• Multilateralism is recognized as the most transparent and preferred form of international cooperation and has continuously evolved in its scope, dimensions, and outcomes.
• The ongoing debate regarding the reforms of multilateral development banks (MDBs) is a subset of the broader discourse on the value, content, and scope of multilateralism.
• In recent years, there has been a growing focus on the restructuring of MDBs.
• Indian Prime Minister, in his address to the US Congress, highlighted the significance of MDBs and the need for their reform.

Historical Background of Multilateral Development Banks (MDBs)

• At the end of WWII, delegates from 44 countries met in Bretton Woods to agree upon a series of new rules for international cooperation and reconstruction.
• This led to the creation of the IMF and World Bank Group (WBG).
• The latter was responsible for providing financial assistance for the less developed countries post-war reconstruction and economic development.
• The role evolved over the years and as of date, the WBG comprises-
• International Bank for Reconstruction and Development (IBRD) which lends to low-and middle-income (LICs and MICs) countries,
• International Development Association (IDA) that lends to LICs, the International Finance Corporation (IFC) lends to the private sector,
• Multilateral Investment Guarantee Agency (MIGA) that encourages private companies to invest in foreign countries and
• International Centre for Settlement of Investment Disputes (ICSID) for dispute settlement.
• While the WBG is the oldest and largest MDB, several other MDBs and regional development banks (RDBs) have emerged over the years.
• Today, there are about 15-16 prominent MDBs and RDBs.

Challenges Faced by MDBs

• Over the years, despite significant geopolitical changes, economic crises, and uncertainties, MDBs have remained relevant as reputable institutions for supporting the development of both MICs and LICs.
• However, it is widely believed that these institutions are no longer suitable in terms of resources, cultural ethos, and methods to address emerging challenges.
• These challenges pertain to global public goods, climate change, and pandemics.
• Many believe that MDBs are currently in a difficult situation, constrained by their procedures, approach, and working methods, and hesitant to undergo structural changes.
• Considering their technical knowledge, experience, and credibility in the financial sphere, MDBs need to redefine their role and methods.
• The two longstanding objectives shared by all multilateral institutions have been the eradication of poverty and the promotion of inclusive prosperity.

Broadening the Mandate

• The new challenge is to expand the mandate and vision to address the issues of transboundary concerns and the opportunities associated with climate change.
• Each of these four aspects requires different financing methods and approaches to work.
• It is crucial to acknowledge that the goals of poverty eradication and shared prosperity have proven to be elusive.
• Furthermore, shared prosperity has worsened both within and between countries in recent times.

Financing Challenges

• Issues lie in the challenge of aligning the financing capacity of MDBs with the broader goals while ensuring that development financing is not compromised.
• Setting aside the impact of the pandemic, the average annual lending commitments from MDBs to developing countries amounted to approximately $120-130 billion.
• According to the World Bank Group (WBG), addressing global challenges such as climate change, conflict, and pandemics will require an estimated average annual expenditure of $2.4 trillion for developing countries between 2023 and 2030.
• Additionally, a report on climate finance emphasizes the need for a significant breakthrough in mobilizing $1 trillion per year in external finance by 2030 for emerging markets and developing countries (excluding China).

Ensuring Sustainable Finance for Development

• While it is essential to broaden the mandate of MDBs, it should not come at the expense of available funding for traditional priorities, such as addressing poverty and inequality.
• These issues remain significant concerns in LICs and EMDCs, including India.
• In this context, the Expert Group is exploring various options to ensure that concessional finance targeted towards LICs is not compromised.
• MDBs need to optimize their current balance sheets to generate greater leverage from existing funds and attract private capital.
• Establishing annual targets and evaluating performance based on outcomes achieved within this revised framework of accountability is crucial.

Need for Enhancing Recapitalization

• As for the IBRD, the paid-in capital currently amounts to just over $20 billion, against which it has successfully conducted lending operations exceeding $800 billion.
• In 2022, the WBG provided loans of $428 billion with equity (paid-in capital and retained earnings) amounting to $267 billion.
• In 2022, the Asian Development Bank granted loans of $144 billion with an equity capital of $54 billion.
• The need for enhancing recapitalization arises from the principle that despite harnessing resources for balance sheet optimization and attracting private capital, there will still be a requirement to recapitalize the banks.
• It is also worth noting that the IBRD operates without a replenishment cycle, which is somewhat unusual.
• Additionally, other multilateral institutions have effectively leveraged their relatively modest capitalization.

Mobilizing Private Capital

• There is a need to mobilize private capital.
• The current system has not been successful in raising sufficient private finance.
• On the demand side, there are concerns about moral hazards associated with private capital.
• On the supply side, private capital is exposed to risks, including those related to foreign exchange.
• Consequently, many projects fail to progress due to either high risk or low returns.
• De-risking approaches, such as blended finance and guarantees, aim to rebalance the situation.
• However, these approaches often require increased reliance on public and donor support.
• Concerns about using public resources to unlock private-sector investments inevitably arise.
• Therefore, it is crucial to strengthen financial channels for capital mobilization.

MDBs'' Coordination, Collaboration, and Advocacy for the Global South

Coordination and Collaboration among MDBs

• There is also a need to develop an incentive structure and make changes to the MDBs'' current operating model.
• MDBs must closely work together with each other.
• To significantly improve performance, broad and deep changes are required, such as first-loss guarantees, realistic return targets, and risk management.

Advocating the Voice of the Global South

• Reforming the MDBs in the context of India involves advocating for the representation and interests of the Global South.
• This endeavour aims to bring coherence to a diverse array of initiatives and endeavours aimed at strengthening the MDBs.
• The Expert Group tasked with this mission takes a comprehensive approach, considering a broad range of issues and outlining a practical and feasible program.
• The Expert Group intends to present two reports, each addressing different aspects.
• The first report focuses on matters concerning vision, financial capacity, and funding modalities for the MDBs.
• The second report tackles issues related to mobilizing private capital, managing risks, effectively utilizing guarantees to leverage private investment, and exploring innovative financing models.

Making MDBs more relevant for addressing 21st-century challenges would significantly contribute to the enhancement of human welfare. It is of utmost importance to establish deeper integration with multiple stakeholders, as their active involvement holds the key to success. Should MDBs fail to effectively respond to these emerging challenges, their relevance will gradually diminish, and alternative forms of collaboration will likely take their place. Hence, it is imperative to take agile action to ensure the vitality and resilience of MDBs in this ever-evolving landscape.