Singh, Summers flag financing concerns
MDB reform urged for climate adaptation and sustainable growth
Developing countries struggled with slow growth, weak investment and inadequate financing from international financial institutions in 2023, according to Larry Summers and NK Singh, co-convenors of an independent expert group (IEG) on reforming multilateral development banks (MDBs) under India’s G20 presidency.
This has made the transition to a green economy more difficult, which is essential to adapt to climate change and achieve growth, the veteran American and Indian policymakers warned. They argued it also requires greater political will from MDB shareholders to commit to reforms.
While India has handed over the G20 presidency to Brazil, in a sign of the criticality of the issue and their own commitment, the IEG co-convenors met the heads of a range of MDBs last week in Washington DC at the Centre for Global Development, a top research institute that closely works with MDBs, on the sidelines of the World Bank and International Monetary Fund’s spring meetings.
They reviewed the current global economic outlook particularly as it relates to developing world and the climate crisis, the progress in reforms of MDBs as suggested by the IEG so far, and looked at future steps.
Speaking to HT in Washington DC, Singh said: “The world is still on fire. And in our engagement with both experts as well as meeting with various MDBs, there was a clear recognition for the need to step up the pace of MDB reform to meet the crises engulfing the world.”
The nature of the crisis
In a brief report that takes stock of the MDB reforms, the Summers-Singh led group has first pointed out the alarming indicators of the past year.
Per capita growth has been “anaemic” with 0.7% growth in Africa, 0% in West Asia and 1.5% in Latin America.
Half the countries eligible for International Development Agency (part of the World Bank Group) concessional financing have not returned to their pre-pandemic income levels. Instead of financing becoming easier, external financing for emerging market and developing countries (EMDCs) became more difficult, with their external debt servicing rising by $40 billion.
Private creditors took nearly $200 billion out of EMDCs in interest and net payments.
And, while multilateral institutions lent more, a lot of the funding was for humanitarian crises, Ukraine and even refugee inflow in donor countries. “Programmable official development assistance (ODA) flows received by low-income countries fell,” the report said.
It was in anticipating of some of these trends that the Indian G20 presidency had set up the MDB reform group, and the New Delhi Leaders’ Declaration endorsed the call for “better, bolder and bigger” banks, which the Brazilian presidency has taken forward with its own imprint and focus on climate.
The focus of the IEG was underlining the importance of MDBs in promoting the investment climate in EMDCs, strengthening their project development and ensuring they had access to adequate financing to meet both developmental and climate goals. “That vision envisaged a transformed MDB system that would lend three times more by 2030 and mobilise five times more private capital through a variety of new instruments and strategies,” the stocktaking report said.
The reforms undertaken
In this backdrop, there has been progress in several domains.
The first is in the case of “callable capital”. In an April 16 statement, the US, Japan, Germany, France, UK, Italy, India, South Korea, Spain, Australia, Netherlands, Switzerland, Belgium, Denmark, and New Zealand appreciated the thoughtful work of the Italian, Indonesian and Indian G20 presidencies and said shareholders had “collectively committed a combined $796 billion in callable capital” — referring to capital that can be called in a scenario where MDBs are unable to meet their financial obligations, a scenario that has never materialised so far.
But in the past six months, the statement said, the shareholders have worked with MDBs to clarify the processes involved. “Through this work, the MDBs have shown how unlikely a call on callable capital would be, and we have demonstrated strong shareholder capacity to respond to a call if ever necessary.” This is significant because it allows MDBs to reduce their equity-to-loan ratio without affecting their creditor status. Singh told HT that in their meeting with MDB heads, there was appreciation for this work.
Second, the World Bank has issued a status update on its evolution roadmap that had been endorsed by the bank’s development committee. Some of the steps include the Bank’s new vision and mission that takes into account both its older development and prosperity centric aims and newer climate and other goals. The Bank has a scorecard tracking 15 outcomes areas and 22 indicators covering the new mission. It is developing a new “knowledge compact for action”. The World Bank Group Guarantee Platform is being developed to significantly increase the WBG’s mobilisation of private capital to support clients.
The IEG stocktake points out that the Bank, to become “better,” aims to cut project approval times by one-third; to be “bolder,” it’s installing climate-resilient debt clauses and consolidating guarantee programs; and to get “bigger,” it has identified eight priority global challenges.
Three, there is a similar push for reform across other MDBs. The stocktaking by Summers-Singh led IEG also indicates that the Asian Infrastructure Investment Bank is “pursuing mutual recognition of standards between MDBs”; the African Development Bank has become the first MDB to issue hybrid capital to private investors and its $750 million bond issuance was oversubscribed eight times; the Inter-American Development Bank has announced climate and biodiversity as key goals and 10 countries are participating in its IDB Clima programme that has a $1 billion outlay; the European Bank for Reconstruction and Development has increased its sustainable lending by 50% through increased shareholder capital; and the Asian Development Bank has raised its headroom through a capital adequacy review and additional climate guarantees.
And finally, there has been some more progress on mobilising private capital by rationalising and simplifying guarantee products, explicit targets, private debt funds among other instruments.
Urgent and unfinished agenda
But the overall sense of the independent expert group is that on the MDB reform agenda, the glass is still “too small”. Six gaps are clear.
The first is regard to deeply inadequate private finance mobilisation at scale. This, the Summers-Singh group believes, requires “an integrated public private strategy across the different arms of MDBs, the deployment of new financial products and changes in the MDB operating model”. In addition, the group has said that there appears to be too little on the ground pipeline development capacity, continued risk aversion, and information gaps among other issues. The group specifically recommends enhancing private sector capital flows to EMDCs and combination of both support for risk reduction with tools to share risks.
Second, the group has called for a “proactive and disciplined engagement with country platforms to help deliver scaled up investment platforms” — this involves setting out actionable investment and financing programmes that integrate climate and development goals and combine specific projects with broader climate and regulatory reforms.
Three, the IEG has kept its focus on the needs of poorer countries by categorically saying that IDA-eligible countries, by the group’s estimation, will need incremental external financing of $350 billion by 2030, which requires concessional financing to reach $200 billion by the end of the decade.
Four, the group has called for further measures for balance sheet optimisation of MDBs, including by better valuation of callable capital — this could add another $30-40 billion.
Five, the group calls for mobilising hybrid capital and portfolio guarantees and recognising the medium-term need for capital increases, which will require shareholders to step up.
And finally, based on a review of the assessment of experts, the IEG believes that MDBs are doing better when it comes to issues directly under the control of the management. These include determining the mission, priorities, and introduction of new tools and instruments. But where they are lacking, and in some cases, severely lacking, is building country platforms, generating a solid pipeline of bankable projects, and scaling up resource flows. All of this, Singh told HT, will require strong “political will”, the key variable in determining whether the former Indian G20 presidency’s committed push for MDB reforms sees results or not. This will arguably be the abiding legacy of India’s leadership of the forum.
