Why in News?

The G20 Independent Expert Group has issued a report card assessing the progress made by Multilateral Development Banks (MDBs) in expanding lending capacity and mobilising private capital.

This assessment highlights the gap between current achievements and the ambitious "triple agenda" needed to meet global development and sustainability goals.

The expert group had been set up under the G20 Indian Presidency and had Fifteenth Finance Commission Chairman NK Singh and former US Treasury secretary Lawrence Summers as co-convenors.

What’s in Today’s Article?

• What are Multilateral Development Banks (MDBs)?
• Why is Reforming MDBs Essential?
• Key Recommendations for MDB Reforms
• Way Ahead to Strengthen MDBs
• Conclusion

What are Multilateral Development Banks (MDBs)?

• MDBs are financial institutions providing loans, grants, and technical assistance to foster economic and social development in low- and middle-income countries.
• These include the World Bank Group, Asian Development Bank, African Development Bank, Inter-American Development Bank, etc.
• MDBs have been pivotal in addressing poverty, building infrastructure, and enhancing human capital across developing nations.
• However, evolving global needs now call for reforming MDBs to better support countries in achieving sustainable and inclusive growth.

Why is Reforming MDBs Essential?

• Outdated legal and institutional framework:
  • The current frameworks of MDBs, established post-World War II for reconstruction, no longer align with the digital age's complexities and challenges.
  • They do not fully reflect the current realities and aspirations of developing nations, particularly those in the Global South.
• Limited private financing engagement:
  • MDBs were urged to mobilise $740 billion annually in private financing to meet climate and sustainable development goals (SDGs).
  • However, current private sector involvement falls short, with MDBs securing only about $70 billion in private capital in the past year.
• Limited local currency lending: While MDBs have expanded guarantees and risk mitigation tools, local currency lending remains underdeveloped, with few successful examples to date. 

Key Recommendations for MDB Reforms:

• Triple mandate for MDBs:
  • Eliminating extreme poverty.
  • Promoting inclusive growth.
  • Financing global public goods with an emphasis on sustainable development and climate goals.
• How to meet this triple mandate? MDBs were advised to triple their financial commitments, establish a "Global Challenges Funding" mechanism, and significantly boost private sector engagement.
• Expanding lending capacity:
  • MDBs have made strides in expanding their lending capacities:
    • A 33% increase in lending capacity.
    • Improved use of balance sheets and guarantee platforms.
    • Reforms to the capital adequacy framework to optimise resources.
  • Despite this progress, MDBs are still short of the targeted tripling in capacity required to fulfil their expanded mandate.
• Innovations in capital mobilisation:
  • MDBs introduced innovative funding mechanisms, including hybrid capital options (non-voting shares) to attract additional financing.
  • Although some member states showed interest, uptake has been limited.
• Private sector involvement:
  • There is the need to change the MDB cultures to lower perceived risks for private capital.
  • Involving private investors, working with rating agencies, and creating an atmosphere that is conducive to investment is the need of the hour.

Way Ahead to Strengthen MDBs:

• Enhancing performance and relevance:
  • Current approaches do not maximise MDBs' potential to mobilise resources, foster policy alignment, and support innovation.
  • Tailored, flexible solutions and diversified instruments are crucial for the dynamic needs of different countries and sectors.
• Improving governance:
  • MDBs' governance structures are often seen as unrepresentative of developing countries.
  • Increased transparency, accountability, and responsiveness are essential to MDBs’ credibility and effectiveness.
• Concessional financing: For the world’s poorest countries.
• Climate-related financing: MDBs have substantially increased climate financing, with commitments reaching $75 billion in 2023 - up from $42 billion in 2019. This includes $50 billion for mitigation and $25 billion for adaptation activities.
• Coordination among MDBs: MDBs are working to harmonise procurement practices and have introduced a digital co-financing portal to facilitate large-scale project coordination.

Conclusion:

• The G20 report card underscores both achievements and gaps in MDB reforms.
• While MDBs have enhanced lending capacity and introduced measures for better private sector engagement, significant efforts are still required to meet the ambitious goals of the “triple agenda.”
• With a strong role to play, India’s leadership and commitment to MDB reforms could help shape a more inclusive, responsive, and effective MDB system for the Global South.