MDB Financing Policies and Country Vulnerability

The UN General Assembly, in resolution 78/322, noted that a country’s vulnerability to adverse external shocks in all dimensions is a threat to its sustainable development. This is true even for developing countries with a high national income as they can be structurally less resilient. Appropriate development finance needs to take this expected volatility into account to support countries to build resilience without creating unsustainable debt burdens. In the resolution, member states encouraged development partners of all types – UN agencies, international finance institutions (IFIs), and bilateral donors to consider using the newly created Multidimensional Vulnerability Index (MVI) as a measure of vulnerability and lack of resilience to complement existing financing policies and practices.

This paper analyzes the response of the four largest MDBs (World Bank, Asian Development Bank, African Development Bank, and InterAmerican Development Bank) to the current and growing vulnerability of Developing Countries (DCs), including Least Developed Countries (LDCs), Landlocked Developed countries (LLDCs), and Small Island Developing States (SIDSs). The paper reviews the current policies used to allocate the spectrum of core financing resources (grants, concessional loans, and ordinary loans) at these four MDBs, as well as other financing provisions in place to help developing countries cope with external shocks. Using the MVI as a measure of vulnerability, the paper identifies which factors in a particular MDB’s system tend to support which vulnerable developing countries in accessing development finance (concessional or otherwise) and which factors tend to reduce access.

In determining eligibility for concessional financing (need) as well as pricing, no MDB uses the MVI or a similar multi-dimensional index. As a result, no MDB considers in a comprehensive manner all the structural factors that inhibit sustainable development in its financing policies. Country income, as measured by GNI per capita, is still the main variable determining the terms on which a country can access financing, with the most concessional terms provided for countries with the lowest incomes. Notwithstanding this result, all MDBs have incorporated some flexibility into their financing policies for middle income countries experiencing challenges. In this way, access to concessional loans has been broadened so that, for example, at the ADB, all structurally vulnerable borrowing member countries (as determined by MVI ranking in the top 40%) receive some concessional financing. But the lack of coordination across MDBs on the determination of country need leads to unequal treatment of countries across MDBs and leaves some highly vulnerable countries without access to more affordable finance at some MDBs.

In reviewing MDB financing policies and their application, this analysis suggests that while use of the MVI could be beneficial in establishing need and determining loan pricing, the MVI should not be considered a substitute for any criteria that MDBs currently use. Instead, it should be used as an additional variable, as it would not be appropriate to exclude from concessional financing countries vulnerable for reasons not reflected in the MVI (for example, low income). The review finds that MDBs’ systems for determining absorptive capacity for concessional resources (performance rankings) may have some systematic biases against vulnerable countries. At the ADB, the lower part of the distribution of performance rankings is entirely SIDS. At the World Bank, one study showed that after experiencing a shock, countries’ ranking are systematically lower. Using indices of absorptive capacity that are not independent of country characteristics penalizes countries with characteristics that inhibit better development policies, this issue deserves further analysis.

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