Can multilateral development banks step up to meet the moment?

As bilateral aid from donor countries such as the United States and the United Kingdom dries up, eyes are turning to multilateral development banks for help. And a pivotal moment to see how — and if — MDBs step up is just a few weeks away: the 4th International Finance for Development summit in Seville, Spain. Ahead of what’s been dubbed FfD4, Devex is hosting a Road to Sevilla series of Pro Briefings to break down the ideas that will be floated on how to reform the global financial system architecture in an era of constricted aid budgets. So what can MDBs such as the World Bank bring to the table? Leverage and impact, according to Homi Kharas, a senior fellow at the Brookings Institution who spoke at the Road to Sevilla series kickoff discussion titled: Banking on MDBs when aid disappears. “What the MDBs offer for the rest of the world is leverage and impact in a way that almost no other organizations offer. So that’s kind of where we are. People are looking to the MDBs to leverage their resources. They’re looking to the MDBs for much more impact,” he said. Scale and speed are two other necessary components, said Vera Songwe, chair of the board of the Liquidity and Sustainability Facility. “So we need leverage, impact, scale, speed, and then, you get better results,” she said. Both Kharas and Songwe — along with fellow panelist Richard Samans, also from Brookings — agreed that MDBs can and should step up in this time of crisis. That includes stretching their balance sheets and taking a hard look at their AAA credit ratings. Samans said there’s plenty of room to increase lending without sacrificing that pristine rating. He analyzed the “unlocked mobilization potential” in the MDB system and, separately, the International Monetary Fund — and how both can realize that potential ”without jeopardizing their MDB triple A rating on the one hand … and on the IMF side, without increasing the price level globally, contributing to inflation.” He found that there’s enough underutilized “capital and capabilities in these institutions to triple the amount of ODA-related flows to well over 100 low- and middle-income countries for seven consecutive years.” Samans also detailed specific ways that MDBs can better optimize their balance sheets. “They could recycle mature infrastructure loans out into the market and then have additional headroom for further greenfield stuff, which is their value add to the market. They could syndicate to a much better, not just by themselves, but among each other, and have a better diversification of risk across the entire MDB system.” But Samans said that at the end of the day, it may take a crisis such as a major global economic slowdown that “forces everyone to think anew about the financial architecture as a mobilizing device for resuscitating global growth and development.” Kharas noted that while the World Bank is sweating its balance sheet to unlock billions in additional lending over the next decade, “it’s not enough to change the system.” “I think what you're seeing is a sense from people that small improvements are nice, but they're not really going to get us where we want to be. And my analogy is, if you are driving off a cliff, does it really matter if you drive off the cliff at a high speed or a slow speed? If you don’t brake in time, you go off the cliff, you’re still gone. So that’s a little bit of where we are right now.” “Look, ultimately, at the end of the day, we're not wanting the MDBs to lend more for the sake of lending more,” he added. “We’re wanting the MDBs to lend more because we think that investment in developing countries has to be larger and reoriented towards higher priority issues.”