Will Multilateral Development Banks Weather the COVID-19 Crisis?

Abstract

We assess the impact of the COVID-19 crisis on the financing capacity of the four major multilateral development banks (MDBs) specialized in sovereign lending (IBRD, ADB, IADB, AfDB), based on available capital buffers and while maintaining triple-A ratings. The capacity of MDBs to expand development exposures, on aggregate estimated in the range of $860-896 billion, would grow to $985-1,020 billion, benefiting from the capital increases approved recently. Simultaneously, a number of potential factors – such as the foreseeable increase in exposures due to the MDBs’ countercyclical role, the deterioration in the ratings of borrowing and non-borrowing member countries, and the possible weakening of ‘preferred creditor treatment’ (PCT) – could substantially erode this lending capacity, reducing it to $116-227 billion. Therefore, in the post-pandemic period, it will be crucial to preserve the PCT of MDBs, also in the hypothetical case of debt restructuring episodes. Other policy suggestions go in the direction of reviving balance sheet optimization initiatives, improving harmonization among MDBs’ risk-management procedures and securing credit risk guarantees from highly rated entities.