Webinar Summary – The Great Mobilization: Reforming and Strengthening Multilateral Development Banks in the Age of Polycrisis

On Wednesday October 4, 2023, the Boston University Global Development Policy (GDP) Center hosted a webinar discussion ahead of the 2023 International Monetary Fund/World Bank Group Annual Meetings on reforming and strengthening multilateral development banks (MDBs) to meet shared climate and development goals. The webinar was moderated by Kevin P. Gallagher, Director of the GDP Center and featured Amar Bhattacharya, Senior Fellow at Brookings Institution; Marina Zucker-Marques, a Post-doctoral Researcher at SOAS, University of London; and Cecilia Nahón, Executive Director (Argentina, Bolivia, Chile, Paraguay, Peru, Uruguay) at the World Bank.

Gallagher opened the discussion by underscoring the polycrisis of COVID-19 impacts, grain supply chain disruptions, natural disasters, Russia’s war in Ukraine as well as interest rate hikes raising the cost of capital, increasing capital flight and placing downward pressure on exchange rates. He notes that this webinar was called “The Great Mobilization” because there is a need to make up for lost ground and surge ahead to meet the 2030 Agenda for Sustainable Development.

The High-Level Independent Panel on Climate Finance estimates the cost to meet the United Nations 2030 Sustainable Development Goals (SDGs) to be $2.4 trillion annually by 2030, out of which $1 trillion must come from external sources; the rest must be sourced from domestic sources, including the private sector. This stepwise increase in financing needs to start with the MDBs because they are unique in offering low cost and long-term financing to steer global markets to different goals. It is also critical to bend down the cost of capital. Nearly 70 countries need immediate debt relief so that they have the fiscal bandwidth to make investment towards development and climate change goals.

Bhattacharya echoed that MDBs are important but underperforming actors in the international finance system, and the root of their underperformance lies in their governance. There is great interest by shareholders of the development banks in transformation of status quo, especially the World Bank, but every MDB is reexamining its role in the system and how to get more out of it. The Group of 20 (G20) Independent Review of MDB’s Capital Adequacy Frameworks highlighted how MDBs could increase the volume of their lending by implementing measures to optimize their balance sheet. The G20 followed up with a two volume report on strengthening MDBs which articulate a ‘triple agenda’ of a triple mandate of ending poverty, boosting shared prosperity and supplying global public goods.

Bhattacharya argues that the mandate of MDBs must be broadened, so that they can help countries deal with development priorities in a climate-constrained world. He urged for recognition of the scale and urgency of challenges. Given that MDBs are providers of public goods at an affordable rate, the tripling of lending by 2030 must include more risk mitigation, credit enhancement and instruments such as blended finance.

He says that MDBs also need to improve their effectiveness in two ways – first, to gradually move away from project-based funding to those targeting system change, and secondly, to improve operational effectiveness through greater reliance on country and regional platforms. Other recommendations include an enhanced working relationship with the private sector through data sharing, developing investment pipelines, risk mitigation structures and smart deployment of blended finance. On MDBs’ financial capital, much can be done on balance sheet optimization, as well as shareholder and portfolio guarantees, which can have multiplier effects. However, Bhattacharya concludes that a regular capital increase is still fundamental for great mobilization, as are the requisite changes in governance structures.

Nahón underscored that the World Bank remains a very relevant institution for developing countries and that it is undergoing a reform called the Evolution process, which seeks to address two key questions: how to make a better Bank and how to make a bigger Bank. When the Evolution process began, it was focused on addressing three global challenges: climate change, pandemics, and fragility and conflict. Now, the World Bank has identified eight global challenges including also energy access, food and nutrition security, water security and access, enabling digitalization, and protecting biodiversity and nature.

In addition, Nahón argues that there should not be a trade-off in terms the allocation of resources; in other words, investments in climate are necessary, but they cannot be at the expense of resources for ending poverty and promoting shared prosperity.

In efforts to make a “better Bank,” the World Bank’s mandate has been expanded and now the Institution has a new vision: To create a world free of poverty on a livable planet.

Nahón argues that a good balance between adaptation and mitigation is necessary in climate finance, and noted that while good progress has been made, MDBs should have bigger ambition when it comes to climate adaptation to strengthen developing countries resilience to climate shocks.

A key element in these ambitions is to strengthen and respect country ownership of projects and programs. In terms of building a ’better’ bank, there is also a commitment to ensure the World Bank build the necessary partnerships for achieving all the SDGs, working with other MDBs and the UN system. Finally, client countries are pushing the World Bank to be more agile and responsive, as projects can often take 20 months to get off the ground.

G20 leaders have committed to make the MDBs ‘better, bigger and more effective’ and welcomed the steps taken by the World Bank to implement balance sheet optimization measures. The World Bank has decided to relax its equity-to-loan ration which will enable the bank generate an additional $50 billion in financing over the next ten years. While there are ideas for exploring new instruments, such as hybrid capital, Nahón emphasizes that these measures need two clear guidelines. First, the affordability of these new instruments must be the same or lower than current interest rates. Second, to support its new vision, there must be recognition that balance sheet optimization measures are welcome but not enough. Countries must open a conversation to move towards a general capital increase that allows the Bank to better address the urgency and scale of the overlapping crises.

Finally, Zucker-Marques presented on key new research to inform robust MDB reforms. First, she built on arguments for new hybrid capital financing instruments by highlighting a recent policy brief she co-authored with Kevin P. Gallagher. In the brief, they proposed a new instrument called Sustainable Future Bonds, a hybrid capital arrangement designed to unleash the potential of foreign reserves for development purposes. Second, she discussed findings from a new report published by the Debt Relief for a Green and Inclusive Recovery Project which examines why MDBs should be involved in debt relief, how much debt relief they should offer and how they can do so without affecting their preferred credit status.

To begin, she underscores that the G20 has called for development banks to be part of the solution for debt relief to meet long-term financial needs of developing countries, but there has been no concrete and systematic plan for burden-sharing among MDBs. Zucker-Marques explains that not only would MDB debt relief efforts reinforce their core mandate of economic development and poverty reduction, but a prolonged debt crisis in the Global South is very costly for them.

In terms of the scale of debt relief, Zucker-Marques explains how historic levels of relief efforts, such as from the Heavily Indebted Poor Countries (HIPC) era, must be combined with new levels of debt relief. She also notes that comparability of treatment is important, and if different levels of lending and prior relief efforts are accounted for, MDB relief would amount to $33 billion, when compared to $53 billion under a flat rate relief scenario.

Finally, Zucker-Marques also puts forward policy options for MDBs. These include replenishing the World Bank’s already existing debt relief trust fund that currently does not have resources supporting the International Monetary Fund’s Catastrophe Containment and Relief Trust and reinstating an international financial transactions tax that could channel more resources to MDBs for debt relief. However, additional donor support is needed for MDBs irrespective of the nature of support.

Gallagher concludes the discussion by emphasizing the remarks of each of the panelists and calling for this global conversation to continue beyond Marrakech at the 2023 IMF/World Bank Annual Meetings.

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