Hybrid Capital is no Substitute
Moreover, MDBs should carefully consider how hybrid capital can help increase lending capacity. Hybrids and other innovations should not be viewed as easy substitutes for traditional paid-in capital from member government shareholders, which is the foundation on which MDB financial strength and access to capital markets is based. If shareholder governments want MDBs to accomplish specific public policy goals, they need to supply the required capital.
Discussions on mobilising private capital have accelerated rapidly. However, accountability for delivery on this agenda could be further strengthened by setting institutional targets, and by refining the incentive machinery and risk appetite behind mobilisation. To date, MDBs have mostly mobilised private actors working transaction by transaction as opposed to leveraging their whole portfolio. To move from marginal interventions at the transaction level to systematic and large-scale change, MDBs need to embrace whole-of-bank approaches that place catalysation and mobilisation of private finance for sustainable development at the core of their corporate strategies, deploying the full range of instruments at their disposal.
Even though all these efforts to increase the supply of finance remain necessary, they will not be sufficient to meet the financing that emerging markets and developing economies need. This means that discussions on a capital increase should start now to assure shareholders will commit to putting more money on the table. Moreover, to meet the expanded mandate for the World Bank, shareholders should commit to an ambitious replenishment of the Bank’s grant-based window (known as IDA) which provides finance specifically to the poorest and lowest income countries. As the most recent Independent Expert Group report notes tripling the size of IDA by 2030 would only require shareholders to commit around 0.04% of gross national income in annual contributions.
The next year will continue to be a litmus test for the World Bank and other multilateral and regional development banks. Implementing the next phase of the reform agenda will require not only considerable technical work, but also the political will to follow it through. As efforts proceed, shareholders must ensure that MDBs work much harder to align with the priorities and needs of its client countries and maximise its lending capacity.
