The message was loud and clear at the World Bank and International Monetary Fund’s annual meetings that ended on Sunday in Morocco. Bigger balance sheets, bigger lending capacity and a bigger scope of funding to include climate finance for mitigation and adaptation projects globally is what the world needs.
Tapping every potential pool of financing to squeeze out even the last available dollar to help countries was the public pledge the multilateral lenders made.
The urgency to find innovative funding solutions and rethinking the way they have been funding projects in the developing world was evident as thought leaders, policymakers, government officials, corporate bosses, civil society representatives and finance leaders gathered in the historic city of Marrakesh.
Throughout the week-long event, topics ranging from rising debt distress and escalating geopolitical risks, which are dimming medium-term growth prospects, to the inclusion of the private sector in funding the trillions of dollars required to address climate change challenges, were discussed.
Making more money available, it seems, is the solution to most problems, be it helping debt-distressed countries with little or no fiscal headroom or funding reconstruction and development in countries suffering from natural calamities and climate disasters.
The onus was squarely put on donors, as well as multilateral banks themselves, which have now pledged to squeeze balance sheets, shuffle their loans-to-equity ratios and adopt hybrid financing models to boost their lending capacity.
Lending capacity
The group of multilateral banks that includes the IMF, World Bank, European Bank for Reconstruction and Development, Asian Development Bank, Islamic Development Bank, European Investment Bank and Asian Infrastructure Investment Bank aim to bring as much as $400 billion in additional lending capacity over the next decade.
“[The banks] recognise the collective role we need to play in response to the global challenges and the efforts that will put us on track towards achieving the SDGs [sustainable development goals],” the heads of the multilateral development bank group said.
“We have identified capital adequacy frameworks measures, including those under implementation and consideration which, with strong contributions from shareholders and development partners, could potentially yield additional lending headroom in the order of $300 billion to $400 billion over the next decade.”
The collaboration with other development partners and “an unparalleled proximity to governments” can work in favour of those most in need, they added.
On Friday, World Bank president Ajay Banga laid out his ambitious vision to transform the bank into a bigger and more efficient institution that will expand the scope of lending to include climate finance as well as cheaper and longer maturity funding for some of the poorest nations.
“We’re investigating if we can reduce interest rates to incentivise exiting from coal as part of energy transitions,” Mr Banga told the annual meeting's plenary session in Marrakesh.
“We’re [also] exploring maturities of 35 to 40 years to help countries navigate longer-term horizons for social and human capital investments.”
In its bid to become a larger bank to boost funding for projects across the developing world, the bank has freed up $40 billion from its balance sheet by adjusting its loan-to-equity ratio, which will become available over the next decade.
Development of a portfolio guarantee mechanism and the launch of a hybrid capital instrument over the past few months has further boosted the lending capacity.
Bigger bank
Taken together, the World Bank would provide $157 billion or more in lending capacity over a decade, he said.
“We will need a bigger bank to increase our financing capacity, take on more risk to encourage investment and support the replicability and scalability that the World Bank is preparing to deliver,” Mr Banga told delegates.
The lender is also looking for additional equity from shareholders to expand the size of its balance sheet.
Earlier in the week, Mr Banga said he will “definitely go back to shareholders” to seek more funding to become a “bigger” bank, “because I believe this is what the world needs”.
In terms of further expanding the scope of lending the World Bank is moving from small, bespoke loans to large, standardised investments that can be packaged.
“If done right, we could draw in institutional investors – pension funds, insurance companies, sovereign wealth funds – and put their $70 trillion to work in developing countries,” he said.
“We are in early days of building such a platform. But by doing the hard work now, we will be in a position later for success; success that could be further multiplied across multilateral development banks to mobilise much greater amounts of private capital than ever before.”
Mr Banga urged the members to contribute large sums to its International Development Association, which help the world's 75 poorest nations to accelerate the fight against poverty.
“If we really want to incentivise change – we can’t just wish it – we need to fight for it. Nowhere is this truer than the IDA,” he said.
During the meeting, the IMF also hammered home the message of rising debt in the global financial system and the need to save heavily indebted low-income countries, with little or no fiscal buffers, from the climate change onslaught.
Though the world is not on the verge of a full-blown debt crisis – an issue widely discussed in policy statements, seminars and press briefings throughout the past week – there should be concern over rising borrowing distress.
Restructuring debt
It is time for creditor groups to come together to help the low and middle-income countries in restructuring their debt piles, IMF managing director Kristalina Georgieva said.
“We should be concerned … but we are not at the footsteps of a debt crisis,” she told a seminar on the sidelines of the annual meetings.
“Why should we be concerned? Because over the last years, governments, households [and] businesses had to borrow to sustain their function and debt everywhere has piled up higher.”
Last year, global debt hit $235 trillion, about $200 billion higher than 2021 levels, and stayed above its “already high pre-pandemic level”, the IMF reported.
Total debt stood at 238 per cent of global gross domestic product last year, 9 percentage points higher than in 2019. With global borrowing likely to rise in the medium term, the fund urged governments to take measures to reduce their debt vulnerabilities.
Aggregate global debt also rose by $8.3 trillion in the first three months of 2023, the Institute of International Finance said in its Global Debt Monitor report in May.
The international government group of 24 developing nations also called on the multilateral lenders to help bring down public debt levels that are stifling growth in many countries.
“We call for immediate global action to assist developing countries to managing their escalating debt vulnerabilities,” Adama Coulibaly, Ivory Coast’s Minister of Economy and Finance, who is also the chairman of G24, said at a press briefing.
The G20 common framework that allows low- and middle-income countries to restructure their debts also calls for the cancellation of the debt burden of the poorest and most vulnerable countries.
Currently, most of the debt of these nations is owed to multilateral development banks, he said.
