How the G7 Can Meet IDA’s Replenishment Goal Without Any Additional Spend, and Germany Can Lead the Way

Fiscal pressures in G7 countries are real—Germany’s cabinet has just agreed to implement further spending cuts in response to theirs—but so too is the geopolitical case for investing more in climate and development. The replenishment of the World Bank’s International Development Association (IDA) fund—the world’s largest funder of both climate and development—comes at a particularly important moment.

The G7 previously announced plans to mobilise hundreds of billions for infrastructure investments which could counter China’s (vast) Belt and Road initiative and some governments—including Germany—are placing stronger emphasis on ensuring spend has impact. The World Bank’s IDA is important to both.

In this blog, we argue that the G7 can and should ensure the IDA replenishment goal is met by reorganising existing aid budgets: reducing the inefficient use of grants to upper-middle income countries; and reallocating some spend channelled restrictively through multilaterals (“multi-bi”).

We identify at least $13 billion per year that can be reallocated ($6.6 billion excluding the US); much more than the $2-5 billion per year increase sought for IDA. Germany has the most potential to drive this change, and it would fit with its government’s calls to ensure their development budget is spent effectively and impactfully.

Whilst this is a shift in existing resources, not an increase, it would achieve much greater impact for recipient countries than current allocations. It would also demonstrate that the G7 can work together to achieve scale, and provide an important geopolitical boost to help motivate developing countries' updated climate emissions reduction plans. The upcoming G20 and G7 development ministers meetings provide an opportunity to discuss the parameters of a common approach.

A geopolitical, economic and public case for IDA

Alongside the G7’s pledge to mobilise new infrastructure finance, it is widely accepted they need to rebuild trust with the Global South. Developed countries have also agreed to double climate adaptation funding; and are expected to agree a new climate finance goal at COP29 in advance of countries setting new emissions reduction plans before February. The World Bank’s fund for the poorest countries, IDA, is the largest provider of climate finance (and adaptation finance) and the most important source of external finance to lower income countries. It played a key role in the $100 billion climate finance goal (see below).

IDA is seeking a bigger replenishment this year, in order to respond to these challenges. While African leaders called for a $120 billion replenishment (over 3 years, mid-2025 to mid-2028), the Bank’s president has set a still-challenging goal of raising $100 billion (up from $93 billion). Much of this figure will be made up from repayments of loans,  as well as income from World Bank-issued bonds,bought by investors. However, over a quarter the goal depends on government contributions which will make up around $28 billion (up from $23.5 billion at the last replenishment, so an increase of just over $2 billion per year). This is made harder by a strong dollar, meaning non-US contributions need to rise even to stand still in dollar terms. Newer contributors like China, South Korea and Saudi Arabia are likely to contribute too; but the top five funders are currently G7 countries.

Surveys show that there is a relatively high level of public trust in multilaterals relative to governments and NGOs, and that working together to solve global problems also makes sense to tax-payers.

There is also a strong economic case for replenishment. With most G7 Governments under fiscal pressure, they are keen to ensure funds are well spent. In Germany, the Ministry for Economic Cooperation and Development is facing a nearly €1 billion cut next year. Germany currently spends less than a quarter of its Official Development Assistance (ODA) on contributions to multilateral institutions core costs, and the federal finance minister has asked whether currently, Germany is “really improving life chances with [their] tax money, or are the projects serving German interests?” 

Why is IDA better than bilateral?

Bilateral finance between two countries can be highly effective—it can be invested in true partnership, take advantage of expertise in the provider country, can be used to respond nimbly, and can be more sensitive to local politics.

But multilateral development funds—especially IDA—are usually more effective. In our Quality of ODA assessment, we rank IDA 3rd out of 49 providers: IDA is focussed on the poorest and most fragile countries and experienced at working in them. Feedback from partner countries is more positive than most, it is transparent; and scored well on evaluation. G7 countries bilateral development spending ranks much lower–the highest ranked G7 country was Canada,  which we ranked 10th, and the median ranking was 29th.

In addition there are two further features of IDA that maximise its efficiency and impact. First, it uses the most appropriate finance:grants for the poorest, and highly concessional loans for those that can afford it. G7 countries, contrastingly,  spend $8 billion per year in grants to upper-middle income countries. Germany provides a huge 7 percent of its ODA budget this way, well above the G7 average of 4 percent. Second, IDA and the World Bank can leverage their balance sheets to borrow on private markets to grow the finance they provide. Loan repayments and bond issuances combined mean the replenishment costs providers under a third the total $100 billion goal. This point has been important in reaching the (separate) $100 billion climate finance goal, with multilateral climate finance tripling since 2015 while contributions have increased by just 21 percent.

In summary, a Dollar or Euro of ODA can be used much more efficiently through IDA. None of this implies that the World Bank is perfect, that it is always better than bilateral, nor that it hasn’t got room to improve - but it is clear evidence that IDA typically does better than bilateral spending.

What sort of shift would it take?

We look at two potential sources within bilateral development budgets— specifically, grants to upper-middle income countries; and “multi-bi” which refers to finance channelled through multilaterals but earmarked for a specific purpose. In 2022, the G7 spent $8.4 billion and $36 billion respectively on these. In each case the US is just under half the total.

Table 1: Proposed Reallocation of G7 ODA to Core Multilateral Contributions

If G7 countries reduced grants to upper-middle income countries by half, and reduced their muti-bi contributions by a quarter; this would free up $13 billion per year (or $6.6 billion without the US). Germany alone could reallocate $3.4 billion per year though its development ministry, BMZ, already needs to find $1 billion (EUR 937m) of cuts to meet its reduced budget in 2025.  Another scenario could be for the G7 to agree a maximum share of their ODA that is provided to upper-middle income countries or multi-bi. For example, the former could be capped at 3 and the latter at 15 percent of ODA, which would free up $18 billion (though Ukraine may be a UMIC in future years, so this cap might need to be for existing UMICs).

If this funding is freed up, IDA—which only needs around an additional $2 billion per year from donors for the $100 billion goal (or $5 billion extra per year for the stretch $120 billion goal, based on increased donor contributions of $14bn spread over three years)—is not the only multilateral that could or should benefit.GAVI is another with an excellent record of impact seeking replenishment; and others follow. We’ve argued that G7 countries, perhaps led by the UK, could be more proactive in how they approach these replenishments.

Implementation and timing

The IDA replenishment runs over the next three years to 2028—so, there’s no urgent need to cut bilateral budgets midstream; projects can be concluded and wound down over the period. Indeed, it may be that providers with budget headroom (like the UK and Saudi Arabia) can front-load commitments while others making shifts from bilateral like Germany and the US can backload their contributions.

These switches will not be painless—they will mean halting some carefully designed and impactful bilateral programmes. Still, if cuts are focussed on those that offer least value, there can be a substantial net improvement in impact.

The G7 should back the institutions it built

The budget pressures that G7 countries face do not make them helpless—how they allocate their funding is at their discretion, and there is plenty of room for improvement in how they do so.

The G7 countries built the multilateral system, and persuaded other countries to help fund it. They should now back this with investment;show that they can work together to rebuild trust with the Global South; and put themselves on a geopolitically stronger footing to motivate emission reduction plans and other global aims.