International financial institutions’ response to the Covid-19 pandemic has been patchy, experts argue, raising questions about their role and governance that need to be addressed if they are to respond more effectively to future crises.
Multilateral development banks stepped up lending when the pandemic hit — but not nearly as much as during the global financial crisis of 2008-9, and some were much more active than others.
Yet Covid’s effects have been much worse. Developing and emerging country GDP shrank 2.2% last year; in 2009 it grew 2.8%.
“The MDBs have not done a good job. Especially in terms of support for middle income countries they’ve been very weak,” said Chris Humphrey, senior scientist at the ETH Zurich university.
A study he wrote in November with Annalisa Prizzon of the World Bank and the four major regional development banks found that, collectively, they had increased lending by 30% last year — but in the GFC they managed 70%.
A report in May by Nancy Lee and Rakan Boneaaj at the Center for Global Development, using full year 2020 figures but leaving out the African Development Bank, put the figures at 39% and 76%.
The concessional arms which serve the poorest countries have reacted most strongly. The World Bank’s International Development Association more than doubled its commitments. The equivalent funds of the African Development Bank and Asian Development Bank also outperformed what they did in the GFC.
But only the ADB managed to grow its main balance sheet more than in the last crisis. The World Bank expanded lending by 55%, against 87% then; the EBRD 9%, down from 45%.
“African Development Bank lending in 2020 actually declined,” said Humphrey. “The MDBs are not providing enough fast-disbursing budget support loans, which is the quickest way to get money out of the door, rather than complicated project loans which take years to approve."
Humphrey said it was understandable that there was a wish to help the poorest countries, but added: “Take Latin America — the entire region is middle income. It’s been devastated. And in Africa, some of the worst affected countries are not the poorest, but South Africa and parts of North Africa.”
There is a mixture of reasons. The AfDB was capital-constrained, Humphrey said, while the World Bank and IADB had attached too many conditions to loans.
Fortunately, private capital markets, bathed in liquidity by central banks, have been very welcoming. In 2008, EM bond issuance contracted by 19%, to $850bn, according to Dealogic. Last year, it grew 6%, to a record $2.27tr.
“The people who say multilaterals haven’t done enough are the people who always say multilaterals don’t do enough,” said Ed Al-Hussainy, senior rates and currencies analyst at Columbia Threadneedle Investments in New York. “They obviously have a different view of the role multilaterals have to play. Ultimately, the bond market has been open to EM issuers — even those of very marginal credit quality have been able to find investors. EM really has nothing to complain about in terms of market access.”
Peru issued a $1bn 100 year bond in November; Benin, rated B+/B, raised €1bn of nine and 31 year debt in January at 4.875% and 6.875%.
Lee at CGD agreed that because middle income countries had been able to issue sovereign bonds at record rates in 2020, providing budget support to them “should not be the principal role of MDBs any more”.
Nevertheless, she said the sector needed an overhaul. “The whole question of their risk tolerance and financial goals needs to be assessed, particularly on the private finance side, to make them more risk taking,” Lee said. "Secondly, the institutions need to think about where their capital is most impactful and and target gaps in private capital markets."
These should focus on three areas, she argued: providing global public goods, such as fighting climate change; they should shift more of their portfolios to poorer countries; and they should provide capital for early stage innovations in a way that "exceeds the risk tolerance of the private sector".
Besides fresh loans, IFIs can help with debt relief. The G20’s Debt Service Suspension Initiative, urged by the World Bank and International Monetary Fund, has given $5bn in relief to 40 countries. But it is only temporary, and for low income countries.
Even when IFIs have restructured debts, they have been criticised. “The official sector went too far in trying to restructure debts that are avoidable,” said Ricardo Adrogué, head of global sovereigns and currencies at Barings in Boston. “Argentina and Ecuador under most metrics could have paid their debts, but refused to. Now in the case of Argentina, it has no credit. The IMF fell into the trap of lending so much money to Argentina that it basically owned the IMF and when it refused to pay foreign creditors, the IMF could not voice any opposition. These countries could have rolled over their debt with private creditors with favourable conditions.”
Adrogué said the official sector was “not doing enough because it is completely confused.” Failing to understand how the private sector works, he argued, “they are forcing restructurings and losses on the private sector, which causes investors to focus on other countries that are reliable. Instead of helping the EM by joining forces with different instruments that both sectors have, the official sector calls the shots and causes investors to walk away.”