G20 leaders recognise the pivotal role the multilateral development banks (MDBs) play in tackling global challenges and supporting sustainable development. Now they must more clearly define and carry forward the agenda with urgency and at scale.
In a 9 September Declaration from New Delhi, G20 leaders highlighted and endorsed the unique contribution of international financial institutions like the World Bank and regional development banks to tackling many of the world’s most pressing challenges. At a time when multilateralism is on life support, the Indian Presidency managed to align a fractious G20 behind the need to transform and scale up these institutions, making them central planks of a shared global strategy to tackle poverty and support inclusive, low-carbon and resilient development trajectories.
G20 Finance Ministers must inject a sense of urgency…
In its first volume, the G20-mandated Independent Expert Group on Strengthening Multilateral Development Banks set out a radical and pressing agenda for MDBs to triple their mandates, their finances and their instruments. As Larry Summers, a co-chair of the Group, eloquently wrote, the world is on fire and actions cannot wait. The same message emerged loud and clear from African leaders gathered in Nairobi for the African Climate Summit earlier this month .
The G20 report is clear, ambitious but realistic about what needs to be done. Adding an overwhelming sense of urgency should now be the central purpose of the meeting of Finance Ministers and Central Bank Governors next month – the last under India’s G20 Presidency. As Financial Times chief economics commentator Martin Wolf has pointed out, this should become the dominant focus of global economic policy-making. The risks of inaction are growing rapidly; it is not over-reaction that we need to fear. Ministers must set out commitments and tight timelines for MDB reform.
…to enable profound change…
Tripling operations will require fresh capital, if not immediately then as part of a sequenced and pre-committed package. And MDBs will need to overhaul their business models, the way they operate individually, as a group and with the private sector. MDBs need to be much faster and more responsive. They need to collaborate closely among themselves and with other public development banks to support and finance country-owned strategies that integrate climate, other global challenges and development through the most effective investments and policies. They must take more risks with their balance sheets, both for shareholders to squeeze out as much value from taxpayer funds as possible – for instance, by considering callable capital in MDB capital adequacy – and to give client countries the kinds of funds they cannot source in the market. They must innovate their financial model, as proposed by the G20 Panel on MDB Capital Adequacy Frameworks, for instance issuing hybrid capital, deploying capital-saving guarantees and increasing the turnover of their portfolios by selling exposures once assets have stable revenue flows. Investing in the non-concessional windows of MDBs offers great value for public money – and could offer even more.
…and an emphatic shift towards facilitating private finance and investment
MDBs’ balance sheets and public money, even scaled up, will fall far short of what is needed. The Delhi G20 Declaration is clear about the crucial importance of boosting private finance. MDBs can mobilise private finance directly and indirectly, for instance with guarantees, syndication models or blended concessional finance. They could do far more of that with the right instruments, risk appetite and incentives, and by moving from individual transactions to portfolio and platform solutions.
MDBs can also catalyse (or ‘enable’) private finance and investment through their support for policy and institutional reform, for instance unblocking energy markets by helping governments design effective off-take frameworks. But to move from pin-prick interventions to systematic and large-scale change, they need to embrace whole-of-bank approaches that place catalysation and mobilisation of private finance for sustainable development at the core of their corporate strategies, deploying the full range of sovereign and non-sovereign instruments.
Acting through MDBs alone will not be enough: a broader strategy for financial transformation is needed to close the gap in sustainable finance flows to the Global South. As we have argued elsewhere, Ministers should initiate a review of the global financial architecture to remove barriers to private flows for climate and Sustainable Development Goal investments. Key regimes established to achieve the vital goals of stability and soundness may have created unintended barriers to flows of long-term private capital into emerging markets. The G20 could commission an assessment of financial regulations to see if they promote (or at least do not prevent) such investments. This could be an important element for attracting the capital needed for the ‘clean, sustainable, just, affordable and inclusive energy transitions’ that the G20 leaders want to see, not least in the Global South.
The G20 leaders’ endorsement of the MDB reform agenda is a significant and very welcome development. It is now up to G20 Finance Ministers to clearly define and carry forward the agenda, with urgency and at scale. That means shareholder and management decisions to reinvent these institutions, take greater risks, equip them with sufficient resources and radically revamp their operating models – especially in working with the private sector.