Multilateral Development Banks

Multilateral Development Banks

News: n his address to the US Congress, the Indian PM talked about the relevance of Multilateral Development Banks (MDBs) and the need to reform them.

What are MDB’s?
• Multilateral development banks are international financial institutions that are established by two or more countries for the purpose of promoting economic and social development in poorer nations.
• They provide loans and grants to fund projects that support infrastructure, energy, education, environmental sustainability, and other areas that contribute to development.

Why are MDB’s relevant?
• At the end of WWII, delegates from 44 countries met in Bretton Woods (US) to agree upon a series of new rules for international cooperation and reconstruction. This led to the creation of the IMF and World Bank Group (WBG) in 1944.
• World Bank Group (WBG) was responsible for providing financial assistance for the post-war reconstruction and economic development of the less developed countries.
• The WBG lends to low-and middle-income (LICs and MICs) countries , to the private sector and encourages private companies to invest in foreign countries.

What is the need to reform MDBs?
• The world has changed significantly since the establishment of the multilateral development banks, with new actors, issues, and opportunities emerging.
• These institutions are no longer suited in terms of the resources, cultural ethos and methods to address the emerging challenges. These relate to global public goods, climate change, inequality, fragility and pandemics.
• The multilateral development banks face a gap between their available resources and their demand for financing. They also face constraints in their operational efficiency, effectiveness, and innovation.
• The MDB’s suffer from a lack of representation, voice, and influence of the developing countries in their decision making processes. They also face challenges in ensuring transparency, accountability, and legitimacy of their actions and outcomes.

How can credible sources of finance be secured to meet growing challenges?
• The MDBs need to optimise their current balance sheets to create higher leverage from existing funds and to attract private capital.
• They need to fix annual targets and judge performances by the outcomes secured in this altered framework of accountability.
• De-risking approaches such as blended finance and guarantees aimed at tilting the balance do exist.
• Financial channels for capital mobilisation need to be strengthened.

Way Forward
• Broad and deep changes are required to significantly strengthen performance, such as first loss guarantees, realistic return targets and risk management. For India, reforming MDBs would mean advocating the voice of the Global South.
• Deeper integration with multiple stakeholders is crucial. If MDBs do not respond to these new challenges, they will become increasingly irrelevant and be substituted by other forms of cooperation.