Stepping on the Scale: The G20 and Raising MDB Ambition for the 2030 Agenda and Beyond
The global community is running out of time and falling behind on financing shared climate and development goals, with the United Nations warning that 85 percent of the 2030 Sustainable Development Goals (SDGs) are either off track, stagnant or regressing. Likewise, efforts to limit a global temperature increase to 1.5C consistent with the Paris Agreement are falling short, with the Intergovernmental Panel on Climate Change estimating that global temperatures are likely to rise by 2.8C by 2100.
As great as the estimated investment needs are, the economic and social costs of inaction will be far greater.
Multilateral development banks (MDBs) have a central role to play in raising ambition to get the international community back on track to achieving its shared goals. But are MDBs’ current capital levels sufficient to the task? And considering the increase in financing necessary to meet shared development and climate goals by 2030 and beyond, do MDBs have the necessary policies and processes in place to regularly assess their capital needs?
A new report by the Boston University Global Development Policy Center finds that MDBs have made important strides toward increasing their lending headroom but more ambition is needed to achieve development and climate goals in a timely and affordable manner.
The report, commissioned by the Brazilian Presidency of the Group of 20 (G20) as an input for the ‘G20 Roadmap towards Better, Bigger, and more Effective MDBs,’ estimates that to meet the lower-bound estimates of the system’s lending needs by 2030, MDBs will need to increase lending by at least a factor of three to provide the necessary non-concessional and concessional financing. To do so, MDBs as a system will need to be more ambitious in implementing the capital adequacy framework (CAF) reform measures, and their shareholders will need to increase the MDBs’ capitalization.
Currently, plans to implement the CAF reforms can generate between $300 billion to $400 billion in the next 10 years. The estimates indicate that capitalization needs under the ‘hybrid capital led’ approach can be as low as $60 billion for the whole MDB system, or 0.03 percent of shareholder budget revenues per year until 2030. This is a small price relative to the cost of inaction.
Additionally, the report finds that, with some notable exceptions, the MDBs lack uniform, evidence-based policies and processes to assess new lending targets and resource needs, creating a notable gap in the MDB and capital adequacy needs information system.
MDBs are an important part of the development finance landscape
An integral part of the development finance landscape, MDBs provide essential low-cost and long-run financing for public investments in infrastructure, education, transportation, health and more that would otherwise be prohibitive on private markets. Their unique financial model enables them to catalyze relatively small amounts of shareholder capital, while leveraging private sector capital through their bond issuances to on-lend for borrowers. What is more, MDBs can stimulate the private sector, drive domestic resource mobilization and serve as key knowledge hubs for development finance and environmental and social safeguards.
MDBs have been on a journey to become “bigger, better and more effective,” in the words of the G20. The transformation of MDBs to make them fit-for-purpose to the 21st century is essential for making “a quantum jump from billions to trillions of dollars for development.” The recent focus on MDB reform began in 2021 under the G20 Italian Presidency, with the “Independent Review of Multilateral Development Banks’ Capital Adequacy Frameworks,” which was completed under the Indonesian Presidency in 2022. The Indian G20 Presidency strengthened the initiative in 2023, and the Brazilian Presidency has continued this effort, pledging to deliver an implementation roadmap for MDB transformation.
Assessing capital needs and reviewing policy and process frameworks is an essential part of the ‘bigger’ pillar of the G20 roadmap, as the needs of the moment require a significant scaling up of resources within individual MDBs and across the broader MDB system.
By acting in parallel and as a system, the authors say that the MDBs can scale their financial capacity and mobilize private and domestic resources while pursuing reforms to become better and more efficient, as visualized in Figure 2.1.
Figure 2.1. MDBs Can Become Systemic Catalysts for Scale
Scaling MDB financing for shared climate and development goals
In terms of scaling up finance, MDBs have begun implementing recommendations from the G20’s CAF Review and have pledged to mobilize between $300 billion and $400 billion in new lending within 10 years.
However, the authors found that, to reach the scale of the investments needed to achieve the UN 2030 Sustainable Development Agenda, lending will need to at least triple, depending on the broader financial landscape. Figure 3.2 showcases the various scenarios for MDB system lending to emerging market and developing economies (EMDEs), excluding China, for 2019-2030. The authors estimate that, if global interest rates continue on a “higher for longer” path, MDB lending – which is often cheaper than private sector – will need to increase beyond the triple level target to ensure that the average total cost of capital is sustainable in the long-term. As Figure 3.2 shows, the current trajectory of MDB lending (yellow dashed line) is far from target lending needs.
Figure 3.2 MDB System Lending Needs to EMDE (Excluding China), by Scenarios Versus Current Trajectory, 2019-2030, USD Billions
Scaling up finance will require different levers and efforts across the MDBs surveyed; there is no ‘one size fits all’ prescription. Rather, as seen in Figure 3.1, the authors developed a framework for assessing MDB capital needs that can maximize lending volume by capital increases and balance sheet optimization, while maintaining debt sustainability.
Figure 3.1. Framework for Assessing MDB Capital Needs
MDBs will have to optimize their capital needs to the costs of borrowing on financial markets for EMDEs, while managing debt sustainability and risk across their balance sheets. Similarly, MDBs will also need to find an equilibrium between optimizing their balance sheets and injecting fresh capital. There are many ways that MDBs can strike this balance, as depicted in Figure 3.1 in triangles B-D, with triangle A showing the current state of the MDB system. Triangle B relies on maintaining current levels of balance sheet optimization while fully relying on fresh capital, while Triangle D relies on balance sheet measures without injecting new capital. Triangle C represents the sought after equilibrium, a balanced combination of new balance sheet measures with fresh capital, minimizing the costs to shareholders and the credit downgrade risks to MDBs.
According to the authors’ estimations and under the current trajectory of CAF implementation, the MDB system would need new paid-in capital ranging from $255 billion to $572 billion. The upper range figure would require yearly investments of paid-in capital over approximately seven years at roughly 0.11 percent of shareholder budget revenues annually. While it would not exclude new capital increase altogether, raising ambition on CAF recommendations would demand less new capital into the system.
Combining increased use of hybrid financing instruments with more ambitious implementation of CAF recommendations could bring the need for new capital down to as low as $60 billion, or 0.03 percent of shareholder budget revenues per year for seven years. This is a relatively small amount compared to the benefits of achieving shared climate and development goals and averting the worst of climate change.
Benchmarking capitalization policies and counting recent capitalizations
The authors of the report also conducted a benchmarking exercise on capitalizing policies and processes across the MDBs, alongside an analysis of recent MDB capitalizations.
From this exercise, the authors identified three key findings. The first is that there have been 24 General Capital Increases (GCIs) across the sample of MDBs since 2009, with $86.2 billion in additional paid-in capital. However, the bulk of these GCIs were made during the global financial crisis (2009-2013), with just 5 percent of the GCIs taking place in or after 2020. This means that while the international community was able to marshal finance to combat the global financial crisis, it has not made an analogous effort to explicitly support the SDGs and Paris targets (2015-2019) or to support the pandemic recovery (2020-2024). Understanding the history and nature of GCIs is important for developing an appropriate policy response to the present circumstances.
Secondly, they find that the MDBs broadly have similar statutory rules and governance over capital increase decisions, with GCIs requiring approval from the respective Board of Governors. Likewise, most MDBs require a qualified majority of sorts to approve a capital increase.
However, the authors also found a general lack of regular evidence-based reviews of 2030 financing needs across the system, as well as a system-wide view on MDB capital needs more broadly. This is problematic, because it is essential for the MDB system to have a scientific and evidence-based capital review assessment to meet their client borrowing needs and help achieve development and climate goals. The authors argue that the G20 can play a key role in setting principles for the capital assessment review as well as tracking and monitoring MDB progress on achieving financing needs, with an eye to the needs of the system as a whole.
Momentum to build on: G20 and MDBs working together to scale the system
Fifteen years since the global financial crisis when the G20 was elevated to a leaders’ forum and the international community rallied to save the global economy, the G20 needs to adopt a system-wide perspective on how the ecosystem of MDBs is working to support shared goals.
To the authors, the G20 must work to transform and strengthen the MDBs to raise financing ambition while also coordinating regular scientific and evidence-based capital reviews across the system. To do so, the authors identify three key policy recommendations.
The first advises G20 members as shareholders to further raise ambition to create more MDB lending headroom to meet financing needs of developing countries. MBDs can increase the ambition of the CAF reform implementation and shareholders can increase the paid-in capital of the MDBs. Such a balanced approach would maintain the credit ratings of MDBs and generate the least level of costs for shareholders. As part of an influential leadership forum, the priorities of G20 members and the rotating presidency carry important weight among MDBs and their capital shareholders.
Secondly, the G20 should encourage MDBs to review resource needs calibrated to achieving the SDGs and Paris targets and conduct these MDB-led reviews every three to five years. Regular reviews are essential to adequate stocktaking of progress to date and work left to be done.
Lastly, they say the G20 can be a platform for setting principles and tracking progress over time to assess the extent to which the individual MDB capital needs sum to a level of capital adequacy and financial capacity to put the MDB system on track for 2030 goals. Such tracking could be conducted on a regular basis without impinging on the work of MDB boards and guided by robust frameworks that promote coherence with strategic objectives, operational effectiveness and resource efficiency. A common methodology and reporting template will need to be developed for MDBs to report on progress.
The report is an important contribution towards making MDBs “bigger, better and more effective.” With the full G20 Roadmap in hand, the succeeding South African Presidency is poised to usher in a transformation of the MDB system to make it fit-for-purpose for achieving climate and development goals by 2030 and beyond.
As the authors state plainly, “there is no time to waste, but MDB capital cannot be wasted either.”
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