The G20 nations have reached an agreement to enhance the lending capacity of multilateral development banks (MDBs). This move primarily aims at addressing China’s increasing financial influence over debt-laden developing economies. Specifically, the World Bank will be the main focus for this expansion.
A joint G20 communique emphasized the need for “better, bigger, and more effective” MDBs. They will pay special attention to raising these institutions’ operational frameworks, responsiveness, accessibility, and financial capacities to boost their economic potential.
This initiative comes at a time when major economies like the United States, the European Union, and India want to lessen China’s influence on developing countries. This is, however, exacerbated by China’s substantial loans to over 150 countries, making it the largest “official creditor” in the world.
The resolution to reform MDBs is crucial as debt-ridden countries seek better lending terms. China’s cooperation is still essential, as it insists that multilateral lenders shoulder the cost of losses on loans to developing countries.
MDBs’ unwillingness to accept losses is motivated by their desire to maintain high credit ratings. Nonetheless, studies suggest that if they settled for a slightly lower credit rating, they could triple their lending capacity without significantly increasing funding costs. While not all debt restructuring discussions fail, China’s case-by-case approach allows it to use debt as a strategic tool.
Beyond addressing China’s influence, the G20 panel has emphasized the need for reforming multilateral banks to provide substantial financial support to emerging economies. They called for a cultural shift within these banks, advocating for greater client responsiveness and risk-taking.