The global community is running out of time and falling behind on financing shared climate and development goals, with the United Nations warning that 85 percent of the 2030 Sustainable Development Goals (SDGs) are either off track, stagnant or regressing. The economic and social costs of inaction will be catastrophic.

Multilateral development banks (MDBs) have a central role to play in raising ambition to get the international community back on track. But do they have the necessary policies and processes to regularly assess how they can increase financing to meet shared development and climate goals by 2030 and beyond?

A new report by the Boston University Global Development Policy Center finds that while MDBs have made important strides toward increasing their lending headroom, more ambition will be necessary to achieve development and climate goals in a timely and affordable manner.

The report estimates that to meet the lower-bound estimates of the system’s lending needs by 2030, MDBs will need to increase their lending by at least a factor of three to provide the necessary non-concessional and concessional financing.

Additionally, the study finds that, with some notable exceptions, the MDBs lack uniform, evidence-based policies and processes to assess new lending targets and resource needs.

The report was commissioned by the Brazilian Presidency to the Group of 20 (G20) as an input for the ‘G20 Roadmap towards Better, Bigger, and more Effective MDBs.’

Further raise ambition to create more lending headroom: G20 members should further raise ambition to create more MDB lending headroom to meet financing needs and provide buffers to maintain current credit ratings at the least level of new capital from shareholder taxpayers.

Identify where further ambition may be needed: The G20 should encourage MDBs to review resource needs calibrated to achieving the SDGs and Paris targets and conduct MDB-led reviews every three to five years.

Coordinate efforts to fill gaps in the MDB system: The G20 can be a platform for setting principles and tracking progress over time to assess the extent to which the individual MDB capital needs sum to a level of capital adequacy and financial capacity to put the MDB system on track ahead of 2030. Tracking would be conducted on a regular basis while avoiding impinging on the work of MDB boards and guided by robust frameworks that promote coherence with strategic objectives, operational effectiveness and resource efficiency. The G20 will need to develop a common methodology and reporting template for MDBs to report on progress.

The report ultimately argues that there is no time to waste, but MDB capital cannot be wasted either. As agents at the center of global resource mobilization for development, bigger, better and more efficient MDBs can enable new growth trajectories in emerging market and developing economies that will spill over to the broader global economy.

Energizing MDB Financing Capacity: Identifying and Filling Gaps to Raise Ambition for the 2030 Agenda and Beyond

July 2024 marks the 80th anniversary of the Bretton Woods Agreement that established the post-World War II multilateral economic order, including the International Monetary Fund (IMF), the precursor to the World Bank, and early global trade governance systems that provided the structure and form of the World Trade Organization (WTO), established in 1995.

A new flagship report by William N. Kring, Rishikesh Ram Bhandary, Rachel Thrasher, Marina Zucker-Marques and Tim Hirschel-Burns synthesizes the work of the Boston University Global Development Policy Center (GDP Center) on global economic governance focused on the Bretton Woods institutions across three key pillars of financial stability, development finance and trade.

While the Bretton Woods institutions have established a rules-based, multilateral system of global economic governance, the GDP Center’s policy-oriented research finds that this system is in urgent need of fundamental reform. This report recognizes both the benefits and contributions of the multilateral institutions established at Bretton Woods, while identifying areas where reform is required. While these institutions have expanded the range of options available for countries, they are indicative of a long gridlocked system that has not transformed itself to accommodate existing economic realities.

Building on GDP Center research, this report outlines key global economic governance reform proposals to ensure a bigger, better and more inclusive Bretton Woods System in the coming decades. The authors identify pathways to improving global economic governance architecture and ensuring that there are sufficient resources to foster financial stability and development; improving the functioning of the global economic governance system; and increasing voice and representation for emerging market and developing economies (EMDEs) within these institutions.

Scale up resources for financial stability and development finance.The IMF and the World Bank need to be equipped with resources that are commensurate with the needs and priorities of EMDEs. The World Bank and other development finance institutions need to play a key role in supporting the ‘big push’ of investments needed to achieve development and climate goals. Likewise, a well-resourced IMF is needed for an effective Global Financial Safety Net.The multilateral trading system should facilitate the scaling up of development, climate resilience and mitigation by increasing trade with developing countries in climate-friendly technology and products. An effective response to the climate crisis requires participation by all countries. If the Global South is left behind, without access to key technology to make the energy transition, or stuck once more with the short straw of supplying primary commodities for the new renewable energy supply chains, those countries will be hindered from taking climate action, and will face additional political obstacles to participating in the global project.

Overhaul lending practices and priorities at the Bretton Woods institutions.The World Bank needs to shift its lending towards supporting structural transformations in EMDEs. This structural shift needs to be supported by appropriately calibrated instruments. The social and environmental risks of a big push need to be minimized and the World Bank operating model needs to better recognize the financial risks faced by members.The IMF needs to improve its lending practices and tools. The IMF and World Bank should improve their Debt Sustainability Analysis framework to account for the necessary development and climate investments and shocks. Moreover, the IMF should eliminate surcharges on borrowing members to avoid further buildup of debt vulnerabilities. Finally, lending conditions and restructuring packages should be connected to growth enhancing plans, rather than austerity packages.WTO members need to proactively transform the multilateral trading system so that it facilitates increased innovation, production and trade in essential climate-related products and discourages continued reliance on fossil fuels.

Enhance voice and representation across all pillars of the Bretton Woods institutions.For the IMF and the World Bank, a significant rebalancing of voting power must be complemented by fundamental governance reforms to ensure more voice and representation for EMDEs.For the WTO, this means maintaining a commitment to multilateral decision-making, recognizing the economic and social impacts of Global North policymaking on the Global South, and allowing special and differential treatment for those countries that need more flexibility during the energy and economic transition.

Mounting global challenges and intersecting crises require an ambitious multilateral response. The 80th anniversary of the Bretton Woods Agreement presents a key opportunity to transform these institutions to meet the needs and aspirations of people around the world.

The Bretton Woods Institutions at 80: Towards A Bigger, Better and More Inclusive Global Economic Governance Architecture

Overlapping global shocks faced by African countries have caused severe liquidity challenges in recent years. Many countries are currently experiencing low real gross domestic product (GDP) growth, higher inflation, exchange rate instability, balance of payments crisis and a high risk of debt distress. The most critical is the increasing disruption that climate change risks pose to the macroeconomy, including worsening conditions of conflict and instability. Africa is at a significant historic moment to resolve its development finance challenges to ensure a transition to a low-carbon economy while achieving the targets set in the United Nations 2030 Sustainable Development Goals (SDGs).

In 2021, the International Monetary Fund (IMF) approved $650 billion worth of Special Drawing Rights (SDRs), the Fund’s reserve asset. Following this allocation, debates emerged on the possibility of using SDR allocations for development, though the mechanism for re-channeling SDRs for this purpose remains elusive.

In a new working paper published by the African Economic Research Consortium, Kevin P. Gallagher and Abebe Shimeles explored the value proposition for enhanced Special Drawing Right (SDR) allocations for African countries, the institutional barriers and conditionalities presenting constraints to African countries, and options for SDR facilities to leverage productive investment and increase domestic resource mobilization. Based on their analysis, the authors present six policy recommendations.

Make new allocations of SDRs: The analysis shows that new SDR allocations bring new and liquid reserve assets without increasing the debt burden of a country and grant a country the highest degree of policy autonomy.

Provide built-in incentives for re-channelling SDRs: During this wave of crises, developing countries have had to rely on pledges of re-channelled SDRs. SDR allocations should have built-in re-channelling mechanisms so stakeholders can deliberate about where and how, not whether, SDRs can be re-channelled based on global circumstances.

Reform the SDR interest rate policy: The current interest rate structure provides disincentives to deploy SDRs. The SDR rate should be brought to zero while increasing the floor rate and levies where appropriate, moving towards a single SDR holding rate.

Channel SDRs to multilateral development banks (MDBs) through hybrid capital arrangements: The African Development Bank (AfDB) proposal is a strong model for maintaining the reserve asset qualities of SDRs while expanding the balance sheets of MDBs so they can provide more development finance to countries in need. SDR-backed bond issuances should also be considered.

Reform IMF instruments and policy: IMF programs that can utilize SDRs such as the Poverty Reduction and Growth Trust (PRGT) and the Resilience and Sustainability Trust (RST) need strong subsidy accounts to bring down the cost of these instruments and broaden the eligibility requirements. Most importantly, requiring investment-led recoveries, rather than conditioning access on fiscal consolidation programs, would make these programs more attractive, achieve better growth and stability outcomes, and improve creditworthiness.

Flexibility in SDR use: African countries could be granted more flexibility in how they use their allocated SDRs. For example, they could be allowed to use SDRs to finance development projects, invest in infrastructure or address social needs, in addition to supporting macroeconomic stability. This may extend to leveraging SDRs for inclusive finance where private entities such as small- and mid-sized enterprises are poised to benefit from SDR-backed hybrid capital arrangements.

In addition to these policies, the authors call for a comprehensive reform of the international financial architecture that considers how the climate crisis will impact the continent. They emphasize that access to concessional funding at scale needs to come forth to accelerate Africa’s progress towards the SDGs.

Africa’s Chronic Liquidity Challenges and the Role of Special Drawing Right Allocations

While Asia continues to grow, South America remains stagnant. There are multiple reasons for this, but one major obstacle is the lack of investment in infrastructure. Development bank support for infrastructure investments in South America could unlock unlimited growth and development opportunities for the region, the benefits of which would far exceed the initial costs.

If the benefits are so great, why isn’t the region making the necessary investments in infrastructure? 

In May 2023, a workshop co-hosted by the Boston University Global Development Policy Center, the Pardee Center for the Study of the Long-Range Future (Pardee Center) at Boston University and the Development Bank of Latin America (CAF) in Cali, Colombia sought to explore ways to promote a more active role for development banks in the expansion of infrastructure in South American countries.

A new report summarizes key themes from the discussion, including exploring the issues South American countries have faced in obtaining long-term financing for infrastructure projects that promote sustainable economic growth as well as identifying potential solutions through the role played by development banks in the region. 

Following the deliberations, the workshop participants put forward several policy recommendations including optimizing the structure and management of projects, linking public and private sectors by creating new financing channels, investing in regional cooperation, and fairly distributing risks and benefits.

The Role of Development Banks in Catalyzing the Infrastructure of South America in the 21st Century

As the international institution charged with maintaining global financial and monetary stability, the International Monetary Fund (IMF) has a vital role to play in ushering in a green transition that is as swift as it is just.

What actions has the IMF taken since the release of its Climate Change Strategy in August 2021 to align the institution’s efforts with a development-centered approach to combatting climate change? And is the IMF on track to help vulnerable countries achieve shared climate and development goals?

A new report from the Task Force on Climate, Development and the International Monetary Fund provides an independent, preliminary assessment of the IMF’s efforts to mainstream climate change. The assessment is evaluated through the development-centered lens articulated in the Task Force’s initial strategy report and advances actionable policy recommendations for the IMF and its stakeholders. 

The Task Force welcomes the early steps taken by the IMF to date, beginning to integrate climate into surveillance activity and most importantly, the establishment of the Resilience and Sustainability Facility (RSF) with re-channeled Special Drawing Rights following the IMF’s historic allocation in 2021. However, the report finds that, while modest progress has been made, the IMF must show greater leadership on climate change and development in three key areas:

Multilateral surveillance activities have adopted a “one-size-fits-all” approach with carbon pricing as a panacea for climate action. Previous Task Force research demonstrates that a carbon tax would not be sufficient to offset budgetary pressure from a decline in fossil fuel revenue in a net-zero pathway nor meet a substantial portion of the investment needs required for a green transition.

Bilateral surveillance activities are underestimating the macroeconomic implications of financing climate transitions in a financially stable manner. The IMF has prioritized carbon pricing when a more holistic approach is required to help countries orient their macro-fiscal frameworks towards resource mobilization, investment, structural change and climate resilience. The IMF’s work should reflect the full range of climate risks confronting countries and foster greater understanding of the economic and financial implications of climate change.

The IMF lending toolkit lacks appropriate scale and overemphasizes short-term fiscal consolidation over long-run resource mobilization. While the Fund’s new RSF has the potential to fill a major gap in the global climate finance architecture, it lacks the scale and design features necessary to trigger and sustain development-centered climate transformations. More generally, the toolkit is not yet designed to help mitigate the balance of payments impacts of short-term climate shocks, loss and damage and resilience in a manner that accelerates intermediate and longer-term development pathways.

IMF surveillance and lending must help member states make the proper investments toward low-carbon, carbon resilience and socially inclusive growth paths. To that end, the Task Force advances a series of concrete policy improvements across the IMF toolkit:

Broaden multilateral surveillance activities to strengthen focus on an investment-led approach to a resilient and just transition, cross-border spillovers, loss and damage and the necessary global cooperation on resource mobilization.

Strengthen bilateral surveillance by deploying better analytical tools to analyze climate risks and their macro-critical impacts, as well as the resource mobilization needs of member states and support capacity building in developing countries to strengthen climate policy analysis and the development of domestic markets for sustainable finance.

Scale and reform the IMF lending toolkit in line with the Paris Agreement on climate change, including the RSF, to align short-term and longer-run financing horizons without jeopardizing debt sustainability and growth prospects.

While the IMF has made strides in mainstreaming climate change into its operations, the progress to date does not match the urgency of the moment, nor a full alignment with the varied development needs of member states, particularly emerging market and developing economies.

The International Monetary Fund, Climate Change and Development: A Preliminary Assessment

Policy Liaison, Global Economic Governance Initiative

The Boston University Global Development Policy (GDP) Center is a policy-oriented research center working to advance financial stability, human well-being and environmental sustainability across the globe.

The Boston University Global Development Policy Center

The Boston University Global Development Policy Center

Contacts

Tim Hirschel-Burns

Energizing MDB Financing Capacity: Identifying and Filling Gaps to Raise Ambition for the 2030 Agenda and Beyond

The Bretton Woods Institutions at 80: Towards A Bigger, Better and More Inclusive Global Economic Governance Architecture

Africa’s Chronic Liquidity Challenges and the Role of Special Drawing Right Allocations

The Role of Development Banks in Catalyzing the Infrastructure of South America in the 21st Century

The International Monetary Fund, Climate Change and Development: A Preliminary Assessment

The Role of Development Banks in Catalyzing the Infrastructure of South America in the 21st Century