Devex Invested: SDRs may be the key for multilateral banks to lend more

Remember those International Monetary Fund reserve assets called Special Drawing Rights that everyone was talking about at the peak of the COVID-19 pandemic? Well, they’re back!

Bear with me because this is wonky, but important. A new IMF board decision could mean that more of those resources will finally be channeled to lower-income countries — as was originally pledged but hasn’t fully delivered. It could also mean MDBs have another way to lend more without the capital increase that their shareholders have been pushing for.

Since 2021, the African Development Bank and the Inter-American Development Bank have been working on a proposal to allow countries to invest their SDRs in MDBs through a hybrid-capital instrument that is part equity and part loan. The holdups were whether the IMF would consider them a reserve asset and how exactly it would all work.

Just over a week ago the IMF board gave the green light for the instrument to move forward, allowing countries to provide up to 15 billion in SDRs to MDBs. There are rules around interest payment suspension and loan cancellation, but an IDB official says that triggering either would be highly unlikely given the robust financial models at the institutions.

So why does it matter? Right now MDBs can turn every $1 they have into roughly $4 in lending to countries. So if AfDB and IDB — or potentially other MDBs — get countries to commit SDRs, that could lead to about $80 billion in additional lending for a wide range of programs.

MDBs need at least five countries to commit SDR resources to meet risk-sharing requirements, and an IDB official says the goal is to get those by the IMF annual meeting in October.

“With the new SDR-based hybrid-capital instrument, we have a cost-efficient way to finance much-needed sustainable development projects to boost climate resilience, reduce poverty and inequality, and lay the foundation for more inclusive growth in many of our countries,” IDB President Ilan Goldfajn said in a statement.

Read: IMF greenlights new financing mechanism for MDBs

From our archives: SDRs and the RST — explaining the acronyms of the IMF's currency system (Pro)

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Getting in the middle

Can the Green Climate Fund, the Global Environment Facility, and the Global Fund to Fight AIDS, Tuberculosis and Malaria better leverage their funding?

World Bank Senior Managing Director Axel van Trotsenburg thinks they can, with the help of the leveraging ability of MDBs. Those funds have received around $45 billion, “the question I would have is, is this effective?” he said at the European Bank for Reconstruction and Development’s annual meeting in Armenia last week.

Stressing that he was talking mostly about work in middle-income countries, he said that donors needed to think about how to “more smartly combine” their contributions with the leveraging ability of MDBs. Doing so could turn some $45 billion in grants into $100 billion, van Trotsenburg said.

“I think there is far more room than meets the eye, and it has not been really discussed,” he concluded. “There are sensitivities, because everybody has their interest. But I think that is where I would push very, very hard.”

One big number

That’s the amount of private infrastructure investment in low- and middle-income countries in 2023, according to new World Bank data. That’s down 5% from the previous year, though about equal to the five year average.

An independent investigation

International Finance Corporation’s board is seeking an outside firm to look into the investigation that the institution’s internal watchdog conducted into IFC’s investment in Bridge International Academies. The review is set to determine if the watchdog — the Compliance Advisor Ombudsman, or CAO — was able to complete its job, had access to the information the task required, and conducted the investigation without interference.

CAO had found that IFC, the World Bank’s private sector arm, had multiple failures related to its Bridge investment, including that staff turned a blind eye to reports of sexual abuse at the for-profit chain of schools and then interfered in the investigation.

Banga has promised an independent review back in March, so it looks this will get the ball rolling.

Background reading: World Bank’s Banga apologizes to kids sexually abused at Bridge schools

+ We have been following the Bridge schools sexual abuse scandal developments. Read the rest of our coverage to get the full details.

Lights, camera, Accion

The global nonprofit Accion has launched a $152.5 million digital transformation fund that will provide financial institutions with capital to adapt and help their small business customers connect to the digital economy. It will make eight to 12 investments of $10 million to 15 million in financial institutions that serve micro, small, and medium enterprises in Asia, Latin America, and Africa. Two investments in India are already confirmed.

“Many financial institutions in emerging economies serving micro, small, and medium entrepreneurs rely on branch or people-heavy models. The Accion Digital Transformation Fund is trying to change this by helping these institutions to lower their costs, improve customer experience, and expand outreach through digital channels,” Accion Managing Partner Abhishek Agrawal told Devex in an email.

The U.K., Dutch, Swedish, and Austrian development finance institutions are all investors, as are IDB Invest, IFC, and Mastercard.

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What we’re reading

MacKenzie Scott has lessons for philanthropists. Are they listening? [Devex Pro]

Odile Renaud-Basso has been chosen for a second term as president of EBRD. [Barron’s]

U.S. President Joe Biden and Kenyan President William Ruto will discuss Kenyan debt relief this week. [Reuters]

Vince Chadwick contributed to this edition of Devex Invested.