Reform of multilateral development banks tops India’s agenda at G20 Leaders’ Summit

Reforming and strengthening multilateral development banks (MDBs) to reflect the changed geopolitical conditions and the rise of the Global South remains a key part of India’s agenda during its G20 presidency.

Senior officials have underlined that India is hoping that MDB reforms will be a part of the Leaders’ Declaration but have indicated that such a reform process would be a “longish” one and not have immediate results. The proposal is expected to see support from US President Joe Biden and other leaders.

The G20 Leaders’ Summit is set to take place in New Delhi on September 9 and 10, and will mark the culmination of India’s year-long G20 presidency.

Why reform? 

Set up nearly 80 years ago in the immediate aftermath of the World War II, multilateral development banks such as the World Bank and the International Monetary Fund are seen to be in need of an overhaul, given the fast changing economic and financial dynamics of the world.

“Radically reformed and strengthened MDBs are essential to address the immense global challenges in today’s world,” noted the report of the Independent Expert Group on MDB reforms that is chaired by Lawrence Summers, President Emeritus, Harvard University, and NK Singh, Chairperson of the Fifteenth Finance Commission of India.

Sustainable development goals are also off track while climate change has become an urgent issue that requires real action and funding. An estimated additional spending of nearly $3 trillion per year is needed by 2030. Of this, $1.8 trillion would be required as additional investments in climate action and $1.2 trillion in additional spending to attain other SDGs.

The report has highlighted that while the problems are getting bigger, and gaps between developed and developing countries are getting larger, MDBs as a system are shrinking. Their gross disbursements were less than 0.3% percent of recipient country GDP (excluding China) in 2019, half the level of 0.55% in 1990. In the current environment of rising interest rates, net transfers from the MDBs may even turn negative, it has highlighted.

Which MDBs would be impacted? 

Though the report has not given any standard definition for an MDB, it is expected that these reforms would impact all such institutions and not just the larger ones such as the World Bank and the International Monetary Fund.

The report has mentioned 17 MDBs in total. Other MDBs include European Investment Bank, African Development Bank, Asian Development Bank, European Bank for Reconstruction, Inter-American Development Bank and Asian Infrastructure Investment Bank.  

Significantly, the World Bank is already looking at a series of reforms such as new financing instruments like hybrid capital and portfolio guarantee platforms to allow higher leverage to the bank. These are expected to help in increased lendable resources to the developing countries.  

Key recommendations:  

The first report of the IEG has recommended a triple agenda to harness the potential of MDBs. The three elements of this agenda include adopting a triple mandate of eliminating extreme poverty, tripling sustainable lending levels by 2030; and creating a third funding mechanism which would permit flexible and innovative arrangements for purposefully engaging with investors willing to support elements of the MDB agenda.

Engagement with the private sector could transform the way they work, it has suggested, noting that MDBs only mobilise $ 0.6 in private capital for each dollar they lend on their own account. They should aim to at least double this target

A key recommendation of the group is the setting up of a global challenges funding mechanism for global public goods. This could potentially result in at least $20 billion in additional annual lending. For this, it has mooted a new flexible legal and institutional mechanism that could crowd-in a coalition-of-the-willing among sovereign donors and non-sovereign investors from the private sector such as pension and sovereign wealth funds, wishing to be associated with specific MDB activities.

The report has also recommended that a larger fraction of concessional assistance should be channelled through MDBs. Low-income countries have the largest shortfalls in spending on achieving SDGs and addressing GPGs due to limited access to resources. Many middle-income countries also need concessional financing, especially when faced with sudden shocks such as natural disasters, conflict, fragility and pandemics, or in support of their efforts to address global challenges, it has highlighted.

Noting that the MDBs have started a process to optimize their balance sheets, it has also called for the full implementation of the recommendations in the G20 Capital Adequacy Frameworks report that could generate headroom to lend $80 billion more each year. “Mobilising hybrid capital, including through recycled SDRs, and risk transfers to private and public actors to free up capital would also add significant capacity,” it has noted.

The report has also called for greater cooperation amongst MDBs and has said there should be institutional incentives to reinforce this.

But the implementation of these could see some challenges. The engagement with private sector could be riddled with challenges as the cost of funds could become an issue. KV Kamath, who built the BRICS- sponsored New Development Bank, had at a recent seminar noted that that one of the fundamental principles is to keep the operating cost low

What next: 

The third G20 finance ministers and central bank governors’ meeting in July had “taken note of Volume 1’s recommendations”. It had further said that the MDBs may choose to discuss these recommendations as relevant and appropriate, within their governance frameworks, in due course, with a view to enhancing the effectiveness of MDBs. 

Greater progress on this front is expected if it is a part of the Leaders’ Declaration. The second volume of the report is expected to be presented to the G20 Leaders in October during the World Bank-IMF meetings in Marrakech, which is expected to provide more nuanced recommendations on the reforms, including engagement with the private sector.