Context: The G20 finance ministers and central bank governors meeting in Marrakech (Morocco) have taken up recommendations suggested by the second volume of the Independent Expert Group on Strengthening Multilateral Development Banks.
What are Multilateral Development Banks (MDBs)?
- A multilateral development bank (MDB) is an international financial institution established by two or more countries with the primary objective of promoting economic advancement in low income and developing nations.
- These MDBs comprise member countries that represent a mix of developed and developing nations.
- MDBs extend financial support in the form of loans and grants to their member nations.
- Multilateral development banks operate under the framework of international legal principles.
- While commercial banks primarily aim to generate profits through loans and other financial services, Multilateral Development Banks (MDBs) makes grants and affordable loans to enhance the economic conditions of impoverished or developing nations.
- MDBs extend non-concessional financial support to middle-income countries’ governments, private sector enterprises in developing countries, and select governments of low-income nations.
- MDBs supply concessional aid, including grants and low-interest loans, to low-income country governments.
- Focus is on development-oriented goals, such as eradicating extreme poverty and reducing economic disparities.
- Provide loans at minimal or no interest rates or issue grants to finance projects in infrastructure, energy, education, environmental sustainability, and other sectors that foster development.
Evolution of MDBs
- At the end of World War II, representatives from 44 nations convened in Bretton Woods, USA, to establish a new framework for international cooperation and post-war reconstruction.
- This meeting in 1944 gave rise to the establishment of the International Monetary Fund (IMF) and the World Bank Group (WBG).
- The World Bank assumed the responsibility of providing financial aid to facilitate the post-war rebuilding and economic progress of underdeveloped nations.
- World Bank Group’s role has evolved, and presently, it consists of various institutions:
- International Bank for Reconstruction and Development (IBRD), which extends loans to both low- and middle-income countries (LICs and MICs);
- International Development Association (IDA), which provides loans to Low Income Countries;
- International Finance Corporation (IFC), support to the private sector;
- Multilateral Investment Guarantee Agency (MIGA), which encourages private enterprises to invest in foreign countries;
- International Centre for Settlement of Investment Disputes (ICSID) for resolving disputes.
Types of (MDBs):
- The first category comprises the largest and most renowned institutions, which offer loans and grants. Example: Inter-American Development Bank (IDB), established in 1959.
- The second category of multilateral development banks is formed by the governments of low-income countries, which then collaborate to borrow collectively through the MDB, enabling them to secure more favourable interest rates. Example: Caribbean Development Bank (CDB), established in 1969.
Challenges for multilateral development banks
- Within the realm of Multilateral Development Banks (MDBs), the major share of responsibility for extending financial support to emerging and developing economies (EDEs), predominantly rests with the World Bank (WB) system.
- The degree of competition and cooperation within the realm of MDBs is currently suboptimal, leaving significant room for improvement, particularly concerning customer service and the ease of borrowing.
- Regional MDBs often find their autonomy limited, particularly when their major shareholders overlap, resulting in the formulation of similar policies.
- MDB governance and the distribution of country voting shares present considerable challenges when seeking to increase capital. Additionally, criticisms are frequently directed at the bureaucratic procedures within MDBs, which can hinder project implementation and decision-making.
- The original purpose of Multilateral Development Banks was to address challenges of the period after Second World War. The contemporary world introduces new concerns related to global public goods, climate change, inequality and pandemics.
- Another issue pertains to the absence of adequate representation, influence, and voice for developing countries in the decision-making processes of MDBs. Ensuring transparency, accountability, and legitimacy in their actions and outcomes remains a significant challenge.
- MDBs grapple with constraints in their resources as they contend with the increasing demands for development financing. This is particularly evident in areas like climate change mitigation, adaptation, and infrastructure development.
- Encouraging private sector investments in development projects poses challenges. MDBs must create an environment conducive to attracting private capital by addressing risks and offering financial incentives for private sector engagement.
- MDBs face the challenge of addressing climate change and supporting sustainable development initiatives. This necessitates the incorporation of climate considerations into their policies, strategies, and project financing decisions.
Reforming Multilateral Development Banks
The independent expert group has proposed a comprehensive triple agenda for Multilateral Development Banks (MDBs). This agenda focuses on three core areas:
- Eliminating Extreme Poverty: MDBs should prioritize initiatives aimed at reducing and ultimately eliminating extreme poverty.
- Tripling Sustainable Lending Levels by 2030: The report recommends increasing annual sustainable lending levels to $390 billion by the year 2030.
- Flexible Funding Mechanisms: MDBs should create flexible funding mechanisms to engage investors actively supporting MDB goals.
The recommendations are:
- Encouraging Private Sector Engagement: The report emphasizes the importance of private sector engagement. It suggests that MDBs should break away from limited operational interaction between their private financing arms and their sovereign activities, encouraging a more collaborative approach with the private sector.
- Optimizing Balance Sheets and Cooperation: The report underscores the significance of optimizing balance sheets and enhancing cooperation among MDBs. These steps are seen as critical for achieving the objectives of the triple agenda.
- Leveraging Private Capital: Currently, MDBs leverage only $0.6 in private capital for every dollar they lend from their own resources. The expert group recommends that MDBs aim to at least double this figure to attract more private investment.
- Establishment of a Global Public Goods (GPGs) Funding Mechanism: The report proposes the creation of a funding mechanism for global public goods (GPGs). This innovative mechanism has the potential to unlock an additional annual lending capacity, estimated at a minimum of $20 billion. To achieve this, a flexible legal and institutional framework needs to be established.
- Focus on “Country Platforms”: G20 expert panel recommends that MDBs shift their focus from individual projects to helping countries build and operationalize “country platforms.” These platforms are voluntary country-level mechanisms set out by respective governments to foster collaboration among development partners based on shared strategic vision and priorities.
- Co-Creation of Multi-Year Programs: The expert group suggests that MDBs should prioritize programs identified by national governments with a sectoral focus and long-term transformation plans. This approach aligns MDBs more closely with the developmental priorities of individual nations and encourages the co-creation of multi-year programs.
- Independent Assessment Mechanism: The expert panel recommends that G20 finance ministers establish a mechanism to advise and independently assess the first-year implementation of the proposed roadmap, ensuring transparency and accountability in the reform process.
- Recommendations for Operational Improvements: Several smaller, well-defined improvements are suggested, including board monitoring of new targets, changing procedures, easing the utilization process, improving managerial incentives for small ticket lending, and providing training for giving warranties.
- Building Bankable Projects: Countries are encouraged to create bankable projects that can compete for finance on the country platforms. Technical support can help in developing granular asset specifics, measurement, disclosure, and appropriate incentives. Transparency and competition are key factors in reducing the impact of geopolitics in project decisions.
- Green Concessional Lending Arm: The report proposes the creation of a green concessional lending arm for the World Bank (WB) with more equitable voting shares, which could make it easier to raise capital for environmentally sustainable projects.
- Reform and Incentive Structures, which may involve implementing first loss guarantees, establishing realistic return targets, and improving risk management. Additionally, incentive structures should be designed to foster innovation and adaptability.
- Global South Representation to should ensure that the voices and perspectives of the Global South, including countries such as India, are not only heard but also advocated for in decision-making processes. This ensures a more inclusive and equitable approach to their operations.