A few weeks past the Annual Meetings of the World Bank and International Monetary Fund (IMF) and approaching the Paris Peace Forum and first-ever Finance in Common Summit, much remains uncertain on the COVID-19 crisis and recovery. Despite lingering uncertainty, one opportunity is clear: we have the chance to rethink development finance and recommit to multilateralism and cooperation as a way of solving shared problems. The international community must act quickly and decisively to ensure stronger and more effective responses to the current crisis, improve the global architecture, and address future vulnerabilities.
The initial financial response to the COVID-19 crisis tested our institutions, but the recovery ahead will test our overall development finance system. In stark contrast to the $12 trillion which wealthy countries have spent to deal with the crisis within their own borders, the international response has been woefully inadequate. So far, the World Bank has disbursed $21 billion, and the IMF is providing close to $100 billion to 81 countries to deal with the crisis. However, estimated financing needs for developing countries and emerging markets are expected to be in the order of $2.5 trillion, and the IMF sees a financing gap for African states alone of $345 billion until 2023.
Meanwhile, impacts on poverty, health, education, and equality in both the short- and long-term will be severe. Between 88 million and 115 million more people will be pushed into extreme poverty in 2020, and many more will hover on the margin. Some 135 million people around the world faced acute food insecurity before the pandemic, and that number is expected to double this year. Meanwhile potential lifetime earnings losses could amount to $10 trillion for the over one billion children in developing countries who have been out of school this year.
Planning must begin now for a resilient recovery that is inclusive, sustainable, equitable, and innovative. Rich countries have been able to finance what they need for the response while poorer countries can only reach into the funds they have—and what they have is not enough. While the most immediate problems faced by countries in this crisis are local, given our shared global public bads – climate change, pandemics, etc.—countries, development banks, and finance institutions must continue to fund the necessary response for the near term as well as engender greater global resilience after the crisis.
The only way to scale up the global financial response to meet the imminent needs of developing countries is by using all parts of the development finance system—and by making it work much more effectively as a system. This means the global multilateral institutions, of course, but it also includes regional, national, and sub-national development finance institutions. According to research carried out by the French Development Agency (AFD), there are more than 450 development banks in the world, scattered across the continents with cumulative assets of more than $11 billion and accounting for 10 percent of global gross fixed capital formation. These development banks are a vital link between the global financial institutions and the local businesses and households that need finance to survive and grow. Development banks are particularly important for ensuring financial services for small and medium enterprises, which have been disproportionately impacted by the COVID-19 shock in terms of sales, profitability, and employment.
The countercyclical role of development banks leads to the expectation that public development banks can increase the size of their balance sheets in 2020 and 2021 just as they did in 2008 and 2009. The quality of financing will also be critical; for example, investments that align with the Paris Climate Agreement will lead to less carbon in the future.
Notwithstanding their size and potential, national and regional development banks have not always been fully integrated in the global development finance architecture. Nor have they always operated with common objectives, norms, or business practices. Fortunately, the upcoming Finance in Common Summit is a welcome opportunity to bring together all parts of the development finance system. By bringing these institutions together, the groundwork can be set for a cohesive financial system with coordinated policies and inclusion and enfranchisement of all financing players.
Moving to new ways of working with each other, aligning policies and operations with the SDGs and the Paris Agreement, and engaging effectively with new national players and private finance institutions requires not just a change in systems, operating rules, and procedures, but also a change in mentalities and mindsets. Diversity of approach can be a strength for the overall system, but it must be guided by common principles of committing to multilateralism, transparency, and the provision of finance in pursuit of a shared development agenda.
The Summit is an important milestone but the declarations of intent that are made there will need to be operationalized and monitored to realize the vision of a fully integrated development finance system and its ability to support the world’s most vulnerable. That is where political engagement by the shareholders—mostly national governments—will be essential both to support the leadership of these institutions and to hold them accountable. Some of the institutions will need capital injections to underpin their more ambitious lending volumes. Others will need a change in the principles that guide these operations to better align them with the shared development agenda. However, in order to strengthen the response to the unprecedented crisis on all levels, political and financial leadership must tap the power and perspective of development banks and incorporate them into the global financial system.
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.