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G20's Plan: Unlocking Trillions for climate fight, development

The G20 is about to hit a crucial intersection in its quest to strengthen institutions like the World Bank. To meet its goals

By Ground report 11 Sep 2023

New Update

G20's Plan: Unlocking Trillions for climate fight, development

The G20 is about to hit a crucial intersection in its quest to strengthen institutions like the World Bank. To meet its goals, everyone needs to buy in.

The participants at the New Delhi leaders' summit will focus on strengthening multilateral development banks as a core agenda of the G20, potentially injecting trillions of dollars into the battle against poverty and climate change.

Development banks play crucial roles in these efforts and serve as vital components of the global economy, offering loans to countries facing financial challenges or disasters.

The process of strengthening multilateral development banks began with the G20's 2016 action plan, which instructed banks to "optimize balance sheets through their Boards, increasing lending without significantly raising risks or harming credit ratings."

Five years later, during Italy's G20 presidency, the reform process advanced with the introduction of an independent review of multilateral development banks' Capital Adequacy Frameworks, evaluating the banks' capacity to meet financial obligations.

In their initial meeting under India's presidency this year, G20 Finance Ministers and Central Bank Governors acknowledged the necessity for multilateral development banks to "adapt to the expanding range and complexity of cross-border challenges, leading to increased demand for their lending resources, knowledge support, and the promotion of private investment."

Shape development bank strategy

They requested that multilateral development banks "comprehensively work towards evolving their vision, incentive structures, operational approaches, and financial capacities to enhance their ability to maximize their impact in addressing a wide range of global challenges, all while staying aligned with their mandate and commitment to accelerating progress toward the Sustainable Development Goals” (SDGs).

The Indian G20 presidency took the logical next step by formulating an agenda that would guide the financing efforts of multilateral development banks.

To address the shared global challenges of the 21st century, an International Expert Group was established.

This group had three primary objectives: to create a roadmap for updating the development banking ecosystem to better support financing various SDGs and cross-border challenges like climate change and healthcare, to assess the funding scale required by these banks and their member countries to meet growing needs, and to enhance coordination among these banks for more effective tackling and financing of global development and other challenges.

The International Expert Group was responsible for outlining a detailed plan that multilateral development banks could follow in fulfilling their functions.

The expert group outlined a triple agenda designed to harness the potential they saw within multilateral development banks.

The first part of this plan mandated development banks to eradicate extreme poverty, promote shared prosperity, and contribute to global public goods.

The other components of the agenda aimed for multilateral development banks to triple sustainable lending levels by 2030 and establish a third funding mechanism enabling flexible and innovative arrangements with investors willing to support elements of the agenda.

Experts: $3 Trillion Needed by 2030

The International Expert Group asserted that achieving additional annual spending of approximately USD$3 trillion by 2030 is necessary. This allocation should include $1.8 trillion for climate action investments, primarily in sustainable infrastructure, and $1.2 trillion for realizing other SDGs. These numbers signify a fourfold increase in funding for climate adaptation, resilience, and mitigation compared to 2019, along with a 75 percent boost in spending on healthcare and education.

To mobilize financing at this scale, the International Expert Group projected that the global development finance community must contribute an extra USD$500 billion annually until 2030. This additional funding would comprise one-third concessional funds and non-debt-creating financing, and two-thirds non-concessional official lending. Moreover, more funding could help attract up to USD$1 trillion in private capital.

Multilateral development banks are expected to supply an additional USD$60 billion in annual official financing, with $200 billion in non-concessional lending, and play a role in stimulating and catalyzing associated private finance.

In their initial recommendations, the expert group called for tripling sustainable lending levels from multilateral development banks by 2030, aiming for USD$300 billion per year in own-account non-concessional finance (typical commercial loans) and $90 billion per year in concessional finance (loans or funding at below-market rates). Achieving this goal could involve G20 members replenishing their contributions to the International Development Association, a soft-lending arm of the World Bank, and significantly increasing contributions to triple its funding pool by 2030.

Aid for Disasters, Private Sector Cooperation

In their primary recommendations, the International Expert Group urged development banks to create a financing instrument providing swift, automatic concessional aid to countries in need, including middle-income nations affected by major natural disasters like Pakistan and Sri Lanka. They also recommended a shift in how banks collaborate with the private sector, advocating systematic cooperation in sovereign and non-sovereign activities.

These recommendations raise concerns about the future of concessional lending by multilateral development banks. Donor country pledges for the latest three-year cycle of International Development Association funding fell short of expectations, potentially limiting the ability of debt-distressed countries to invest in development.

The funding challenges faced by the International Development Association are partly due to the United States' reluctance to increase its contributions to multilateral development banks. US Treasury Secretary Janet Yellen suggested at the third meeting of G20 Finance Ministers and Central Bank Governors in July that exploring capital increases for these banks should only occur after progress in multilateral development bank reforms.

Multilateral development banks play a vital role in achieving the SDGs, particularly by providing concessional finance to developing economies. The New Delhi summit can emphasize their significance and garner essential political support to enhance their sustainability.

This content is originally published under the Creative Commons license by 360info™. The Ground Report editorial team has made some changes to the original version.