Focus on holistic reform,Sitharaman tells G20 expert group

Terming the composition of the group “eclectic” when she met them, Sitharaman is understood to have acknowledged the diversity it encapsulated in terms of regions and backgrounds.

Washington In a meeting with the G20 expert group on strengthening multilateral development banks (MDBs), Union finance minister Nirmala Sitharaman called for a “transformative” rather than incremental change in the banks; a “holistic” rather than fragmented approach to reform; and the need for more financing to achieve both developmental and climate goals, without viewing them as mutually exclusive.

Union finance minister Nirmala Sitharaman with veteran policymaker NK Singh, in Washington DC. (HT Photo)

Sitharaman met the group, led by former United States (US) treasury secretary Lawrence Summers and veteran Indian policymaker NK Singh over the weekend in Washington DC before departing for India.

People familiar with the conversation said the group recognised that the FM had given “visionary” targets, especially that there was no getting away from the fact that the World Bank’s twin goals — eradicating extreme poverty and boosting shared prosperity — needed to remain in place, but accompanied by a focus on “global public goods”. And at the moment, there weren’t enough finances for both. Resolving this puzzle is set to be the group’s biggest challenge. The experts, however, believe that a mix of creative leveraging of the Bank’s current capital, with fresh capital infusion, can make a significant change to lending capacity.

The rationale and the mandate

During the spring meetings of the World Bank and International Monetary Fund last week, and through India’s G20 presidency, the issue of reforming MDBs has gained renewed traction. This is happening in the backdrop of an internal evolution road map prepared by the Bank itself, a leadership change in the offing with US nominee Ajay Banga set to take over as the Bank president later this summer, the everyday challenge that Bank staffers are facing in meeting the financing demands of client countries, Prime Minister Narendra Modi’s clear directive that MDB reform should be a top priority, and the constitution of the G20 expert group.

Terming the composition of the group “eclectic” when she met them, Sitharaman is understood to have acknowledged the diversity it encapsulated in terms of regions and backgrounds. Besides Singh and Summers, the group includes Singapore’s senior minister Tharman Shanmugarathnam, former director general of the South African national treasury Maria Ramos, former governor of the Central Bank of Brazil Arminio Fraga, London School of Economics academic Nicholas Stern, former World Bank chief economist Justin Yifu Lin, former World Bank Vice President and current dean of the Fletcher School at Tufts University Rachel Kyte, and former executive secretary of the Economic Commission for Africa Vera Songwe.

At the suggestion of some members, the group was renamed as the independent expert group on strengthening MDBs.

The group’s deliberations

Based on both Sitharaman’s guidance, and their various other engagements in Washington DC, the Summers-Singh group is clear that MDBs cannot compromise on poverty eradication, but need to step up on delivering global public goods, from climate financing to pandemic preparedness. Innovative balance sheet optimisation had limits and there was no alternative to a degree of capital increase, which refers to the Bank’s shareholders putting in more money if the Bank’s lending capacity had to be increased, said people aware of the discussions.

In this backdrop, the idea of a “staggered timeline” for capital increase, members feel, deserves closer attention. As Ajay Banga takes over the presidency, among his top tasks will be getting a consensus among all of the Bank’s shareholders on the quantum and proportion of these capital increases — in a way that does not alter the geopolitical balance. He will have to begin by convincing his own country, the US, to pitch in more.

While the idea of mobilising private capital has been a familiar theme in reform discussions, the high-level group has a delicate balancing act ahead. The Bank needs to find imaginative and innovative uses of its balance sheet strength to mitigate the risk and multiplicity of risks that private capital will encounter in green financing. At the same time, members in the expert group have cautioned against the excessive mitigation of risk and raised the question of moral hazard. This will require creating a guarantee structure for private finance that avoids the old malaise of risks and potential losses being public, while gains remain private.

In addition, the group will also have to examine ways to not just retain but enhance concessional financing provided by the International Development Association — IDA provides grants and low-interest loans to low income countries.

The group also has the mandate, according to its terms of reference, of finding ways to strengthen the coordination among MDBs. This poses another difficult challenge. Greater harmonisation, standardisation of processes, regular institutional coordination will help augment resource capacity of all concerned development banks, but this must not happen at the cost of overstandardisation and the curtailment of autonomy of various banks which cater to diverse needs.

As the Summers-Singh group gets down to preparing its report in time for the third G20 finance ministers and central bank governors meeting in Gandhinagar in July, the PM and FM’s call for reform — while balancing various internal and external constraints that MDBs face — will be on the top of the minds of the experts. But the ball will finally be back in the court of the G20 countries in general, and the Bank’s top shareholders in particular. .