G20 experts urge 'inescapable' capital increase for development banks

Reforming the multilateral development banks will not be enough to yield the amounts of money needed to tackle climate change and fight poverty in the 21st century, and wealthy shareholders must put more money into the system, a group of experts said in a lengthy report for the Group of 20 leading economies obtained by Devex. Nine experts, co-led by former U.S. Treasury Secretary Lawrence Summers and the Institute of Economic Growth President NK Singh, were tasked by the Indian presidency of the G20 with outlining a road map for reforming institutions such as the World Bank and tackling the urgent challenges of the modern era. The experts’ clear call for a capital increase — they say they are “ inescapably led” to urge one — comes after the World Bank earlier this year proposed reforms to get out $50 billion in additional lending over the next 10 years, and U.S. Treasury Secretary Janet Yellen, who is spearheading reforms, said her goal is to get to $200 billion across all the multilateral lenders. The U.S. is the largest shareholder in key banks and Yellen has demurred on support for a capital increase, saying reforms must come first. There are questions about whether the U.S. Congress would appropriate more money for the effort. However, the G20 experts say that hitting the development goals of its proposed “triple mandate” — eliminating extreme poverty, increasing shared prosperity, and boosting global public goods, like climate and pandemic prevention — will require an additional $3 trillion in available capital per year by 2030. This number far exceeds anything currently under discussion using public funds and the concern is that insufficient money will force uncomfortable trade-offs between fighting poverty and tackling climate change, to the detriment of the world’s lowest-income people. The experts’ report, which backs the ongoing reform efforts, also says the banks have to get better at mobilizing private capital. Notably, new World Bank President Ajay Banga has already made this a priority of his policies, though past efforts have failed to truly crowd in significant sums for the lowest-income countries. “Today, MDBs only mobilise 0.6 dollars in private capital for each dollar they lend on their own account,” the G20 authors write. “They should aim to at least double this target.” The report argues that a new “Global Challenges Funding Mechanism” should be housed at the World Bank to help bring in more philanthropic and private capital, which could expand the available financial tool kit to include more things like guarantees for investments. Summers and Singh recently met with Yellen in Washington to discuss their plan. Singh told the Hindustan Times after the session that he found the U.S. treasury secretary had “an open and transparent approach.” Notably, he did not walk away with a clear promise on more money. The report does not argue for any specific figure. The U.S. Treasury did not respond to a request for comment on the report. Package deal Chris Humphrey, a development finance expert who co-authored the benchmark 2022 report to the last G20 presidency on reforming the banks — which argued that overhauls could release hundreds of billions in new lending — backed the call for a capital increase. He said shareholders need to see both aspects as a “package deal” to meet development needs. Management at the banks has shown trepidation about moving too aggressively on reforms to stretch their balance sheets without shareholders offering to boost their equity stakes, fearing markets will see this as a sign of weakened support and hurt their credit ratings. Shareholders, for their part, are demanding reforms before they agree to cough up cash. “It’s a bit of a Mexican standoff,” Humphrey told Devex in an interview. “The obvious solution is that the two need to go together and they do reinforce each other rather well. Make it a package deal.” The report itself acknowledges this, saying the slate of reforms it is proposing, including stretching the balance sheets, will not cut it. “Even if implemented with maximum effectiveness” the proposals “will fall substantively short of what is needed.” It argues that reforms and capital increases need to “take place concurrently.” This move will increase the money available for development while safeguarding the AAA credit rating that allows the World Bank and other major lenders to lend cheaply to fund development and raise money even in adverse economic environments. The new report to the G20, like others before, supports the banks keeping their top-tier ratings. GCI or die While in absolute terms the MDBs have grown in size over the past decades, their relative fiscal strength has declined by almost half, relative to the GDP of the countries they serve, the report said. The experts’ report is the latest push in a growing movement to get the banks into shape after a slew of crises, including the COVID-19 pandemic, the war in Ukraine, and climate change, along with the unsustainable debt burdens in many low-income nations. Barbadian Prime Minister Mia Mottley is leading the Bridgetown agenda, which takes a broader approach to global reform to tackle both climate change and poverty. Reforms are more attractive to shareholders, as it means they do not need to find new money for the global system. In the current economic climate, with inflation, high-interest rates, recession fears, and tight budgets, reform has become especially attractive. But, as Humphrey noted, “given what shareholders are demanding from the banks, it is unrealistic for there not to be a capital increase.” Already the European Bank for Reconstruction and Development and IDB Invest — the Latin American private sector lender — have issued separate calls to shareholders for billions in new equity, on top of the general warning from the World Bank in its evolution “roadmap” from December that a capital increase will be needed. The issue is also political. Not only would a capital increase be difficult to sell to a divided Congress in the U.S., but it would likely see China’s voting power rise substantially as Beijing injected fresh money at a rate difficult to match for now-powerful shareholders such as Japan. The 73-page first volume will be discussed by G20 finance ministers and central bank governors at their meeting in Gandhinagar, India, on July 14-18. A second volume fleshing out some of the proposals is expected ahead of the annual meetings of the World Bank and International Monetary Fund in Marrakech in October. Issues the report raises that are likely to be discussed include improving cooperation between the banks, to create a more systemic overhaul and a more impactful joint way of working. The experts also want the banks to be more engaged in middle-income countries, something likely only possible with more ammunition at the ready.