Context: Recently, a G20 independent expert group released its report on strengthening Multilateral Development Banks (MDBs).

About Multilateral Development Bank (MDB):

• It is an international financial institution chartered by two or more countries for the purpose of encouraging economic development in poorer nations.
• They originated in the aftermath of World War II to rebuild war-ravaged nations and stabilize the global financial system.

• Significance of MDBs
  • Support Developing Countries: The MDBs provide financial and technical support to developing countries to help them strengthen economic management and reduce poverty. 
    • Instrumental Role: During the global financial crisis 2008, the MDBs provided $222 billion in financing, which was critical to global stabilization efforts. 
  • Building Institutional Capacity: MDBs support member nations in enhancing governance, policy frameworks, and institutional capacity. 
  • Beyond Political Borders: MDBs are concentrating more and more on solving problems that cut across national borders.
  • Support Climate Action: They back programmes aimed at reducing global warming and adapting to it, using renewable energy, safeguarding the environment, preserving biodiversity, and building sustainable infrastructure.
    • For Example-The World Bank has approved a five-year loan (for the second phase) to the National Mission for Clean Ganga (NMCG) or Namami Gange Project 
  • Support Private Sector Participation: By lowering risks, enhancing governance, and promoting public-private partnerships, they contribute to the development of an environment that is favorable for private investment.

Image Source: Brettonwoods Organisation

Need for Reforming MDBs:

• One Size Fit Approach: In order to pursue equitable and sustainable development, developing countries have a variety of different and changing needs, and MDBs’ current operational methods and business models are not best suited to address those needs.
• Balancing Traditional Priorities: As MDBs broaden their mandates, there is a concern that traditional priorities like poverty elimination and addressing inequality should not be compromised. 
• Not Fit for 21st century: The current institutional and regulatory framework for MDBs is out-of-date and unable to handle the complexity and quick-changing nature of the digital environment.
  • Example: New cross border challenges—climate change, pandemics, fragility, migration—require new finance capacity and new approaches. 
• Limited Resources: Resources are limited, making it difficult for MDBs to meet the rising demand for development funding.
  • The total flow of support from the World Bank and other MDBs to developing countries was $192 billion in 2022, however, it is a third less than the share of developing country GDP attained in 2009 .
• Lack of Private Sector Participation: MDBs encounter difficulties in securing private sector funding for development initiatives.
• Procedural Restrictions: MDBs frequently come under fire for being bogged down in bureaucratic processes, which can impede the implementation of projects and decision-making.
• Restricted Support: Currently, MDBs only mobilize 0.6 dollars in private capital for each dollar they lend on their own account.

Highlight of G20 Expert Group Report on Strengthening Multilateral Development Banks (MDBs)

• About Expert Group: Expert Panel, headed by economists Lawrence Summers and N.K. Singh was commissioned by the Group of 20 nations to propose reforms for MDBs with a focus on increasing funding for sustainable development goals and climate change.
• Expert Group suggested adopting a Triple Mandate:
  • Eliminating extreme poverty, boosting shared prosperity, and contributing to global public goods.
  • Tripling sustainable lending levels by 2030.
  • Creating a third funding mechanism to permit flexible and innovative arrangements to support elements of the MDB agenda.
• Role of G20: G20 should link sustainable lending levels of the MDB system in 2030 to the financial support needed by developing countries to invest to achieve SDG goals.
  • G20 should review the adequacy of such lending every three years.
• Infusing Capital: MDB should infuse spending of some $3 trillion per year needed by 2030, of which $1.8 trillion represents additional investments in climate action and $1.2 trillion in additional spending to attain other SDGs (like Health and Education).
  • An international development finance system should be designed by providing $500 billion in additional annual official external financing by 2030.
  • Global Challenge Funding mechanism of $50 billion: To tap into a coalition of willing donors and non-sovereign investors, to boost investment in Global Public Goods.
• Partnering with Private Player: MDBs should place the mobilization and catalyzation of private capital at the center of their sustainable development strategies,
  • They can help governments reduce policy and regulatory risk and align financial product offerings to private capital market gaps.
  • There are considerable innovative ways of attracting private capital into sustainable infrastructure, and MDBs must complement, rather than compete with, these efforts. 
• All Stakeholder Approach: MDBs, like the International Monetary Fund and World Bank, must work with governments and the private sector to reduce, share and manage risks and thus bring down the cost of capital.
• Ensuring Accountability: MDBs need to fix annual targets and judge performances by the outcomes secured in this altered framework of accountability.
• Implementation of G20 Capital Adequacy Framework: MDBs can optimize their balance sheets and create headroom to lend an additional $80 billion annually.

Other Recommendation to Reform MDBs

• Prioritizing investment: MDBs must prioritize investment in sectors that are critical for development and climate outcomes rather than spreading financing thin across the whole economy. 
• Support climate-related objectives: MDBs would help deploy concessional funding to support investment projects on needs-based criteria to incentivize larger climate investments.
• Country Specific Strategies: It must play a critical role in helping countries integrate the need for collective action on regional and global challenges into their strategies.
  • MDBs can help countries identify where their existing gaps and investment opportunities.
  • Funding should be disbursed to governments based on performance under the agreed country strategy.
• Reforming International Financial Architecture: Make it more inclusive, efficient and equitable and to grant developing countries greater representation and a stronger voice in the governance bodies of these institutions.
  • Strengthening of global financial safety nets through precautionary and insurance lines that enable developing economies to cope with crises and exogenous shocks.
  • Close coordination between the Bretton Woods Institutions to better respond to the debt restructuring needs of developing countries. 

Conclusion

• Making MDBs more relevant for addressing 21st-century challenges would contribute towards enhancing human welfare. 
• Deeper integration with multiple stakeholders is crucial.

News Source: Business Standard