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Unlocking the potential of multilateral development banks : boosting lending capacity and operational efficiency
Multilateral development banks (MDBs) can play a crucial role in financing sustainable development in Asia and the Pacific, yet their capacity is constrained by insufficient capital and conservative lending practices. To address this, MDB shareholders should consider boosting equity capital because the current funding levels fall significantly short of meeting development financing needs of developing countries. In addition to capital injections, MDBs should consider including callable capital in their capital adequacy frameworks. Although not guaranteed, callable capital is a large part of the subscribed capital and can strengthen their ability to handle risks. Including callable capital, as demonstrated by the Inter-American Development Bank, can expand lending capacity of an MDB without compromising credit ratings.
Operational and financial innovations can further enhance MDBs‘ lending capacities. Hybrid capital, which combines debt and equity features, can attract private investment and potentially increase lending to developing Asia-Pacific countries by $15 billion through the Asian Development Bank (ADB) and $2.5 billion from the International Bank for Reconstruction and Development (IBRD) over the period of 10 years. Consolidating concessional and non-concessional balance sheets, as carried out by ADB, can also significantly increase overall lending capacity. Risk transfer agreements with private insurers and guarantee programmes among MDBs can also mitigate credit risk and mobilize additional funding.
Finally, systemic coordination among MDBs is crucial for maximizing their collective impact. The United Nations, including the Economic and Social Commission for Asia and the Pacific (ESCAP), can facilitate such collaboration. Specifically, the United Nations can convene MDBs at its high-level intergovernmental platforms to foster dialogue on shared priorities, such as climate resilience, sustainable development financing, and debt sustainability.
Operational and financial innovations can further enhance MDBs‘ lending capacities. Hybrid capital, which combines debt and equity features, can attract private investment and potentially increase lending to developing Asia-Pacific countries by $15 billion through the Asian Development Bank (ADB) and $2.5 billion from the International Bank for Reconstruction and Development (IBRD) over the period of 10 years. Consolidating concessional and non-concessional balance sheets, as carried out by ADB, can also significantly increase overall lending capacity. Risk transfer agreements with private insurers and guarantee programmes among MDBs can also mitigate credit risk and mobilize additional funding.
Finally, systemic coordination among MDBs is crucial for maximizing their collective impact. The United Nations, including the Economic and Social Commission for Asia and the Pacific (ESCAP), can facilitate such collaboration. Specifically, the United Nations can convene MDBs at its high-level intergovernmental platforms to foster dialogue on shared priorities, such as climate resilience, sustainable development financing, and debt sustainability.
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