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In A World On Fire, How Multilateral Development Banks Can Help

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Some MDBs have separate private and sovereign arms.

New Delhi:

An independent group of experts that was commissioned by the Indian G20 presidency has released the second volume of its report on strengthening multilateral development banks (MDBs), and recommended several steps and a roadmap to reform MDBs.

“The world is on fire, literally and figuratively. In July 2023, the world recorded the hottest month in the global temperature record going back to 1880. Major wildfires and extreme weather events are no longer once-in-a-century natural disasters. They have become commonplace…” the report said.

“We now know considerably more about what must be done, and where the investments and reforms are needed, but we lack mechanisms to make this happen on a global scale, especially in emerging markets and developing economies (EMDEs). A world on fire needs the MDBs to accelerate new investments in EMDEs,” said the report by the independent expert group, whose co-convenors are Lawrence Summers, President Emeritus of Harvard University, and NK Singh, President, Institute of Economic Growth and Chairperson, 15th Finance Commission of India.

The first set of recommendations is that MDBs convert their operational model to shift away from individual projects towards programmes where national governments take a strong lead in identifying multi-year transformations with sectoral focus, achieved through scaled-up investments.

An example of an institutional coordination mechanism that offers a promising way forward is a “country platform” approach, previously recognised and supported by the G20, the report said.

“We recommend that MDBs focus their operations, both financial and analytical, on helping countries create and operationalise such platforms for the highest priority SDG and GPG sectors or themes, as evidenced by the commitment of country leadership and degree of national investment,” it said, referring to sustainable development goals and global public goods.

The second set of recommendations is to bring engagement with the private sector to the centre of MDB operations. Despite the rhetoric, and notwithstanding a few oft-cited examples of success, private financial flows to emerging market and developing economy remain disappointingly low.

Some MDBs have separate private and sovereign arms, but the default approach has been one of limited operational interaction between these private financing arms and the sovereign activities of MDBs. This must now change, the report said.

“The private financing arms must do much more to crowd-in private investments for transformational change. They must be complemented by a whole-of-MDB approach to co-create investment opportunities with the private sector… To this end, MDBs need to shift their own culture from one of risk avoidance to informed risk taking and reduce significantly the time for decision-making,” the report by the group of experts said.

They thanked Finance Minister Nirmala Sitharaman “for her leadership and guidance.”

The third set of recommendations revolve around sizing MDBs to make a material difference at scale. A target to triple MDB financing to $390 billion annually – $300 billion non-concessional and $90 billion concessional – by 2030 may seem ambitious but is essential if the emerging market and developing economies are to make adequate progress towards the SDGs and cope with climate change, the report said.

The five key policy recommendations for MDBs are:

Convert operating models to co-create multi-year programmes for transformative change.

Streamline and simplify business processes to halve processing time.

Work together better as a system with individual and collective key performance indicators, shared diagnostic tools and pool risks.

Bring a whole-of-institution approach to mobilize $240 billion in private capital and catalyse private finance by shifting culture from risk avoidance to informed risk taking

Triple financing levels to $390 billion per year to achieve the transformational change required to meet national and global priorities.

In addition, the G20 Finance Ministers should establish a mechanism to advise and independently assess the first-year implementation of the proposed roadmap, the report said.

In Volume 1 of the Independent Expert Group on strengthening multilateral development banks, the report had reasoned that EMDEs should be investing an additional $3 trillion (10 per cent of their gross domestic product) by 2030 in key areas that would transition them onto a path of low-carbon, equitable, resilient, and rapid economic growth.