#Fin4Dev: 10 Things MDBs Can Bring to the Table

MDBs want to move ‘from billions to trillions’ on development finance to achieve the SDGs.
MDBs want to move ‘from billions to trillions’ on development finance to achieve the SDGs.

By Anuradha Rajivan

As the dialogue on #Fin4Dev advances, multilateral development banks and the IMF have joined hands to seriously consider what they specifically can bring to the table in going from ideas to action. Here are 10 takeaways from last week's major #Fin4Dev conference in Addis Ababa.

As the dialogue on #Fin4Dev advances, multilateral development banks (MDBs) and the International Monetary Fund have joined hands to seriously consider what they specifically can bring to the table in going from ideas to action. Here are 10 points that came out of the briskly moderated panel discussion From Billions to Trillions as well as from the many parallel dialogues that took place last week at the 3rd International Conference on Financing for Development in Addis Ababa, Ethiopia.

1. MDB business model seems the best in the business.

The unique business model of MDBs—“a dollar in” resulting in more than “a dollar out” for development—contrasts with that of other development partners . In the case of bilateral donors, for instance, typically, a dollar allocated results in less than a dollar of development finance. Each dollar managed by MDBs can catalyze, mobilize, and crowd-in additional funds for sustainable development. Using the capital base to multiply funds several times over for development investments is a design very well suited to move from billions in official development finance to trillions in broader financing for development  from all sources – public and private, national and global. The remark “You can’t eat GDP” by outgoing African Development Bank President Donald Kaberuka triggered some participants to comment that if MDBs did not exist, they would have to be invented.

2. Strengthening domestic fiscal space is vital.

Domestic resource mobilization (DRM) is crucial for developing countries, especially expanding the tax base and improving collection, to achieve the proposed Sustainable Development Goals (SDGs). But this was also an area where MDB support has been inadequate. In Asia and the Pacific, the tax-GDP ratio was just 18%, and even lower in low-income countries and some lower middle-income countries. This should be seen as an opportunity for more MDB support in this area. Some participants complained that MDB support for DRM is also inadequate, and that MDBs often don’t respond fast enough or don’t remain for sufficient time in-country. Some countries thus hire consulting firms to identify bottlenecks, but not all can afford this. Moreover, this work should always be country-specific.

3. Pay attention to the expenditure side.

To strengthen DRM, it’s crucial to use fiscal resources well for development was underlined. People do not like to pay taxes, and even less so if domestic resources are not managed properly. Specific areas for MDB support include better prioritization of expenditures, subsidy management, improved targeting, and good procurement practices.

MDBs can help resource-rich, yet poor countries like Mongolia escape the ‘resource curse.’4. Natural resources management.

MDBs can help poor countries that are rich in resources like Mongolia or Papua New Guinea harness the long-term value through extraction in environmentally, socially, and financially responsible ways to boost domestic fiscal revenues, and draw in private finance and technology. MDBs can also help on fair contract negotiations with companies and management of windfall foreign currency profits through sovereign wealth funds.

5. Blended finance to combine public, private efforts.

There is growing recognition within the private sector that financial and social returns can coexist, and this paradigm shift has opened more opportunities for development partnerships with the private sector. However, systematic development dialogue with business and financial markets has been limited – the SDGs are hardly known among businesses. #Fin4Dev wants to initiate a sustained dialogue with the private sector, anchored in sustainable development, where MDBs not only have a strategic role, but can also identify new opportunities like tools for leverage, PPPs, and other types of blended finance. Stronger financial markets are key to unlocking and pooling private funds for infrastructure.

6. Shifting from financier to partner can open up more opportunities.

The traditional MDB way of operating just as financiers is limited in scope. Let’s re-orient MDBs to become partners in project development in the SDG period, and facilitate a body of practical cross-country comparative knowledge sharing.

7. Unlock long-term funds for long-term investments in infrastructure.

Eliminating regulatory bottlenecks can help unlock long-term pension and insurance funds so they can be invested in liquid, listed, and short-term instruments. MDBs can help mobilize part of these funds by identifying ways to address regulatory issues and facilitate the development of training modules for finance professionals, without  compromising the security and value of the funds.

8. Use technology to galvanize access to finance.

MDBs can help technology applications for development spreading faster to meet current and future needs. For instance, banks can be supported to extend more services to poor customers, and tap into migrants through lowering costs, improving the safety and lower cost of money transfers, facilitating payments, and reaching remote locations.

Microtrade programs could allow more Asian SMEs to share in the benefits of global trade.9. Trade finance has huge potential.

Asia accounts for 60% of global trade, yet trade finance is limited to just 10% of firms. The trade finance gap for Asia alone is estimated at $1.1 trillion. New approaches such as microtrade programs could allow more small- and medium-sized enterprises (SMEs) to share in the benefits of global trade.

10. Plugging revenue leaks may do more than ODA.

Trade mispricing, tax havens, tax base erosion, and profit shifting by some multinational seriously undermine domestic tax efforts in poor countries, and dwarf official development assistance (ODA) flows. MDBs can join the global effort to help plug these leaks  and prevent them from draining already scarce domestic resources. Developing countries believe the whole system needs a full review, but that review should be undertaken in multilateral fora, not by the countries who made the rules, and hence the debate should take place only in the UN, not within the Organization for Economic Development and Cooperation. Although the UN’s role in this is still limited, the genie is already out of the bottle, and the demand is only expected to grow. In this long journey, MDB technical assistance can identify country-specific challenges and areas of action.