G20 endorses multilateral development bank reform — but will it be enough?

Leaders of the world’s 20 largest economies backed a joint agreement calling for “better, bigger and more effective” multilateral development banks, or MDBs, at the G20 summit in New Delhi, India, last weekend, endorsing a road map on reforms which they say could free up an extra $200 billion in lending to help tackle growing global challenges such as climate change. The declaration stopped short of offering any firm financial commitments, however, which experts say are needed alongside reforms. The fear is that without a fresh injection of cash from donors, funding gaps will force a trade-off between action on climate change and poverty alleviation in the lowest-income countries. “Without a commensurate increase in the financing capacity, there is a real concern that the resource availability for the core development mandate of MDBs will face a severe crunch,” said V. Anantha Nageswaran, chief economic adviser to the government of India, in an email to Devex. Implementing reforms, “while an important building block, will not suffice for the financing needed.” Talk of reforming MDBs, particularly the World Bank, has been gaining momentum in recent months, with a growing consensus that they need to expand their operations beyond the original mandates of poverty alleviation and shared prosperity to address the transboundary challenges of the modern era. The COVID-19 pandemic pushed 70 million people into extreme poverty, with climate change threatening to do the same to up to 132 million by 2030. The war in Ukraine and the unsustainable debt burdens in many low-income countries has further compounded the urgency for enhanced MDB lending. India, which has styled itself as the voice of the global south throughout the G20, has made MDB reforms a key part of the G20 agenda under its presidency. In March, it commissioned an independent expert group on strengthening MDBs, co-convened by India’s 15th Finance Commission Chair Nand Kishore “N.K.” Singh and former U.S. Treasury Secretary Lawrence Summers. In July, the expert group released the first volume of its report, which proposed adopting a third mandate of global public goods, such as climate change and pandemic prevention, alongside the original mandates of poverty alleviation and shared prosperity. The report also called for a tripling of sustainable lending by 2030 and more flexible and innovative financing methods for MDBs. It was careful to emphasize, however, that a third mandate should not detract from the original two. “We are deeply conscious that there should be no substitution,” said Singh in an interview with Devex, noting that the report calls for “the additionality of resources, not a substitution of resources.” “The original issues of extreme poverty and shared prosperity must remain the priority concern of the global financial architecture,” he said. This, said Singh, is why tripling donor contributions to the International Development Association — the branch of the World Bank that deals with the lowest-income countries — was “a central recommendation” of the report. The need to urgently enhance the lending capacity of MDBs has been broadly accepted, but shareholders and banks face a stalemate over where the money should come from. The World Bank and other lenders had previously expressed concern that stretching their balance sheets without the promise of a capital increase from shareholders would damage their prized AAA credit rating. Shareholders on the other hand are reluctant to put up more money, with U.S. Treasury Secretary Janet Yellen recently rejecting calls for a capital increase before progress is made on reforms. The joint declaration issued by G20 leaders reflected this standoff, with a “focus on the key issues that more or less kept the G20 themselves off the hook,” said Karen Mathiasen, a project director at the Washington, D.C.-based Center for Global Development and former acting U.S. executive director at the World Bank. The statement requested MDBs to “undertake comprehensive efforts to evolve their vision, incentive structures, operational approaches and financial capacities so that they are better equipped to maximize their impact in addressing a wide range of global challenges while being consistent with their mandate.” Reform measures included optimizing balance sheets through fuller implementation of recommendations made in the G20 review of MDB capital adequacy frameworks, including better accounting for callable capital, preferred creditor treatment, and removal of statutory lending limits, as well as the mobilization of hybrid capital. Implementation of these measures “will potentially yield additional headroom of approximately $200 billion over the next decade,” said India’s Finance Minister Nirmala Sitharaman at a press briefing on Saturday. However, this figure falls far short of the additional $3 trillion per year in capital that the expert group’s report estimated will be required by 2030, if the goals of an expanded mandate are to be met. The report warned that without a commensurate increase in donor capital, reforms alone would be insufficient to address the unprecedented funding demands of the 21st century. “Even if implemented with maximum effectiveness, these measures will fall substantively short of what is needed,” it concluded. While “the first priority must be to optimize and fully harness the balance sheet,” Singh said, “as you go forward in the road map, recapitalization is an important and inescapable ingredient.” The joint statement released by G20 leaders on Saturday acknowledged the report, saying that it would “take note of Volume 1’s recommendations.” “We will collectively mobilize more headroom and concessional finance to boost the World Bank’s capacity to support low and middle-income countries that need help in addressing global challenges,” it said. But the statement gave no firm commitment on funding increases or the timeline over which these might be made. “There just isn’t a lot there that is concrete,” said Mathiasen. “There are no financial commitments being made. They're just commitments to commit.” While the declaration “provided quite a bit of detail on the kind of reforms that they're hoping to see the MDBs make,” she added, “the language on donor commitments that would help make all of this possible was a bit vague.” In a speech at the summit on Sunday, World Bank President Ajay Banga welcomed the joint declaration, but said that “after we deliver a better bank, we will need a bigger Bank,” emphasizing that reform measures alone would not be enough to address funding challenges. “This progress is important, but it is not the end of our journey,” he said. The need for greater financial backing from donors has been acknowledged by the Biden administration, which has strongly endorsed strengthening the World Bank and other MDBs as a counter to Chinese investment in the global south. Last month, the White House submitted a supplemental budget request of $3.3 billion to Congress to boost World Bank funding and “provide an alternative to coercive PRC [People’s Republic of China] financing.” At the summit, U.S. President Joe Biden rallied other G20 leaders for support, calling on them to mobilize more headroom to enhance the lending capacity of the bank. But Mathiasen noted that domestic politics in the U.S. would prove a probable hurdle to the request for supplemental funding, which is unlikely to be approved by a divided Congress. “The political environment is not there,” she said. The U.S. is also likely to resist a capital increase that would trigger a shareholding review, wary of increasing the voting power of China, which would be able to inject money at a greater rate than some shareholders who currently hold strong voting power. “When you look at the shareholding, and you look at the formula for the shareholding which is heavily based on economic weight, China really stands to gain,” explained Mathiasen. “It's admirable that [the U.S. is] trying to lead on this, but both domestic headwinds and complex international fissures make it quite difficult.” Singh was keen to emphasize that the Indian presidency of the G20 did not end with the summit last weekend, calling efforts to strengthen MDBs a “work in progress.” A fourth and final meeting of G20 finance ministers and central bank governors will take place in October on the sidelines of the 2023 annual meetings of the World Bank and the International Monetary Fund. There, the expert group will present a road map on recapitalization “in more granular terms,” said Singh, after publication of the second volume of its report. The level of engagement on strengthening MDBs at the summit was a positive indication of progress, he added. “While it would have been even more gratifying if the commitments on recapitalisation were bolder and met the expectations presented in our first report,” he wrote, “MDB reforms occupying centre stage and being the focus of the G20 economic roadmap after remaining dormant for some years is a demonstration of the willingness to engage and address the multiplicity of economic challenges we face.”