Bridging the Climate-Development Gap

Development Finance: More Bang for each ODA Buck

The struggle to end poverty and fight climate change is leading to ever-growing demands for more development aid (ODA) in the form of capital replenishments of Multilateral Development Banks (MDBs) and other Development Finance Institutions (DFIs), especially towards funds dealing with development and climate issues.

The Summit for a New Global Financing Pact hosted by President Macron last June promised nothing less than a new era for development finance, one with a new financial system that will endeavor to make billions available in order to tackle the pressing climate challenges ahead.

Marcus Fedder

Marcus Fedder is Vice Chair of TCX and was formerly Treasurer of the EBRD, Vice Chair of TD Securities and a Director of IFFIm. He also worked for the World Bank in the 1990s.  He has acted as an advisor to IFAD in the past.


Alas, as stated in this column by Jayati Ghosh and co-authors, it has failed to meet its lofty goals so far. Mobilizing private capital is difficult and ODA is limited.

Even wealthy countries like Germany are cutting back on their development budgets. Ultimately, there is a growing realization that the billions, if not trillions, needed may not be coming fast enough. The subsequent logical question that has to be asked is whether or not more can be done with existing money within existing institutions. Are DFIs all operating at maximum efficiency?

A review of the lending capacities of MDBs was launched under the Italian G20 Presidency, leading to the publication of the Report of the Independent Review of MDB’s Capital Adequacy Frameworks:  Boosting MDBs investing capacity  in July 2022. The report sets out a package of recommendations which, taken together, were intended to help MDBs pursue increased development investment and impact as well as sound financial management. A key takeaway of the report was that MDBs should take more risks, which, in other terms, means lending more.

Unsurprisingly, the response from finance professionals at the World Bank was not particularly enthusiastic, fearing that an expansion of lending without a fresh capital injection could lead to a loss of its AAA rating.

This sacrosanct rating status guarantees capital market borrowings at the finest terms and hence lending at the lowest sustainable rates. Prodded by its main shareholder, the United States, the World Bank proposed to implement part of the panel’s recommendations, under what it called its “Evolution Roadmap”, which would add $50 billion to its balance sheet by 2030.


However, many deemed this proposal too timid. For instance, the UK based ODI promptly followed up, focusing inter-alia on the capital adequacy framework, stating that “the slight reduction in the equity-to-loans ratio, the elimination of the statutory lending limits and progress on hybrid capital instruments – as proposed in the draft Roadmap – are all positive steps and will generate an estimated $50 billion in lending space over the next 10 years.

Nonetheless, World Bank management has resisted grappling with the more fundamental aspects of the CAF (capital adequacy framework) reform proposals, particularly whether the Bank (as well as rating agencies) are overestimating financial risks to the detriment of lending capacity.” Under the Indian G20 Presidency, another taskforce produced the report “Strengthening MDBs: the Triple Agenda”, further elaborating on proposals of how to make MDBs more efficient. Whilst the focus on optimizing MDB balance sheets is important, one has to realize that according to Moody’s, the World Bank as of FY2021 already had a leverage ratio of 4.75, down from 5.19 in FY2020 and that the average leverage ratio of AAA MDBs stood at 2.8.

Yes, these ratios can be tweaked, but, as importantly, we should broaden the scope of institutions considered to include all DFIs, including bilateral funds, many of which have a leverage ratio of 0. If they were to add a 2.8 or 4.75 leverage ratio to increase business volumes and thus outreach, a lot more money would be available. The G-20 reports focused on MDBs alone as their first step, but next natural reform should  address the inefficiencies of (a) funds that have been set up, inter alia to fight climate change and (b) those bilateral development finance institutions which operate in a sub-optimal way.

Let us look first at the latter:  The UK’s BII, the DFC of the USA, BIO of Belgium or IFU of Denmark and many other of the bilateral development finance institutions remain unleveraged and thus, from a balance sheet perspective, less efficient.

One frequent argument against leveraging is that it would prevent from taking risks on the asset side, for instance reducing the equity investments that those institutions can make. This is not the case: this is not a zero-sum game. EBRD, IFC and others do both. The unleveraged bilateral Development Finance Institutions only need to look at their neighbors to see how things can be done differently: the Dutch FMO (equity EUR 3.5bn, balance sheet EUR 10bn), the French AFD (equity EUR 8.8bn, balance sheet EUR 64bn) or the German KfW (equity EUR 37bn, balance sheet EUR 555bn) all efficiently leverage their equity via borrowings in the international capital market and thus achieve much higher business volumes – more bang for each equity buck.

Another inefficient use of capital can also be found in some multilateral funds:

The Green Climate Fund is an example of an institution that operates below its capacity. With USD 12.5 billion committed (and only USD 3.5 billion disbursed after 10 years of operations), it now needs to ask member countries for replenishments in order to continue and grow its operations. Rather than asking the Fund to optimize its balance sheet and follow the recommendations of the G-20 report, governments simply pour more money into the pot, which is clearly a sub-optimal use of scarce development resources.


Another example is IFAD, the International Fund for Agricultural Development, which was set up to lend its equity in concessional loans to the poorest countries in order to support smallholder farmers.

Loans for less poor Upper Middle-Income countries are priced with reference to a floating interest rate (Euribor or SOFR), leading the fund to decide that such loans could be funded out of borrowings.  Consequently, IFAD set up the policies and infrastructure, enabling it to obtain two AA+ ratings so that it could start borrowing in the capital markets to leverage its equity. Now other lower income countries can also obtain such floating rate funding in addition to their allocated slice of concessional funding which comes from the fund’s equity. IFAD’s leverage ratio is still extremely low, but the institution is now set up to expand its lending and have a greater outreach and impact. As negotiations over IFAD’s replenishment are starting, now is the time to make use of this leverage.

That leaves the question about IDA, as the institution’s leverage is very low.

But IDA’s loans are to the greatest extent on concessional terms, which are not linked to market rates. Only an expansion of non-concessional lending could be funded by additional borrowings as IDA’s long term fixed funding rates (via swaps) are significantly higher than its concessional lending rates. Both IFAD and IDA show that there is a limit to leverage not only from a prudent financial management and ratings perspective but also from a lending perspective, as only those loans that are linked to market interest rates can realistically and without significant losses be funded by borrowings whereas no-interest or extremely-low interest concessional loans have to be funded by the institutions’ equity.

Nonetheless, all DFIs, be they MDBs, bilaterals or funds, should analyze and define their optimal leverage ratio based on their product blend and on prudent financial considerations. It is essential if they are looking to grow their lending businesses beyond current levels and increase their impact on pressing issues in the fields of economic development, poverty reduction and climate finance, where much more needs to be done and cannot be achieved under current conditions, with limited, unleveraged resources.

From the Summit to camp-base: what happened in Paris?


Since 1981, a peculiar tradition has taken hold in France on June 21st, the summer solstice and the longest day of the year. It is the day of “La Fête de la Musique”, when musicians show up and perform, from amateurs on tiny street corners in a joyous cacophony to famous performers on stages set-up in all major public squares.

It was fitting that the “New Global Financing Pact”, the summit on climate and development finance organised by French President Macron, took place on the next two days, June 22nd and 23rd 2023. The Summit had all the features of experimental jazz: powerful soloist moments, interspersed sentiments of pointlessness and disorientation, brilliant improvisation, instants of disharmony. At the end of such a concert, the sentiment was that not much concrete has been accomplished, but that something happened, a dialogue, even if the participants did not always listen to each other, often sung past each other, and were mostly not playing in the same key.

1. Some harmony but dwarfed by dissonances

Before diving into the concrete outcomes, it is important to stress how different this Summit was, and this difference might be the most interesting and productive aspect. It was unique in that developing and emerging countries had a broad and diverse voice at the highest levels.

About 50 Heads of State were present, from countries of different sizes and levels of income. In that, it was unlike G20 Summits, which only gather large economies; or the Spring and Annual Meetings of the IMF and the World Bank, which bring Finance Ministers together to focus on more technocratic issues. At the same time, it was more structured and concrete than discussions which can be heard at UN General Assemblies. In Paris, the discussion was often technical, but also integrally political.

Interestingly, it was a space of unusual dialogues across diverse countries, and was taken seriously by large emerging countries, and this convening power is important, at a time where the G20 continues to have difficulties going over geopolitical tensions. The participation of China and Brazil at very high levels, and the importance and articulate voices of leaders from Africa, South Asia, and Latin America, have clearly shown that such discussions are useful.

While representation from the richest countries was disappointing, president Macron compensated by chairing a dynamic closing session on a first name basis, bringing into the discussion very outspoken leaders from the global South, in addition to the Prime Minister of China, and influential Northern leaders such as Janet Yellen, Wolfgang Schmidt, and of course Kristalina Georgieva and Ajay Banga.

The summit's main success was to consolidate the new narrative, with leaders from around the world agreeing that progress on poverty reduction and on the environment were inextricably related. Across speakers, there was a broad consensus that climate and poverty were converging problems, and that the South had a major role to play in solving this problem.




Mia Mottley, William Ruto, Luiz I. Lula, Nana Akufo-Addo, Hakainde Hichilema, Shehbaz Sharif, Antonio Guterres, Cyril Ramaphosa, ABDEL Fattah el-sisi,  Abiy Ahmed, Macky Sall, Kristalina Georgieva, Akinwumi Adesina, Ajay banga, Laurence Tubiana, Ranil Wickremesinghe, Ilan Goldfajn, Mohamed Bazoum and Emmanuel Macron

There was also a broad agreement that the current global institutions are not up to the task and need a major overhaul. While Secretary Yellen focused on the MDBs – the World Bank, and regional banks -- Southern leaders, as well as UN SG Gutierrez, called on the governance of the IMF and of the UN to become more democratic and representative of a diverse world.

There was finally an agreement that cooperation among all countries from the North, South, and East are needed to achieve these common aims.

But beyond those agreed principles, the most visible outcome of the Forum was to highlight the abundance and severity of disagreements, especially along the North/South divide. Advanced economies tend to take a long-term perspective: how can we be ready for 2050, and maybe make some progress by 2030? Developing countries are much more focused on the now: they feel that the house is burning, and that they need to find solutions now to urgent problems that cannot wait.

Whether about potential climate shocks, like Barbados, or the debt burden like Ethiopia, Kenya or Ghana, countries from the South have been rocketed by a long series of shocks, and they want relief now, which a global financial safety net dominated by advanced economies, is not providing.

President Ruto referred several times to the fact that the Bretton Woods system emerged in a few weeks, but that institutional reforms now take decades. The President of Ghana, as chair of the V20, highlighted the need to take into account climate prosperity. Mia Mottley said the role of bureaucrats – and think-tanks for that matter! – is to bring those perspectives closer. President Sisi reminded the audience that if the $100billion/year pledge on climate finance was met in 2015, the planet would be in much better shape today. All Southern leaders warned that if cooperation does not improve fast, then as emphasized by president Ramaphosa, it would not even be worth their time to keep coming to global summits, much less cooperate on climate.

2. Outcomes: vague and vaguer

Beyond this ambitious forum of Heads of States, what were the outcomes? We can read them through the four documents published on the official website: a “Paris Agenda for People and the Planet” endorsed by 17 countries, coherent but somewhat misleading, a “Chair’s summary of dicussions”, a hodge-podge of significant advances, ambitious principles, already adopted measures, and promising ideas, a “Roadmap” which materializes those principles into the series of meetings over 2023-24, and a “Vision Statement” for MDBs.


This has been said over and over again, so no need to belabour this point: the numbers on most of the outcomes do not add up. While the summit was not about fundraising, there were some expectations that key processes would be unlocked by the flurry of conversations before and at the Summit. It was not the case, and the numbers announced all require a little bit of window dressing. In qualitative terms, the objectives do match the ones that were discussed half-a-year before in our seminar with major experts in development finance, but we would have hoped that the preparation would have made those commitments more specific.

  • The G20 pledged in October 2021 that it would reallocate $100 billion in SDRs. While Paris announced that the mission was accomplished, this is disingenuous for several reasons: first, because this include $20 billion from the US which require Congressional approval; and second because even with an enlarged RST, only $80 billion can be channelled through the IMF, leaving $20 billion still hanging. While the call for using the African Development Bank’s hybrid capital proposal resonated several times, no country has yet confirmed it could participate. The SDR bond could emerge as a possibility for countries which are limited by technical or legal constraints but this was not mentioned either.


  • MDB’s expansion remains work in progress. Secretary Yellen proposed an objective of an increase of $200 billion over 10 years. This is a useful target, which includes the $55 billion proposed by World Bank in its roadmap. It is also .. not ambitious at all! Total lending by MDBs has increased by the same absolute amount between 2015 and 2020, from $500 to $700 billion. The new goal for 2030 would amount to a 28% total increase over 2020… when global inflation in 2022-23 adds up to 16% already.


  • The ambition of a leverage ratio of $1 of private capital mobilized by $1 of MDB investment seems strangely off. As noted by Charles Kenny, this would mark a renunciation of the “billions to trillions” strategy. Moreover, such an aggregate goal would not just happen by itself, but it requires instead the development of specific tools that can mobilise the private sector without undue cost in terms of MDB capital. The performance so far with blended finance has however been quite disappointing, in spite of overambitious promises made in Glasgow at the COP26. So at best work in progress, but with so far, little progress to show for.


  • Pause clauses for vulnerable countries announced by the World Bank will help in their automaticity, especially for those mostly dependent on official lending. The specificities of the pilot will be important, but this will be a useful test of those instruments at a greater scale than before. This is one of the few tangible progress announced in Paris, but at the end, these are gains at the margin, as opposed to fundamental advances in improving poor countries’ ability to attract capital.


  • Country-specific outcomes, which negotiations were accelerated by the Summit were at the end the main source of progress: the successful conclusion of the official creditors debt restructuring deal with Zambia is a major advance for the G20’s Common Framework, after three years of difficult negotiations that saw Zambia stuck in default; and the JETP signed with Senegal is an important sign that after encountering difficulties in South Africa, there is life to this potentially crucial instrument for climate finance mobilisation.


That said, while those agreed outcomes can be disappointing, the summit also led several leaders to state their intention, which will become important in the agenda. For some of these, priorities of leaders in developing countries have been heard, and will be highlighted in the months to come.

The urgent need to replenish IDA was forcefully demanded by Ethiopia's PM Abiy Ahmed and several other African leaders, and it was explicitly mentioned by Ajay Banga and supported by Emmanuel Macron. This has been a longstanding priority of African finance ministers and will be the first big test on fundraising for Banga. We have suggested that the new Crisis Facility could help do some fundraising for post-restructuring countries even pre-replenishment.

Similarly, the depletion of the PRGT’s subsidy account under rising interest rates and large commitments should be tackled, and this was repeatedly stated at the highest level.

Any ambitious action plan for the World Bank will have to combine recapitalization and balance sheet optimisation measures, as we noted last year, a principle adopted by Emmanuel Macron in his concluding account as well.

With a roadmap

Perhaps the most important outcome document is the roadmap, clearly showing where this ad-hoc summit could see some of its ambitions realized. 2023 and 2024 have important milestones where decisions can formally be adopted, which was not the case in Paris.

The objectives inscribed in the Chair’s summary might not all translate into reality, but they open a space for ambition that could influence the next two years, crucial as ever, for environment and poverty.


Could a new World Bank fund help solve the debt stalemate?

A proposal for a World Bank led Trust Fund dedicated to countries having addressed their debt distress situations and confronted to the needs to enhance growth recovery and prioritize green transition projects.

The war in Ukraine, the second major global shock in less than two years had particularly large effects on developing countries. Accelerating inflation, exchange rate depreciation and declining private inflows have put considerable pressures on already fragile macroeconomic frameworks.

As a result, debt crises will continue to accelerate and move from relatively small economies to larger emerging markets. Yet, as recent experiences have shown, debt restructuring tends to be a slow and uncertain process, subject to both geopolitical disputes and brinkmanship as well as complex dynamics with private creditors.

Countries that have gone through holistic debt restructuring processes generally continue to operate under tight fiscal constraints for a certain number of years. The post-restructuring fiscal consolidation period is often coupled with limited access to international finance related to a scarcity of affordable sources of funding compatible with the contemplated debt trajectory. This may affect the conduct of growth enhancing projects essential for the countries to pursue their green transition and/or create jobs. The difficulty to bounce back from a restructuring explains why countries tend to delay the reckoning, often increasing long-term costs.

This note argues that the World Bank could play a much more important role in unlocking new financing for post-debt restructuring countries to foster a more growth and resilience-enhancing path. We propose to build on the new “Crisis Facility” set-up by the World Bank last month in order to meet the budget short-falls of the Crisis Response Window, with more ambitious targets, but also more ambitious impact which could appeal to donors.

In previous notes, the Finance for Development Lab argued that 1. IDA’s financing model is at risk due to its exposure to countries at high-risk of debt distress, shifting its commitments from credits to grants and making it less sustainable; 2. That IDA financing for high-risk countries was less effective when other creditors tend to obtain more debt service than new loans, thus equivalent of a soft bailout by the World Bank; 3. That the World Bank could provide more new loans for countries in restructuring to unlock the stalemate between Paris Club creditors, China, and private creditors, provided those creditors accept deep enough haircuts restoring debt sustainability.

How would the World Bank deliver new funds?

First, the Fund would constitute the sole instrument through which Multilateral Development Banks (MDBs) participate in debt restructuring processes. Such an initiative would contribute to moving away from the interpretation of MDBs Preferred Creditor Status as not respecting “Comparability of Treatment”, to a fairer interpretation of Comparability of Treatment that take grant elements and the amount of new money provision into consideration. In that perspective, it could resolve the protracted debt restructuring processes we have been witnessing over the last three years while preserving MDBs preferred creditor status.

Second, this kind of surge funding would not be allocated arbitrarily but conditional on a successfully debt restructuring. In doing so, it would not substitute for the need of a rapid growth in the balance sheet of IDA, but provide a resource for countries in debt distress.  It would not seek to substitute to needed debt restructuring but to provide post program funding. This could be achieved by funding specific projects with high public returns such as climate adaptation.

Third, this is initiative would also come as way to address the urgent call from debtor countries to have the appropriate means to grow out of debt in post restructuring contexts and meant their developmental imperatives. A reform of IMF program frameworks could support such an evolution, as argued by Reza Baqir, Ishac Diwan and Dani Rodrik.

Fourth, under reasonable hypotheses on losses by other creditors, we estimate that new required IDA financing would be between $2 and $5 billion over three years, according to our calculations considering the ability to leverage donor contributions. In other words, this would be in line with current fundraising efforts.

A risk is, of course, that this initiative would be used to provide existing creditors eligible to the restructuring with more generous terms?

On the one hand, providing additional concessional financing would alleviate Balance of Payment and fiscal constraints . On the other hand, these funds are supposed to be additive to the existing identified mix and therefore impact external debt and debt service indicators. The channel through we would like to see this facility affect the restructuring terms is mainly through growth. Therefore, the growth impact will be a key selection factor. the amounts and the type of projects financed by this new lending should be calibrated such that its net impact on the interest rate/growth differential is negative (r-g<0).

The underlying operational obligation is that the positive impact of the external and fiscal constraints outweighs the additional burden on the DSA indicators, up to a certain quantum of IDA funding.

Alternatively, we could envisage that such post-programme funding would not be accounted for in the programme DSA (neither in the needs related to the projects, nor in the financing), to ensure additionality.


The forthcoming June Paris Summit, which has put forward the link between debt, multilateral finance, and the climate crisis, could be the right place for a renewal of the role of IDA.


New Tool: Public Debt Decompositions in Emerging Economies


By Théodore Humann

This paper presents a methodology for public debt decomposition and introduces FDL's new publicly available online tool to be used by researchers and analysts in the field. It builds on the IMF methodology for Debt Sustainability Analyses and was developed relying only on publicly available statistics from the IMF and the World Bank. 


Two decades after HIPC and MDRI, two famous debt relief initiatives, the world is back to an era of high inflation and rising public debt, making it more important than ever to better understand the drivers behind debt dynamics in developing economies. This should help promote tailored fiscal and policy recommendations for key debt drivers, eventually pressing for pre-emptive debt restructuring in countries facing unsustainable dynamics.

Discover FDL's new debt decomposition tool

FDL's new tool makes it possible to systematically study debt-to GDP ratio dynamics in low-and middle-income economies at country-level and various aggregate perspectives. We have addressed several methodological challenges, from crossing IMF and World Bank debt statistics on external debt, to the understanding of stock-flow adjustments.

The FDL debt decomposition tool enables to disentangle the contributions to changes in debt ratios of interest payments, exchange rates, inflation, GDP growth, primary balance and stock-flow adjustments. We made the decomposition as accurate as possible, for instance by taking into account the various currencies of denomination of external debt. This tool will be updated in the future to account for methodological and statistical improvements, as well as user feedbacks, which we welcome.


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SDR Rechanneling and ECB Rules

Why rechanneling Special Drawing Rights (SDRs) to Multilateral Development Banks is not always and everywhere monetary financing.

By Stephen Paduano, London School of Economics

Eurozone countries are financially and politically pivotal to the SDR rechannelling agenda.  Collectively, they hold $200bn in SDRs (just over 20% of all SDRs), and the Eurozone countries which are G-20 members hold $120bn in SDRs (just under 20% of the G-20’s SDRs). These countries are also the most ambitious and proactive members of the SDR system, with France being the first advocate of SDR rechanneling and Spain being the first to rechannel (to the IMF  Resilience and Sustainability Trust - RST). However, the Eurozone’s capacity to lead on and participate in SDR rechanneling has been complicated by the European Central Bank (ECB). President Lagarde has expressed that SDR rechanneling to Multilateral Development Banks (MDBs) may not preserve the reserve asset characteristic of the SDR and may violate the prohibition on monetary financing.


Building on Paduano and Maret (2023), this paper demonstrates that certain forms of SDR rechanneling can clearly satisfy the ECB’s concerns — and, more importantly, that the rechanneling of reserve assets to multilateral development banks already occurs. The paper makes the following four core arguments:

  • SDRs fall under the “Agreement of Net Financial Assets” (ANFA holdings) of eurosystem National Central Banks (NCBs), which affords the NCBs greater sovereignty over how they use their SDRs. This means that the ECB’s jurisdiction over SDRs is limited to enforcing the prohibition on monetary financing — so long as the prohibition on monetary financing is not violated, eurosystem NCBs can use SDRs at their discretion.
  • The prohibition on monetary financing is not violated by the purchase of SDR bonds given the rulings of the Court of Justice of the European Union and the ECB underlying the ECB’s Public Sector Purchase Programme (part of the Asset Purchase Programmes). The Public Sector Purchase Programme explicitly included the purchase of supranational bonds, including those of multilateral development banks, and eurosystem NCBs now hold EUR 288bn in supranational bonds. By extension, the Court of Justice of the European Union and the ECB have already ruled affirmatively on the purchase of an SDR bond.
  • The European Investment Bank (EIB)’s access to the ECB’s repo facility and its EUR 13bn in borrowings from eurosystem NCBs further demonstrate that the ECB and eurosystem NCBs already rechannel reserve assets to MDBs. This funding arrangement can be altered with respect to denomination, tenor, and collateralization structure without legal complication, thereby serving as precedent for future forms of SDR rechanneling.
  • The primary regulation of concern to the ECB — EC3603/93, Article 7 — does not limit the rechanneling of reserve assets to the International Monetary Fund (IMF). Instead, it highlights the IMF as one entity onto which public obligations may fall. This is demonstrated both by reference to existing forms of reserve asset rechanneling to entities other than the IMF (the public sector purchase programme and the EIB’s repo access), and by evaluating past ECB rulings on SDR rechanneling arrangements. Past rulings make clear that the ECB rules not on the basis of which entity receives financing, but whether that financing preserves the reserve asset characteristic of the SDR and honours the prohibition on monetary financing.

IDA in the debt crisis

Exploring feasible deals through comparability of treatments and new loans


Several low-income and lower-middle income countries with access to concessional World Bank financing are now negotiating a debt restructuring program, which entails the sharing of losses by the different creditors. The goal of this note is to estimate the size of losses, at the current juncture of the debt crisis, and how they can be distributed among the different types of creditors.


We also consider how the MDB system can play a more prominent role in this context. There have been suggestions to put MDB’s preferred creditor status in question. In this paper, which focuses on the role of IDA, we propose instead to view its participation as providing new loans and estimate a possible envelope. We start by identifying countries that require debt restructuring and estimate the amount of debt reduction needed to bring them back to a sustainable path. In a second step, we distribute financial contributions across creditors. One contribution of this paper is to propose alternative approaches to Comparability of Treatment: not only as proportional reduction in present value claims, but by requesting a higher contribution from non-concessional lenders.

Focusing on the 73 IDA clients, our results show that, under a set of simple assumptions, 19 to 23 countries will need some kind of debt restructuring to bring back the present value of public debt to levels which can be considered as sustainable. Total face value of debt varies between $230 billion and $374 billion, and we estimate that the total reduction needed in present value stands between $31 and $76 billion. Those are large, but manageable numbers. The key question is thus: how to split those losses? While in terms of stocks, MDBs is the largest creditor sector, followed by the private sector and China, their loans are much more concessional. How can this be taken into account?

We then estimate the distribution of the burden of debt reduction, including IDA’s share, according to two different Comparability of treatment rules. Comparability of Treatment aims at ensuring that all participating creditors should be treated similarly. A traditional interpretation of this term seeks to apply haircuts among creditors on the basis of the distribution of their debt’s present value. While we accept this line of reasoning, we believe however that this is not sufficient, especially in the context of poorer countries where the range of grant elements among creditors is very large.

We thus develop a new fair rule for comparability of treatment, which we think is needed when countries obtained loans with a wide range of concessionality levels. The goal is to equalize the level of concessionality after debt restructuring, thus requesting larger losses from less concessional lenders.

In this scenario, what would be the appropriate financial contributions from IDA? We estimate that support to its clients with new flows would require and additional credit allocation of $1.5 billion / year over the next three years under a "fair burden sharing" scenario, a manageable effort, equivalent to 20% of the normal country allocation scenario.

China Development Finance | Seminar Summary

The Finance for Development Lab’s first China conference took place over two days (27 & 29th March 2023), aiming to build a better understanding of the country’s key challenges as a leading provider of finance to developing countries. Day 1 focused on the macroeconomic aspects of Chinese lending, whilst Day 2 discussed the new objectives of China’s lending operations and approach to development finance in today’s context of increasing debt levels and pressing climate and nature-related challenges. A summary paper of the discussions has been published here.

" The Common Framework, being a case-by-case approach to debt restructuring, cannot be industrialised like the Heavily Indebted Poor Countries (HIPC) Initiative. There needs to be a win-win approach to the debt crisis (…), a consensus on what constitutes a cut-off date for a country in default and for a process to define a capital state.”
Guillaume Chabert, IMF
" (There is) increasing difficulty of developed countries to access markets at reasonable rates, leading to more competition for capital flows. The World Bank has announced more flexible lending policies and the use of guarantees to access formal markets, but there is still little appetite for recapitalising or changing the rules in some Asian countries.”
Simon Cueva, former Minister of Economy and Finance of Ecuador
" Chinese creditors are hesitant to participate in debt restructuring when they feel that privileged creditors and non-creditors are pushing major creditors to pay the bill (...). A timely solution requires a fair and equitable burden sharing by all creditors.” 
Dr Jin Zhongxia, People's Bank of China
  • The seminar opened with a Keynote Address by Dr Jin Zhongxia, Director General of the International Department of the People's Bank of China
  • Day 2 opened with a Keynote Speech by Dr Justin Lin, Dean of the Institute of New Structural Economics, and a dialogue with Bert Hofman, Director of the East Asia Institute at the National University Singapore
  • Followed by a discussion with Dr Deborah Brautigam, Director of the China Africa Research Initiative (CARI) at Johns Hopkins University
Justin and Bert

Four Research papers were presented:

Paper 1:

--> Comparability of Treatment, by Gong Cheng (BIS) and Aitor Erce (INARBE)

The paper discusses debt relief games and the interaction between different types of creditors, specifically the Paris Club, the private sector, and China. It proposes to build indicators or coincidence to investigate historical restructuring data and how different creditors interacted among themselves. The focus is on de facto inter-creditor coordination, rather than on the application of Comparability of Treatments (CoT).

Paper 2:

--> Use of SDRs by China for the development of African countries, by     Etsehiwot Kebret and Hannah Ryder (Development Reimagined) 

The paper discusses China's commitment to reallocate 10 billion US dollars of its Special Drawing Rights (SDRs) to African countries, which accounted for around 25% of its new SDR allocation, the largest proportion of SDR locations committed to reallocate by any country in the IMF.

The paper suggests innovative ways to reform the system, exploring 5 options to re-channel China's SDRs to Africa.

Paper 3:

--> Christoph Nedopil Wang, Director of the Green Finance and Development Center, Fudan University: "Can tripartite cooperation with China mobilise green project finance in the global South?"

The research examines the intersection of project infrastructure and finance, with a particular focus on green infrastructure finance. The paper feeds into the broader discussion on how to accelerate green infrastructure project funding in emerging countries, with an emphasis on addressing the environmental, social, and governance (ESG) challenges for tripartite cooperation between China, international institutions, and host countries.

Paper 4:

--> Tianshu Sun (CAITEC) and Wei Shen (Institute for Development Studies) on: "Horizontal Fragmentation and Coordination Vacuum in China’s Foreign Aid System"

The paper focuses on the integration of climate and nature considerations into public financing. It examines the fragmentation and coordination vacuum in China's foreign biodiversity aid. Protection of nature as a focus of Chinese development assistance really took off in the run-up to the 15th Conference of the Parties for biodiversity hosted by China in 2021 and co-hosted by Canada in 2022. The initial goal of this research was to look at what China has been doing in terms of international development supporting biodiversity. Interviews were conducted with institutes involved in such projects.

Options Paper for Channeling China’s SDRs to Africa

In August 2021, the International Monetary Fund (IMF) announced its largest allocation of Special Drawing Rights (SDRs) worth 650 billion USD to boost global liquidity and support member countries in their post-COVID-19 recovery. Just three months later, in November 2021, at the Eighth Forum on China-Africa Cooperation (FOCAC) in Dakar, Chinese President Xi Jinping committed to reallocate 10 billion USD (or one quarter) of its SDR allocation to the African continent, the first country to commit SDRs to African countries specifically.

In the 2021 global allocation, the African continent as a whole received a mere 33 billion USD, or 5% of the total allocation while high-income countries such as the United States, which received 117 billion USD, received much more. This unequal distribution, which is due to the IMF’s age-old quota system, is not the only example of a financial mechanism that disproportionately impacts low-income countries.


Just recently, Japan announced that it will be channeling 40% of its SDRs to needier countries. Over the next few months, there will be several opportunities for China and other countries to make announcements for reallocation through the instruments explored in this report. In May, AfDB will be hosting their annual meetings, the Paris summit will be held in June and the World Bank/IMF Annual Meetings will be held in October in Marrakech. The world is watching to see what countries will be doing next.

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As the international community grapples with the polycrisis witnessed in our world today, the need for greater financing and a reform of the international financial system has never been more dire. SDRs, as a financial instrument, have been a point of much debate and contention over the last few years, mainly due to the need to maintain its reserve asset status and in relation to that, the challenges and limitations of reallocating SDRs outside of the IMF, in particular through Multilateral Development Banks (MDBs).

Developed in partnership with the Finance for Development Lab, DR's new report, titled “Options Paper for Channeling China’s SDRs to Africa” explores five options for China to reallocate its SDRs to the continent.

The report examines reallocation through

  • (1) bilateral transfers

  • (2) the African Development Bank’s Hybrid Capital Instrument, Africa Growing Together Fund and Climate Action Window

  • (3) The IMF’s Poverty Reduction and Growth Trust (PRGT) and Resilience and Sustainability Trust (RST)

  • (4) the World Bank (WB) and

  • (5) the Liquidity and Sustainability Facility (LSF)

The report assesses and scores these five options against bespoke criteria that take into consideration both Chinese and African developmental priorities. The authors conducted six interviews with officials working directly or have worked directly with the different options explored in the paper as well as reviewing and analyzing dozens of documents and publications from a range of MDBs, think-tanks and research institutions. The report brings to light African and Chinese views on SDRs and discusses the debate around reallocation through MDBs and the benefits of such reallocation.

After scoring the five options against those criteria, two options- reallocation through the African Development Bank and reallocation through the Liquidity and Sustainability Facility came out with the highest points. What distinguishes these options is that these instruments have a clear SDR reallocation process, these instruments support many African countries and they put African priorities, ownership and agency first.

Lessons from Sri Lanka and Zambia

The IEA/FDL Webinar of March 17, 2023 discussed the recent debt restructuring agreements of Sri Lanka and Zambia



Grieve Chelwa, The New School: “No narrow calculation of returns would justify the infrastructure projects that were undertaken, but when one looks at the social returns to these projects, they are immense”.

Jayati Ghosh, University of Massachusetts Amherst: “Social Safety Nets are not sufficient to protect the poor -- inflation erodes transfers very rapidly. A program that is distributionally fair should tax the rich, include more IMF financing, and have deeper debt relief.”

Deborah Brautigam, Johns Hopkins University: “It took 7 years to develop the Brady bonds, 32 years for the Paris club to give its first net present value reduction, 14 years to come up with the HIPC plan and 25 years to get complete debt write offs from the World Bank and the IMF. China is a new creditor: it will take some time to get it on board.

Sharmini Coorey, Sri Lanka's Presidential Advisory Group on Multilateral Engagement and Debt Sustainability: “The process to reach agreement among the debtor country, all creditors, and the IMF is complicated and is taking way too long. Innovations are needed to shorten the time it takes for a debtor to get to the IMF Board and to formalize comparability of treatment across creditors.”

Moderated by Dani Rodrik, the conversation between Sharmini Coorey, Grieve Chelwa, Jayati Ghosh, and Deborah Brautigam was too rich to allow for a faithful succinct summary. Below are the main messages that the discussion highlighted:

  • The importance of ensuring sound macro-fiscal management to avoid the emergence of a crisis;
  • Post-crisis, the necessity to develop adjustment programs that protect the poorest and that can put the country on a new growth path rapidly; and
  • The need to push for international arrangements that foster faster debt restructurings.

The lead up to crisis

The current wave of crises was triggered by a period of excess liquidity in advanced economies, which led to a situation where capital flooded to emerging, developing and even frontier economies in search of higher returns. Consequently, these countries became more exposed to sudden stops in the face of adverse shocks. When a series of negative shocks hit after 2019 (COVID-19, the Russia-Ukraine war, the tightening of monetary policy in advanced economies), many of these countries fell into a debt crisis. Responsibility must be shared between borrowers and lenders, but the poor and vulnerable should be protected.

Debt crises are costly and their negative effects linger. The best way to avoid this is through sound macro-fiscal management. Sri Lanka’s debt problems are partly self-inflicted and related to the difficulty of transitioning its institutions from a low-income to a middle-income status. But both Sri Lanka and Zambia had an infrastructure backlog that drove their demand for loans. Borrowing to invest in infrastructure however led to a significant maturity mismatch between financing obligations and growth payoffs. But infrastructure produces wide-ranging benefits, which extend beyond the narrow economic sphere into social gains and even nation-building externalities. Participants stressed the need to have patient capital with proper governance and environmental safeguards to support infrastructure in the future.

  • Grieve Chelwa, The New School: “No narrow calculation of returns would justify the infrastructure projects that were undertaken, but when one looks at the social returns to these projects, they are immense”.

In Sri Lanka, economic growth had also generated a middle-class demand for subsidies and civil service jobs that disciplining institutions were not strong enough to resist. At the same time, the government committed policy mistakes, such as implementing unnecessary tax cuts for the benefit of economic elites. In both countries, corruption in procurement increased the cost of large projects. Participants stressed the need for these countries to have stronger, more transparent institutions, and to avoid investing in costly white elephants.

Responding more effectively to crises

Participants stressed that the adjustment programs supported by the IMF remain too dependent on austerity, mainly because of the lack of external financing. To cut fiscal spending and generate new revenues rapidly, these programs focus on removing subsidies (particularly on energy and fuel) and increasing VAT. This pushes much of the burden of debt restructuring to the poorer segments of society. While the programs also support social safety nets, in an inflationary context, social safety nets do not sufficiently compensate for real income lost. The middle class and the elites are more able to lobby to retain some of their advantages.

Participants stressed the need to increase direct taxation, through wealth and income taxes. However, they also noted that it takes time for these taxes to be effective and that the additional revenue generated tends to remain low as long as the economy is in a recession. They also stressed the need to take actions against money laundering and corruption, even if it does not help in the short term.

Speakers criticised the resulting short-term nature of adjustment programs. The lack of foreign exchange liquidity and risks of hyperinflation increase the urgency to stabilize the macro situation. This makes it more difficult for the government to focus on medium-term issues. There is however a necessity for these programs to focus more on growing out of the debt problem, a strategy that should be in the long-term interest of both the borrower and its creditors.

  • Jayati Ghosh, University of Massachusetts Amherst: “Social Safety Nets are not sufficient to protect the poor -- inflation erodes transfers very rapidly. A program that is distributionally fair should tax the rich, include more IMF financing, and have deeper debt relief.”

A main part of the difficulty in squaring this circle is that demanding adequate external debt relief to improve the liquidity situation can prolong the negotiations when it runs into the creditors’ reluctance to share the burden adequately. But debtor countries facing a liquidity crisis are unable to bargain effectively in these conditions. This weakens their ability to face the challenge of growth recovery successfully. Strengthening the debtor bargaining power is needed to redress the situation – as would happen if there was a debt service moratorium during negotiaitons. The World Bank should also be more involved in supporting larger new financing, and to add a medium-term perspective.

Improving debt restructurings

The speakers stressed that debt restructurings must converge more deliberately. The current delays are partly due to the increased relevance of non-Paris Club creditor countries and private agents. Deals are more complex to strike and remain stuck on how to apply comparability of treatment among different creditors. Introducing new legislation on debt restructuring in creditor countries, especially in London and New York, will help. Another avenue is to introduce most favoured creditor clauses in debt negotiations and the international debt restructuring architecture. Sri Lanka’s presidential letter that committed the country to the comparable treatment of its creditors presents another innovative route.

It might take some time to fully involve China in the process, despite its agreement in principle to cooperate in the multilateral process. Part of the difficulties is internal – how to develop the legal and regulatory frameworks in China to allow institutions to take losses without weakening the financial sector unduly.

  • Deborah Brautigam, Johns Hopkins University: “It took 7 years to develop the Brady bonds, 32 years for the Paris club to give its first net present value reduction, 14 years to come up with the HIPC plan and 25 years to get complete debt write offs from the World Bank and the IMF. China is a new creditor: it will take some time to get it on board.”

China is also still demanding the participation of MDBs in debt restructurings. Participants were divided on the issue. Those in favour argue that MDBs were associated with unsustainable financing practices, and that past debt write-offs under HIPC had no effect on regaining market access. For those against, sharing losses would eventually damage debtor nations, given that the MDBs are the main providers of new liquidity, and that they would risk losing their AAA ratings, which allows them to act as lenders of last resort, and to keep the costs of their loans low.

Participants recognised that the IMF’s demand for full financing assurances before a program is approved, is problematic: it both generates delays related to getting buy-in from the creditors of a DSA and on its debt restructuring implications, and it forces the debtor country to manage without critical external financing during the negotiation phase, exacerbating the impact on the poor and imposing higher permanent output costs. Alternatives exist to soften this requirement: one option is to start with the IMF-supported adjustment program with a small initial disbursement that allows MDBs and bilateral creditors to provide the liquidity that is urgently needed and debt restructuring discussions to start, and to make the bulk of the disbursements later, after a debt restructuring is reached.

They also noted that there is an unnecessary degree of non-transparency in debt restructuring processes. To ensure a national buy-in and endorsement, all participants felt that the DSA parameters and the adjustment program should be publicly available as soon as the staff-level agreement is reached. Some speakers went further to argue that the staff-level agreement should be open to a national discussion, and to modification, before it goes to the Fund’s Board.

  • Sharmini Coorey, Sri Lanka's Presidential Advisory Group on Multilateral Engagement and Debt Sustainability: “The process to reach agreement among the debtor country, all creditors, and the IMF is complicated and is taking way too long. Innovations are needed to shorten the time it takes for a debtor to get to the IMF Board and to formalize comparability of treatment across creditors.”

Participants pointed out that the IMF and MDBs need to be reformed to respond more rapidly and more flexibly to the emerging challenges of the global macroeconomic environment. They noted that financing from these institutions remains too low compared to needs, both when a surge is required, and to meet the long-term investments of emerging countries.

African perspectives on the current debt situation and ways to move forward

The 4th virtual meeting of the “Amplifying Africa Voices Initiative”, a group of African policy institutes co-convened by the African Center for Economic Transformation (ACET) and the Finance for Development Lab (FDL), reflected on the current debt situation in African countries. The previous two meetings covered climate finance and the reform of Multilateral Development Banks.

Discussions focused on structural questions, including why and how many African countries went back to debt distress situations. Reasons are both internal and external. At the same time, the fragmented creditor landscape and the high cost of borrowing could create an unnecessary crisis, for which global institutions and existing mechanisms, in particular the Common Framework, are not sufficiently equipped to manage.


Debt in Africa: How did we get there again?

In the 2000s and 2010s, high growth in developing countries allowed to ignore emerging debt challenges following a successful HIPC initiative. Since 2016, however, a decline of trend growth and a series of major economic crises have brought debt challenges to the fore.


Since the first large scale debt restructuring process (HIPC and MDRI), public debt in African countries has escalated, reaching $645bn in 2021 compared to $233bn in 2010. Its structure has also changed, with domestic debt playing a much more prominent role than in the past – though with wide variations across countries.

Nonetheless, compared to the HIPC period, public debt remains relatively low. From an external point of view, it is also far from the main determinant of flows: in 2019, debt accounted to around 30% of capital flows to African countries ($24bn), but FDIs ($32bn) and grants ($30bn) actually dominated.

Figure 1 - Public debt in Sub-Saharan Africa

Figure 1 - Public debt in Sub-Saharan Africa

Participants in the Amplifying Africa’s Voice dialogue noted an internal lack of governance to explain some of this debt accumulation. These include a deterioration of public financial management systems, a lack of transparency, and poor returns on investment. But “push factors” have also played an important role, such as Chinese loans driving large infrastructure investment of variable quality, a low rate environment and a stagnation of concessional finance. All this led some countries with access to markets to issue expensive Eurobonds while commodity price volatility exposed them to boom and bust dynamics.

The case of Zambia, presented by the Zambian Institute of Policy Analysis and Research (ZIPAR), illustrated those “pull” and “push” factors, including the issuance of expensive Eurobonds whose use of proceeds were opaque, large loans by Chinese finance institutions, all this happening amid declining growth. Those flows were financing investments, sometimes with poor returns, but also a growing civil service workforce, with no increase in tax revenues. ZIPAR presented key factors behind the dramatic accumulation of debt between 2010 and 2020, leading to a default in 2020. A summary of a forthcoming paper is available here.

The consequences of the case of Zambia are also important and should worry other countries: the deal has been too slow and contentious. The delayed publication of the IMF Staff-Level Agreement led to frustration among creditors, both official and private. In the end, it relies on austerity and provides little on renewing the growth model. It has become more urgent than ever to find compromises that are specific to Zambia, and to draw the lessons of past delays to catalyse broader reforms.


Recent macroeconomic shocks have exacerbated fiscal and external vulnerabilities for many emerging and frontier economies, namely the COVID-19 crisis, the Russian war in Ukraine,  and fuel and food price shocks.

Experts in the Amplifying Africa’s Voice dialogue suggested that liquidity more than solvency has been the main concern. Debt to GDP remains low compared to other regions, as do other metrics such as debt to revenues. However, debt service has been increasing rapidly, and private as well as official sources of finance of the past decade are drying up. Since 2020, net transfers have been decreasing. For some creditors such as China and commercial lenders, net transfers are negative, i.e., more money is leaving Africa as debt service than money coming into Africa as loans. This is due to the types of financing raised by African countries in the 2010s, with a turn to Eurobonds that had shorter maturities and no concessionality. The problem lies in the refinancing risk it is creating. For many countries, yields are above 10%, implying a de facto lack of market access. Repayments walls under the form of large payments appeared and often lead to defaults.

Table 1: A simple typology of debt problems



In addition, increasing financing needs for developmental purposes, and investment in climate mitigation and adaptation are stretching an already limited fiscal space in many African countries. Climate financing alone requires $2 trillion per year, notwithstanding financing needs for developmental purposes, or to absorb inflationary shocks.

Repeated crises have led to an increased involvement of the IMF, which has been increasing its programs in Africa. Twenty-six countries have an IMF program, in addition to a program of lending to Rwanda under the Resilience and Sustainability Trust. MDBs have also expanded lending.

But the sustainability of such surges is uncertain. Ethiopia, Zambia and Ghana are in the midst of a debt restructuring, whilst many others are under high risk of debt distress. As of March 2023, 24 countries were at risk. The complexity induced by the changing composition of creditors has undermined current debt restructuring processes. New debt restructuring and management processes are needed to provide African economies with the necessary fiscal and policy spaces.


The Amplifying Africa’s Voice discussion on debt focused on the reforms needed to avoid another wave of debt. Three topics were highlighted:

  • The “productivity of debt”

An influential view from Ndulu and O’Connell, 2021 is that debt accumulation also contributed to a more productive economy for African economies since the 2000s. Large financing needs to fund infrastructure and developmental purposes as well as the rising costs of climate vulnerability will not disappear, and a significant share will remain on governments’ balance sheet. However, growth effects have sometimes disappointed, or were not translated into government revenues or exports. Some countries in debt distress suffer from chronic public financial mismanagement and corruption. In other cases, security spending is a large, unavoidable cost which bears heavily on public finances. How to make debt more productive and for international organisations to recognize the burden of conflict, are important agendas for the future.

  • Transparency and debt management need to improve.

Governments need to improve control on spending and borrowing. More frequent and accurate data is necessary, including contingent liabilities or PPP-linked debt. Opaque loans sometimes lead to more costs down the line. More research should go into what works to strengthen debt management capacity.

  • Finally, governments and international organisations need to improve their surveillance frameworks.

There is a broad confusion between the different types of debt risks, and indicators. Debt to GDP ratios may be less useful in today’s complex world and need to better include factors such as exports or public revenues. Growth assumptions are often unrealistic. A broad review of the risks is necessary, both narrowly focusing on reforming Debt Sustainability Analyses (DSAs) and a broader understanding of the risks. The search for an “optimal” level of debt and domestic/external balance is also important, especially for countries with large domestic markets like Nigeria or Kenya.

At the same time, participants in the Amplifying Africa’s Voice dialogue noted that short-term tensions require the full attention of policymakers. While the topic of debt in African countries is a key concern for policymakers, both in the region and globally, with frequent mentions in G20 communiqués, there have been few concrete advances recently. The World Bank and the IMF themselves have suggested reforming the Common Framework by clarifying timelines and offering a single definition of “Comparability of Treatment”. Those reforms would allow more transparency in the process and give more agency to debtors. At the same time, the IMF could lean more on its ability to lend into arrears – private or official.

The fact that tensions on debt remain mainly due to the lack of liquidity is important too. The need for liquidity is urgent, but its sources so far have been drying up: SDR reallocation has been disappointing, multilateral development banks have reached the limit of their capacity, barring important reforms to their financial models. In addition, if debt rescheduling is necessary, are IMF tools adapted to such cases? How to prevent the diversity of creditor groups from stopping deals which could benefit everyone? Those questions should be treated at the highest level.

Yet, the “Summit for a New Global Financial Pact” announced by French President Emmanuel Macron to be held June 2023 does not have a separate track, or objectives, on debt reduction. Amidst concerns on climate financing, the debt agenda risks being forgotten. There are economic and geopolitical reasons for this as debt forgiveness is expensive for lenders and it creates geopolitical tensions across OECD countries and non-traditional lenders such as China. But ignoring debt would be a grave error. Countries in Africa need a stable debt framework to make progress on the SDGs and address global public goods such as climate. Advocacy and inventive policy solutions to this short-term challenge are required.

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 fourth technical session on African perspectives on the debt crisis was held on March 15, 2023 and gathered nearly 20 African policy institutes from across all the regions and several experts of development finance.

Priorities for the upcoming “Summit for a New Global Financial Pact”

On 6th January 2023, the Finance for Development Lab hosted a high-level panel event to put the spotlight on key priority issues to be discussed during the Summit announced by President Macron at COP27 for a “New Global Financial Pact” (Paris, 22-23 June 2023).


The webinar opened with an Address by Chrysoula Zacharopoulou, French Secretary of State for Development, Francophonie and International Partnerships, introducing the rationale for a summit and setting out its objectives. Amélie de Montchalin, French Ambassador to the OECD, then outlined the key work elements to progress, both within the OECD and outside, to ensure a successful summit.

FDL’s Chair, Daniel Cohen, then moderated a conversation between Tidjane Thiam (CEO, Freedom Acquisition), Vera Songwe (Chairperson of the Liquidity and Sustainability Facility and Co-Chair of the High-Level Panel on Climate Finance), Masood Ahmed (President, Center for Global Development), Marilou Uy (Director of the Secretariat, G-24) and Deepak Mishra (CEO, ICRIER), whom we would like to thank again for their kind participation.

The following note summarises their priorities for the June Summit in Paris.