-The following is an extract from the Unlocking Investment and Finance in Emerging Markets and Developing Economies (EMDEs) World Bank program with Cecile Fruman
Here I will be talking about the role of concessional finance delivered by multilateral development banks referred to as MDB’s and global thematic funds in achieving the ambitious twenty thirty agenda for sustainable development. Success in achieving the SDGs requires using the billions in official development assistance to channel and crowd in trillions in investments of all kinds. Public and private national and international. As part of this mix financing on concessional terms from multilateral development banks and global thematic funds often referred to as vertical funds through grounds or low interest rate loans is a vital source of finance for the world’s poorest countries especially in Africa and South Asia.
In the years twenty seventeen to twenty nineteen donors contributed sixty four billion dollars to MDBs in vertical funds which allowed these funds to leverage a hundred and twenty five billion in concessional resources for low income countries. So what exactly is concessional finance? One form of concessional finance is loans extended on terms substantially more generous than market loans. The concessionality is achieved either through interest rates below those available on market or by grace periods or a combination of these. Grants are another form of concessional finance. These are transfers made in cash goods or services for which no repayment is required.
Let’s first look at the role of MDB’s in providing concessional finance. Examples of MDB funds include the international development association IDA of the World Bank the Asian Development Fund and the African Development Fund. MDBs provide on behalf of donors and through leveraging their own strong balance sheets for instance through the issuance of bonds. The lion’s share of concessional financing available to developing countries. MDB is clean and portable with brazen concessional finance from donors including through trust funds and with helping to coordinate funds and they’re delivered to clients. Through the robust business model MDBs help insure that funds achieve maximum development impact that they deliver value for money for donors and taxpayers and that they achieve long term growth and sustainable results. MDB funds Share the following characteristics. They help align and pull donor funding around common strategic goals.
They provide demonstrated high level aides of aid effectiveness. They are not earmarked which allows countries the possibility funds to more closely aligned with their development strategies. They reduce coordination requirements for clients receiving funding from multiple donors and finally they are efficiently managed with low administrative costs. Now return to vertical funds. Vertical funds are also an important growing source of concessional finance. The past couple of decades have seen the emergence of global thematic funds known as vertical funds. These are established to address specific development challenges of global nature that require special focus and cannot be addressed effectively through other mechanisms.
Most funds of this type can be found in the health sector such as the global fund to fight AIDS tuberculosis and malaria Gavi the Vaccine Alliance in the education sector such as the Global Partnership for Education and then the environment and climate change area such as the Global Environment Facility and the Green Climate Fund. Most of these funds just like the MDB funds operate on a replenishment cycle pledging sessions or organize every few years a line but the policy package. Some vertical funds have grown to be bigger than the MDB funds.
For instance the global fund aims to raise fourteen billion for its ongoing sixteenth replenishment compared to the five point two billion the African development fund raising its latest replenishment. So let’s look at some of the trends now in concessional financing. While donor support to MDB funds remain strong contributions have started to decline over the years. This has been offset by growth of donor contributions to vertical funds. Gavy the global fund and the Global Partnership for Education have all seen an increasing donor contributions. Some of this can be explained by interest rate fluctuations and growth from a low basis for some these global these vertical funds. But this also seems to indicate growing appetite from key donors to contribute to funds with more focus thematic mandates and more diverse government structures.
Indeed many of the boards of vertical funds include civil society foundations and private sector constituencies in addition to more traditional donor and recipient government. Another interesting trend is donor composition. The top ten donors such as US, UK and Japan provide the bulk of resources in MDBs in vertical funds a trend that is likely to continue. However some new and emerging donors have also started to contribute. For instance there are now over fifty donor countries in IDA with five new countries having joined during the last replenishment and more countries considering to join the current replenishment. Some of which are actually IDA graduate themselves.
IDA donors now include a diverse range of countries such as China India Indonesia Algeria Iran Nigeria Poland and Greece. While emerging market countries contributions are still small relative to the totals around seven percent. Some of the biggest increases in recent replenishments have come from non-traditional donors. Emerging donors are also showing interest in vertical funds. These countries are not only steadily increasing financially but are also increasing their engagement in the global development policy dialogue ensuring their own development experience. This is a very encouraging trend for the future of multilateralism.
To conclude multi-lateral and vertical funds have committed to scaling up finance to tackle global challenges and achieve the SDGs. Concessional finance plays a critical role in making this happen. All funds will continue to rely on the continued strong support provided by traditional donors and welcome the emergence of new donors. Donors have a special role to play in the upcoming replenishments by supporting MDBs and vertical funds in a balanced manner without encouraging the proliferation of new funds and the resulting fragmentation the eight architecture. MDB funds and vertical funds have a continued responsibility to further strengthen help confessional finances delivered from greatest impact in client countries. In this manner we will work together to achieve the SDGs.