IDB Governors: The Case for Capital Replenishment Needs To Be Made

This week, the Inter-American Development Bank’s governors gather for their annual meeting. Much is at stake as the region reels under the compound crises of COVID-19 and recession. With 718,000 dead and 23 million COVID-19 cases, Latin America is living through the worst economic crisis of the past 120 years, with a drop of 7.7 percent in regional GDP in 2020.   

On the expenditure side, countries are faced with massive and expanding health and safety net requirements alongside inflexible pension and wage bills. Thus far, spending has not met needs—the region spent only 4.3 percent of GDP in countercyclical response, in sharp contrast to the 8-12 percent spent by less affected high-income countries, likely aggravating or extending the crisis and its effects. And despite these needs, the IDB perplexingly kept its new commitments flat during 2019-2020. 

Most analysts foresee a slow recovery with risks tilted to the downside. Fiscal consolidation challenges and rising (and exceptionally) high levels of public debt will likely continue to put downward pressure on sovereign ratings through to 2022, and the costs of borrowing are increasing

The financing needs ahead may be even more demanding: a recent media report put Colombia’s COVID-19 vaccine bill at $850 million to immunize its population, almost the entirety of its annual public spending on health, even while boosters are likely needed annually in the future.

Under these circumstances, one might easily conclude that more IDB lending and concessional finance is both urgent and essential.

But none of this urgency is yet evident in the IDB’s public case to its member countries. Focused on recovery via “nearshoring,” small and medium enterprises, and increased digitalization, the new IDB president Mauricio Claver-Carone seems to forget that the Bank’s main business is sovereign lending, primarily to safety nets, infrastructure, and health systems, and that the crisis can only end with herd immunity to COVID-19 and its emerging variants.

Further the IDB has an important role to play in reforming inefficient systems, promoting better governance, and, perhaps most importantly, in financing regional public goods like pandemic preparedness and climate change mitigation via greater concessional resources, blended finance, and philanthropy.

As the bank’s governors meet in “virtual Barranquilla,” we hope to see a clearer mandate for the IDB to address the COVID-19 compound crisis head on—with a dedicated and upscaled program of lending to sovereigns to address the issues of the next decade. At the moment, there is too much focus on winning a capital increase from the bank’s shareholders as a sort of trophy for the institution. There is a good case for a capital infusion at the IDB and a group of US senators is already prepared to back the effort, but that case is predicated on better efforts to address the crisis than we have seen to date.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.

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