The world is at a crossroads: one where the choice is between investing in a better, safer and prosperous future for all of us or a continuing cycle of crisis and collapse. Overlapping issues facing countries today, including the war in Ukraine, natural disasters, climate-related catastrophes, rising inflation and a deepening debt crisis, coupled with ongoing global economic challenges, are driving many low-income countries to the brink. Failure to address these converging crises only deepens the struggle in both advanced and emerging economies. But for emerging economies that already struggled to provide education, food and health services, the struggle is even greater today.
In part, this points to a failure of global financial institutions designed specifically to address crises and poverty. The length and depth of the economic challenges many countries face today are symptomatic of a system that has not worked – or needs to be modified to work much better. Climate change, conflicts, pandemics and other global challenges will not pass, rather we can expect them to get worse and we need the right tools to face them.
Without sufficient support, governments have had to borrow more to deal with these crises, while at the same time trying to invest in their continued economic development.
Africa’s debt burden was already a growing concern before the current polycrisis, but has undoubtedly exacerbated it. More borrowing to respond to growing needs, higher interest rates and a strong dollar have all accelerated the next debt crisis. Twenty-two countries in Africa are already in debt or at high risk of debt.
The changing nature of debt also complicates matters for struggling economies. During the last debt crisis, the debt was largely owed to the Paris Club, now it has diversified to Chinese and private creditors, who play a more important role. This is a bubble waiting to burst.
The Bretton Woods institutions (the World Bank and the International Monetary Fund) were established in 1944 to deal with times like this. Originally established to help rebuild Europe after World War II, the World Bank has since evolved into a global institution that has shaped the global financial architecture and reduced poverty around the world through development aid.
But to date, their assistance has been too slow and too little, as evidenced by their poor response to the Covid-19 pandemic. This set alarm bells ringing among world leaders who recognized that something urgently needed to change. Mia Mottley, the Prime Minister of Barbados, who will host a summit with French President Emmanuel Macron, has said that the World Bank “in the 21st century no longer serves the purpose it served in the 20th century.”
A closer look at the World Bank (Figure 1) will show that it provided $47 billion in 2020, accounting for more than 41% of total MDB spending. More than 40% of that funding went to social infrastructure, health and governance. 88% of the financing was in the form of loans ($42 billion). 62% ($25.8 billion) of this was provided as hard loans and 38% ($15.8 billion) as concessional loans.
However, in 2021, only 36% ($16.4 billion) of World Bank global funding went to Africa. USD 12.7 billion of this was official development aid (concessional loans and grants) and USD 3.7 billion was other loans (figure 2). More than half of the flows went to four sectors: social infrastructure (15%), energy (14%), governance (13%) and health (10%) (figure 3). Experts say Africa needs to invest about $100 billion a year in infrastructure to achieve the African Continental Free Trade Area (AfCFTA) and make enough progress to avoid future crises from shocks like the pandemic.
The heating is on
Africa has been disproportionately affected by the impacts of climate change, pandemic threats and food insecurity – not to mention that grappling with simultaneous crises exacerbates already mounting geopolitical tensions.
Climate change continues to have catastrophic consequences for Africa. Parts of Ethiopia and Somalia are experiencing some of the driest conditions since 1981, leaving populations in East Africa with little food available. The situation in Somalia is deteriorating rapidly and food insecurity is approaching famine.
Traditional sources of funding are not keeping pace with the needs of the unfolding crises in the region, such as in East Africa. At the same time, there is also less money available for these economies to invest in more sustainable, less impoverished futures.
Government revenues have fallen across the African continent. The cost of paying back debt has skyrocketed, leaving less money to invest in development. Rich countries have yet to honor their $100 billion climate finance commitments they made in 2009. According to the UN, it is estimated that hundreds of billions of dollars will be needed for climate adaptation financing by 2030 and up to half a trillion dollars by 2050. In Africa, the estimated annual cost of climate adaptation will be $50 billion by 2050.
African countries’ annual debt payments have quadrupled since 2010, to pay for health and wellness to support populations during the pandemic, and to offset the rising costs of energy and food since the fallout from the war in Ukraine. In 2020-2022, food prices in sub-Saharan Africa increased by an average of 23.9%.
In October 2022, the International Monetary Fund (IMF) released a report warning that government debt and inflation in Africa are “not seen in decades” and predicted that many parts of Africa would experience “difficult socio-political and security situations” .
The World Bank must step up its aid to the African continent.
Time for reform
Financial experts examined the World Bank and found that the way it operates has not changed since the 1940s. The ‘outdated’ structure is out of touch with today’s crises and prevents capital from being allocated in a timely manner to countries in crisis. In addition, it is estimated that the capital that can be freed up by reforms is in the hundreds of billions to a trillion dollars.
Since its inception, shareholders have contributed $19.2 billion in capital to the World Bank, which has converted it into $750 billion in loans and $23 billion in grants to developing countries. If the World Bank adopts the G20 recommendations, modest injections into the World Bank would have a huge impact.
The five reforms that financial experts have identified for MDBs are:
Take more risk Allocate more credit to callable capital Do more financial innovation Improve rating agencies’ assessment of MDB’s financial strength Increase access to MDB data and analysis
One of the reasons the World Bank has not been as efficient as possible with existing capital is the fear of losing their AAA credit rating. The rating is considered crucial to providing more affordable financing, as it guarantees that MDBs are safe investments and can borrow cheaply from bond markets.
However, in 2021, the G20 commissioned an independent review by 14 experts, which found that the MDBs were taking an overly cautious approach. The report outlined how billions of dollars up to $1 trillion could be unlocked by the World Bank without hurting their credit.
Another reason they are considered “safe investments” is that they have preferred creditor status, meaning they are first in line among creditors to be repaid. Analysis for the G20 showed that governments almost always repay loans to MDBs on time.
It is critical that World Bank funding goes specifically to low and lower middle income countries in Africa to support long-term poverty eradication and shared prosperity. While additional funding – which could be leveraged by the changes outlined above – could help scale up investments in traditional priorities and address new challenges such as climate. Experts see huge potential in World Bank funding to address climate finance gaps that the international community has so far failed to fill.
Africa faces a funding gap of USD 41 billion per year for climate adaptation. It can also be used to create stronger agricultural systems so that African countries can achieve food sovereignty. This means that food security crises such as those in the Horn of Africa can end once and for all. This, combined with the implementation of AfCFTA, would strengthen infrastructure and health systems across Africa to propel their economies while making countries resilient to future shocks.
Speed is essential
Many of the World Bank’s largest shareholders, with the most votes, are also G20 governments, and the process of reforming the Bank’s approach to capital adequacy was kicked off in the G20. MDB shareholders have the power to implement these recommendations (in order of voting share: US, Japan, China, Germany, UK, France, Russia, India and Canada hold 49% of the voting rights).
Joint action by major shareholders is necessary to jointly implement all recommendations. Speed will be essential to respond to the urgency and to capitalize on the current political appetite for reform. Otherwise, we will face a protracted economic crisis, a sluggish global response to climate change and even greater food insecurity spreading across the globe.
Major shareholders should support all five recommendations and urge MDBs to implement them over the next two years, with a clear timeline to set expectations and ensure concrete progress.
Borrowing countries should formulate a clear set of reform requirements, including the most critical uses of new finance and addressing the challenges of speed, flexibility and responsiveness.
Serah Makka, ONE Campaign Executive Director Africa, concluded:
“Multilateral development banks should start implementing reforms in line with the roadmap by the end of 2024, addressing technical or political issues.
“These small, but carefully coordinated efforts will free up significant resources that could be a game changer in the global effort for a stronger African economy and a brighter future for all of us.”