Devex Invested: How MDBs can spend hundreds of billions more

There was more than a bit of drama last week around the release of a blockbuster report to the G-20 from a group of independent experts arguing that multilateral development banks could step up spending for the world’s lower-income countries, which have borne the brunt of a series of global crises.

Sources familiar with the discussions tell us that some of the MDBs, led by the World Bank, balked at the document’s release as they pushed for more input in the process, while Russia stepped up to block its publication, at least temporarily. Shabtai got hold of the report before its official release, and the G-20 posted it publicly the day after Devex ran his exclusive story.

So here’s what the document said and what’s at stake:

• The report, authored by a group of experts selected by the G-20, argues that MDBs could unleash hundreds of billions of dollars in extra lending for lower-income countries — if the banks took on calculated risks. The crux of the paper is that this can be done without hurting MDBs’ top-notch credit ratings; many of them have the coveted AAA.

• Why does this matter? Over the years, MDBs have often said that they must maintain their credit ratings so they can borrow cheaply and pass on the savings to low-income countries, which would otherwise face steep rates. The belief is that their ratings could fall if they took on more risk, but the report argues for a way out of this line of thinking.

• The banks are instinctively reluctant to change. Thus far, their response to the report has been tepid. In a statement signed by all the major MDBs, the banks say they are concerned that the “complex interactions among the recommendations” in the report could make it harder to keep the AAA ratings and raise the cost of borrowing for low- and middle-income countries, which rely on the MDBs for low-interest loans.

• Some G-20 nations issued a joint statement welcoming the report, though their levels of enthusiasm varied. The U.S. urged “all shareholders and the banks to carefully consider these recommendations, and be bold in thinking about how to pursue reforms to increase ambition on development finance.”

Exclusive: G-20 report says MDBs are holding back hundreds of billions

Downgrade No. 1

MDBs — and their shareholders — could face more pressure to lend a hand, following the publication this morning of IMF’s updated World Economic Outlook. Its title, “Gloomy and More Uncertain,” says everything we need to know about 2022 so far.

Global economic growth is seeing a downgrade, declining from 6.1% last year to a projected 3.2% in 2022 — with a further drop expected in 2023.

For low-income countries, exposure to the slowdown in China is having serious ripple effects. And the outlook for Africa may be deceiving: While it appears that the average rate of growth is staying steady, that is largely due to boons for oil producers, and commodity importers are likely to face tough times ahead.

Read: IMF warns of ‘gloomy’ economy rife with uncertainty and high inflation

Downgrade No. 2

In a rare move, Fitch Ratings has downgraded the New Development Bank a notch, citing the fallout from Russia’s war in Ukraine, Shabtai reports. Russia owns almost 20% of the bank’s capital, and U.S. sanctions on Moscow could lead to challenges for NDB in issuing bonds in U.S. markets.

For context, the shift from AA+ to AA still gives NDB the third-highest rating. The bank’s plans to add new members could diversify its portfolio and reduce Russian risk.

Read: BRICS-led development bank takes credit ratings hit over Russia links

Step up to the plate

Climate stability, much like the world’s macrofinancial stability, is a global public good. But while macroeconomics is the purview of IMF, no one institution is charged with looking after climate, write two ex-officials of the World Bank Group.

Rabah Arezki and Philippe Le Houérou argue that the World Bank is well equipped to become that institution and has the financing capacity to do so. Its advantages are its universal membership, vast expertise in climate-relevant sectors, and understanding of private sector investment through IFC, they write for Devex.

Opinion: The World Bank should become the ‘IMF of climate’ (Pro)

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Investments of interest

• The Green Climate Fund approved four new projects totaling almost $381 million, including a climate resilience initiative in Benin, a fishery initiative in Gambia, and a so-called e-mobility program in Latin America and the Caribbean. GCF, which has a pledging conference for its replenishment set for September, now has 200 projects on its books.

• British International Investment is committing up to $250 million for a new electric vehicle venture to be launched by Mahindra & Mahindra. The deal aims to accelerate availability and adoption of electric vehicles in India and other markets.

• The European Bank for Reconstruction and Development will invest up to $100 million in a Kazakhstan Railways bond that aims to improve the financial resilience of the national rail operator and modernize freight routes.

• The U.S. DFC has committed $280 million in financing for Access Bank PLC in Nigeria. The loan intends to help finance small- and medium-sized enterprises, advance financial inclusion, and support businesses owned or led by women.

What we’re reading

ESG should be boiled down to one simple measure: emissions. [The Economist]

China reckons with its first overseas debt crisis. [Financial Times]

IMF approves first policy-reform loan for Tanzania in a decade. [Bloomberg]