The Multilateral Development Bank for the Future

The escalating impact of cross-border problems like climate change and pandemics both heighten the urgency of investing in global public goods and underscore the unique position of the multilateral development banks (MDBs) in forging collective solutions. CGD’s work on MDBs for a Global Future explores how the MDB system must change to ensure these challenges are met, with a key focus on ensuring the perspectives of borrowing countries—emerging markets and low-income countries alike—are central to the discussion.

In October, CGD hosted an event with finance ministers on MDB reform, and we now continue the conversation with this reflection from Nadia Fettah, Minister of Economy and Finance of Morocco, and an accompanying piece from Michel Patrick Boisvert, Minister of Economy and Finance of the Republic of Haiti. We hope to bring additional voices to the discussion in the months to come.

First of all, I would like to congratulate the Center for Global Development (CGD) for [exploring] this strategic issue, the topicality of which is well established, namely "Multilateral Development Banks for the Future,” especially in this particular context marked by (i) the importance of the financing needs necessary to boost post-Covid economic activity, and (ii) the persistence of geopolitical conflicts which have accentuated the inflationary pressures and led to a large-scale tightening of monetary policies, thus impairing recovery efforts and constituting a major challenge to recovery policies.

Through this window offered to me by this renowned think tank, I would like to share with the readers some elements of reflection on the role that the multilateral development banks (MDBs) should play, in the light of the lessons learned from the multiple crises encountered, in particular the Covid-19 pandemic and the current conflict in Ukraine, with the aim to strengthen the resilience of developing countries to the multiple challenges facing the world today.

This theme fits well with the vision of this think tank, which aims to engage the governors of MDBs in a strategic debate about ways and means to improve the management of global public goods.

These debates are all the more relevant as our countries are facing today, major economic and social challenges, particularly in relation to the need to strengthen our development models and achieve the Sustainable Development Goals (SDGs), as well as with the strategic challenges of the succession of global crises, climate change and food, health, and energy security.

Before getting to the heart of the matter, I would like to recall that the MDBs are already integrating into their actions and, to a certain extent, through appropriate programs, the challenges arising from the management of the pandemic and those relating to the aforementioned issues.

In this regard, I would like to salute all the initiatives and actions carried out in this direction by the international community in recent years, in terms of technical support and the mobilization of public and private resources to make up for the financing gap of developing countries, and to which I reiterate my full support.

As a reminder, the donor countries have enabled, within the framework of the 20th replenishment of the IDA-20, the mobilization of a historic level of US$93 billion of resources for the benefit of the poorest countries, if although this reconstitution took place in advance, which is, in itself, a commendable effort.

Similarly, the historic allocation of Special Drawing Rights (SDRs) initiated by the International Monetary Fund (IMF), for a record amount of US$650 billion, and above all the creation of the Resilience and Sustainability Trust (RST) with a target envelope of US$50 billion, which should be an important channel for the reallocation of SDRs to the benefit of low-income and middle-income countries, is also a very important step forward. Similarly, the declaration adopted at the last European Union-African Union Summit held in February 2022 in Brussels, focused on the mobilization of SDRs in favor of Africa and on the composition of the European envelope of 150 billion euros to finance investments in infrastructure, health and education.

Without forgetting, of course, the Common Framework for the treatment of debt, adopted by the G20 and the Paris Club, in November 2020, with the technical support of the IMF and the World Bank, which aims to provide a structural response to the public debt vulnerabilities.

In addition, I would like to pay a special tribute to all the actors who have spared no effort to help combat climate change and land degradation and to preserve biodiversity. In particular, the MDBs have been called upon, in particular, through their involvement at COP 26 in Glasgow, which has resulted in the raising of the level of ambition of the trajectories for the reduction of greenhouse gas emissions and by reaffirming the commitment to mobilize US$100 billion annually in climate finance for developing countries, by 2025. As you know, in this regard, the world is called upon to go much further to cap global warming to 1.5°C by the end of the century.

Certainly, these efforts have a favorable impact on the economic situation of developing countries, particularly the poorest. Nevertheless, and given the high levels of financing needs of these countries, concomitantly with reduced budget space and increased debt vulnerabilities, induced by the Covid-19 health crisis, it is clear that the whole actions taken by the international community fall short of the resources required to support these countries in their efforts to meet current challenges and implement their development policies.

This situation calls for the efforts made to be complemented by additional support. This would require, in my view, more courageous solutions from the MDBs. Indeed, at the time of global crises, which, above all, require more proactive supranational actions, these institutions must be at the forefront to mobilize the international community and support developing countries in the protection of global public goods, in particular the climate, biodiversity, and global health, while anticipating the occurrence of future crises.

Thus, the MDBs must play a crucial role in supporting developing countries in their development strategies, aimed at achieving a green and sustainable recovery, capable of reducing social and spatial disparities and promoting new engines of wealth creation, especially among young people and women.

First, the MDBs must put in place a common vision for climate finance, in line with the objectives of the Paris Agreement and following the call of the G-7 in the last Summit of June 2022 for better access ways of financing climate action and paying particular attention to the most vulnerable countries, including middle-income countries.

In addition, the MDBs would be called upon, more than ever, to design an "enhanced version of the debt treatment" that will provide a roadmap for further debt relief or restructuring of countries that are struggling with the increase related vulnerabilities. As such, these institutions must accelerate the reforms of multilateral debt restructuring frameworks and support, among other things, the extension of eligibility in favor of over-indebted middle-income countries in order to meet the challenges of vulnerabilities linked to their indebtedness. 

To be able to respond favorably to all of these aspirations, it is necessary for the MDBs to increase their financing capacity in the medium term, by resorting to a revision of the methodologies of capital adequacy, a more efficient use of the lending capacity and clear and transparent communication, while ensuring that ambitious programs, such as those relating to the green and digital transition, are not blocked by lack of funding.

In this context, the MDBs are called upon to work more closely with their member countries so that (i) these institutions are properly capitalized to meet the increased demands in terms of funding requests, while ensuring that participations reflect the economic potential of the countries within the global economy, and that (ii) the limited capital resources of MDBs are used as efficiently as possible to meet the financing needs of developing countries, including in terms of supporting SMEs and strengthening the sector privacy and its resilience. On this last point, these institutions must continue to strengthen their support for this sector and further explore ways of creating a leverage effect with limited public resources in order to mobilize additional private financing.

Beyond the financial contribution, which developing countries need more than ever to finance their projects and reform programs, the "knowledge bank" dimension of these institutions is also important for providing more expertise and know-how needed to better manage the complexity of major projects and structural reforms. Through specialized technical assistance, these countries should be better supported, able to develop well-structured bankable projects, ensure good governance in terms of debt-financed investments and properly target priorities in terms of reform projects and programs, based in particular on more relevant analyzes and on more vigorous and transparent public procurement.

All of these actions must be accompanied, in my view, by a comprehensive and profound reform of the current multilateral system, combining efficiency and inclusiveness and conditioning the transition of the global system towards a more integrated, prosperous, fair and sustainable, capable of better managing possible future crises. This would go through:

• Reforming the international financial architecture to make it inclusive, efficient and equitable and to grant developing countries greater representation and a stronger voice in the governance bodies of these institutions.

• Broadening the use by MDBs of financial innovations, with a view to improving the use of existing capital and freeing up additional financing for the implementation of national development strategies of member countries, adapted to the circumstances and to local needs.

• The strengthening, by the IMF, of global financial safety nets through precautionary and insurance lines that enable developing economies to cope with crises and exogenous shocks.

• The adaptation of global rules according to the overriding objectives of social and economic stability, common prosperity and environmental sustainability.

• The deepening, by the MDBs, of the reflection on the determination of an efficient approach to risk tolerance, while strengthening the dialogue with the rating agencies.

• In the same vein, the review, in the current context, of risk assessment criteria by these agencies is important so as not to prejudice investment opportunities in developing countries.

• Good coordination between the Bretton Woods Institutions to better respond to the debt restructuring needs of developing countries. These two institutions are specifically called upon to advocate for the relaxation of aggressive limits on non-concessional borrowing and to apply their financing policies flexibly to the benefit of countries with limited financial capacity.

Finally, these challenges concern the entire international community and call for joint action to design and implement global solutions. Thus, it is very important to gather around the same table all the stakeholders in the implementation of public development policies to define a concerted strategy, sufficiently appropriate by all parties, starting with the beneficiary countries of the assistance from these institutions.

As such, the MDBs are well placed to show the way, design and implement solutions based on partnership, which take into account the needs and constraints of member countries, but also the room for maneuver in terms of financing.

In doing so, collective reflection would certainly make it possible to bring out relevant ideas and proposals, which could help improve the performance and role of the MDBs, not only in the financial part, but above all in terms of support for the development efforts of member countries.

Nadia Fettah is the Minister of Economy and Finance of the Kingdom of Morocco.