MDBs must seize the initiative to shape their own destiny
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MDBs must seize the initiative to shape their own destiny

“To transform development, the MDBs will have to transform themselves,” said the G20 last week. Some are, which is a smart move

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It is a maxim in corporate life that it is better to bring one’s boss a solution than a problem. The world’s multilateral development banks seem to have grasped this notion.

When their shareholders — national governments — through the mouthpiece of the G20 started pressing them to lend more, many of the big MDBs initially resisted.

The need for greater development funding is acute, and impossible to deny. The Covid pandemic, the war in Ukraine, rampant inflation and soaring interest rates have piled pressure on to developing countries already suffering a rain of blows from climate change.

Last week a panel reporting to the G20 estimated an extra $260bn of lending was required from the MDBs every year: twice the roughly $130bn they handed out last year.

Institutions such as the World Bank, European Investment Bank and Asian Development Bank have historically financed projects in developing countries by borrowing at the super-low rates afforded by their triple-A credit ratings and lending the money on at a cost no developing country could hope to achieve by itself.

Small wonder, then, that speaking privately to GlobalCapital, some senior finance officials at the MDBs have argued calls for big expansions in their balance sheets and risk appetite are cavalier.

MDB professionals tend to believe the critics calling for them to lend more lack understanding of how each MDB’s capital model works — for each institution is set up differently — and would endanger their triple-A ratings.

There is certainly a lack of understanding somewhere, but it is not only or even mostly in the minds of the critics.

Each MDB is different and there are exceptions, but the sector in general could almost certainly lend more if three things happened, which would turn a vicious circle into a virtuous one.

At the moment, the MDBs' shareholders are not explicit about under what circumstances and how readily they would help the institutions out if they were in difficulties. Most of the MDBs have tens of billions of dollars of callable capital, for example, but although it has been legally pledged, because of lack of clarity about when it could be used, it is largely discounted by rating agencies and the MDBs themselves.

Secondly, the MDBs do not use all the leeway given to them by the rating agencies — fearful that if they sail too close to the wind and get in trouble, their shareholders could turn on them in fury.

Thirdly, the rating agencies do not give full credit to aspects of the MDBs' balance sheets and practices, including callable capital, because they lack information and clarity about them.

If shareholders, rating agencies and MDBs were all more explicit and communicative, understanding would be created where at the moment there is confusion.

Still more could be done. The rating agencies could create a credit rating sandbox — models whereby the MDBs could see how changes to their balance sheets would impact their ratings before they made them.

But what some MDBs, such as the African Development Bank, realised long ago, and others are beginning to realise now, is that they can take the initiative.

The AfDB is working on its first hybrid capital deal, which would give it a new source of risk-bearing capital, away from its shareholders.

This would be just the latest in a series of financial innovations it has pioneered, spurred on by its acute need for capital.

Last week the AfDB and Asian Development Bank concluded a $1bn swap of sovereign exposure to diversify their credit portfolios. This technique is not new, but there is scope to use it more.

And urged on since last year by Janet Yellen, US treasury secretary, the World Bank, too, is working on a raft of reforms including issuing hybrid capital.

In the run-up to last week's G20 finance ministers' meeting in India, the World Bank put out a statement highlighting its hybrid capital plans and three other things it is doing to boost lending capacity: shareholder guarantees on its loans, widening the conditions under which it can use callable capital and funding a new crisis lending facility.

Other multilaterals are beavering away too at schemes to power up their balance sheets.

What has opened the way to this burst of energy is the clear and unequivocal signals coming from shareholders.

The MDBs are right that they know the most about how their balance sheets and capital models work: much more than their shareholders, rating agencies or academics.

But they need to use that knowledge to shape their own destiny and set the agenda.

Shareholders and the rating agencies seem like powerful, remote forces, which can do with the MDBs what they will.

What the MDBs must realise is they are not just pawns on this chessboard — they are players.

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