Russia’s war in Ukraine raises the costs of addressing climate change, inequality, and other big development goals. While focusing on economic development support for low- and middle-income countries, the big global players in development finance such as the International Monetary Fund and the World Bank have so far been unable to address the climate crisis and social inequality with agility and scale. is required. A regional multilateral development bank can.
Even before COVID-19, LMICs were struggling to secure the $2.5 trillion needed annually to meet basic development goals. The pandemic pushed that gap to $4.2 trillion. The war in Ukraine is widening again.
The IMF and the World Bank have taken important steps to strengthen the global economy and support countries to achieve economic growth. But as US Treasury Secretary Janet Yellen said recently, neither institution is equipped to deal with the multiple global crises plaguing the nation today while simultaneously tackling climate change.
This puts the onus on world leaders to rethink the global financial architecture and design new ways to help countries address short-term issues like inflation but also long-term challenges like climate change — and ultimately generate financing to achieve the Sustainable Development Goals.
One thing world leaders can do immediately to address this problem is to empower regional multilateral development banks such as the African Development Bank and the Inter-American Development Bank.
If allowed to do so, the AfDB and IDB could dramatically increase the value of the $650 billion in resources that have been allocated by the IMF to help countries overcome the COVID-19 pandemic. That includes nearly $275 billion in resources — known as Special Drawing Rights — specifically for LMICs. SDRs are international reserve assets whose value is based on a group of five currencies.
Paradoxically, high-income countries have access to over 57% of the total. On the other hand, countries in Africa and Latin America and the Caribbean, whose needs are much greater, have access to only 5% and 8%, respectively.
World leaders should be commended for encouraging high-income economies to channel those funds to LMICs. The Group of 20 and other countries have already pledged nearly $45 billion to the effort. But this is not enough.
High-income countries can also channel those resources to regional banks such as AfDB and IDB. Both banks can then use those reserve assets to provide additional loans in a way that the IMF cannot. For example, if these banks receive less than 1% of IMF resources, they can double the amount of low-cost loans they can offer to their member countries. Doing this is not difficult, but it requires global leaders to act innovatively.
Indeed, the IMF itself is innovating. In April, the IMF’s executive board approved the establishment of the Resilience and Sustainability Trust. This and another IMF trust, the Poverty Reduction and Growth Trust, offer a way for countries to lend each other part of their SDR holdings to achieve long-term structural reforms. Regional development banks can complement and multiply benefits to LMICs.
Therefore, it makes more sense to allow regional banks to get the funds to LMICs.
Regional banks can also deliver key development results at only a fraction of the cost that countries spend on direct foreign aid: Every dollar contributed to the MDB as a hybrid equity — a financial instrument that is less risky than equity but shares characteristics with equity investment — generates $4 in additional resources . At a time when every dollar counts, this is a unique value proposition for governments everywhere.
AfDB and IDB have AAA ratings and strong positions in capital markets, meaning they can absorb risks on their balance sheets and offer affordable financing terms to member countries. As many governments face high debt burdens after the pandemic, this is another good reason to favor regional banks.
Regional banks can also use those IMF reserve assets to lend to domestic public development banks, which will help strengthen the regional financial system and provide more financing for sustainable development.
As regional banks already have development effectiveness frameworks and monitoring teams in place, lending reserve assets to them will make it easier for high-income countries to track, measure and achieve progress towards achieving the SDGs.
By offering financing on highly subsidized terms, regional development banks can invest more easily in countries, including in the most vulnerable countries. That will provide better access to water and sanitation services, health care, and social protection networks. It will also create jobs and facilitate much-needed climate action.
Finally, regional development banks are also adept at mobilizing private sector financing to increase investment. Last year, for example, IDB Invest, the IDB’s private sector arm, mobilized a record $3 billion, and 70% of the finance mobilized by IDB Invest was linked to climate finance transactions. If it has more capital, it can mobilize more.
After the war in Ukraine, countries are desperate to find new ways to deal with everything from higher gas prices to sea level rise. World leaders can help them immediately by using regional development banks more creatively.
Doing so will benefit all countries by making it easier for LMICs to achieve our shared development goals, including combating climate change, as both the AfDB and the IDB have made specific climate finance goals. And it will do so at a fraction of the cost.
Original story: https://www.devex.com/news/opinion-time-to-empower-regional-development-banks-for-sdg-financing-104258