This blogpost was written in collaboration with participating think tanks from the Amplifying African Voices Initiative and jointly published
Now is the time to build momentum for meaningful MDB reforms that address Africa’s needs
Co-convened by the African Center for Economic Transformation (ACET) and the Finance for Development Lab (FDL), the third meeting of African think-tanks, under the Amplifying Africa Voices Initiative, specifically focused on MDB reforms (January 31).
The absence of African voices in the conversation on global financial architecture issues increases the urgency of this initiative.
The number and frequency of crises of all sorts (climate change, COVID-19 pandemic, geopolitical conflicts) has increased in recent years and underlines the urgency to find ways to overcome some of the most pressing global challenges of our time. International responses so far have been disappointing and lessons from the past have not yet been properly assimilated.
The G20, the international development community, and CSOs have repeatedly called for in-depth reforms of Multilateral Development Banks (MDBs). Indeed, whilst the latter may be uniquely qualified to address today’s crises with strong country-specific programmes, their approaches and fiscal impact need to be improved and concessionary funding has to be scaled up in order to effectively address the development challenges ahead.
MDBs play a unique role in tackling today’s global development challenges while maintaining vital country-level programmes.
The estimated needs to respond to shocks, finance development and the SDGs, and address to climate challenge run in the trillions. It is estimated that the new global challenges will require a tripling of financing from the MDBs, a doubling of bilateral aid, and a massive rise in the flow of private capital.
To succeed on all of these challenges, it is perceived that the role of MDBs is central. They have a financial model whereby all member countries – even developing economies - are shareholders. Contrary to many developing countries to which the markets have currently closed their doors, MDBs are able to borrow from capital markets. This leverage effect has allowed the World Bank Group’s International Bank for Reconstruction and Development (IBRD) to lend over $750 billion in loans from 1944 to 2020 with a capital of $18 billion provided by the 189 member countries.
Given the scale of today’s new global challenges, MDB financing will need to be increased significantly.
Concessional financing represents around $200bn a year, which is clearly insufficient considering that climate financing alone requires $2 trillion per year. There is a view that MDBs are overly constrained constrained by mandates and are too focused on protecting their capital base. Over time, a push by MDB non-borrower shareholders has led MDBs to focus on low-income countries (LICs) and to withdraw middle-income countries (MICs) from MDB concessional lending. This was due in part to the fact that MICs economies were growing, providing them access to international capital markets. In particular, during the Covid-19 pandemic, concessional lending to LICs rose sharply while the rise in non-concessional finance for MICs was much lower. MDB lending is seen by many as not aligned with the priorities of emerging economies, and it comes with high costs related to policy conditionalities, rigid safeguards, and lengthy processes.
THE INDEPENDENT REVIEW OF MDBS’ CAPITAL ADEQUACY FRAMEWORKS (CAF)
To address pressing financing needs, the G20 called in July 2021, for an Independent Review of MDBs’ Capital Adequacy Frameworks (CAF). The question is whether MDBs could leverage its capital even more. The panel’s view is that it does.
To do so, it recommended strategic shifts in five areas of the capital adequacy frameworks to maximise the impact of MDBs capital. These included adopting more efficient management of capital and risk, defining risk tolerance more precisely, relying more on callable capital, increasing the rate of financial innovations, and engaging in a closer dialogue with credit rating agencies. They further recommended creating an enabling environment for reform through greater transparency and information. The CAF report suggests that these actions could allow MDBs to substantially increase available funding by $1 trillion while protecting the World Bank’s AAA credit ratings.
Following the CAF Report, shareholders during the 2022 WB/IMF Annual meetings called on the World Bank to produce an “Evolution Roadmap”. In December 2022, the World Bank released its roadmap with a focus on the need to broaden and redefine poverty appropriately, while also revisiting the “shared prosperity goal”. The roadmap broadly accepted to deepen engagement with Middle-Income Countries, increase financial capacity, and work harder to catalyse private capital and raise domestic resource mobilization. It also warned that such reforms cannot lead to much more financing in the absence of a capital increase.
During the discussion, think tanks and experts stressed that the report lacked ambition and innovation. It also failed to focus sufficiently on the need for a parallel scaling up of finance to poor countries. This is reflected in insufficient stress on finding the right balance between financing global public good investments related to mitigation, and resilience enhancement – in particular with regards to food security. Higher level of disbursements will require major changes in safeguards, legislation, governance and human capacity. Capacities for national planning and donor coordination as well as learning and evaluation will also need to be enhanced. But equally, to ensure new financing is effectively used, Nationally Determined Contributions (NDCs) need to become more disciplined and more ambitious.
Currently, the dialogue on how to leverage MDB capital is mostly a G20 political dialogue and there are three key issues to be resolved:
- How to ensure the LIC agenda continues to advance as the unit cost of development increases, particularly considering climate change adaptation and mitigation.
- With regards to MICs, how to ensure that climate lending does not come at the cost of other development goals.
- Even if it gets expanded, how can climate financing match the borrowing needs.
In all of this, it is critical to ensure that African voices are influencing the design of the reforms
It is time for a new institution with equal participation or a new African-led and focused financing instrument. A proposal for the creation of a new climate finance institution was discussed. It would bring together governments, the private sector, and civil society representatives and where the Global South would have an equal voice to the Global North. Some policy institutes have noted there might not be a need for new organisations, but rather closing down some existing ones with overlapping mandates could be more effective. That said, attracting funding from the private sector remain a big challenge. Establishing a new instrument focused on climate may more easily attract funding from the private sector, provide incentives for carbon credits, elicit political will and create a channel to sell green bonds.
The discussion highlighted the political economy of how to affect the international financial architecture for development. Unprecedented global financial resources were spent on the Covid-19 response and now Russia’s war in Ukraine. But many in Africa feel insufficient resources have been allocated to the continent, which is leading to dissatisfaction and anger. Some policy institutes felt that reforming the international financial institutes is an impossible task as it is a zero-sum game. If one party gains more voice or voting rights, then another party loses its voice or voting rights. Others are more optimistic. But all agree that for African perspectives to have a chance of influencing these debates, there is need for a much stronger effort at articulating what Africa collectively wants to see out of this reform.
Given that G20 members India, Brazil and South Africa are/will serve as presidents of the G20 in the next three years, there is an opportunity for African think-tanks to build momentum on the financing agenda by deepening and filling the void of African voices on these topics. Concrete proposals need to be advanced to inform African leaders. This is even more urgent given the African Union (AU) is seeking a seat at the G20.
Two tracks of ways forward
Workable solutions for global financial architecture reforms need to come from the continent. It will come down to strategies combining public goods and national development plans. The challenge is how to structure new instruments to address the current crises and provide solutions where governments fail to do so.
The African economic policy institutes have discussed two tracks of research.
- The first relates to proposals for structuring a new instrument.
- The second focuses on leveraging what is already happening on the ground in Africa. In this way, and with a strong African voice in global fora, the new global financial architecture can reflect on Africa’s priorities.
Amplifying Africa Voice is an initiative of the African Center for Economic Transformation (ACET) and Finance for Development Lab (FDL) to improve knowledge sharing and joint analysis among African economic policy institutes on the global financial architecture agenda. The second technical session on African perspectives on the MDB reform was held on January 31, 2023.