African Priorities for MDB Reform

In late May, experts from across Africa and globally met in Nairobi on the margins of the African Development Bank Annual Meetings to share their perspectives on how the multilateral development banks (MDBs) should be reformed to better serve the needs of borrowers and other stakeholders from the Global South. As the scope and scale of development challenges have evolved to include global threats like climate change and pandemics, it has become clear that international financial institutions lack the mandates, resources, and expertise needed to effectively tackle these new threats. This need for reform is the basis for an ambitious agenda, manifesting as the “Evolution Roadmap” at the World Bank, for example.

While the agenda is moving forward, it has largely been driven by the priorities of the largest shareholders, primarily the G7 and other advanced economies. One of the major reform priorities has been to stretch MDB balance sheets so they can increase lending levels without a new infusion of capital from donors. However, the balance sheet optimization efforts to date have chiefly benefited creditworthy middle-income countries, not low-income countries where people are being disproportionately affected by external shocks and the consequences of climate change.

The event in Nairobi was an opportunity for members of MDB borrowing countries to share their perspectives and priorities, spotlighting debt, climate, and domestic resource mobilization, as well as the challenges of fundraising for the poorest in an increasingly complex field of worthy causes.

Here are a few themes that emerged:

A more equal partnership

There was a clear call for more equal voice and vote for countries that are most affected by decisions made at the MDBs but where they often have little real decision-making power. That is an increasingly untenable set up—and not just for reasons of fairness. In a world where there are many more nodes of power and influence, African countries have more choices when they are looking for partners and allies. As the continent that is home to the world’s youngest population, huge reserves of resources critical to the energy transition, and many of the world’s fastest growing economies, what Africa wants matters and more decision-making power is at the top of that list.

The new permanent seat at the G20 for the African Union, agreed under India’s leadership last year, is a step in the right direction but there is much further to go. More voting rights at the boards of the major global financial institutions, greater input and control into global tax mechanisms, and a sustainable debt workout system were just a few of the issues on the table.

This issue will be front and center as the IMF and World Bank review their shareholding formulas, which to date have heavily favored large, advanced economies.

Prioritize but manage for complexity

Global financial institutions, and the leaders who shape their work, need to get better at dealing with complexity. Pandemics, an acute climate crisis, and widespread conflict are challenges the MDBs did not anticipate having to manage when they were established. They are learning to adapt, but progress is slow; at the same time, demand for funding—especially on concessional terms—far exceeds supply.

Not every organization should do it all—or even try to. If everything is critical, nothing is, and different organizations all have their comparative advantage. This means smart prioritization, better coordination, and partnership between institutions.

During the conference, participants emphasized the need for an economic transformation development approach where the sum of individual projects is greater than the parts, as well as more attention to regional trade, integration, and investment. Health, education, and other social sectors remain critical but underfunded priorities for many countries.

Development effectiveness needs to return as a top agenda item

The question of how to reinvigorate the aid effectiveness agenda and give it the political weight it needs deserves renewed attention. The 2005 Paris Declaration on Aid Effectiveness was meant to change the way “developed and developing countries do business.” With clear principles and measurable performance indicators, arguably it did that for a while. Sadly, that agenda has lost momentum and influence. But the discussion in Nairobi made it clear that it still matters to partner countries and the principles that were agreed almost two decades ago still resonate today.

While the high-level principles still hold true, they need updating. The donor landscape has changed since those principles were agreed, and the development field itself has become more complex as issues like climate change and biodiversity have come to the fore. There are many more actors in the form of new development entities as well as “non-traditional” donors. More should be done to improve collaboration, build dialogue and foster understanding on all sides—especially in a resource-constrained world.

Multilaterals matter 

Notwithstanding the problems of a relative lack of voice and votes compared to the G7 countries and other advanced economies, multilateral institutions like the MDBs remain highly valued, not least because developing countries have a say in shaping priorities and decision-making. But at the same time, the trend from donors is increasingly away from these channels with more and more aid being delivered bilaterally or through vertical funds targeted at one issue or sector. 

There are also concerns about the growing number of multilateral organizations, increasingly fragmenting a system designed to scale and align efforts. From just a few organizations 80 years ago, there are now at least 200 multilateral organizations involved in development with more appearing virtually every year. Many are competing for a share of shrinking multilateral aid without taking into account how borrowing countries can best be served

More concessional finance

And finally, while there was much discussion on what better development finance and better MDBs should look like, the question of the quantity of finance remains fundamental. Credible estimates put financing needs in the trillions of dollars, far exceeding available finance. Countries can and should take action themselves to mobilize more domestic resources and work with international partners to stem illicit financial flows, but financing needs will still outstrip what those efforts can deliver. New and additional external financing will be a necessity.

In recent years there has been a growth in donor countries allocating international aid and spending within their own countries, mostly to address migration. This use of donor finance has come at the expense of aid to countries in Africa. So, while overall financing is growing, it is poorly allocated. Better use of precious and limited concessional finance will have to be part of the solution. 

Better resource allocation matters but not enough to meaningfully close financing gaps. Getting to the trillions needed for climate and development will require leverage. Particularly at a time when the cost of capital has locked many countries out of the finance they need, MDBs offer exceptional value for money because of their ability to leverage additional affordable finance, either through accessing bond markets or providing guarantees.

The World Bank’s International Development Association (IDA) is seen as a critical and major source of much needed concessional finance—a successful IDA21 replenishment will be a test. There are numerous other funds that are up for replenishment in the next 12 months, including the AfDB’s Africa Development Fund, and Gavi, the Vaccine Alliance; it will be important to highlight their complementarity and ensure ambitious resourcing to grow the overall pool of available concessional finance for Africa.

Past MDB reform efforts have largely been specific to each institution and have failed to address inefficiencies and deficiencies in the global financial architecture system. We have seen some positive indicators of change, with new memorandums of understanding among MDBs, examples of risk sharing, and initiatives to share methodologies.

Maybe for the first time, genuine and meaningful systemic reform seems possible. But the real difference? While there is much further to go to reach a level playing field, the voice of the Global South in those discussions is louder and stronger.