prepares rates management's best estimate of the probable current value financial statements expected cash flows of these instruments to IBRD. IBRD manages its balance sheet by making extensive The current value of all loans is based on a discounted use of derivatives to manage the interest rate and cur- cash flow method.

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