Banga hype at the Springs

While much fanfare surrounds Banga’s initiatives at the World Bank, a closer look reveals a concerning agenda to promote private finance interests.

World Bank president Ajay Banga with treasury secretary Janet Yellen during the World Bank/IMF Spring Meetings at the World Bank headquarters in Washington on April 19. | Photo Credit: JOSE LUIS MAGANA/AP

Less than a year ago, Ajay Banga, a former chief executive of Mastercard, was picked to head the World Bank. Putting a Wall Street player addicted to profits in charge of a development institution claiming to help lift poor countries out of their underdevelopment seemed incongruous. Given that the Bank was and is seen by many as an institution with a disappointing track record and a governance structure unfit to meet the development challenges of the current epoch, a person with demonstrated concern with social purpose was the needed choice. But if reports on an otherwise uneventful set of Bank-Fund spring meetings held in mid April are to be believed, less than a year down the line, Banga has begun transforming the global development financing landscape in the required manner.

However, a close look at what he has managed to push through points in a different direction. His agenda seems to include three elements. First, moves to increase funds made available to the Bank through country contributions and guarantees, ostensibly to extend its grant, concessional and commercial financing, to meet old (Sustainable Development Goals [SDG]) and new (climate/green) challenges. Since this is a period when overall development financing from the rich nations is being curtailed, the Bank would have to increase its share and influence in the development and climate financing space. So, a related objective seems to be to make the Bank the principal conduit for flows of official developmental finance to poor countries.

Second, “reform” to increase the Bank’s flexibility and respond to demands that it should leverage its own resources to mobilise more funds and provide larger volumes of financing. Since this is to be done without damaging the Bank’s AAA rating, support in the form of guarantees from sovereigns and a pooling of the resources mobilised and risks borne by regional development banks is crucial to advance this objective. Centralisation of official financial flows under a US-controlled agency seems to be the motive.

Third, attempts to refocus the Bank as an entity that, through innovative, hybrid, or blended financing, will incentivise private investors to divert a significant share of assets under their management to SDG-related projects and those that facilitate mitigation and adaptation. The justification for this is that the scale of the financing challenge is far larger than what even an expanded resource base of multilateral banks can support. As Banga reportedly put it: “The reality is government money and multilateral bank money alone will not get to those trillions of dollars... that is why the private sector is really important.”

‘Shared approach to risk’

Despite the hype, progress was marginal in all these areas at the spring meetings, held in a year critical for enhanced commitments to climate finance. The commitment that the media headlined was a $11 billion contribution from 11 rich nations to new financing mechanisms set up by the Bank. One is the Portfolio Guarantee Platform, which the Bank claims provides “a shared approach to risk”, in the sense that “donor” contributions are leveraged to borrow additional funds, potentially at lower cost, to fund socially relevant projects. Another is a hybrid capital instrument that offers shareholders and partners a channel to invest in bonds with “special leveraging potential”. The third is the Livable Planet Fund targeted at governments and philanthropies to mobilise funds meant to address common challenges such as pandemic prevention and preparedness.

In all these cases, the exact nature of the mechanism and its effectiveness are still unclear, and the total resources that can be mobilised with the $11 billion promised so far is placed only at around $70 billion. Given the estimates of development finance needed over the next few years, of anywhere between $500 billion and a few trillion dollars a year, this is small change.

The other major “achievement” is the announcement by ten different institutions—regional multilateral development banks and the World Bank—that they would set up a global co-financing arrangement. Under it, they would share information on project pipelines and co-financing opportunities to facilitate decision making on joint financing and the sharing of ideas on best practices. This is expected to facilitate efficiency and transparency in the co-financing space. Besides the fact that much is being made of a norm that should follow from the need to coordinate activities and seek coherence in the activities of Multilateral Development Banks, often receiving funding from common sources, this in itself is unlikely to lead to additional financing.

The real issues on the financing front are already known. Development financing must be massively enhanced, especially the mandatory annual contributions that would be made under the New Collective Quantified Goal on Climate Finance currently under negotiation. A large chunk of this additional financing should be concessional flows through existing channels such as the Green Climate Fund, the Adaptation Fund, and the recently established loss and damage facility.

Another crucial issue this year is the size of the 21st replenishment of the International Development Association, the soft-lending window of the World Bank. Replenishments occur once in three years. The 20threplenishment was finalised in December 2021, with the term of that financing package stretching to June 2025. It is the norm that financing size increases with each replenishment but given the current challenges the Bank is looking to a substantial step-up in funding from the $93 billion level reached in the 20th round, built on $23.5 billion from donors. However, as of now there is much pessimism that, with competing demands for funds, development assistance being diverted to financing countries in war such as Ukraine, and allocations to manage migrant refugee populations, the prospect of a huge increase is dim.

Highlights

• Banga’s agenda seems to include three elements. First, moves to increase funds made available to the Bank through country contributions and guarantees, ostensibly to extend its grant, concessional and commercial financing, to meet old SDG and new (climate/green) challenges.
• Second, “reform” to increase the Bank’s flexibility and respond to demands that it should leverage its own resources to mobilise more funds and provide larger volumes of financing.
• Third, attempts to refocus the Bank as an entity that, through innovative, hybrid, or blended financing, will incentivise private investors to divert a significant share of assets under their management to SDG-related projects and those that facilitate mitigation and adaptation.

Hype vs reality

Finally, Banga’s own contribution has thus far been minimal—a decision, backed by a G20 committee report, to lower the Bank’s equity-to-loan ratio from 20 per cent to 19 per cent, which is expected to release additional resources to the tune of around $4 billion a year.

Put all of this together and the hype surrounding Banga and the transformative impact he is having on the Bank is difficult to swallow. But that hype is easy to explain. Banga was chosen to hold the position by the US that has retained the right to decide the leadership of the Bank. But the US government alone cannot make that choice, and must yield to the demands of powerful economic interests.

The most powerful such force today is globalised US finance, the representatives of which are working to subordinate for profit the large sums that governments are being prodded to allot to development financing. Their aim is to divert a larger share of so-called development aid to forms of financing, identified as “innovative instruments”, in which the private sector shares in or takes all profit, whereas the risk is carried and losses borne by the multilateral development banks using public resources. That is the agenda that the World Bank president has been chosen to implement. Which explains the hype over Banga.

C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US.