Multilateral lenders need to step up to the global ‘polycrisis’

Multilateral development banks like the World Bank need to step up assistance to Africa in the face of unprecedented global shocks, says the Africa executive director at ONE, a global movement campaigning to end extreme poverty and preventable disease.

Opinion by

The world is at a crossroads: one where the choice is between investing in a better, more secure and prosperous future for all of us or a continued cycle of crisis and breakdown. Overlapping issues facing countries today, including the war in Ukraine, natural disasters, climate-related catastrophes, soaring inflation and a deepening debt crisis, coupled with continued global economic challenges are pushing many lower income countries to the brink.

Failing to deal with these converging crises is only deepening the struggle in both advanced and developing economies. But for developing economies who were already struggling to provide education, food, and health services, the struggle today is even greater.

In part, this highlights a failure by global financial institutions specifically designed to tackle crises and poverty. The length and depth of the economic challenges facing many countries today is symptomatic of a system that hasn’t worked – or needs to be retooled to work much better. Climate change, conflict, pandemics and other global challenges are not going away, rather we can expect them to get worse and we need the right tools to confront them.

Without ample support, governments have had to borrow more to deal with these crises while simultaneously trying to invest in their ongoing economic development.

African debt distress was already a growing concern before the current polycrisis, but it has no doubt exacerbated it. Increased borrowing to respond to growing needs, higher interest rates and a strong dollar have all accelerated the next debt crisis. Twenty-two countries in Africa are either already in debt distress or at high risk of debt distress.

The changing nature of debt is also complicating matters for struggling economies. In the last debt crisis, debt was largely owed to the the major Western creditors of the Paris Club, but now it has diversified to include loans from Chinese and private creditors, who are playing a more important role. This is a bubble waiting to burst.

Assistance is too slow

The Bretton Woods institutions (the World Bank and the International Monetary Fund) were established in 1944 to deal with times like these. Initially created to help rebuild Europe after the Second World War, the World Bank has since evolved into a global institution that has shaped the global financial architecture, reducing poverty across the world through assisted development.

But, to date, their assistance has been too slow and too small, as demonstrated by their poor response to the Covid-19 pandemic. This sent alarm bells to world leaders who recognised that things must urgently change. Mia Mottley, the prime minister of Barbados, who is due to host a summit with French President Emmanuel Macron, has said that the World Bank “no longer serves the purpose in the 21st century that they served in the 20th century”.

In 2021, the World Bank disbursed $46bn. Over 40% of that financing went toward social infrastructure (16%), governance (14%) and health (13%). Some 87% of financing was in the form of loans ($40bn), of which 63% ($24.8bn) was provided as hard loans, and 37% ($14.8bn) as concessional loans.

Just 36% ($16.4bn) of the World Bank’s global funding went to Africa, $12.7bn of which was ODA (concessional loans and grants) and $3.7bn other loans (see chart below).

Over half of flows went to four sectors: Social Infrastructure (15%), Energy (14%), Governance (13%) and Health (10%) (see chart below). Experts say that Africa needs to invest about $100bn every year in infrastructure if it is to realise the potential of the African Continental Free Trade Area (AfCFTA) and make sufficient progress to prevent future crises caused by shocks such as the pandemic.

The heat is on

Africa has been disproportionately hit by the effects of climate change, pandemic threats, and food insecurity – not to mention how grappling with simultaneous crises is exacerbating already rising geopolitical tensions.

Climate change is continuing to have a catastrophic impact on Africa. Parts of Ethiopia and Somalia are experiencing some of the driest conditions recorded since 1981, leaving populations in East Africa with little food available. The situation in Somalia is deteriorating fast, with food insecurity levels edging closer to famine.

Traditional sources of finance are not keeping pace with the needs of the unfolding crises in the region, as in East Africa. At the same time, there is also less money available for these economies to invest in more sustainable, less impoverished futures.

Government revenue has declined across the African continent. The cost of debt repayments has spiralled, leaving less money to invest in development. Rich countries are yet to meet their $100bn climate finance pledge made in 2009. According to the UN, global climate finance adaptation is estimated to require hundreds of billions of dollars by 2030 and up to half a trillion dollars by 2050. In Africa, the estimated annual cost of climate adaptation is $50bn by 2050.

African countries’ yearly debt service payments have quadrupled since 2010, to pay for health and welfare to support populations during the pandemic, and to offset the rising cost of energy and food since the fallout of the Ukraine war. In 2020-22 food prices in sub-Saharan Africa surged 23.9% on average.

In October 2022, the International Monetary Fund (IMF) issued a report warning that public debt and inflation in Africa are at “levels not seen in decades” and forecasted that many parts of Africa would experience “difficult socio-political and security situations.”

The World Bank needs to step up its assistance to the African continent, as do the other MDBs.

Time for reform

In many ways, the way the World Bank operates hasn’t changed since the 1940s. Its out-of-date structure is out of touch with crises of today, and is blocking capital from being allocated to countries in crisis in adequate time.

In 2021 the G20 commissioned an independent panel of financial experts to undertake a review of the World Bank and 14 other MDBs to see how they could maximise their lending capacity through reform of their capital adequacy frameworks. The report, published last year, suggested that the MDBs were taking an overly cautious approach to lending.

Part of the reason the World Bank hasn’t been as efficient as possible with its existing capital is fear of losing its AAA credit rating. MDBs see maintaining such a rating as critical to providing more affordable finance as it guarantees that they are safe investments and allows them to borrow from bond markets cheaply.

But the report stated that $500bn to $1trn could be unlocked by the MDBs without damaging their credit ratings. The five reforms that the financial experts identified are:

  1. Taking on more risk
  2. Giving more credit to callable capital
  3. Doing more financial innovation
  4. Improving credit rating agency assessments of MDB financial strengths
  5. Increasing access to MDB data and analysis

Since its inception, shareholders have contributed $19.2bn in capital to the World Bank, which has turned this into $750bn in loans and $23bn in grants to developing countries. If the World Bank takes up the G20’s recommendations, then modest injections into the World Bank would have a huge impact.

It’s crucial that World Bank financing goes particularly to low and lower middle income countries in Africa to support long-term poverty eradication and shared prosperity. While additional finance – that could be leveraged through the changes outlined above – could help to scale up investments in traditional priorities and in growing new challenges like climate. Experts see huge potential in World Bank financing addressing the climate finance gaps that the international community has so far failed to fill.

Africa faces a financing gap of $41bn per year for climate adaptation. Financing can also be used to create stronger agricultural systems so that African countries can achieve food sovereignty. This will mean that food security crises like the one happening across the Horn of Africa can end once and for all. This, paired with AfCFTA implementation, would strengthen infrastructure and health systems across Africa, helping to advance their economies while making countries resilient to future shocks.

Speed is of the essence

Many of the biggest shareholders of the World Bank, with the most votes, are also G20 governments and the process to reform the MDBs’ approach to capital adequacy was kicked off in the G20. MDB shareholders have the power to implement these recommendations (in order of voting share: US, Japan, China, Germany, UK, France, Russia, India, and Canada hold 49% of voting power).

Joint action by major shareholders is needed to implement all of the recommendations together. Speed will be of the essence in responding to the urgency of need and to take advantage of the current political appetite for reform. Otherwise, we’ll be facing a continued economic crisis, a slow global response to climate change, with even greater food insecurity spreading across the world.

Major shareholders should support all five recommendations and push the MDBs to implement them in the next two years, with a clear timeline to set expectations and ensure concrete progress.

Borrower countries should articulate a clear set of demands for reform, including the most critical uses of new financing and for tackling the challenges of speed, flexibility, and responsiveness.

Multilateral development banks should begin making reforms in line with the roadmap by the end of 2024, laying out any technical or political issues for resolution.

These small, yet carefully coordinated efforts will give free rein to significant resources that could be a game changer in global efforts for a stronger African economy and a better future for us all.

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Serah Makkah

Africa executive director at ONE, a global movement campaigning to end extreme poverty and preventable disease.