At a glance
- The International Development Association is the largest single source of concessional finance for the world’s poorest countries. Negotiations begin in December for the next funding round
- The target is to triple by 2030, but contributions have been dropping since the 2012 peak
- MDBs can “sweat their balance sheets” with initiatives such as portfolio guarantees and hybrid capital — but it is fresh capital that is most urgently needed
The joint statement issued during the October IMF meetings in Marrakech from nine multilateral development banks (MDBs) declaring their intention for increased collaboration was the first of its kind. It was a response to calls from client countries for MDBs to reduce their administrative complexity and speed up disbursement.
But while collaboration is both welcome and vital — the World Bank estimates there is the potential to achieve sizeable efficiencies and secure $300–400bn in additional lending capacity — it is not enough.
“At the moment, the focus is on better multilateral development banks, but what we really need is for them to be bigger, and this didn’t come up very strongly in the conversations in Marrakech,” says Annalisa Prizzon, principal research fellow at the Overseas Development Institute (ODI).
A key process that lies at the heart of making MDBs bigger is the upcoming replenishment of the International Development Association (IDA), the concessional finance arm of the World Bank, and the largest single source of concessional finance for the world’s poorest countries.
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The IDA is funded by contributions from donor countries, and provides lending at very favourable rates — approximately 1–3%, with maturities between 30–40 years. Importantly, its terms are not determined by global interest rates, meaning that when financial conditions are tight, the IDA provides critical liquidity at a low cost.
But IDA replenishment contributions have been consistently dropping over the last 10 years from their 2012 peak, even as donor economies have grown significantly. Negotiations are due to start this December for the next replenishment, and will run throughout 2024, with the first disbursements scheduled for July 2025.
Two Independent Expert Group reports, commissioned by the Indian G20 presidency and released in June and October, called for a tripling in the size of the IDA by 2030, entailing a jump from $93bn to $279bn. Ms Prizzon, a contributor to the reports, stresses that this tripling is not about “being ambitious”, but simply what is needed.
“It is the amount of financing the poorest countries must have to tackle the most pressing challenges,” she says.
Right now, Ms Prizzon sees it as too early to tell what sort of figure we might expect for the next replenishment round, or the appetite for increased commitment by donors. “But the ambition has to be to move beyond the underpinning figure, so to at least reach the $100bn mark in the next round,” she says.
If it is capital that is required, should MDBs take a bigger role in supporting private capital mobilisation? In short, yes. The mobilisation of private capital is one of the areas that the joint statement highlights. “Of course we want MDBs’ role in mobilising private capital to be bigger, but we would also call for them to be bolder,” says Ms Prizzon. By this she means taking more risk when working with the private sector.
This is echoed in a report released in June, co-authored by Jay Collins, vice-chairman of banking capital markets and advisory at Citi. The report argues that changes in MDB risk posture, and the assumption of incremental risk in their product offering, would enable the crowding in of commercial banks and institutional investors, thereby unlocking capital on a greater scale than MDBs currently manage on their own. It cites this as a “quick win”.
Quality, not just quantity
While we wait for bigger, what can we expect from the commitments to be “better”?
Ms Prizzon is satisfied that much of what was proposed in Marrakech is in line with what client countries — those borrowing from MDBs — have said they need. She references a survey, carried out by the ODI, which consulted 500 senior government and MDB officials in 73 countries.
“Most of the recommendations put forward as a result of our survey featured in some shape or form in the discussions in Marrakech,” she notes.
One of the principal recommendations is around boosting operational effectiveness and reducing the complexity of administrative procedures, safeguards, procurement and financial management. This was the top concern among client countries that came up in the client survey.
“Each MDB has its own systems and that puts pressure on client countries, so from a client perspective a top priority is the reduction of the administrative burden,” she says. From this new commitment to collaboration from the nine MDBs, Ms Prizzon believes, we should start to see a convergence and amortisation of standards and procedures, potentially reducing the burden on the client countries.
Ms Prizzon observes that in the past it “wasn’t unusual” for client countries to turn down MDB financing and borrow from other financiers, due to the burden of administrative procedures.
She points to Just Energy Transition Partnerships seen in South Africa, Indonesia, Senegal and Vietnam as good examples of co-financing, joint diagnostics, and MDB collaboration via a country platform.
“That’s where MDBs can work together — reducing the costs for the client countries and maximise the impact on the ground,” she says.
Tailored advice
The relevance of the long-term impact of technical assistance and policy advice is another point that Ms Prizzon stresses is of vital importance to client countries. In the ODI survey, 92% of government officials in client countries said this was “very or extremely important”, but in the same survey only 58% of MDB staff thought the same.
“Client countries want to see more tailored advice and assistance that is more responsive to their own specific cultural contexts,” she says.
“There are some initiatives within the new ‘Evolution Roadmap’ that address these concerns, but the agenda could go much further than it does. We would like to see more commitment to working with local partners and building local capacity,” she says.
But in the end, the top priority is the need for bigger MDBs. And that goes back to their shareholders. While there is merit in squeezing the juice out of the balance sheets with a range of approaches and processes, in the end it is fresh capital that is needed.
“MDBs can sweat the balance sheets: lowering the equity-to-loan ratio, portfolio guarantees, hybrid capital — but all this can really only go up to a certain level,” says Ms Prizzon. “We need to have bigger MDBs and that’s certainly where we haven’t seen a lot of progress during the annual meetings in Marrakech.”
