While the outlook is bleak, there is still time to act, but only if the international community moves quickly to invest at scale in sustainable, resilient and inclusive growth in low- and middle-income countries. In this growth story, the multilateral development banks (MDBs) have a critical role, given their unique combination of technical support, policy advice and affordable long-term finance. MDBs will only be able to meet this challenge if they undertake fundamental reform.

Progress on the MDB reform agenda: a mixed assessment

Recent G20 presidencies have laid out a comprehensive agenda for MDB reform, requiring nothing short of a sea-change in how MDBs operate. This comprehensive agenda outlines several solutions to increase MDBs’ financing capacity, including by mobilising financing, and enhancing MDB operating models, individually and as a system. Commissioned by the Indian G20 Presidency, the 2023 report of the Independent Expert Group (IEG) calls for MDBs to be “better, bolder and bigger.”

What is the progress on MDBs becoming “better, bolder and bigger”?

“Better” banks. First, MDBs were asked to increase their speed and flexibility and be more responsive to their clients. There is some progress here. MDBs are starting to become faster, and the World Bank aims to reduce its project review and approval time by one third.

Second, MDBs urgently need to support country-led platforms for transformational change for ambitious climate and development objectives. MDBs have committed support, but without any specific targets or timelines, and existing platforms are not operating smoothly, as complex negotiations among MDBs make it difficult to recognise or even harmonise standards.

Third, MDBs must work as a system. At the institutional level, there have been renewed efforts with the revival of the Heads of MDB retreat and the so-called ViewPoint Note. However, this needs to translate into increased staff incentives for cooperation, on which there has been little progress. As a result, there is little upstream collaboration on strategies, diagnostics, market support, project pipeline development or monitoring and evaluation. Harmonisation or recognition of standards is a critical area.  While there has been good progress for procurement, environmental and social safeguards have proven much more difficult.

“Bolder” banks. Here MDBs need to take on and manage risk more effectively, and work systematically with the private sector, to co-create investments and increase private capital mobilisation. This requires a major shift towards a culture of informed risk taking, innovation and whole-of-MDB strategies for mobilisation. This in turn means changes to staff incentives and operating models.

Unfortunately, there is little progress in creating whole-of-bank approaches that combine support for reducing risk with tools to share risk. Only three banks have set private capital mobilisation target ratios, and some are not very ambitious. Even subsidies have been insufficient to overcome internal barriers to taking more risk.

“Bigger” banks. The implementation of the recommendations of the G20 Independent Review of MDBs Capital Adequacy Frameworks released in 2022 is mixed.

On a positive note, financial innovation and balance sheet reforms are on track.  MDBs have successfully piloted innovations, such as hybrid capital and risk transfers. The 2024 Heads of MDBs Viewpoint Note estimates that measures already taken could release $300-400 billion of additional headroom in the major MDBs over 10 years. These increases are largely driven by hybrid capital and risk transfers.

So far, however, shareholders have avoided the most difficult and sensitive reforms to capital adequacy frameworks and to incorporate callable capital.  But these reforms have the potential to increase lending headroom.

More broadly, the IEG recommended the tripling of MDB lending levels by 2030, going beyond the CAF recommendations, in particular, through general capital increases. Capital increases have been approved at the IDB Invest and the EBRD (the latter for Ukraine). The World Bank Group has also proposed a capital review in 2025. The IEG also recommended a substantial scaling-up of concessional financing, including a tripling of IDA by 2030. So far, the current IDA replenishment discussions are not very encouraging.

Why has progress been insufficient?

Ultimately the big decisions remain in the hands of MDB shareholders. Even where managements can move forward, they look to shareholders for guidance.

The inability to deliver transformational reform, therefore, speaks to the political economy of these institutions. Namely, while they exist to serve mainly low- and middle-income countries, decision-making lies in the hands of the Western industrialised countries that own the majority of the shareholding. In overseeing the MDBs, these “creditor countries” respond to domestic constituencies which can be conservative. The clearest illustration is in safeguards, which should increasingly take a risk-based approach in their application.

At the same time, the lack of concerted action by emerging economies is also disappointing. Working together, large emerging G20 members could push forward reforms, even in the face of conservative shareholders.

How to accelerate progress?

What is needed is leadership to advance an MDB agenda of global benefit.

Work is required at a technical level to track progress, prepare reporting and ensure accountability for delivery. Such work is being undertaken, for example, by the Brazilian Presidency in the G20 International Financial Architecture working group. But the technical work is often not enough, as technical discussions often result in a low-common denominator consensus.

Political leadership is needed – at the highest levels – to deliver on the full vision for MDB reform. This is especially important now, as we turn from the politically and intellectually satisfying work of designing a reform agenda to the mundane work of implementation. G20 presidencies must champion MDB reform as part of their central agenda. MDB presidents must challenge their shareholders to consider radical reform. Furthermore, reform-minded shareholders must build constructive alliances to support action.

Thanks to recent G20 presidencies, we have a comprehensive vision for MDB reform and political leaders must show that they are serious about delivery.