Ideas to Action:

Independent research for global prosperity

X

Views from the Center

Feed

When the Inter-American Development Bank (IDB), alongside other multilateral development banks (MDBs), responded to the G20’s call to lend aggressively into the Global Financial Crisis over a decade ago, they did so by risking their long-term financing positions. Within a year of that crisis, the IDB and other MDBs came back to the G20 to say that they were facing a financing cliff resulting from their outsized crisis lending. Absent a new infusion of capital from their shareholders, they would be forced to dramatically scale back their development lending programs in the years that followed. The G20 in turn responded, and an unprecedented round of capital increases proceeded across the MDBs.

Today the IDB is again making the case for a capital increase to its shareholders. Yet, despite an unfolding crisis that threatens development progress in Latin America to a degree that eclipses the Global Financial Crisis,  talk of a financing cliff at the bank is absent from its appeal for more capital. That’s because a spike in crisis financing has yet to materialize in IDB’s lending numbers. According to published numbers, new IDB commitments to governments in the region were flat between 2019 and 2020. “Crisis” commitments of $12.6 billion look about the same as pre-crisis commitments in 2019. At these lending levels, there’s no financing cliff to fall from.

That doesn’t mean the IDB has been passive in the face of the pandemic. The bank reportedly has been focused on more timely disbursement of existing loans, though data on such disbursements are not yet published. Getting money to countries faster, particularly in a crisis moment, is well worth prioritizing given the immediate fiscal needs facing governments under stress.

But the absence of any significant scale up in new loan commitments since the start of the crisis last year is striking. Over the same two-year period, World Bank (i.e., IBRD & IDA) commitments to the region grew from a fraction of IDB lending pre-crisis to eclipse the IDB in 2020, from just $4.9 billion in 2019 to $13.9 billion as the crisis unfolded in 2020. And as we have described elsewhere, it is reasonable to question whether even this degree of crisis response is adequate to the financing needs of developing economies during this crisis.

Of course, backstopping a scale-up in crisis-related financing is not the only rationale or path to a capital increase. The long-term development finance needs of the region are likely significantly higher as a result of the pandemic shock. Combined with the pressing challenge of financing climate change mitigation and adaptation, these needs make a compelling case for more of the type of financing and expertise the IDB and other MDBs can offer to Latin America.       

But the cautious stance of the IDB, evidenced by lending commitments that have failed to budge in the face of an unprecedented crisis in the region, ought to give the bank’s shareholders some pause. Yes, the needs of the region would point to a bigger IDB. But if the bank receives more capital, will those resources be put to work?

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.