The new Bretton Woods: How India's G20 Presidency accelerated talks on multilateral development bank reforms

One of the top priorities during India’s soon to be concluded G20 presidency was finding ways to finance the world’s increasingly complex development challenges. And India made a start to this end with the New Delhi Leaders’ Declaration taking up the issue of reforming international financial institutions. There is palpable excitement about the move that could usher substantive changes in not only the work that these multilateral development banks (MDBs) do, but also bridge the funding gap through greater private sector engagement, especially after the fourth meeting of finance ministers and central bank governors in Marrakesh in October.

The MDBs were set up in a different era. The World Bank, for instance, was set up in 1944, and its articles of agreement included rebuilding the economies of countries devastated by war and increasing the economic development of developing countries. When it began operations in 1946, it had 38 members; now almost all countries of the world are its members. Similarly, the International Monetary Fund (IMF), too, was established in 1944 after the Great Depression of the 1930s with 44 founding member countries that sought to build a framework for international economic co-operation. Now, it has 190 countries as members.

In recent years, there has been a growing consensus that the mandate of the MDBs needs to be reviewed in light of changing global priorities, including climate finance, meeting sustainable development goals (SDGs) by 2030, and the eradication of extreme poverty. Under-representation of the Global South and the need for more financing to meet these goals are other pressing needs.

Noted economist Jeffrey D. Sachs, Director of the Center for Sustainable Development at Columbia University, sums up these challenges. “The MDBs together lend about $100 billion annually, which is just one-tenth of the world output. As many as 79 of the 82 low-income countries in the world are below investment grade and so capital doesn’t flow into them,” he said at a recent webinar organised by New Delhi-based think tank Research and Information System for Developing Countries.

The G20 Summit in New Delhi in September saw leaders reach a consensus that the 21st century requires an international development finance system that can address the shocks facing developing nations, in particular the poorest and the most vulnerable. They also welcomed efforts of the Independent Expert Group (IEG) on Strengthening MDBs in preparing Volume 1 of the report and said they looked forward to examining it in conjunction with Volume 2, which was released in October.

An agenda for growth

Volume 1 of the report by IEG—that is co-chaired by N.K. Singh, former chairman of the 15th Finance Commission of India; and Lawrence Summers, President Emeritus, Harvard University—pegs an estimated additional spending of nearly $3 trillion annually by 2030. Of this, $1.8 trillion would be for additional investments in climate action and $1.2 trillion in additional spending to attain other SDGs.

It has called for a triple agenda to harness the potential of MDBs. These are: eliminating extreme poverty; tripling sustainable lending levels by 2030; and creating a funding mechanism that would allow flexible and innovative arrangements for purposefully engaging with investors willing to support elements of the MDB agenda. It has also mooted a “global challenges funding” mechanism that can garner an additional $20 billion for global public goods by including the private sector in these activities.

Volume 2 of the report, titled ‘Bigger, Better, Bolder’, has taken this vision forward by focussing on the changes needed to implement the G20 leaders’ vision of a strengthened MDB system. The recommendations include a shift in the operational model of MDBs from individual projects to programmes where national governments take the lead in identifying multi-year transformations with sectoral focus, achieved through scaled-up investments. It also suggests ways in which MDBs can mobilise more funds through the private sector by diversifying their instruments.

It has also set an ambitious target for MDBs to triple financing to $390 billion annually—$300 billion non-concessional and $90 billion concessional—by 2030 so that emerging markets and developing economies can make adequate progress towards SDGs. “To triple their lending, MDBs should make use of all their funding avenues,” it says, adding that these can include the implementation of the Capital Adequacy Framework (CAF)—that aims to identify the optimal balance of a financial institution’s assets, liabilities and risks—for optimisation of their balance sheets, and new opportunities to innovate with different forms of shareholder support.

Besides the World Bank and IMF, the reports mention 15 other MDBs, including the European Investment Bank, African Development Bank, Asian Development Bank (ADB), European Bank for Reconstruction, Inter-American Development Bank and Asian Infrastructure Investment Bank.

Ashok Lahiri, a member of the 15th Finance Commission and former Chief Economic Advisor, points out that the first report is an appeal to the more noble instincts of aid-giving countries. “Countries, when they give funds, especially aid, want leverage on a bilateral basis. When the aid is multilateral in nature, the leverage tends to go away. A large-hearted multilateral approach to aid by donor countries is still awaited,” says Lahiri, a former executive director at ADB.

Experts point out that the coming months and years are expected to see increased global dialogue and activities towards strengthening and reforming MDBs. Sudipto Mundle, Chairman of the Centre for Development Studies, says the reports have got to the heart of the matter on climate challenge. “The critical issue is not developing the technologies to effectively deal with climate change... The critical issue is the huge amount of money required to deploy those technologies at scale and in the geographies where they need to be deployed,” he says, adding that the implementation of the IEG's recommendations will need a change in mindset of the boards and staff of the MDBs, as well as governments.

Growing support

The US has been unequivocal in its support to transforming the MDBs for a better planet and, perhaps, to some extent to cut down China’s rising influence in lending to developing countries. Others, including Germany and the UK, also support the move. The Marrakesh meeting also saw significant support from the MDBs. The World Bank, which has been going through an evolution process to become a “bigger and better bank” that is fit-for-purpose to respond to the most pressing needs of people and the planet, has done much groundwork on this. World Bank President Ajay Banga said a start towards this was made in April by “squeezing $40 billion over 10 years from our balance sheet by adjusting our loan to equity ratio”. Over the past few months, it has created a portfolio guarantee mechanism and launched a hybrid capital instrument. “These new tools enable us to take more risks and boost our lending capacity further—all while preserving our AAA rating. Taken together, we could provide $157 billion more in lending capacity over a decade,” he said at the 2023 Annual Meetings Plenary.

Significantly, the heads of 10 MDBs, including those of the World Bank Group, ADB and Islamic Development Bank, have welcomed the G20 deliberations and agreed to strengthen their collaboration in five critical areas: scaling up financing capacity; boosting joint action on climate; enhancing country-level collaboration; strengthening co-financing; and catalysing private sector engagement.

The MDB Reform Tracker, developed by the Washington-based non-profit Centre for Global Development, highlights that a very broad MDB reform agenda is firmly in play. “MDBs are actively considering a wide-ranging reform agenda, and we have already seen notable progress in areas like raising lending limits and launching innovative finance programmes,” it says.

Some of the reforms being undertaken include the World Bank lowering its E/L (equity to loan) ratio and plans to eliminate its statutory lending limit. ADB has also approved capital management reforms that unlock $100 billion in new funding over the next decade to address crises in Asia and the Pacific, including climate change, through an update of its CAF.

A longer horizon

But the reports are just one part of the overall efforts to strengthen these institutions. The Delhi declaration also has other provisions, including the G20 Roadmap for Implementing the Recommendations of the G20 Independent Review of MDBs’ Capital Adequacy Frameworks that could potentially yield additional lending headroom of approximately $200 billion over the next decade. Quota reforms at financial bodies like the IMF, too, have been a long-pending demand of developing nations, and the G20 leaders have also reiterated their commitment to a strong, quota-based, and adequately resourced IMF.

Finance Minister Nirmala Sitharaman said the G20 finance ministers and central bank governors also gave a call for further deliberations on the IEG recommendations to suggest the way forward before their next meeting in April 2024. “India will work with Brazil under its 2024 presidency to progress towards implementation of IEG’s recommendations,” she said after the October meeting.

Apart from the challenge of raising capital from the private sector and issues such as credit ratings, moving forward on the implementation of CAF and more representation of the Global South will remain key issues. But given that the G20 presidency will be hosted by countries of the Global South in the next two years—Brazil in 2024 and South Africa in 2025—it is expected that they will keep the foot on the pedal on this key agenda that would benefit developing countries and possibly pave the way for a more equitable world.

@surabhi_prasad

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