September 6, 2023
In the wake of the G20 Leaders’ Summit and ahead of the World Bank-IMF Annual Meetings, a range of global think tanks—based in countries from Bangladesh to Brazil to Tanzania—submitted short essays and responses on what they want to see out of the MDB reform agenda.
The multilateral development banks are some of the most promising instruments to mobilize the financing needed to tackle global challenges, and major reform discussions are underway to make them fit for purpose moving forward. The perspectives of countries who borrow from the MDBs must be at the heart of these debates.
How can MDBs better meet today’s challenges in Africa?
African Center for Economic Transformation (ACET: Ghana) – Rob Floyd
The MDBs can better meet today’s challenges in Africa in three distinct ways. First, they need to be responsive to the priorities highlighted by Africa’s leaders. The UNECA Conference of Ministers, the High-Level Working Group on Global Financial Architecture, and the G24 have highlighted broad categories of primary topics, while the African Agenda for Global Financial Architecture prioritizes five key demands. It is easy for “everything and nothing” to get done unless there is laser focus on a few key reforms that can have the greatest impact. Second, while the MDBs are important for development finance generally, they are absolutely critical in addressing extreme poverty and the Sustainable Development Goals (SDGs). To do so will require scaled up grant and concessional flows. This will require even more innovation and higher risk tolerance. With IDA facing a financial cliff and bilateral grant aid getting smaller, the poorest and most vulnerable people on earth will bear the brunt of climate change, insecurity, food scarcity, and less access to health and education. Third, MDB leadership needs to champion reforms to voice. Given geopolitical tensions and the zero-sum game of voting rights, this is not going to be taken up by political leaders. Only the leaders of MDBs can effectively champion these reforms.
Revolutionizing sustainable development finance takes a global village of development banks
Brazilian Center for International Relations (CEBRI: Brazil) – Rogerio Studart
To expedite the shift towards sustainability, trillions are requisite for green infrastructure, technologies, and enterprises. Developing nations seek fiscal leeway for public investments and access to enduring private capital, vital amidst debt concerns. For effective sustainable projects and funding, MDBs should reform, exploring innovative models beyond financial changes. One concept involves a collaborative ‘constellation’ of development banks, encompassing multilateral, regional, and national institutions. Their objective is to augment project development, risk management, practical knowledge sharing, creation of shared risk tools, and origination of financial instruments. These instruments can mobilize funds from specialized markets, impact investors, and philanthropies. Governors of the IMF and World Bank, with stakes in other national and regional development banks, can foster cooperation and gauge success based on sustainable project expansion in developing economies. Yearly meetings could catalyze a fresh support system surpassing the confines of the World Bank, thus transforming multilateral finance globally.
Poverty reduction at the core of the MDB mandate.
Center for Global Development (CGD: US and UK) –Clemence Landers
Much of the current MDB debate is dominated by discussions around their role in middle-income countries. But at least over the near-term, it is in lower-income countries where their financing is most going to be most needed. This is especially true at a time when low-income countries are battered by a series of external shocks that threaten to derail decades of development progress and external funding—from bilateral sources as well as market finance—is on the decline. For these reason, concessional lending windows like the International Development Association (IDA), the African Development Fund (AfDF), or the International Fund for Agricultural Development (IFAD) stand out as key components of the global financial safety net for the world’s poorest countries and the central nodes of the MDB system. But they too need to adapt to a changing international economic and political landscape. Important policy questions loom large including around the sustainability of their funding models, their roles (and responsibilities) in the global debt architecture and more broadly their approach to preparedness and response in a more crisis prone world.
MDB reforms should emphasize “development effectiveness”
Center for Policy Dialogue (CPD: Bangladesh) – Debapriya Bhattacharya, Towfiqul Islam Khan, and Najeeba Altaf
The core purpose of the MDBs is to deliver development assistance effectively. In the era of polycrisis, maximizing the effectiveness of development assistance has perhaps become more important than ever. The providers belonging to DAC/OECD, being informed by the SDGs and the commitment to ‘leave no one behind’, are also asking for inclusive interventions. The recipients from the South, being guided by their development experience, are also expecting that the effectiveness of the assistance will also be assessed at the local level. But is the MDB reform agenda adequately sensitive to these issues?
The GPEDC initiative has recently adopted a revised framework for assessing the principles that should embedded for achieving effectiveness of development cooperation. This new approach emphasizes the concept of ‘collective accountability’ on the part of providers and recipients. One wonders to what extent the MDBs are prepared to reassess their conventional methods for assessing development effectiveness at the disaggregated level at the country level.
The sensitivity of MDBs towards the aforementioned dimensions of development understanding should be an integral part of their next reform agenda. Furthermore, MDBs cannot remain oblivious about a notable expansion and influence of bilateral financing from Southern providers, the emergence of MDBs of Southern origin, the growing popularity of non-traditional financial instruments and complex new geostrategic alignments. Do the MDBs have the necessary institutional will and the requisite processes and instruments for taking on board these critical issues in their evolving reform agenda?
How can MDBs better meet today’s challenges?
Center for the Study of the Economies of Africa (CSEA: Nigeria) – Mma Amara Ekeruche
A key part of MDB reform is the need to integrate global challenges, or Global Public Goods (GPG), across Banks’ operations. Issues such as climate and the environment, global public health, a fair international trading system, financial resilience, and peace and security have cross-border externalities which reduce incentives for individual countries to contribute towards addressing these issues beyond what is in their national interest. For this reason, MDBs must continuously amend their institutional set-up, financing, and operations in order to bring the Global Public Goods element into projects. This can be achieved through several ways. First, MDBs should prioritize countries with high GPG relevance, and within those countries, GPG projects with high cross-country externalities. For instance, in the fight against climate change, it will be more beneficial to target high-value projects consistent with reducing emissions in countries with high greenhouse gas concentrations. Second, MDBs must strike a balance between financing investment projects, whose success is visible and measurable, to policy-oriented projects. This is because good policies complement investments and is particularly the case in nascent and/or constantly evolving sectors such as global public health and climate change. Third, GPG provision requires an instrument mix of not only finance but also technical assistance. Furthermore, GPG finance in MDBs needs to be a mix of loans and grants with the degree of concessionality rising with GPG benefits. This will encourage national governments to support projects with large GPG benefits.
How can MDBs better meet today’s challenges?
Overseas Development Institute (ODI: UK) – Annalisa Prizzon
This time of polycrisis calls not just for bigger banks, but for better banks. The day-to-day operations of MDBs are not working as well as they should, particularly with regard to delivering on climate-smart development. Even if all the reforms currently under discussion are implemented, the risk remains that client countries will still choose to borrow limited amounts from MDBs.
Despite the operational model of MDBs demonstrably possessing many strengths, borrowers nevertheless see some drawbacks. In the ODI survey of client countries, we found that policy conditionality creates barriers to borrowing and can potentially shift priorities away from what countries and their citizens want. Lending approval and disbursement processes can be lengthy. Advice and ideas are not always tailored to country needs.
To address these challenges, MDBs should adapt their technical offer and support countries in crafting climate-smart development strategies. They must also make lending operations more agile by streamlining their requirements and safeguards, harmonise their rules and procedures across their lending operations, and further delegate project approval to management. MDBs should also offer more responsive and targeted advice and seek to attract a wider range of expertise, while staff should be rewarded for the impact of their advice rather than the quality of their report writing.
How can MDBs better meet today’s challenges?
Policy Center for the New South (PCNS: Morocco) – Otaviano Canuto
The reform of the global development finance architecture should be perceived as a means rather than an end. It goes beyond the reform of MDBs. The evolving mandates of international financial institutions (IFIs) and multilateral institutions carry potential unintended consequences for developing countries, prompting the need for institutions insulated from global geopolitical dynamics. The focus lies in constructing institutions that are shielded from rivalry-induced stagnation, ensuring effective development finance that aligns with broader goals of Southern countries. Africa, often sidelined, should play a central role in these conversations, recognizing its substantial potential investment prospects amid associated risks, that can be solidly managed with the appropriate trust mechanisms. Particularly concerning Africa’s development challenges, IFIs can enhance trust and bridge the gap vis-à-vis the private sector. Globally, MDBs and IFIs are also key to preserve a platform to uphold a solidly grounded rules-based order, where the Global South can play a significant role.
MDBs and domestic resource mobilization and public financial management
Research on Poverty Alleviation Programme (REPOA: Tanzania) – Jamal Msami and Ahmed Ndyeshobola
MDBs have traditionally provided and mobilized much of Africa’s development finance through various financing instruments. MDBs have also been instrumental in influencing public financial management (PFM) reforms in Africa that have anchored growth and development. However, following an initial decline in the early 2000s, Africa’s public debt has soared to 56.4% of GDP from 36.1% in 2005, underlining increased debt risks and vulnerabilities. In light of the targeted MDBs’ reform effort, MDBs need to firstly, and collectively, support African countries in renewing PFM reforms beyond technical reforms towards institutionalization of transparency, accountability, and inclusivity. Secondly, MDBs need to support these countries to develop their domestic resource mobilization (DRM) as the long-term path to sustainable development finance—to finance their economic stimulus packages and renew progress toward the SDGs, deliver public services, and sustainably alleviate poverty. Thirdly, MDBs need to effectively support policy development processes and frameworks in these countries. To that end, policy support instruments like the IMF’s “Policy Coordination Instrument” should underly the collective MDB’s targeted capacity development to all African countries to, inter alia, strengthen their respective policy environments and transparency, and their key macroeconomic institutions.
A renewed call for MDBs to address the currency risks of borrowing countries
Shanghai Institutes for International Studies (SIIS: China) – Ye Yu
The accelerated global monetary tightening since 2022 reveals exchange rate volatility is still a major risk for the developing economies. The “debt traps” are to a large extent “dollar traps”. Embracing the strong concerns of the Global South on their currency volatility, the BRICS leaders are bold in calling for greater use of local currencies. While the globalization paradigm is being replaced by regionalization and localization processes, the case for a single currency-dominated global monetary system is being weakened.
This means MDBs should not simply provide more concessional financing. Instead, they should exhibit more “additionality” by prioritizing mitigation of currency mismatch risks for their borrowers. The various instruments developed by MDBs in the last two decade should be significantly scaled up, such as The Currency Exchange Fund (TCX) and the IDA’s Local Currency Facility. Major shareholders should allocate more resources for this purpose.
Local currency bond issuance and financing is more fundamental in helping the borrowers develop their local capital market. New institutions such as the New Development Bank and Asian Infrastructure Investment Bank are getting more ambitious on this aspect. Legal obstacles need to be addressed for some legacy MDBs, e.g., the IBRD agreement prohibits it from providing local currency loans except “in exceptional circumstances”.
How can MDBs better meet today’s challenges?
South African Institute of International Affairs (SAIIA: South Africa) – Conrad Van Gass
For African LICs and MICs, global initiatives to increase MDB lending capacity through use of callable capital, hybrid instruments and shifts in credit rating methodologies should be balanced against the capacity of regional MDBs and national DFIs to absorb loans for climate mitigation and adaptation infrastructure amongst the other sustainable development priorities.
The most acute blockages lie in the project preparation phases of project design, feasibility, operational and financial structuring and tendering. Both recipient and donor country grants can be channeled into equity stakes, revolving funds, redeemable grants and other mechanisms to bridge the long incubation and grace periods required for this initial phase of infrastructure projects.
Use of country systems to support development of the institutional capacity and financial depth of borrower countries and markets; combined with the cross-national harmonization of regulation, dispute resolution and taxation, with sustainable pricing models pertaining to utilities, will enable scale economies, reduce transaction costs and attract more blended finance.