To many people’s surprise, last weekend in New Delhi there was suddenly a 37-page text in which all G20 members agreed – from the EU to Russia and from China to the US. At the G20 summit, the diplomatic success of the Indian presidency attracted a lot of attention: the unanimously adopted final declaration came despite the serious differences of opinion between the West and Russia over the Russian invasion of Ukraine.
The consensus came at a political price: the final statement was milder on Russia than the G20 statement a year ago. On the other hand, all G20 members, who together account for more than 80 percent of global GDP, formulated something of a common basis. This at a time when global problems are piling up. Consider the increased poverty after the pandemic, increased food prices and increasing natural disasters.
Also read: Consensus at G20 comes at a price: Russian invasion of Ukraine not condemned
One person who was very pleased with the consensus was Ajay Banga, chairman of the World Bank since June. Because in the midst of all these crises, Banga, an Indian-born American, wants the development bank to grant more credit. With exactly that assignment, the White House put Banga forward for the top job earlier this year.
The world must be prepared to think about a “bigger” World Bank, says Ajay Banga
In their statement, the G20 leaders pledge to “collectively mobilize more financial space” to enable the World Bank to help poor and emerging countries. It “gives me wind in my sails” to make the World Bank “work better,” Banga said after the G20 summit.
Climate finance
Although geopolitical tensions continually overshadow the work of the G20 – Chinese President Xi Jinping was absent from New Delhi without explanation – the group is primarily intended as a financial-economic consultative body. The G20 was founded after the Asian financial crisis of the late 1990s and gained wings after the 2008 global financial crisis.
Recently, global crises, such as the pandemic but especially the climate problem, have entered the agenda of both the G20 and the World Bank.
By promising to financially strengthen the World Bank, the G20 is in effect saying: this club must take the lead in financing climate policy in poor countries. A lot of money is needed for both the construction of sustainable energy infrastructure and for adapting to global warming in developing countries. The G20 declaration states that $4 trillion per year (approximately Germany’s GDP) is needed by 2030 to finance sustainable energy projects in poor countries. This is to achieve the Paris climate goals.
The private sector will primarily have to pay for these amounts, according to governments. Only: many climate projects are expensive and risky. Consider the construction of solar parks or the construction of electricity grids in politically unstable countries. To get private parties on board, the World Bank should do more, according to the US, the EU and India, among others.
The World Bank now lends more than $100 billion a year to developing and emerging countries. This money mainly goes to projects aimed at combating poverty and economic development – the bank’s traditional domains.
Poor and emerging countries do not want climate financing to come at the expense of, for example, education projects. At the same time, there is a growing realization that heat, drought and natural disasters only make achieving development goals more difficult. Banga made this concrete in an interview with Indian TV: if there is too little rain, farmers’ income disappears and they take their children, who are the first to go to school, back home to work for the family. Then decades of progress in education “will be reversed in a few years,” Banga said.
The G20 is essentially saying that the World Bank should take the lead in financing climate policy
Increasing borrowing capacity
The G20 statement suggests that governments will provide additional capital to the World Bank to increase lending capacity. So far, only the United States seems willing to do so (somewhat). The White House requested $3.3 billion in additional funding for the development bank from Congress in August. This should increase the World Bank’s lending capacity by more than $25 billion over ten years.
By the way, President Biden aims for more than just extra money for the climate. The World Bank must remain attractive as a financial window for poor countries, Biden’s advisers say. Otherwise, China, the US’s major strategic rival, will take over the role of the World Bank single-handedly. In recent years, China has granted a lot of credit to poor countries for strategic reasons, such as securing the supply of raw materials. Moreover, the US Congress, in which the Republican opposition partly has a majority, must approve Biden’s extra billions for the World Bank, which is uncertain.
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At the insistence of several governments, Banga first looked for opportunities to lend more based on the current capital. And without endangering the solid credit status (AAA) of the World Bank. Because this AAA status allows the bank to borrow at low interest rates on the capital markets.
Just before Banga took office, the bank’s capital ratio was already reduced slightly. In addition, Banga has proposed a number of financial tricks, such as issuing special bonds that should act as “leverage”. Member states or international organizations could purchase these. Rich countries could also voluntarily guarantee certain World Bank loans that poor countries may not be able to repay. The risk of default then shifts from the bank to the rich member states.
With the latter proposal, Banga made it clear that rich countries cannot actually avoid the tricky topic of capital injections: if they do not provide extra money, they must at least be prepared to take on risks from the bank.
In a statement after the G20 summit, Banga said “creative thinking” about lending capacity cannot be “the end of the journey.” After the bank does its job ‘better’, the world must be prepared to think about a ‘bigger’ World Bank. In other words, about a better capitalized bank that lends more.
In a recent report for the G20, American economist Larry Summers, former Treasury Secretary, and Indian economist Nand Kishore Singh called a general capital injection for the World Bank “inevitable.” Investing extra money in the World Bank would be very beneficial for the member states. Every additional dollar you provide in capital yields at least 15 dollars in sustainable investments, the two calculate.
Passing the hat is difficult at a time when interest costs have also risen sharply for governments and when other budget items, such as defense, require additional expenditure. But Banga has had something to wave about since last weekend: the entire G20 has now really said that the World Bank must be financially strengthened.