Balance sheets of multilateral development banks strained by global crises

Janet Yellen’s call last month for the World Bank to ‘think way beyond the status quo’ to help provide the trillions of dollars needed to deal with multiple global crises has made the US Treasury Secretary part of a growing chorus of Western economic officials urging the bank to lend more by easing its capital requirements.

Over the past year, development economists and US government advisers have relied on multilateral development banks (MDBs) to borrow more – even if it means giving up their triple-A credit ratings – to raise a multitude of challenges, ranging from food crises to climate change. , affecting some of the world’s poorest countries.

The pandemic and the fallout from Russia’s war in Ukraine added pressure on institutions, such as the World Bank and other MDBs, which were already struggling to provide the financing needed to achieve the Sustainable Development Goals. United Nations.

“We never anticipated that we would have to deal with near-permanent crises over the past two years,” said Axel van Trotsenburg, the World Bank’s chief operating officer. “Once this crisis is over, we will no longer be able to lend to [the] types of levels [we are at present].”

MDBs were designed to finance long-term development projects and to deal with short-term crises on a case-by-case basis. However, the multiple crises currently facing the global economy are stretching balance sheets to the max.

A member of the board of a multilateral lender said: “We cannot say that the multilaterals are doing too little – it is already a huge effort – but the situation is bad and we risk not one but two decades lost for development”.

Munir Akram, Permanent Representative of Pakistan to the UN, highlighted the scale of the challenge facing the MDBs. Akram said last month that developing countries had received only about $100 billion of the estimated $4.3 billion in funding they would need to fund their recovery from the pandemic.

The World Bank’s lending capacity has already increased significantly in recent years.

In 2018 and 2019, the International Bank for Reconstruction and Development and the International Development Association – the divisions of the group that lend to governments in middle-income and low-income developing countries respectively – had a combined lending capacity of about $88 billion.

In 2020 and 2021, that figure rose to $135 billion, an increase of more than 50%. In April, the bank pledged a combined IBRD and IDA loan package of $170 billion over the next 15 months, leading to a further increase in the bank’s business.

This is without counting two other divisions of the World Bank, the International Finance Corporation and the Multilateral Investment Guarantee Agency, which finance the private sector in developing countries and which together have increased the lending capacity for 2020. and 2021 at around $204 billion.

However, much more is needed. Yellen spoke last month of the “trillions and trillions” of dollars needed to fight climate change on its own, and suggested the World Bank should change its mandate to be able to mobilize more money from the private sector.

Chris Humphrey, a development finance specialist at the Overseas Development Institute, a UK think tank, argued at the start of the pandemic that the six largest lenders, with a combined loan portfolio in 2019 of $463 billion, could have lent an additional $745 billion just by including their callable capital – a security provided by shareholders that has never been called by any MDB – in their capital adequacy calculation. On top of that, he argued, they could have loaned an additional $1.3 billion by accepting a one-notch downgrade in their credit rating to AA+, with negligible impact on their cost of borrowing.

The new development bank – created in 2015 by Brazil, Russia, India, China and South Africa – found that its AA+ rating, a notch below triple-A, only increased its borrowing costs than less than 0.15 percentage points.

The World Bank, however, does not want to lose a triple A rating which it describes as “the cornerstone of our financial model”. He argued that lower ratings would leave the group able to provide fewer loans rather than more, especially in times of crisis.

Nor is there consensus among shareholders for MDBs to become less risk averse.

A person familiar with discussions of the issue within the G20 group of major economies said that while some developing countries supported such changes, there was “more rather than less polarity” among members.

“Winners in the system are really afraid of change,” the person said. “There’s a ‘Chicken Licken’ response when they hear the words ‘rethink capital adequacy’, that only the worst will happen to us if we do something different. »

With little immediate prospect for change at the MDB level, developing country governments have called on advanced economies to lend or otherwise share their special drawing rights, or SDRs – a form of IMF reserve assets whose fund handed out the equivalent of $650 billion last year as part of its coronavirus response – to fill the lending gap. But progress here too has been slow.

Richard Kozul-Wright, director of globalization and development strategies at the United Nations Conference on Trade and Development, said the inability of rich countries to act faster had caused irritation and frustration for many countries. in development at the Spring Meetings of the IMF and World Bank this month.

“There is one mechanism that could really solve the problem, and that is the hundreds of billions of dollars in idle SDRs,” he said. “But we don’t use it. This is not a call for major reforms to the multilaterals. This is a call to intervene – please.

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