Issue Briefs
International Financial Institutions Raising the Game: From Billions to Trillions
Eugene Spiro
April 18, 2016
The world’s leading international financial institutions (IFIs) announced, last year, a new, coordinated strategy designed to substantially strengthen their support toward achievement of the Sustainable Development Goals.[2] The strategy speaks to the IFIs’ combined contribution to “Financing for Development”, bringing such financing to a new level, from billions to trillions. However, the strategy is not about numbers alone: First, it appears to recognize that much-discussed and long-needed improved coordination across IFIs is required to advance – and in some cases, not hinder – progress in development. Second, the IFIs are making important adjustments, implicitly and explicitly, to their various business models by placing renewed emphasis on their catalytic role in motivating other, innovative financing, not least from the private sector. Six principal areas on which the IFIs are focusing in the context of this new approach are:
First, their leverage and multiplier effect, referring to the IFIs’ ability to leverage financing, technical assistance and knowledge. The standard way to describe this is that, for example, $1 of shareholder investment generates $2-5 in new financing yearly. This multiplier effect can add an estimated $40 – 100 billion to development annually, as when IFIs get involved in a country or project, or when the government introduces an IMF program, private sector actors — banks and other lending institutions and investors — see their own comfort levels raised and are accordingly more likely to enter the market. This is how IFIs “crowd in” additional private and public resources for development.
Second, use of exposure exchange agreements. Here IFIs seek to enable countries to access IFI financing even when they are “maxed out” with their borrowing from any given IFI. The way they do this is they agree to share the risk of a given borrower, an approach that has been tested with success by World Bank Group subsidiaries, the International Bank for Reconstruction and Development and the Multilateral Investment Guarantee Agency, with promising results seen in Latin America.
Third, the IFIs are creating new modalities to facilitate poor countries’ access to financing mechanisms, as well as to motivate private sector investment. Examples include creating or combining so-called “windows” where countries can borrow, as is being done by the African Development Bank. Alongside this would be mechanisms to motivate private sector participation in investments, as in the case of, for example, the European Bank for Reconstruction and Development creating an investment fund along the lines of the International Finance Corporation’s Asset Management Company.
Fourth, IFIs are placing more emphasis on helping to strengthen public financial management. This involves looking more closely at ways to increase domestic resources for development: working with governments to help them raise revenues and improve expenditure policies in ways that will raise the impact of development projects. This will include improving coordination of policy guidance and capacity-building at the country level in the area of, among others, tax collection — keeping an eye on equitable tax policies.
Fifth, IFIs are exploring ways to further mobilize financing flows. This is based on the recognition that increasing external resource flows to developing countries needed to achieve Sustainable Development Goals (SDGs) will happen only when countries have coherent development strategies, macroeconomic stability, effective delivery of public services and an “offer” of a functioning business environment that supports growth. This, in turn, involves reforming and strengthening regulatory frameworks — itself not a new idea, nor a new area of focus for IFIs. However, IFIs are taking steps to more explicitly address gaps in these areas. Examples include the EBRD’s Investment Climate and Governance Initiative and the Inter-American Development Bank Group’s Institutional Capacity Strengthening Fund. This area also involves strengthening local financial and capital markets.
Last and most certainly not least, IFIs are increasingly focused on private sector engagement, positioning themselves to more effectively unlock private sector financing. They are putting emphasis on demonstration effects that can motivate further private sector investment, and they are looking at modalities for building a pipeline of projects that will be attractive to private investors, for example through dedicated Project Preparation Facilities, establishing norms for risk management and mechanisms for risk-sharing with governments, and setting up mechanisms to reduce investor costs, like guarantees and risk insurance.
An ambitious agenda to be sure, and one that will not be accomplished overnight. The important point is the recognition among IFIs that, for all the good work that has gone into the development agenda, with all the good results to date, the game needs to be raised alongside expectations. This is particularly the case in the current environment of scarce public financial resources, heightened competition among both suppliers and users of financing, and considerably more rigorous oversight and requirements regarding the impact of resources spent on development.
A key aspect to watch for regarding the strategy itself will be the extent to which the IFIs are willing and able to commit to the coordinated aspects of its implementation, as the hoc and uncoordinated approach misses the target on two counts: It creates confusion and impediments to progress among the borrowing countries, and, thereby, it wastes resources. It is a good sign that the coordinated approach has been announced, and the coming years will show the extent to which its spirit is put into practice.
Eugene Spiro is a Global Policy Institute Fellow. His expertise is in international development in transition environments, with focus on private sector development, corporate governance and financial sector reform. He has held senior positions at the Bretton Woods institutions, the United Nations system, and civil society organizations, as well as several years in private banking. Currently he is engaged as a consultant with the United Nations Development Program, co-authoring a strategy for UNDP’s partnership with international financial institutions. At the International Finance Corporation, IFC, he led a corporate governance capacity-building and technical assistance program in Asia. In the civil society sector he led capacity-building, governance, and advocacy programs in support of private sector development in Africa, Central Asia, Central and Eastern Europe and the Middle East. Earlier in his career, Spiro held research positions at the World Bank’s Africa Department and the International Monetary Fund’s Policy and Development Review and European Departments. He holds a Master’s Degree in International Economics and a Bachelor’s Degree in International Studies, both from the American University in Washington, D.C.
[1] This article draws on information provided by the joint IFI announcement, From Billions to Trillions: MDB Contributions to Financing for Development, July 2015.
[2] The IFIs involved are: The African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development, European Investment Bank, Inter-American Development Bank Group, World Bank Group and the International Monetary Fund.