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Monitoring MDB Reforms

Written by

Nadia Setiabudi

Published on

April 13, 2023

At the World Bank and IMF Spring Meetings on April 10-16, 2023, much attention will focus on the ongoing calls to reform the MDBs to enable them to provide more financial resources to LICs and LMICs. The additional financial resources that reform could unlock would support countries in addressing ongoing financial impacts of the COVID-19 pandemic, the war in Ukraine, and climate-related disasters. The calls for MDB reforms gained traction because of Barbadian Prime Minister Mia Mottley’s Bridgetown Agenda for the Reform of the Global Financial Architecture, raised at UNGA77 and COP27. The calls have been further amplified by MDB shareholders, including recent calls from the US Secretary of the Treasury Janet Yellen “for a strong set of initial evolution reforms for the World Bank Group at the upcoming Spring Meetings” in a call with German Minister for Development Svenja Schulze.

The Bridgetown Agenda lays out concrete asks to:

  • provide emergency liquidity to halt the debt crisis, including the re-channeling of SDRs and debt restructuring;
  • expand MDB lending to governments;
  • fund a global loss and damage mechanism, and;
  • accelerate private sector investments for climate mitigation.

Learn more about SDR reallocation

Read more about COP27 and the Commitment Tracker for the loss and damage fund

How does MDB financing work?

MDBs are a source of development finance for governments in LICs and MICs, providing below-market rate lending and grants to governments who would otherwise have to pay a premium on international financial markets. MDBs issue debt by leveraging capital paid in by shareholders. MDBs can issue debt at a low interest rate as their shareholder capital and CAF mean they have AAA ratings.

Typically, MDBs lend to governments through 1) non-concessional windows (e.g., the World Bank IBRD), and 2) concessional windows (e.g., the World Bank IDA). MDBs’ non-concessional window operations are largely sustainable as borrowers pay a small margin to cover operational expenses. They are typically used by LMICs and UMICs deemed creditworthy. LICs with lower credit ratings, who are unable to access loans at market terms despite the relatively lower interest rates that non-concessional windows offer, access financing through MDBs’ concessional windows. Concessional windows provide financing as grants or with low interest rates. They require regular replenishments of donor financing to meet LIC demands.

The G20-commissioned panel review examines the CAF of 14 largest MDBs to identify ways in which they can unlock additional lending.

How will MDB reforms generate additional financing?

The Bridgetown Agenda’s second ask to expand MDB lending focuses on stretching MDBs’ balance sheets to generate additional lending. The G20-commissioned panel’s review of MDBsCAF, released in July 2022, lays out concrete ways in which the MDBs can free up capital to expand their lending.

Each MDB has a CAF, for its non-concessional lending window to assure shareholders that financial obligations will be met in the case of unlikely and unprecedented default. The proposed reforms would make the framework less conservative, thereby freeing up more resources for MDBs to issue debt and further lend without additional capital deposits from shareholders. Additional financing generated through CAF reforms will, therefore, be non-concessional and accessible mainly to MICs. Financing for LICs through concessional windows will still require new donor contributions.

The report stated five recommendations, summarizing the following key points:

  • Taking on more risk while maintaining ratings: Preserving their AAA ratings is essential as it enables MDBs to provide loans below the market rate. Noting this importance, the panel’s key recommendation of relaxing capital adequacy requirements is coupled with calls for enhanced discussions with CRAs, refining CRA rating methodologies of MDBs, public support from shareholders, and increased access to MDB data and analysis (recommendations 1, 2, 4 and 5).
  • Expanded use of financial innovations: Aside from capital that shareholders deposit with MDBs (paid in), MDB capital also consists of shareholder commitments to repay MDB debt in the case of a default, known as callable capital. The panel calls for MDBs to assign value to this callable capital in their CAF. Assessing this value might prove complex as the process of accessing callable capital differs by shareholders. The panel also highlights other financial innovation options, including consideration of non-voting capital classes and shareholder repayment guarantees (recommendation 3).
  • Strengthening MDB governance: In addition to reforms that would directly expand MDBs’ lending capacity, the report highlights the need for improved MDB governance to support the implementation of the other recommendations. The panel’s recommendations include cross- MDB benchmarking, better information management between MDBs and shareholders, inclusion of financial experts as non-voting board members, and dissemination of core MDB credit statistics and related analyses (recommendation 5).

Following the CAF review, the World Bank Group published an evolution roadmap in December 2022. The roadmap includes the World Bank Group’s considerations of the panel’s proposals, such as assessing "the feasibility for a moderate reduction” to IBRD’s minimum equity-to-loan ratio while maintaining AAA ratings, and exploring a number of financial innovation options, including risk transfer, callable capital, and non-voting capital. The roadmap also lays out plans for broader reforms to its Twin Goals mission and operating model. In addition to internal reforms, the roadmap calls for a capital increase to further expand IBRD’s lending capacity, and for the World Bank Group’s private sector arms, IFC and MIGA, to meet concessional demands.

Deliberations are also taking place in other MDBs as they are expected to follow in the World Bank Group’s footsteps. Following the report’s release, ADB invited the expert panel to discuss its recommendations. The G20 is expecting updates from MDBs on their implementation of the panel’s recommendations in Spring 2023.

How should advocates address MDB reforms?

Development finance advocates are closely monitoring MDBs’ responses to the G20-commissioned panel’s recommendations as implementation of the reforms are expected to unlock significant increase in lending. The report states potential lending increase of “several hundreds of billions of dollars over the medium term” across 14 key MDBs included in the review. World Bank Group President David Malpass stated in March 2023 that the reforms will lead to an additional US$40 billion of World Bank lending over ten years.

Push from the largest MDB shareholders in the G7 and G20 has been key in maintaining momentum on MDB reform. The World Bank’s roadmap came about after its Development Committee requested concrete plans to consider the panel recommendations on CAF reforms, and a particularly strong push from its largest shareholder, the US. Germany reinforced its support for the Bridgetown Agenda with Development Minister Schulze’s joint opinion piece with Barbadian Prime Minister Mottley. However, the German government has yet to communicate a coordinated position on the CAF reforms. Support from shareholders is crucial to the reforms, including accelerating internal deliberations on revisions to the framework and a strengthened position as MDBs deepen engagements with CRAs.

Other DAC donors have also expressed support of the broader Bridgetown Agenda. French President Emmanuel Macron’s Summit for a New Global Financial Pact aims to expand fiscal space for LICs and MICs. In the lead up to the summit in June 2023, France and Germany announced they will work jointly on the World Bank reforms to better respond to the climate crisis, while France and Barbados launched a call to action. Advocates in France and Spain have also echoed calls for financial architecture reforms.

While general support for the reforms is important, there is a need for advocates to more strongly highlight the risk that LICs may not be able to access the benefits generated by the reforms. At a budget hearing at the end of March 2023, US Secretary Yellen opposed the World Bank Group’s proposal of capital increase. While the CAF recommendations have shown how MDBs can expand lending for LMICs and UMICs without a capital increase, a concrete path of reforms is needed to ensure LICs also benefit from an expanded concessional window. During the World Bank and IMF Spring Meetings, it is critical for shareholders not only to show public support for MDBs to stretch their non-concessional balance sheet, but to also show commitments to expanding concessional windows and addressing debt sustainability for LICs.

Nadia Setiabudi

Nadia Setiabudi

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