MDBs unite in breakthrough pact but Banga ducks capital increase call
Reform agenda leaps forward after shareholder pressure as MDBs pledge to innovate
World Bank president Ajay Banga unveiled a new agreement with nine other multilateral development banks on Friday, at last bringing the kind of inter-MDB coordination that reformers have long called for.
The fragmented sector, which has common shareholders but no regulator or well-organised overarching governance system, has long suffered from conservatism, partly as a result. Mounting calls for MDBs to do more to meet gaping needs in the developing world have kicked the sector into action over the past 15 months, leading to more change than had occurred for decades.
“We have a completely new situation at the World Bank, which might not be the biggest of multilateral development banks but is the most important one,” Werner Hoyer, president of the European Investment Bank, told GlobalMarkets. The EIB has joined the group. “With the new leadership in the World Bank, I think the sky's the limit. We are can really move forward with this new impetus and drive at the World Bank that [can] take everybody else with them. I think we can move towards a breakthrough.”
A crucial step will be to get the MDBs working together on important policy issues, not just informally, as they have done in the past, but in a more concerted way. One key issue is their relations with the rating agencies, which are their de facto regulators as issuers of their triple-A ratings.
Working together to use hybrid capital and portfolio guarantees, make collective assessments of Paris Agreement alignment and climate reporting, collaborating better in-country and harmonising processes for co-financing and private sector investments could unlock $300bn to $400bn more lending over the next decade.
But with annual development financing needs in the trillions, some were disappointed Banga did not make an explicit request for more shareholder capital.
“What I found a bit disappointing is that he did not really go into the issue of going after major shareholders to push them to actually make a capital increase,” said Hung Tran, non-resident senior fellow at the Atlantic Council’s Geoeconomics Center.
International tensions, disagreements among G20 members and high sovereign debt levels make it difficult to convince MDB shareholders to provide more capital. “But that doesn’t mean the World Bank and other supporters of the Bank shouldn’t raise the issue and say to leaders: get your act together,” Tran said.
Paul Cadario, a former director at the Bank and now fellow at the University of Toronto’s Munk School of Global Affairs and Public Policy, said the financial engineering in the collaboration would “not be a piece of cake… The MDBs all have slightly different approaches to capital, not all of which are minor to harmonise.”
Luiz Vieira, coordinator of the Bretton Woods Project NGO network, said the collaboration was based on a drive to leverage massive amounts of additional private capital.
“We’re already concerned that this entire process is not evidence-based,” he told GlobalMarkets.
Banga highlighted the potential of hybrid capital and credit guarantees to leverage every dollar of government finance six to eight times over 10 years.
His wording is significant, because until this summer, the World Bank used a leverage ratio of six as a rule of thumb in its announcements.
But Vieira said: “One has to ask: given that billions have not been converted into trillions in the past, the assumption of this six or eight-to-one leverage seems quite problematic and unrealistic.”
Billions and trillions
The issue of a capital increase is partly about sequencing. Governments including the US want the MDBs to reform first, before they ask for more capital.
Banga highlighted the World Bank’s plans to “spend better” and be more efficient with its existing resources. Once the World Bank has optimised it will be easier to convince shareholders to — in Banga’s words — “bring their ambition to this fight.”
Karen Mathiasen, a project director at the Center for Global Development in Washington, said Banga had handled the issue of a general capital increase deftly — he signalled a way forward that should reassure supporters of a capital increase, without antagonising the Bank’s biggest shareholder.
The US wants MDBs first to leverage their callable capital and crowd in more private investment. US treasury secretary Janet Yellen used a speech in Marrakech to urge the World Bank to fully implement the recommendations of the G20’s Capital Adequacy Framework report of July 2022.
In a meeting on the sidelines of the IMF conference, the G20 presented its new Independent Expert Group, which is focused on the ‘Triple Agenda’ pushed by the Indian G20 presidency of making MDBs bigger, better and bolder.
“MDBs are an essential piece of this equation to get us to where we need to be,” Danny Alexander, vice-president for policy and strategy at the Asian Infrastructure Investment Bank, told GlobalMarkets. “MDBs can’t do that by themselves, you need support from shareholders. That’s both financial support, and in some cases more policy support for changes that need to be made.”
The G20 issued a communiqué on Friday encouraging MDBs to collaborate on areas like hybrid capital and guarantees. It said each MDB’s board would be “best placed to determine if and when a capital increase is needed” alongside CAF measures.
Yesterday GlobalMarkets broke the news that the European Bank for Reconstruction and Development, another member of the group, plans to issue hybrid capital to investors for the first time. It is also seeking a €3bn-€5bn capital increase.
“I think shareholders would like to see some outcome by the end of the year,” said Odile Renaud-Basso, EBRD president, on the callable capital discussions. “It’s quite difficult to see how the callable capital which doesn’t appear in governments’ balance sheets, in a way, can have more value for us without having an impact on governments. That’s a bit to square the circle.”
She added: “It’s going to be tricky, I think, but it’s good to have that discussion because we need to clarify that point, to avoid saying, ‘You should take that more into account’, but the rating agencies are not able to do it.”
Asked what the breakthrough in the MDB sector might look like, Hoyer said: “Firstly, the removal of artificial barriers to strengthening lending,” he said. “Secondly, in some cases, probably better capitalisation of the institutions. And thirdly, extremely important for me, is the production of synergies between the institutions. If we all work in our separate boxes, we will not get the huge impact that we need. … in the readiness for more cooperation, coordination, co-financing … we are making progress.”
Additional reporting by Phil Thornton and Jon Hay