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IMF/WB annual meetings: climate challenges require radical reform of MDBs

By Aliya Shibli
The role of multilateral development banks comes under scrutiny at the 2023 IMF and World Bank annual meetings, Marrakech, with calls for MDBs’ mandate to be strengthened, while undergoing some structural change (Photo: Fidel Senna/AFP via Getty Images)
The role of multilateral development banks comes under scrutiny at the 2023 IMF and World Bank annual meetings, Marrakech, with calls for MDBs’ mandate to be strengthened, while undergoing some structural change (Photo: Fidel Senna/AFP via Getty Images)

Calls grow for multilateral institutions to embrace culture change, take a more client-responsive approach, and become less risk averse

As the World Bank and the International Monetary Fund hold their annual meetings in Marrakech this week, the role of multilateral development banks is coming under increasing scrutiny.

In the text of her speech today, US Treasury secretary Janet Yellen supported greater resources for concessional loans to address global challenges. She said US president Joe Biden had requested funding that “would enable the World Bank to provide $27bn for projects that address climate change, pandemics and fragility, and to support immediate crisis response in the poorest countries”, adding: “The G20 has committed to mobilising more resources. And other countries are making announcements on how they will boost capacity as well.”

Strengthening the mandate of MDBs such as the World Bank has been a key priority for India’s presidency of the G20, which expires at the end of November. India has warned that in their task of supporting economic and social progress in developing countries, MDBs have not sufficiently scaled up investments to meet contemporary development and sustainability challenges.

Such a concern is shared by Biden, who in September called for a $25bn increase in the World Bank’s lending capacity for middle and low-income states, with a view to other nations contributing in a potential $100bn-plus fundraising effort.

An Independent Expert Group report commissioned by the Indian G20 presidency warned that the pace of sustainable development across all countries – developed and developing – remains inconsistent with the UN’s sustainable development goals alignment and climate change needs, and leaves millions of people behind.

The IEG recommends a “triple agenda” to fully harness MDBs’ potential, namely the elimination of extreme poverty, tripling sustainable lending levels by 2030, and creating a third funding mechanism to enable more innovative arrangements for engaging with investors who support the MDB agenda.

Moreover, multilateral institutions must embrace culture change, take a more client-responsive approach, and become less risk averse, the IEG says.

With less than 15 per cent of SDG progress targets on track, the emphasis on the need for reform reflects the urgency and breadth of the crises, with the pressure on MDBs to evolve a lot faster, says Glada Lahn, senior research fellow at Chatham House.

Climate-resilient transition

As the need for climate-resilient infrastructure grows, Lahn says, MDBs’ current disbursement levels constitute just a “drop in the ocean”.

An additional $18tn is needed to properly support climate action, the IEG said in its report. This represents a fourfold increase in adaptation, resilience and mitigation measures compared to 2019, with the funding of sustainable infrastructure the key priority.

According to the World Bank, the greatest need for sustainable financing is often in lower-income states that have contributed little to global warming and where access to capital markets and private investment is more limited than in developed economies.

To finance equitable, climate-resilient transitions, MDBs require structural reform, Lahn says. “Originally, MDBs were effectively set up to fund packages of investment and large projects – some of which are now the problem, like coal-fired power, other forms of thermal power and upstream fossil fuel investments.”

She adds that creating ecosystems for transformation is at the heart of how banks envision a just energy transition, with collaboration at the fore. “Addressing climate change has forced more internal co-ordination and more humility from MDBs, in terms of really thinking about localisation and what works at the country level, listening to their needs and their limitations as well,” she says.

“It’s about the turnaround from big infrastructure project finance – which was just seen as a good thing in itself – to a more holistic, system-wide endeavour.”

Private sector engagement

MDBs must complement, not compete with, private sector capital into sustainable infrastructure, given that private investment presents “one of the greatest opportunities for transformation”, says the IEG report.

Asian Infrastructure Investment Bank chief financial officer Andrew Cross says the key question for all MDBs is: “How do we create an environment and run projects that enable the private sector to enter?”

Today, MDBs mobilise $0.60 in private capital for each dollar they lend on their own account, the IEG says, and it recommends that they should at least double this target.

Cross says MDBs must lead the way to open up private sector investment. “If you think back to the evolution of the green bond space, the first few transactions there to get to critical mass were done by the MDBs. The same rationale applies to private sector mobilisation,” he adds.

The IEG recommends that co-ordination with the private sector should take a systematic approach, based on the use of the Cascade principles (introduced by the World Bank in 2017 as a means of leveraging and prioritising private sector support for economic growth and sustainable development); guarantees; blended finance; political risk insurance; and foreign exchange hedging..

Leveraging finance from billions to trillions rests on the mobilisation of private capital, and MDBs are uniquely placed to catalyse this shift, says Roberta Casali, vice-president for finance and risk management at the Asian Development Bank.

As part of this, in September the ADB announced capital management reforms to unlock $100bn in new funding across the coming decade, introduced through an update of the bank’s Capital Adequacy Framework.

Lahn at Chatham House hopes initiatives such as these, together with private sector mobilisation, will encourage investment into the development of resilience- and climate-oriented measures. “There’s a lot of hope put on MDBs because they’re seen as the de-risking vehicle which can open up markets, or even create new markets,” she says.

Evolving investment

An issue of particular urgency is the need to help low-income countries attract financing for climate change mitigation – with many efforts thus far falling short, says Patrick Schröder, senior research fellow at Chatham House.

“MDBs need to get their head around how to finance adaptation. Some of that can be through infrastructure investments – which is good because that’s what MDBs are good at – but there are a lot of other elements to adaptation, including building community resilience,” he says.

Investment in human capital may also provide more capacity, particularly as issues persist with equality of opportunity between the global north and global south. Alongside this, international community governance structures must be more equitable, Schröder says, pointing to “decision-making power” that is concentrated between a few major shareholders.

Borrowing costs reflect challenges too. The least developed countries borrow from international capital markets at rates of 5 to 8 per cent, compared to 1 per cent for many developed countries, according to the UN’s SDG Stimulus.

The International Development Association already aims to mitigate this, lending money on concessional terms. As such, IDA credits have a zero or very low interest charge and repayments are stretched over 30 to 40 years, according to the World Bank.

Still, MDBs’ finance has typically been mobilised in middle income or upper middle income countries, rather than the poorest, Lahn says. “They are lenders – they do want returns,” she adds. “MDBs really want to see more blended finance. That means countries increasing grant funding.”

Just Energy Transition Partnerships may also evolve, Lahn says, after the first JETP was announced at COP26. While it focuses on transitioning heavily coal-dependent emerging economies, she foresees the evolution of JETPs extending into other sectors, such as food and agriculture.

Collaboration on JETPs also demonstrates the success of internal co-operation in MDBs, which may encourage innovative approaches over traditional forms, says Lahn. “You’ll see a lot of other countries which face comparable issues with the oil and gas sector, saying ‘what about us?’ and ‘how can we envisage a just transition?’. For this, MDBs must look at local business ecosystems and communities, and here, revenue is already flowing.”

As MDBs reform to address challenges, there is “no room for individualistic or silo approaches”, says Casali at the ADB. According to the IEG report, the G20’s expert group on strengthening MDBs anticipates a forthcoming roadmap for an updated MDB ecosystem.

An earlier version of this article first appeared in The Banker

A service from the Financial Times