By Biswajit Dhar, Council for Social Development, New Delhi in New Delhi
The G20’s quest to strengthen institutions like the World Bank is about to hit a crucial intersection. To meet its goals, everyone needs to buy in.
A core focus of the G20’s agenda at the New Delhi leaders’ summit will be on strengthening multilateral development banks, with success potentially adding trillions of dollars to fight poverty and save the climate.
Development banks are linchpins in those fights and important cogs in the global economy, stepping in to lend to countries in need, whether it is financial challenges or disaster.
This process of strengthening multilateral development banks was initiated through the G20’s 2016 action plan, which directed banks to “work through their Boards to optimise balance sheets, in order to increase lending without substantially increasing risks or damaging credit ratings”.
Five years later, then-G20 president Italy took the reform process forward by instituting an independent review of multilateral development banks’ Capital Adequacy Frameworks, which assess banks’ ability to meet their financial obligations.
In their first meeting under India’s presidency this year, G20 Finance Ministers and Central Bank Governors recognised the need for multilateral development banks to “evolve given the scope and complexity of transboundary challenges and the resultant increase in demand on their lending resources, knowledge support, and for catalysing private investment”.
They asked multilateral development banks to “undertake comprehensive efforts to evolve their vision, incentive structures, operational approaches and financial capacities so that they are better equipped to maximise their impact in addressing a wide range of global challenges, while being consistent with their mandate and commitment to accelerate progress towards Sustainable Development Goals” (SDGs).
The Indian G20 presidency took the logical next step, developing an agenda, based on which the multilateral development banks can carry financing the recipients.
An International Expert Group was entrusted with this task, established to “address the shared global challenges of the 21st century”.
The group had three broad objectives: to prepare a roadmap for an updated development banking ecosystem that is better equipped to finance a range of SDGs and transboundary challenges such as climate change and health, evaluate the scale of funding required by and from banks to address their increasing needs and that of member countries, and better coordinate among banks to “address and finance global development and other challenges more effectively”.
The International Expert Group was tasked with spelling out the details of a plan which multilateral development banks could follow while discharging their functions.
The expert group spelt out a triple agenda aiming to harness what it saw as the potential of the multilateral development banks.
Under the first part of that plan, development banks had a mandate to eliminate extreme poverty, boost shared prosperity and contribute to global public goods.
The other planks of the agenda are for multilateral development banks to triple sustainable lending levels by 2030 and create a third funding mechanism which would permit flexible, innovative arrangements with investors willing to support elements of the agenda.
The International Expert Group argued that additional annual spending of around USD$3 trillion is required by 2030, of which $1.8 trillion should be investments for climate action (mostly in sustainable infrastructure) and $1.2 trillion for spending to realise other SDGs.
The figures imply a four-fold increase in climate adaptation, resilience and mitigation funding compared with 2019, and a 75 percent increase in spending on health and education.
It takes many contributors to mobilise financing on that scale. The International Expert Group projects that the global development finance community needs to provide an additional USD$500 billion every year until 2030.
Of this additionality, one-third would be concessional funds and non-debt-creating financing, while two-thirds would be for non-concessional official lending.
More funding would also help mobilise private capital of up to USD$1 trillion.
Multilateral development banks must provide an incremental USD$60 billion of additional annual official financing, of which $200 billion in non-concessional lending, and help mobilise and catalyse most associated private finance.
In its first set of recommendations, the expert group argued sustainable lending levels from multilateral development banks should be tripled by 2030, targeting USD$300 billion per year in own-account non-concessional finance — normal commercial loans — and $90 billion per year in concessional finance — loans or other funding that might be provided at below-market rates.
According to the expert group, this could be achieved if G20 members restored their contributions to the International Development Association — the soft-lending arm of the World Bank — and sharply increased contributions, tripling its funding pool by 2030.
In its major recommendations, the International Expert Group asked development banks to build a financing instrument that provides rapid, automatic concessional assistance to countries in need, including middle-income countries hit by major natural disasters like Pakistan and Sri Lanka.
They also asked banks to change their approach to partnering with the private sector, by working systematically with them in sovereign and non-sovereign activities.
These recommendations do not bode well for the future of concessionary lending from multilateral development banks. Donor country pledges for the latest three-year cycle of International Development Association funding were well below expectations.
It also raises questions over the ability of multilateral development banks to provide debt relief to countries most in need, potentially limiting the ability of debt-distressed countries to invest in development.
The International Development Association’s funding challenges are unsurprising given the United States’ reluctance to contribute more to multilateral development banks.
US Treasury Secretary Janet Yellen told the third meeting of G20 Finance Ministers and Central Bank Governors in July that the G20 must only explore capital increases after multilateral development bank reforms had progressed.
Multilateral development banks hold the key to realising the SDGs, for they can provide concessional finance to developing economies. The New Delhi summit can underline the importance of these banks by garnering the necessary political support to improve their viability.
Biswajit Dhar is a former professor of economics, Jawaharlal Nehru University. He is currently Distinguished Professor at Council for Social Development, New Delhi.