31 May 2024
ReNew
Op-eds
In previous articles, I've called for a major shift in the multilateral development banking (MDB) system to enable climate action at the required pace and scale. There is a growing debate about how this should happen, and the MDBs, to their credit, have shown unusual willingness and constructiveness on this issue. The World Bank Group, under President Ajay Banga’s leadership, is one such MDB.
The
World Bank Group and the IMF are clearly trying hard.
The World Bank, along with the International Monetary Fund, recently held their annual Spring meetings in Washington, DC. I keenly tracked the progress on climate finance. These meetings draw finance ministers, central bank chiefs, and development experts. This time, the meeting had a multitude of challenges on the agenda, given that the global economy has been passing through a period of sustained high inflation and a general sense of uncertainty.
Throughout the week, several good announcements were made. For example, the World Bank is implementing 27 of the recommendations made by the G20 Expert Group on Strengthening the MDBs. They are reducing project approval times, unifying their approach with joint Country Representatives, and exploring new financial instruments to increase lending capacity while maintaining their AAA rating.
The World Bank also announced a new 50-year financing facility for cross-border projects, that I think is a very good step to support electricity transmission projects, water management projects and similar high impact infrastructure. A $11 billion commitment was also announced by eleven countries to support sustainable development goals. In partnership with the African Development Bank, the World Bank increased its goal of providing electricity to 300 million Africans, tripling their previous target.
Despite these efforts, MDB financing alone will still fall short of what is needed. MDB financing can at best be a catalyst, not the main source of finance, given the scale of capital required. According to the IEA, India alone needs an annual investment of $160 billion through 2030 for its low-carbon transition. In contrast, in 2022, the MDBs collectively provided $230 billion in financing to all developing countries. Even with the efforts taken by the World Bank and others, the volumes are unlikely to be enough.
The bulk of the money for climate action will need to come from either the governments themselves or the private sector. Given the precarious fiscal conditions, government funding is hard to imagine in over a third of the countries globally, at least in the short term. In contrast, the global financial services sector holds ample liquidity, with assets under management estimated between $110 and $120 trillion.
What more can the MDBs do to catalyze this money to flow into emerging economies? They are doing well to strengthen their own processes and extract lending and financing capacity from wherever possible, but now they need to quickly move to deploying these for two things, in my view:
Support development of domestic capital markets: The savings rate in numerous emerging economies is over 20% of the GDP, with some like Zambia, Sri Lanka, Angola averaging well over 30% over the last two decades. Yet, these countries are facing financial stress, partly due to servicing of excess overseas debt. To address this, MDBs and the IMF should encourage and support the development of robust domestic capital markets. These markets would incentivize households to invest in financial assets rather than physical ones like land, and enable governments to borrow domestically in local currencies. This approach may require MDBs to provide tailored guarantees, participate in bond issuances and subscriptions, and bolster the capital base of financial institutions.
Launch new instruments to enable international capital flows: To attract foreign capital, MDBs should leverage their AAA rating to support more countries in improving investment conditions. As investors seek attractive risk-adjusted returns, MDBs can provide concessional funding, guarantees to support investor participation, and foreign currency hedging mechanisms. These efforts are crucial as capital flows are increasingly channeled through investment funds and portfolio investors (who in many countries, have surpassed banks as the largest source of foreign credit) and influenced by factors like ratings and indices. For instance, a recent increase in India's weight in the MSCI Global Standard index is expected to result in an additional $2 to $2.5 billion investment inflow.
MDBs have in the past enabled the entry of foreign banks into emerging economies, through co-investments, lines of credit, or equity participation. They could do more, with a special focus on sustainability. From first-hand experience, I can say operations of foreign banks help in addressing structural barriers that domestic banks often face—exposure limits that constrain their overall ability to lend to a sector, and project financing limits that constrain their ability to provide capital at scale to individual projects/companies. Both are needed to enable the energy transition, since projects like clean energy are capital intensive.
To conclude, the clean energy transition needs accelerated progress on MDB reforms. 2024 is the year when an agreement on the New Collective Quantified Goal (NCQG) is sought to be agreed at COP29 in Azerbaijan, and MDBs will be an important part of this conversation. In the next five months, I hope we will be able to see more progress on this front.
Sumant Sinha(Founder, Chairman And
CEO)
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