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Did Paris Call It Quits on Billions to Trillions?

June 27, 2023

The recently concluded Paris Summit for A New Global Financing Pact wrapped up with an Agenda for People and the Planet that first prematurely declared victory on the $100 billion SDR reallocation and then, even more prematurely, pre-declared victory on the $100 billion global climate finance commitment (remember the ‘new and additional’ bit? It seems no one in Paris did). But what came next was a statement of almost breathtaking not-hugely-over-promisingness: “Each dollar of lending by MDBs should be complemented by at least one dollar of private finance.” That simple statement undercuts the calculations at the core of the idea we could take billions of multilateral finance and ODA to mobilize trillions of private investment for climate and development. If the Paris Summit participants meant it, we can all at last move on to thinking about how trillions could actually, realistically, be delivered.

“Billions to trillions” was the magic mechanism whereby donors wouldn’t have to cough up more cash to deliver on the Sustainable Development Goals they were agreeing to, even though those goals implied many trillions in investment spending that was utterly beyond the financing capacity of poorer countries. The Blended Finance Taskforce for the Global Goals argued aid and multilateral development bank-backed finance could mobilize private investment at a 9:1 ratio—and that those investments would deliver the infrastructure and services required to meet targets including zero extreme poverty, universal education, an end to preventable child deaths, and universal infrastructure access. We’ve never achieved anywhere close to a 9:1 ratio; the best estimates are for closer to a 0.7:1 ratio in the finance involved—one dollar of public investment nets you seventy cents of private investment. So the new language suggested by the Paris Summit of a 1:1 ratio is immensely more realistic, even though still a stretch for several reasons: because the 0.7:1 ratio is only true for the subset of aid and multilateral finance that is development finance operations, because we don’t really know if it was mobilized by the public money, and because even then 0.7 is notably less than one.

It is a little hard to tell if the death of billions to trillions was the intent, because the World Bank was busy announcing its new Private Sector Investment Lab at the same time, and the wording in the press release echoed the billions to trillions language. But maybe the Bank’s external affairs department hadn’t been given the memo, or they were just too excited about calling a committee a lab to read it. Regardless, let’s assume Paris marks the break, and we are back to comparatively reality-based ideas on how to raise lots more investment finance for climate and development. What was on offer?

The Paris Agenda returned to potentially excessive optimism when it came to what can be achieved by balance sheet optimization at the multilateral development banks (MDBs), but give it the $20 billion additional annual lending capacity it suggested we can get from that source, because it also recognized “MDBs may need more capital “ and notes we needed “An ambitious replenishment of IDA.” If we are to get anywhere near trillions in finance even given the stretch to a one-to-one leverage ratio with the private sector, that is surely unarguably true.

A back-of-a-soggy-Post-It-note calculation suggests very approximately what might be required. Usually, the World Bank and regional development banks do about $70 billion a year in sovereign non-concessional lending and $25 billion in concessional lending. Let’s say optimistically the non-concessional lending can get to $100 billion through balance sheet adjustments. At the World Bank, commitments over the past three years have run at about 14 percent of loans outstanding, so assume we’d need to increase the portfolio by seven times the desired increase in annual commitments. Add to this the assumption that this applies across MDBs and that you want $350 billion in additional lending every year: that’s $2.5 trillion added to the portfolio. At a 19 percent equity to loans ratio, that will carry a $465 billion global price tag in terms of new equity, although that could be spread out over time as disbursements increase, perhaps over ten years.

Then add in the concessional lending, at (say) a 65 percent grant element, at perhaps triple its current commitments: that grant cost is a little more than $30 billion annually on top. You’d also need to back the non-concessional bit: throw in $15 billion over ten years for that (and, further caveat, this is not the way that the World Bank’s concessional arm, IDA, currently works, whereby it would pretty much need a dollar of grants to finance a dollar of additional grants and credits at scale).

Put it all together, you’d get maybe a little over $500 billion in annual financing. Hopefully with the promised one-to-one mobilization that gets to a trillion—though it probably wouldn’t. The cost to the world is on the order of $78 billion a year. At current shareholding at IBRD, the Bank’s middle-income country arm, and near current IDA contribution shares, the cost to the US is maybe $11 billion (compared to a current official development assistance, or ODA, budget of $55 billion) and the UK about $4 billion each year (compared to a current ODA budget of $16 billion)—probably more, but surely still not utterly beyond the bounds of the possible. At least, if you ignore the issue of rebalancing MDB capital shares.

The world would need far more than just a lot more international finance to achieve the Sustainable Development Goals and limit climate change and its impacts. And it isn’t clear there is the demand for $500 billion in international finance, at least under the World Bank’s current model. But making a lot more international finance available could still definitely help. Perhaps the Paris summit can mark the start of discussing comparatively realistic ways to deliver that, beginning with a billions-to-maybe-half-a-trillion expansion of the multilateral development bank system.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.

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