Multilateral banks are in ferment. Transform them - Hindustan Times

Multilateral banks are in ferment. Transform them

ByNK Singh
Sep 02, 2023 09:06 PM IST

As the world battles myriad challenges, transformative, and not incremental changes are needed for multilateral development banks. The time to act is now

There is an old adage that necessity is the mother of invention. In the aftermath of World War II, the overriding necessity was the reconstruction and growth of a war-ravaged economy. This led to a rules-based international economic architecture as the fulcrum of global cooperation. The International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF) — known as the Bretton Woods Institutions — were created in 1944. Since then, the World Bank Group (WBG) comprises the International Development Association (IDA) for concessional finance, the International Financial Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), the Global Environment Facility (GEF) and a plethora of trust funds. On the other hand, the IMF has the critical mission of furthering international monetary cooperation, encouraging the expansion of trade and economic growth, and discouraging policies that would harm prosperity.

World Bank headquarters.(File photo) PREMIUM
World Bank headquarters.(File photo)

What is a Multilateral Development Bank (MDB)? While there is no standard definition of an MDB, we have, in our report, mentioned 17 MDBs, although we know that the more prominent include the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank. Over the past eight decades, these institutions have served the world well. They have been, perhaps, the most efficient intermediators of financial capital and remain central to the global financial architecture.

Notwithstanding the success achieved by them, there is an overwhelming feeling that these institutions, in their current form, have outlived their utility. The world now faces unusual challenges. Geopolitical tensions, unsustainable levels of debt, rising poverty in lower-income countries and a decline in shared global prosperity need urgent redressal. These challenges have forced us back to the drawing board.

Declining disbursements in relation to the rising financial needs and availability of alternative finance, particularly private capital, are increasingly marginalising them further.

It is in this context that the G20 is at the core of the efforts to reform these institutions. The finance ministers and central bank governors (FMCBG) have met from time to time to discuss issues of global governance. While the G20 existed since 1999, it was only in 2008 that the body was elevated to the leader’s level, and increasingly focussed on contemporary economic, political and social challenges. The reforming of the broad architecture of economic governance, although a recurring topic, has eluded success.

Credible efforts commenced at the time of the German presidency and, thereafter, the Italian presidency considered measures to strengthen the lending capacity of these MDBs. However, even before India had assumed the presidency of the G20, Prime Minister (PM) Narendra Modi had said, “It is imperative that every democratic nation should push for reforms of the multilateral bodies so that they can come up to the task dealing with the challenges of the present and the future.”

It was, therefore, not surprising that, during India’s presidency, it was decided to constitute an independent expert group (IEG) on strengthening MDBs at the second meeting of the FMCBG on February 12 and 13, with wide-ranging terms of reference. In pursuance of that, the first report of the MDB group was presented on July 18, in Gandhinagar. The basic recommendations in a report entitled, Strengthening MDBs: The Triple Agenda, were to triple the mandate, namely beyond the twin mandates of extreme poverty and shared prosperity, and a third mandate to address sustainable development goals (SDGs), climate action, and other global public goods (GPGs).

We, the independent expert group, felt that to address the triple mandate we would need $3 trillion each year between now and 2030. Out of this, we believe that $2 trillion can come from domestic resource mobilisation by the countries concerned through better policies, fostering growth, and undertaking macroeconomic and structural reforms resulting in improved tax buoyancy. Out of the $1 trillion balance, we felt that $500 billion could come from the private sector with appropriate incentives, while $500 billion could come through official development financing including concessional and non-concessional finance. It is in this context that triple the capability of MDBs as a whole, from an average of $120 billion a year to close to $400 billion, is achievable through a constellation of actions.

We have suggested the constitution of a global challenges funding mechanism for GPGs. This would crowd in a coalition-of-the-willing among sovereign donors and non-sovereign investors. Optimising the balance sheet and innovative capital to fully implement the recommendations of the Capital Adequacy Framework report is inescapable. This will result in a substantial enhancement of the capability of the MDBs coupled with an improved operational model. Restructuring processes, procedures, modalities of work and actively seeking private capital is the path forward.

For us, this is a work in progress. We seek to present our second report to the leaders at the time of the annual meetings of IMF and the World Bank in Marrakech in October. While the two reports are independent and stand-alone, inevitably, they form a part of an integral package for the reform of the multilateral development system.

In our second volume, we naturally seek to make more granular recommendations on engagement with the private sector to mobilise and catalyse it, suggesting structural changes in the operational and accountability processes of MDBs, and a model for enabling MDBs to interact with their clients. Additionally, we seek to outline the framework of the innovative proposal of a Global Challenges Financing mechanism and suggest modalities for enabling the multiplicity of MDBs to work in cohesion as a family. Finally, we seek to provide a credible roadmap with medium-term monitoring mechanisms for transformative changes in MDBs.

We recognise that even with the fullest implementation of the report, significant financing gaps will remain. A new operational model for MDBs will certainly enhance their credibility to the shareholders and their credibility in dealing with the emerging market.

It is our endeavour to suggest far-reaching transformative changes. MDBs are in ferment. They need transformative changes. The leaders of MDBs must enhance their lending capability as part of this process through a credible programme of recapitalisation. No road map can be credible without a multiplicity of these ingredients, namely, optimising the balance sheet, improving efficiency and the operating model, significantly harnessing private capital and recapitalisation of the banks. Innovative forms of private capital such as hybrid capital, blended finance, and risk mitigation for private capital are central to these efforts. While the record of MDBs to leverage their equity is commendable, representing over 10 times the leveraging capability on private capital remains disappointing, with just 0.6 for each dollar.

The time to act is now, and we must work together, given the criticality of the moment and the need to act with urgency and at scale. Business as usual will not address the needs of a world literally on fire. We need to reinvent our approach, instruments and modalities. We need to conserve and fortify a rules-based global order. A transformative MDB is a historical necessity.

NK Singh is chairman,15th Finance Commission and co-chair of the G20 expert group on MDBs. The views expressed are personal

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