Deep dive: Progress on MDB reforms, but a long way to go

Devex offices — home or otherwise — are closed this week for a summer break. Instead of our regular Newswire, we are bringing you deep dives into some of this year's key development stories. Today, we dig into the world of development finance and reforming the global financial architecture. It’s been a big year so far for the World Bank and efforts to reform multilateral institutions and the global financial system. But some major questions remain. Will reforms to help the World Bank do more with its existing resources be officially approved? While a plan to lend $50 billion more over the next 10 years through increased leverage — essentially doing more with the money it already has — was announced in March, it was not officially approved at the Spring Meetings. Keep an eye out at the annual meetings in Marrakech, Morocco, this October. What more can the bank do to maximize the money it has? One proposal from shareholders and the bank is for the lender to issue hybrid capital. A pilot program is meant to draw in private investors with about $1 billion generating $10 billion in lending. But that could raise the borrowing cost for lower-income nations, former World Bank President David Malpass warned. World Bank President Ajay Banga, who took the helm in June, would like to see the lender use its resources to attract more private investment to global challenges. But the old “billions to trillions” narrative that the private sector can help dramatically increase funding for development has never worked out. I looked into the International Finance Corporation’s Scaling Solar program, which hoped to expand solar projects and bring in private capital but failed to scale — and it may be a cautionary tale. It’s also still unclear exactly how the bank’s private sector arm, IFC, or its guarantee vehicle, the Multilateral Investment Guarantee Agency, might play a role in those efforts. IFC officials told me that it is adapting to the new pressures and mandates from shareholders. That means more focus on climate, an expectation it will take on more risk in the future, and considering new types of financial instruments that might better attract money from pension funds or insurance companies, they said. How much of a voice will the world’s lowest-income and most vulnerable countries get in reforms to the international financial system? There is a push and pull between the demands of the biggest World Bank shareholders and those of borrowing countries, especially around expanding the lender’s focus on climate. In April three World Bank board members, who together represent more than 1 billion people in emerging markets and developing economies, wrote: “Letting the climate effort overshadow the World Bank’s broader objectives would be a grave injustice.” And at French President Emmanuel Macron’s Summit for a New Global Financing Pact in June, the leaders of Kenya and Zambia appealed for a greater voice for low-income countries in international financial institutions and quicker debt relief. It helped illustrate the resentment simmering around the world toward the Bretton Woods bodies — a point of contention that also threatens to derail an agreement about the Sustainable Development Goals in September. And one of the biggest looming questions: if the largest shareholders want more spending on climate, will they be willing to put up more cash in the form of a capital increase? Some of them – including the U.S. – have been reluctant to commit to doing so pending further reforms. But many advocates and an expert group for the Group of 20 leading economies argue there is no other way to meet growing demand. What about debt? How much Banga might prioritize debt discussions is still up in the air. His predecessor, Malpass, was vocal about the need for more debt relief and helped spur the creation of the Global Sovereign Debt Roundtable, which brings together debtor nations and their creditors to try to improve the debt restructuring process. It has helped overcome an impasse around the role of MDBs in debt relief. While after some three years a debt deal is finally close for Zambia, the lengthy and complex process doesn’t create much of a blueprint for what will undoubtedly be more debt workouts necessary down the road. Low-income countries are being hit particularly hard, and the formal international processes designed to help are mostly falling short so far. There’s a push for the IMF’s Special Drawing Rights to be used to help, including some innovative suggestions, but here too many wealthy donor nations are reluctant. The big reads: • Where things stand with World Bank reform. (Pro) • Why a major IFC solar initiative failed to scale in Africa. • Frustration and tentative progress at Macron finance summit. • Exclusive: US, allies block major UN development declaration. • Why low-income nations are “cracking” under debt pressure. • G20 experts urge ‘inescapable’ capital increase for development banks. (Pro) + A Devex Pro membership lets you access all our exclusive reporting, events, and data-driven analysis, as well as the world’s largest global development job board. Not gone Pro yet? Start your 15-day free trial today to enjoy these perks and more. DFC redesign Back in May the leadership of the U.S. International Development Finance Corporation told staff that they would reorganize the structure of the organization around five key sectors. The plan’s rollout was met by some significant staff concerns, including about the process and how their jobs and investment deals would be impacted. While DFC initially set out an ambitious timeline of Oct. 1 to complete the changes, it has decided to slow implementation as a result of consultations with staff. DFC said the changes are needed because it is growing fast and has to better meet the needs of an expanding workforce as well as the broader development mission that lawmakers gave it when it was created three years ago. The reorganization isn’t the only question though as this still young institution works to establish its systems and identity. It is still constrained by a complex budget rule that limits its ability to make equity investments. The U.S. Congress is also contemplating expanding the number of countries where the agency can operate, largely to compete with Chinese economic moves. But some are worried that doing so might undermine DFC’s development mandate. Catch up on DFC’s reorganization plans: • DFC plans restructuring, “anxious” staff say it’s “rushed.” • DFC extends reorganization timeline, responds to staff concerns. • What’s behind DFC’s new strategy — will it help or hinder growth? • Lawmakers hint at DFC expansion to compete with China. ICYMI: Around the world of MDBs Inter-American Development Bank President Ilan Goldfajn, who took the helm toward the end of last year, has been well received. He has said he wants the lender to focus on climate and sustainable growth, poverty and inequality reduction, and digital infrastructure. He also wants the bank to be more effective in achieving development aims and said that he wants to align staff incentives with impact. That’s something I’ll be watching closely — most similar institutions haven’t figured out how to do that, or don’t want to. The lender’s private sector arm IDB Invest is also seeking a capital increase of between $3 billion and $4.5 billion. Elsewhere, in April, the New Development Bank issued a $1.25 billion green bond, the first U.S. dollar bond issuance since Russia’s invasion of Ukraine, which caused serious challenges for the lender because Moscow is a major shareholder. Meanwhile, the Asian Development Bank is piloting a new model of raising funds that will let it lend an additional $15 billion for climate projects. It is looking to take $3 billion in pledges and leverage it on the capital markets, turning it into $15 billion in one-time lending for projects over five years. + You can read up on all of our coverage of multilateral development bank reforms. Sign up to Newswire for an inside look at the biggest stories in global development.