Over the past few months, the call to reform the international financial system has been growing stronger in all diplomatic forums. All eyes are on the annual WB and IMF meetings now.
Starting today, the annual meetings of the World Bank and the International Monetary Fund (IMF) will go on till October 15, in Marrakech. The need for the reform of the international financial system, including putting effective mechanisms in place to triple low-cost financing for developing countries and ensuring debt relief for debt distressed countries has been gaining momentum across various diplomatic summits in the past few months.
Over the past few months more support has come out strongly for the various proposals on overhauling the global financial architecture. For instance, the G20 shareholders have backed a joint agreement calling for “better, bigger and more effective” multilateral development banks. The biggest client countries, including from the African continent, have called for concrete, time-bound action on the proposals to reform the multilateral financial system to make it fair and equitable and help the continent build resilience to climate shocks.
And the G77+ China— a bloc of 134 developing and emerging countries representing 80% of the world’s population— stressed the urgent need for a comprehensive reform of the international financial architecture and a more inclusive and coordinated approach to global financial governance.
While research shows that IMF and WBG’s policies are undermining climate and development goals, the public development banks have laid out their commitments to contribute to the reform process. The UN Secretary General has also urged the financial institutions to urgently act on reforms and the youth and people’s movements have taken to the streets to demand reforms to the international financial institutions which possess a key role in shaping multilateral finance globally.
Tracking the progress so far
Expectations from the new World Bank president, Ajay Banga, who is attending his first annual shareholder meeting, are running high. Ajay Banga had previously committed to taking bold new steps to increase the Bank’s lending capacity such as building on the recommendations of the G20 Capital Adequacy Framework to stretch every dollar it has and strengthening partnerships with the private sector and other development banks. Banga has also recognised that climate change and poverty are intertwined challenges which need to be addressed alongside one another. The World Bank launched a Climate Resilient Debt Clauses pilot project, which would “provide a pause in debt repayments for the most vulnerable countries in times of crisis or catastrophe.”
The $100bn Special Drawing Right (SDR) recycling target has been achieved (pending US congress’ approval for the $21bn US contribution). The long-awaited $6.3 billion debt restructuring deal has been struck between Zambia and bilateral creditors including China and the IMF, setting an important – albeit delayed – precedent. And shareholder countries have shown resolve on reforms, with the US indicating that it would consider a $25bn capital increase for the Bank and the G20 nations committing to pursue reforms for better, bigger and more effective MDBs.
However, the commitment to unlock $20-25bn in low-cost financing by the MDBs has been regarded as insufficient in scope and scale when trillions of dollars are needed by developing countries to effectively tackle climate and development challenges. Additionally, the IMF’s flawed framework to calculate debt sustainability has also been blamed for lack of progress on debt restructuring.
The elephant in the room
The IMF continues to be under intense scrutiny from US political figures as to how much their mandate allows them to act on climate, with the IMF Managing Director pledging to stay in ‘our lane’ on climate. Also research continues to show that the World Bank has continued to support fossil fuel expansion with an investment of approximately $15bn in fossil fuel projects since the signing of the Paris agreement and supplying an estimated $3.7bn in trade finance to oil and gas projects in 2022 alone.
What’s up for discussion?
1. Unlocking new concessional financing
The World Bank and other MDBs have been under pressure by the shareholders to adopt the recommendations of the Capital Adequacy Framework review — a set of recommendations laid out by a G20 expert panel. During the Spring meetings, the World Bank indicated its plans to lend up to an additional $50 billion over the next decade to help developing countries tackle climate and development challenges. China, Brazil and other developing countries had earlier called for a capital increase from governments to increase the World Bank’s lending capacity.
New research indicated that implementing the recommendations of the Capital Adequacy Framework review could help unlock nearly $190 billion in additional low-cost financing for developing countries without jeopardising the Bank’s high preferred AAA credit rating.
The recent statement from the World Bank’s president, Ajay Banga, suggested that new contributions from wealthy countries combined with balance sheet changes could boost the bank’s lending capacity by $100 billion to $125 billion over a decade. However, Banga himself has acknowledged that this would be woefully inadequate as compared to the current needs and “is a pimple on a dimple on an ant’s left cheek compared to what we need in the world.”
Earlier, it was reported that the US would consider a $25bn capital increase for the Bank and could stretch this figure to more than $100bn if other G20 nations made similar pledges.
2. The World Bank’s roadmap and updated mission
The World Bank’s evolution roadmap was initially released in January, following a request from shareholders. The evolution roadmap laid out the plans on how the World Bank will reform its policies and practices. There has been a strong push by shareholders for the roadmap to go further to meet global challenges, including climate change. The US Treasury Secretary had earlier stressed the need to include building resilience against climate change, pandemics, conflict, and fragility as core goals for the Bank.
The World Bank’s development committee had taken stock of the World Bank Group’s updated evolution roadmap back in April. They had agreed to make progress on balance sheet optimization for IDA, develop options for enhanced callable capital and shareholder-purchased hybrid capital, and explore a potential voluntary channelling of Special Drawing Rights (SDRs). The Board has agreed to an updated mission of the Bank on ‘eradicating poverty and promoting growth on a liveable planet’. However, the formal approval from the World Bank governors is still awaited. We could see an updated evolution roadmap and the updated mission statement from the Bank during the upcoming World Bank and IMF meetings.
3. New mechanisms to reduce the cost of hedging the billions of dollars of inwards investment
Mia Mottley and her advisor, Avinash Persaud, are calling for new mechanisms such as a partial foreign exchange (FX) guarantee to reduce the cost of capital to drive in private capital at scale. This proposal could gather further momentum during the annual meetings.
Avinash Persaud recommended a longer-term fix to the issue of high cost of capital for clean energy solutions in developing countries (which is often due to the high interest rates on investments). He suggested setting up a foreign exchange guarantee agency — a joint agency of multilateral development banks and the International Monetary Fund (IMF) — which could hedge the currency risks for investors (reducing the excess costs significantly) and provide adequate protection for future foreign exchange so that investors have an incentive to invest in emerging markets.
4. A new allocation of Special Drawing Rights and recycling through AfDB
The IMF made a historic allocation of $650 billion of Special Drawing Rights, its special reserve currency, to help countries recover from the pandemic. However, the majority of the share went to rich countries that did not need this currency, with only 5% of the total share being allocated to the entire African continent. The G20 last year pledged to recycle $100bn of its unused SDRs— IMF’s special reserve currency— to countries that need it most.
African leaders have called on the IMF to consider allocating a new sum of US$650 billion of Special Drawing Rights for climate crisis response, distributed more equitably as compared to the last allocation. They are also backing a proposal to rechannel the Special Drawing Rights through the African Development Bank, which could hold them as hybrid capital. Progress on these key demands could be seen at meetings. Another way SDRs can be rechanneled through the development banks can be through the issuance of bonds or hybrid capital securities denominated in SDRs
5. US proposal for the loss and damage facility as a Financial Intermediary Fund under the World Bank
The US has proposed that the Loss and Damage Facility should be hosted by the World Bank, effectively taking this facility out of the UNFCCC space. This would mean that the World Bank provides secretariat services and serves as a trustee for the fund.
This proposal has sparked concerns, given the lack of an independent board for the proposed facility and the idea that this would give extra representation to major donors on top of the existing developed country representation, which would ‘tilt the power towards wealthy countries.’