Ahead of G20 that recently concluded, Financial Stability Board’s Chair, Klaas Knot issued a letter to the G20 Leaders highlighting the vulnerabilities that exists in the financial system that needs consideration. Amid oscillating financial stability, the G20 concluded with a definitive outcome to work collectively towards establishing stable economic order, highlighting the role of Multilateral Development Banks (MDBs). Following this, the heads of MDBs met last week and issued a statement calling for strengthening their collaboration for greater impact.
The task that MDBs have at hand is not easy given the myriads of challenge that they need to address. National debt levels are increasing and the government budgets are strained in combating economic adversities. As per RBI data, India’s external debt at end-June 2023 was placed at $629.1 billion, recording an increase of $4.7 billion over its level at end-March 2023. As per a Reuters report, India plans to borrow $78.72 billion through bond through new security with a 50-year maturity. It has projected gross market borrowing at 15.43 trillion rupees for the current fiscal year ending March 31, 2024. The long-term impact of these borrowing may be detrimental. In the UK, the Office for Budget Responsibility (OBR) has cautioned about impact of increasing debt on the economy as population ages.
Inflation has increased rapidly all over the world due to a strong post-pandemic recovery and the emergence of extraordinary cost-push shocks linked with the energy crisis. Since Covid, countries have eased sovereign spending which continues. During the Covid pandemic, the EU had suspended the Stability and Growth Pact (SGP) enabling Member States to borrow more on markets and increase both their deficit and debt levels. This has been carried forward into the Ukraine conflict. It may get further impacted by Israel- Palestine conflict. The EU Commission has extended the moratorium on EU SGP fiscal rules until the end of 2023 allowing Member States across the EU to increase borrowing to meet societal and economic needs such as energy and food crisis. The challenge that MDBs have is a pressing one and requires policy revisit on approaches to government borrowing, weighing its long-term implication for cause of sustainability.
There have been calls for reforms within MDBs. IMF has been facing pressure to revisit its quota. In past, economists such as Stiglitz have criticized the IMF for imposing significant surcharges on countries that have had to undertake large borrowings and are unable to pay their debts back quickly. According to them, the surcharges are essentially penalties imposed on countries at a time when they can least afford them. Such surcharges arguably benefits only the IMF at the expense of both the borrowing country and its investors.
When the world is faced with a wicked problems of climate crisis and growing inequality, there needs to be a concerted effort made to decrease inequality not only among the nations but even within. As per OXFAM report, India is one of the fastest growing economies in the world but is also one of the most unequal countries, where the top 10% of the Indian population holds 77% of the total national wealth. As per the report, 73% of the wealth generated in 2017 went to the richest 1%, while 670 million Indians who comprise the poorest half of the population saw only a 1% increase in their wealth. This is not supportive of India becoming a leading economy power. And this is not the case only for India. World Bank Gini Index stands above 50 percent for countries such as South Africa, Namibia, Suriname and Zambia, Brazil etc.
MDBs can play an important role in identifying the impact of borrowing and encourage countries to build resilience into government budgets to cope with future stresses. Given that the global uncertainty looms large and long, pressure will not ease on government budgets anytime soon. This will make imperative for them need to take a longer-term approach to achieve economic and social balance while factoring with growth and resilience. Productivity must be the focus for governments. Policies at home must encourage private participation and entrepreneurship and it will be crucial to design policies at the top that allows to achieve these objectives on the ground. Evidence shows that trade and market openness has consistently led to greater economic growth.
With the ongoing geopolitical conflict, trade principles have been neglected. At a time of weakened global order, strategic efforts to define new resources and collaborative frameworks to address these global challenges has become critical for MDBs and determining their existence. MDBs at its core, provides us with a ready engine but requires consensus among its stakeholders. Currently, the MDBs are constrained by their current mandate of removing inequality, focus on infrastructure and newer mandates of achieving SDG goals. Evidence shows that despite the massive financing gaps for pandemic response, climate and other global challenges, MDBs have not sufficiently scaled up investments. There is need to realign the priorities of MDBs that could help shape the speed and character of the global recovery. There is a need for higher commitment from the partner countries, and at the same time explore ways to increase cooperation from private institutions. While this may create another divide in the future, for now, it does help in expanding the resources for the MDBs and reaffirm their role in addressing global vulnerabilities.
Dr Neeti Shikha teaches at the School of Law, University of Bradford, UK.