Category: Blog
Rightsizing the MDB System in the Polycrisis Era
For both rich and poor countries, the climate crisis is no longer looming. It is all around them. Yet, as thousands gather in Sharm el-Sheikh for COP27, scientists have just confirmed that we are nowhere near where we need to be on greenhouse gas emissions reductions.
We can expect a raft of finance promises to emerge from the meetings, many focused on contributions to the arbitrary climate finance target of $100 billion per year, first set in 2009. But very credible analysis suggests that we need an additional $1.3 trillion in climate finance by 2025 and $3.5 trillion by 2030 to achieve a “sustainable, resilient and inclusive recovery.” (See also this report of the Independent High-Level Expert Group on Climate Finance.)
Regrettably, adding to all the other crises the world is facing a crisis of confidence. For good reason, many doubt we have the collective will and capacity to spend and invest on the scale needed.
And yet, in the midst of all this gloom, we need to remind ourselves that we already have a set of multilateral development banks (MDBs) that collectively have the potential scale, reach, knowledge, and tools to play a much bigger role in confronting these challenges. MDBs collectively committed about $63 billion in climate finance in 2021—$50 billion to low-income countries (LICs) and middle-income countries (MICs). But they can do much more.
Recall that MDBs were originally conceived as part of the response to a global catastrophe. They were launched after a world war when the focus was on reconstruction of destroyed infrastructure and productive capacity. Our time is not so different. We face the challenge of reconstructing infrastructure, industries, agriculture, and health systems-partly to address serious damage already evident, partly to reduce future damage, and partly to adapt them to new climate and health realities.
A significant MDB contribution to the goal of $1.3 trillion in additional climate finance by 2025 is essential. The authors of the analysis posit a target of $126 billion by 2025 in additional MDB non-concessional climate finance. That number assumes countries do their part in boosting domestic resource mobilization in a very difficult global economic environment, and the private sector doubles its own finance contribution. But there are broader SDG finance needs, which have only increased in the wake of the pandemic, war, and reversal of progress on poverty, educational attainment, and food security. It makes no sense to scale up climate finance at the expense of tackling poverty reducing programs or by cutting back investments in human and physical capital for the most vulnerable.
We don’t know yet what these additional SDG finance needs are, but let us assume as an illustrative exercise, that they add a similar amount, another $125 billion, to the total annual finance needed from MDBs. That would suggest that we need an MDB system that can generate an additional $250 billion in annual commitments.
That sounds like a lot. But it adds relatively small increments to the financial capacity of the developing world. It amounts to 5 percentage points of GDP for LICs and less than 1 percentage point (0.75 percent) of GDP for MICs. Compare that to pre-pandemic research by the IMF which concluded that the average LIC needed to spend an additional 15 percentage points of GDP in 2030 to achieve the SDGs and the average MIC an additional 4 points.
Can we get to that number? Actually, it seems more feasible than you might think if we pursue all the pathways available. Below are four parts of an ambitious but feasible strategy.
1. The gorilla in the room is, of course, general capital increases (GCIs) for MDBs. The arguments for putting aid dollars into MDB capital are compelling. These are banks that leverage capital dollars. Over the lifespan of the IBRD, cumulative shareholder contributions of $20 billion has supported $800 billion in lending. There is no other financial channel that can generate that kind of leveraging in support of tested development programs.
Adding capital to MDBs is also much more efficient than adding more small trust funds and financial intermediaries. There are already more than 50 separate climate finance entities falling under the umbrella of the World Bank Group. They all have separate budgets, governance structures, and missions, but few have robust finance allocation systems that channel funds to their most productive use.
But we heard a deafening silence on capital increases during the annual meetings of the IMF and World Bank, as well as the G20 meeting, last month. Contrast that to the aftermath of the Global Financial Crisis when every major MDB received a capital increase. Yet the magnitude of the GFC shock, especially to the developing world, was far smaller.
Reasonably sized MDB capital increases would move us much of the way toward the $250 billion annual addition to lending A CGD proposal suggests a green capital increase of $32 billion in paid in capital for the IBRD and the IFC. Using the ratio of new capital to lending for the previous capital increase, the additional capital would allow for $100 billion in additional annual lending through 2030. Capital increases for the other MDBs could be added, perhaps prioritizing spending for other priorities urgent for particular regions—education, health, and poverty progress reversals—as well as climate finance.
2. Capital increases would be much more productive if combined with prudent measures to use MDB capital more efficiently. The independent panel convened by the G20 to assess MDB capital adequacy concludes that there is significant scope for MDBs to expand combined lending while maintaining MDB institutional ratings. The panel offers a set of specific recommendations that, if implemented across the system and at scale, would increase collective lending capacity by hundreds of billions of dollars over the medium term. And the recommended innovations have strategic value beyond simply increasing MDB lending capacity. They offer ways to mobilize more of the wall of private capital seeking credible SDG investment on a scale that MDBs have thus far been unable to achieve. And from a political economy perspective, a two-part package of capital increases and more effective use of the existing balance sheet is much more likely to get broad shareholder support than either could on its own.
3. For concessional MDB finance, particularly from IDA, there is also room for more efficiency. Several CGD pieces argue that IDA could make significantly more use of its untapped equity, including through issuing new debt to markets which could be concessionalized through grants. IDA currently has $179 billion in equity, $175 billion in net loans outstanding and $21.9 billion in market borrowing. Even assuming a conservative 1:2 leverage ratio appropriate for IDA, more market borrowing could generate significant new lending funds.
4. More productive and better targeted use of SDRs also needs to be on the table. Several MDBs are exploring whether SDRs can be a source of financing for loan operations. Two basic models are being considered. In the first, SDRs are lent to the MDB and the MDB on-lends them to client countries for institution-specific purposes. This is similar to what the IMF is doing with its long-established Poverty Reduction and Growth Trust and its new Resilience and Sustainability Trust. In the second model, donor countries lend SDRs to the MDB as hybrid capital that can then be leveraged to mobilize three to five times the loanable funds (under consideration by the African Development Bank). Both models require auxiliary financial structures to preserve the risk-free and redeemable nature of the SDR loans. But the second uses MDB leverage to generate more lending.
Finally, increases in MDB financial capacity need to be tightly linked to progress on significant reforms. Changes in MDB models to strengthen their support for global public goods (GPGs) are needed as much as more financial firepower. As suggested in this note, the model changes should include a shift toward more catalytic instruments to help countries mobilize more GPG finance from both public and private sources, consolidation and rationalization of donor concessional finance for GPGs, building a structure for collaboration across MDBs, and targeting impact and outcomes, not just finance inputs.
While the focus is on the MDBs. It is also important to recognize that they are part of a much larger—and financially much bigger—network of public development banks (PDB). These PDBs span the spectrum from subnational to national and regional banks with a portfolio of $23 trillion. Aligning their activities with the SDGs and the goals of the Paris Agreement will add multiples of targeted climate financing to current flows. One important role the MDBs, and particularly the World Bank, can play is to accelerate and facilitate the process of alignment for the larger PDB community.
In sum, we already have a multilateral system capable of responding to the polycrisis with the right reforms and the right financial capacity. We do not have to invent a new system. Shareholders can give it enough financial firepower if they act on the different fronts described here. And because of MDB leverage, the additional lending capacity can be achieved through a combination of not unrealistic amounts of additional capital and concessional resources and more efficient use of those resources. But farsighted, resolute leadership is essential to move this agenda forward. One hopes that it will emerge during COP27 and its aftermath.
Amplifying Africa’s Voice in Reforming the Global Financial Architecture
ACET and the new Finance for Development Lab, with the support of the Transformation Leadership Panel, are launching a new initiative to enhance Africa’s voice on needed changes to the global financial architecture.
Following the COVID-19 crisis, the Ukraine war, and the growing fight against inflation in rich countries, the global economy is heading for years of weak growth, rising prices, and high interest rates. These developments have destabilizing consequences for low and lower-middle-income economies, and especially so in the Sub-Saharan Africa (SSA) region. Many of these countries already face or will soon face debt distress and/or fiscal crises. Furthermore, climate change is already causing loss of lives and livelihoods across the continent, and its effects are expected to get much worse in the coming years.
And yet, SSA is barely vaccinated, the Debt Service Suspension Initiative DSSI initiative has already elapsed, the promised Special Drawing Rights (SDR)-reallocation has not happened, the G20-created Common Framework to organize debt restructuring has not taken off, climate funding has not reached the promised $100 billion mark, and the multilateral and regional banks continue with business-as-usual approaches.
Development has slipped low on the international agenda, and the global and regional institutions in charge of supporting development are currently not able to avert the multiple crises affecting SSA. Leaders on the continent need to champion a “global wake-up call for action” to start addressing forcefully the interlocking economic, social, and environmental challenges. An urgent focus must be on reforming the global financial architecture, which is no longer fit-for-purpose and is failing Africa. What is needed is a new global partnership for economic transformation.
There is an emerging plethora of actors and initiatives that aim at addressing the failures of the global financial architecture, including the Independent Review of MDBs’ Capital Adequacy Frameworks, the Bridgetown Agenda, and others. In Africa, UNECA had started convening meetings of African Ministers of Finance. But so far, Africa’s voice is missing in the global debates. There are few advocates for innovative solutions and new initiatives among intellectuals, policy institutes, think tanks, thought leaders, or academia. While the rising issues are global, they have an outsized impact on African economies and societies. African thinks tanks have not yet focused sufficiently on these issues due to funding and capacity constraints, lack of access to the ongoing dialogues, and lack of demand by international fora and organizations.
The goal of this initiative is to change that. Within six months, the initiative aims to see policy proposals emanate from African experts and think tanks and start to interact with ongoing global conversations on how to reshape the finance for development global architecture. To get there, there is a need to support a process of engagement, knowledge sharing, and research and advocacy with a select group of African think tanks, policy institutes, and thought leaders. This process will lead to a better understanding of the global financial architecture challenges. It will also lead to African-led analysis, research, and perspectives that will be translated to policy briefs for African leaders, and advocacy content for TLP to use in advancing the cause of reform. These engagements should provide opportunities for global experts and African experts to share ideas and identify solutions.
Knowledge-sharing series
We will organize a monthly series of knowledge-sharing engagements of African think tanks with ACET and FDL experts, TLP members, African policymakers, and MDBs representatives. Each knowledge meeting will focus on a particular issue for the global financial architecture, such as SDR allocation; climate finance; IMF loans, conditionality, and DSAs; MDB reforms, etc. Each engagement will be anchored by a global expert. These engagements intend to be participatory and foster reflection and dialogue.
Joint analysis
As the knowledge-sharing engagements are underway, ACET and FDL will explore with the African think tanks important themes or topics for joint or collective analysis and research to further inform African policymakers’ positions on the global financial architecture. For example, this may be country-specific analysis to understand how different MDB policy changes would impact a particular country or group of countries (low income v. low middle income for example). Or the analysis may explore what African governments and institutions such as the African Union can do to accelerate access to capital markets, reduce debt burdens and increase investments in climate adaptation.
Advocacy
ACET and the TLP will support dissemination of the research outputs, particularly to African policymakers and Heads of State. The analysis can be used to engage global stakeholders and use the policy recommendations in advocacy efforts to amplify African perspectives and Africa’s collective voice.
Partnerships
The partnership among ACET, the FDL, and other African think tanks on the topic of global financial architecture will evolve into a long-term collaboration to collectively address key issues related global and continent-wide issues that might otherwise not be an area of focus for African think tanks. Partners already enrolled in the initiative include the following.
| Regional-focus think tanks | Country-focus think tanks |
| African Center for Economic Transformation | ECES (Egypt) |
| African Economic Research Consortium | BIDPA (Botswana) |
| Centre for the Study of the Economies of Africa | IPAR (Rwanda) |
| Policy Center for the New South | KIPPRA (Kenya) |
| South African Institute for International Affairs | |
| Institute for Strategic Studies | |
| AUDA-NEPAD Policy Bridge Tank |
If you are interested in being part of this initiative, please write to Rob Floyd.
A United Front: John Asafu-Adjaye on Africa at COP27
John Asafu-Adjaye, ACET Senior Fellow and climate & agriculture specialist, talks about the common African concerns, demands, and expectations at the upcoming climate conference in Egypt.
African countries are expected to speak with one voice at COP27 in Egypt this month. What are the top concerns and demands that African negotiators will bring to the climate conference?
John Asafu-Adjaye: At the top of Africa’s agenda at Sharm el Sheikh will be a push to unlock the pledges that were made by the wealthy countries at COP15 in Copenhagen. This includes the promise to pay $100 billion each year to help developing countries adapt to climate change and undertake mitigation efforts. Africa’s overall target is $1.3 trillion between 2020 and 2030. This covers the costs of adaptation, mitigation, and compensation for losses and damages caused by climate change. Of course, despite repeated promises, these funds have not materialized. There will also be a push for technical assistance, to help African countries access more climate finance. A final priority focus will be on ensuring a just transition for developing countries. Africa is going to make a strong case that there is a need to balance the priorities of energy access with climate change mitigation and adaptation. About half of Sub-Saharan African people, about 600 million, do not have access to electricity today. To solve this energy access deficit, there will be a strong push for the use of gas as a transition fuel. This of course has become a big issue in the last year due to the war in Ukraine, which has affected the flow of gas to European countries. Now European countries are looking to Africa as an additional source of natural gas supplies. Africa is going to make the case that they should also be allowed to use gas as a transition fuel.
What about the mitigation targets that countries have set before – have they become a secondary concern?
Asafu-Adjaye: For African countries, clearly adaptation is going to be at the top of the agenda. And this is because in the past adaptation has not received as much finance as mitigation. In fact, 60% of the past climate finance has been for mitigation. But 44 out of the 55 countries on the continent have submitted their nationally determined contributions (NDCs) – and these are very, very ambitious NDCs, which shows a strong commitment on the part of African countries to contribute their part to a low-carbon emission transition. Meeting those targets, however, will depend on the level of external finance that is unlocked. Ghana, for instance, has committed to finance 25% of its carbon reduction targets unconditionally using domestic sources of finance. But that means, of course, that 75% will have to come from outside. And a lot of this will have to come from multilateral institutions such as global climate funds. So far, these have not been able to deliver what is needed, and it is very likely that African leaders will push for reform of these funds. Countries have complained of long procedures, a lack of flexibility in the processes, and also a lack of technical assistance. So I think that African countries are going to say: if you want us to do our best in terms of mitigation, then you really have to come up with a lot more funds.
We have seen in the past that wealthy countries have failed to deliver on their climate financing promises repeatedly. How can they finally be held to account?
Asafu-Adjaye: Because this conference is being held in Africa, there is a real opportunity for the African position to be taken more seriously. Even leading up to the conference, there are some signs that this is already happening. At a September meeting in Senegal of African and Western environment ministers, US Special Climate Envoy John Kerry agreed that African countries should be allowed to develop local gas resources, albeit as a short-term measure. It seems that both the US and Europe have begrudgingly accepted the African position that developing countries need to use fossil fuels as part of the just transition. Looking at COP27, I expect a firm commitment to the amount of finance made available and an agreement on technical assistance. The global carbon trading mechanism will also kick off, which will be of great benefit to African countries. In terms of accountability, loss and damage compensations still pose a major challenge. At COP26, the wealthy and most polluting countries agreed in principle to the idea of compensating less developed countries for loss and damages due to climate change, but there was no agreement on the amount – and it looks unlikely that this issue will be fully resolved in the near term.
How can African countries benefit from the improved global carbon trading mechanism?
Asafu-Adjaye: Currently, only about 2% of trading on the carbon market comes from Africa. With the exception of some of the Northern African countries such as Morocco and Tunisia, along with South Africa, most African countries are not trading carbon at all. Carbon market participation requires verification of your carbon stocks, which needs a lot of technical expertise to map, and most countries are not ready for that, meaning that very few African countries will be trading right away. But eventually, African countries will become major suppliers of carbon credits to the international markets. On the continent, we have huge stocks of green carbon in the form of standing forests, as well as blue carbon. And there are great prospects for developing renewable energy resources, especially solar panels. So there are good opportunities, but a lot of still needs to be done. I look at it as a medium-term prospect. Maybe in the next five years, African countries will be ready, but in the meantime, if we know that carbon trading has started, there will be an impetus to try to develop local resources and take advantage.
How can African countries collaborate more closely beyond COP27 on climate adaptation and mitigation?
Asafu-Adjaye: A lot can be done through regional collaboration, both on adaptation and mitigation. A lot of countries have submitted their NDCs, but some sub-Saharan African countries are lagging behind due to a lack of capacity to develop national adaptation plans. And some of the Northern African countries have fared much better. Collaboration between the North and the South could be a win-win situation in terms of sharing expertise and experiences to help each other complete adaptation plans. These kinds of knowledge exchanges should also be deployed in other areas, including upgrading the renewable energy infrastructure and using the African Continental Free Trade Area to trade carbon credits.
What kind of research will you be conducting at ACET in the area of climate and agriculture in the coming years?
Asafu-Adjaye: Climate-smart agriculture (CSA) has long been a major focus of ACET research in this area. CSA leverages technological innovations to increase productivity while building resilience, helping African countries turn climate risks into opportunities. Examples include the use of drought- and heat-tolerant crop varieties, using new farming techniques such as conservation agriculture, and solutions like digital agriculture technologies. These technologies allow smallholder farmers to gain access to market and weather information and to credit and insurance services, all on their mobile phones. This drives the modernization of the agricultural sector, increases productivity, and thereby stimulates overall growth and growth with DEPTH. Properly implemented, it strengthens the entire agricultural value chain and builds new linkages between the agriculture and industrial sector, by providing inputs for agro-processing and manufacturing. This approach could help the recovery, as well as create jobs and boost economic growth. Going forward, we hope to do a lot more work on digital agriculture technology. Since there is no one-size-fits-all solution, we hope to undertake multiple multi-country studies, to look at challenges and opportunities countries face so we can develop solutions to enhance climate adaptation and improve productivity in the sector.
Climate Action for Africa at COP27
Climate finance has failed Africa. African countries receive a grossly insufficient amount of climate finance, falling far short of what they require. For the period 2020-2030, the average annual climate funding needs for Africa are estimated at around $33.5b for adaptation, $72b for mitigation, and $36.5b for loss and damage, totaling $142b. However, annual climate flows to Africa currently stand at only $30b. If the same level of climate funding persists throughout the period 2020-2030, there will be an annual shortfall of $112b – amounting to a total climate finance gap of $1.1tn. At COP26, the advanced countries promised to double global adaptation funding by 2025, which would amount to an additional $40b per year for Africa. However, Africa would still face a total shortfall of at least $820m for the decade.
Six Priorities for Africa at COP27
Three immediate actions:
Multilateral agencies and development finance institutions should:
- Deliver technical assistance to African countries and streamline climate fund processes to improve access to already available climate finance.
- Improve capacity building and technology transfers to enhance the transition to low-carbon economies and help access Africa’s huge carbon stocks for job creation and development.
- Invest in two or three renewable energy manufacturing centers in Africa to produce products such as solar panels and batteries for the African market.
Three new long-term targets and goals:
- To close the climate finance gap, rich countries need to make a strong commitment to $1.3tn in climate funding for Africa for the period 2020-2030 to cover the costs of climate adaptation, mitigation, and loss and damage.
- Africa’s long-term energy transition to net zero has to include natural gas as a transition fuel, and climate funding should be made available for natural gas development projects.
- The global financial architecture has to be reformed to better serve developing countries and address the climate crisis. More innovative instruments such as green bonds, green loans, debt-for-climate swaps, and climate-linked debt should be made available; unused Special Drawing Rights should be reallocated for climate finance, and climate funding processes need to be streamlined and made more transparent.