How the G20 can bring about a more functional MDB system

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Image: AIIB Headquarters in BeijingEnhancing the role of Multilateral Development Banks (MDBs) in sustainable global economic development has been an important issue for G20 leaders since their first meeting in 2008. For leaders, the primary purpose of revitalizing the MDBs was to counter the cyclical effects of the crisis. As the subprime crisis receded, the focus of leaders and the overall G20 agenda since 2010 has shifted towards growth, for which infrastructure financing has been highlighted as a key driver.

The adoption of the UN 2030 Sustainable Development Agenda in 2015 even encouraged the MDBs to aspire to grow the scale of their investment portfolios “from billions to trillions”, in order to meet the new challenges. The G20 Hangzhou Summit also asked the MDBs to play a key catalytic role in supporting infrastructure financing. International economic circumstances have not been favourable to this agenda however, with the recent decade of long-term low interest rates constraining the MDBs’ income and their loan capacity.

With this upgrading of the MDBs mandates and the expectations placed upon them, a salient change has been witnessed in the approaches and priorities of the G20 in strengthening the resource capacity of MDBs. In its first two years as a leader-led forum, the G20 focused on pushing forward voice reforms that acknowledged the increasing contribution towards global GDP among non-G7 economies, mobilizing public resources from shareholding countries, including through general capital increases, as well as a selective capital increase and replenishments for the concessional lending facilities of the MDBs. In total, $350 billion in capital increases was mobilized for the MDBs, allowing them to nearly double their investment capacity. The reform package approved by the World Bank Development Committee in April 2010 enabled an additional 3.13% of the IBRD’s voting power to be transferred to developing and transition countries (DTCs), bringing the total voting power of DTCs to 47.19%. A new round of shareholding review is undergoing this year, but progress on further reform to vote-share arrangements is not expected to be easy in the near future, considering the difficult political and economic dynamics both within and among major economies.

Against this recent background, there has been a shift in the G20’s MDB agenda that aims to increase the leveraging of market resources, by better utilizing the MDBs’ existing equity, reserves and loan portfolios. The G20 Antalya Summit of 2015 endorsed the Multilateral Development Banks Action Plan to Optimize Balance Sheets, and called for MDBs to consider the following five measures:

  • Increase development lending by achieving higher capital efficiency while maintaining the AAA ratings;
  • Deploy sovereign exposure exchanges among MDBs to reduce their country concentration risks and relieve capital pressure;
  • Develop financial innovations, such as leveraging the equity of concessional windows as collateral to borrow on international capital markets (at the WB, AfDB and IDB);
  • Evaluate structured instruments for increased sharing of risk with private investors in non-sovereign operations;
  • Consider net income measures in order to improve overall capital Position.

This more expansive approach to MDB lending has its merits since it is financially attractive, insofar as it does not require a major increase in capital replenishment from all of the major MDB shareholders, and therefore politically appealing to various key stakeholders. Under the proposed reforms, poor countries seem to be able to have access to more non-concessional resources, in addition to the concessional ones. This is considered achievable as the IDA, the World Bank’s soft loan window just got a ‘triple A’ rating in 2016, and is therefore able to tap the global capital markets; the AsDB has already gone done this route, and has merged its non-concessional window with its concessional loan arm (the AsDF) in order to achieve more leverage and therefore loan capacity.

But a larger structural shift in the makeup of the global MDB system has been presaged through the establishment of two new MDBs by emerging economies, i.e., the BRICS New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB) in 2014 and 2015 respectively. Suspicion and mistrust were plentiful among non-participants at the beginning of these initiatives around 2012-2013. But due to the efforts of both advanced and emerging economies, including through the G20, the two new institutions are getting along pretty well within the existing system and in their early projects. Chinese and US leaders have reached strategic consensus on international development cooperation and committed to meaningfully increasing investment in existing MDBs while supporting the new initiatives, as well as work together on improving MDB Standards.

The AIIB has adopted an open and flexible strategy in recruitment, procurement and operations, so that non-members’ nationals and businesses can fully participate in and even shape it. In the 12 projects approved by the end of March 2017, amounting to more than 2 billion dollars in financing, 9 were co-financed with the existing MDBs. The NDB’s organizational design is more closed in that it recruits people and procures goods and services from its members only. It also prioritizes localization of its operations, such as issuing bonds in RMB and other local currencies of the BRICS for local use, and providing on-lending to their national banks and entities. That said, the NDB is also very actively pursuing co-financing arrangements with its development bank peers, such as shown in the 8 cooperative MoUs that have already been signed with other MDBs. However, NDB President Kamath has said co-financing will not be a significant part of their business as the NDB will try to learn and improve its own skills. This may reflect the NDB’s intent to function more as an alternative to the legacy MDBs. But generally speaking, and as facilitated by the G20 process, the two new institutions have been fully represented in the MDB community’s regular discussions on common interests.

Looking ahead to this year’s and future G20 MDB-related agendas, continuous efforts need to be made for the system to be more functional. Here, two points are worth mentioning, the first is that the G20 should follow up on the ways to implement the MDB Action Plan to Optimize Balance Sheets, and assess the impacts of this program more closely, while at the same time recognizing the vital role of maintaining public contributions to MDB funds. As Reisen astutely commented  , the MDBs’ balance sheet optimization needs to be approached carefully, case by case. Poverty will continue to stay with us as a big challenge for an extended period of time, even though the MDBs have expanded their attention to include a range of newer responsibilities, such as: inequality, infrastructure gaps, food security, climate change and fragile and conflict affected states (FCS), to name just a few, all of which are heavily reliant upon aid financing. Therefore, the demand for multilateral aid will increase, rather than diminish. The G20 leaders should urge both advanced and emerging economies to continue increasing public contributions to the MDBs. The AIIB may also face more pressure to provide subsidies to its borrowers when it accepts more low-income countries and FCS as members.

Secondly, the G20 can help to facilitate discussions on the standards adopted by international rating agencies for MDBs. Currently, 12 existing MDBs, including the World Bank and major regional development banks, enjoyed zero risk weight treatment for selling bonds in international capital markets so that they can raise funding at the lowest cost. More than a dozen other MDB s, including the two new ones initiated by BRICS countries, presently need to apply standards of commercial banks. This constitutes a major disadvantage for these latter banks in terms of being able to play a full role. They should be treated in a different category to commercial banks, as they play a different role and purpose.

Image: Ye Yu

Ye Yu is Associate Professor and Assistant Director of the Institute for World Economy Studies at Shanghai Institutes for International Studies (SIIS)

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