Multilateral Development Banks and
EBRD
Lecture 7
LIUC 2010
Multilateral Development Banks (MDBs)
MDBs are institutions that provide financial support
and professional advice for economic and social
development activities in developing countries.
The term Multilateral Development Banks
(MDBs) typically refers to the World Bank Group
and four Regional Development Banks:
 The African Development Bank (AfDB)
 The Asian Development Bank (ADB)
 The European Bank for Reconstruction and Development
(EBRD)
 The Inter-American Development Bank Group (IADB)
The World Bank Group





The World Bank Group is owned by 187 member countries
It is made up of two development institutions - the International
Bank for Reconstruction and Development (IBRD) and the
International Development Association (IDA)
The IBRD focuses on middle income and creditworthy poor countries,
while IDA focuses on the poorest countries in the world.
They provide low-interest loans, interest-free credits and grants to
developing countries for a wide array of purposes that include
investments in education, health, public administration, infrastructure,
financial and private sector development, agriculture, and
environmental and natural resource management.
The International Finance Corporation (IFC) is also a member of
the Group. It provides investments and advisory services to build the
private sector in developing countries
African Development Bank

Shareholders: 53 African and 24 nonAfrican countries
 Mission: to promote sustainable economic
growth and reduce poverty in Africa
 Total Employees: 1,491
 Headquarters: Abidjan, Côte d’Ivoire
 Temporary relocation: Tunis, Tunisia
Asian Development Bank




Shareholders: 67 members, of which 48 from the region
and 19 from other parts of the globe.
Mission: to help its developing member countries reduce
poverty and improve the quality of life of their people
Total employees: 2,500+
Headquarters: Manila
Although most lending is in the public sector - and to
governments - ADB also provides direct assistance to
private enterprises of developing countries through equity
investments, guarantees, and loans
Inter-American Development Bank (IADB)
The IADB group is composed of the Inter-American Development
Bank, the Inter-American Investment Corporation (IIC) and the
Multilateral Investment Fund (MIF). The IIC focuses on support for
small and medium-sized businesses, while the MIF promotes private
sector growth through grants and investments, with an emphasis on
microenterprise.




Shareholders: 48 of which 26 borrowing and 22 non
borrowing
Mission: combat poverty and promote social equity
through programs tailored to local conditions.
Total employees: 1,745+
Headquarters: Washington D.C.
European Bank for Reconstruction and
Development (EBRD)

Shareholders: 61 countries and 2
intergovernmental institutions (EIB and European
Community)
 Mission: promotes entrepreneurship and fosters
transition towards open and democratic market
economies in Central-Eastern Europe and Central
Asia (former soviet bloc).
 Total employees: 1,260+
 Headquarters: London
What do MDBs do?
The MDBs provide financing for development through the
following:
 Long-term loans, based on market interest. For funding
these loans the MDBs borrow on the international capital
markets and re-lend to borrowing governments in
developing countries.
 Very long-term loans (often termed credits), with interest
well below market interest. These are funded through
direct contributions for governments in donor countries.
 Grant financing is also offered by some MDBs, mostly
for technical assistance, advisory services or project
preparation.
MDB Response to the Financial Crisis




While the IMF is the focal point for the response to the
systemic liquidity threat, the MDBs play a critical
complementary role in limiting the spread and the impact
of the crisis by:
Financing for fiscal measures targeted towards
maintenance of jobs and social protection of the poor
Closing gaps and mitigating rollover risks in project
financing, including infrastructure directly and by
crowding in private and other official financing
Catalyzing trade financing
Supporting financial systems and credit flows to private
sector and SMEs
How MDBs have responded to the crisis

Acceleration and expansion of lending
 Streamlined facilities made available
 Increased flexibility to meet the varying needs of
emerging markets and developing countries
 Provided much larger scale of financing than
anytime in their history: they are on track to
deliver the promised $100 billion in additional
lending.
MDBs’ role after the crisis




Even beyond the crisis, the global financial environment is
likely to be much more difficult than in the past years.
MDBs can still play a critical role in mobilizing long-term
market financing through its direct borrowing and by
catalyzing stable private sector financing.
MDBs remain the most effective channel to provide
concessional financing for low income countries.
New challenges: climate change and food security, global
in nature and require globally coordinated action.
What’s next?



Need for a clear and shared vision and strategy on the role
of the MDBs
Strengthen and reform the global development
architecture for responding to the world’s long-term
challenges. Increase coordination with other bilateral and
multilateral institutions.
Key to learn lessons from the crisis. This includes:
promote greater use of guarantees to provide insurance
and catalyze private financing, simplify lending
requirements, shift from an excessive focus on ex-ante
safeguards and conditionality to country systems and expost evaluation…
EBRD and its role in the crisis
The spread of the crisis across the region




Aug 07- Sep 08 Most transition economies remained largely unaffected,
with the exception of Kazakhstan and the three Baltic countries, where
credit reversal had started before the onset of the global crisis.
Sept 08 - Mar 09 The crisis hit hard following the collapses of Lehman
Brothers and Washington Mutual in the United States in mid-Sept. Risk
premiums shot up, cross-border net lending turned negative, and export
volumes contracted. FDI flows also declined, although net inflows
remained positive. Sharp economic contraction in many countries.
April 2009-June 2009 In line with the general recovery in international
financial markets, regional financial indicators began to point upward .
At the same time, the effects of the financial and real shocks began to be
felt in the corporate, household, and banking sectors, with rises in
unemployment, corporate insolvencies and non-performing loans.
H2 2009 – present signs of recovery, but a lot of heterogeneity
Ebrd: Transition report 2009
Domestic policy challenges




Monetary and fiscal policies: no one-size-fits-all.
Right policies depend on: strength of public balance sheet,
credibility of monetary and fiscal institutions, currency
composition of debt, domestic inflation dynamics, external
and public financing constraints.
The overriding challenge (almost everywhere): to protect the
core banking system and SME lending.
Another key challenge: maintaining SME financing
Why the need for an international and
coordinated policy response


International dimension was critical because of lack of
private sector financing
Coordination is critical because of massive cross-country
externalities:
– Trade and financial integration carry the effect of both
the crisis and the crisis response across borders
– Competition for a common pool of private resources
(global savings and liquidity).
What did EBRD do to respond to the crisis?
Increased business volume from €5.1 bln in 2008 to €8
bln in 2009
 Recapitalised sound banks
 Stepped in support for small and medium-sized
enterprises
 Expanded trade facilitation programme to maintain vital
trade flows to and from the region
 Worked more closely in coordination with other IFIs
 Continued to finance key infrastructure in the region

The Joint IFI Action Plan for Eastern
European Banking Systems

European commercial banks have deeply invested in the EE
region.
 In Feb 2009 a common initiative of EBRD, EIB and World
Bank Group was announced with the following objectives:
 Common needs assessment both at the level of Eastern
European banking systems and at the bank group level
 A coordinated approach to refinancing and
recapitalization, with burden sharing across IFIs, home and
host countries, and parent banks.
 IFI contribution: about € 25 bn during 2009-10
Capital increase

As a consequence of the crisis and the need to
increase its investment activity in the region, in
May 2010 EBRD Governors approved a capital
increase of €10 billion, which will allow the Bank
to accomplish its mandate and safeguard its
financial stability, while preserving its AAA
rating.
 € 1 billion is paid-in through reserve and €9
billion is callable capital
New challenges

Foreign vs local currency: the new initiative
 Graduation and post-graduation
 Climate change - A new role for the Bank?
The local currency and local capital market
development initiative

Why?
 Reduces systemic risks associated with FX lending to
unhedged borrowers
 Encourages domestic saving and investment
 Why now?
 Significant post-crisis common ground
 Regulators moving forcefully against FX
 Post-crisis macro conditions start to make local
currency a more realistic proposition
The effects of the crisis on graduation




The global financial crisis has revealed the fragility of
some past achievements in transition terms and has sharply
increased demand for EBRD finance in the form of crisis
response.
This has delayed the process of graduation, even if has not
changed the Bank’s strategic orientation.
The EU-7 countries that were on the path to graduation
before the crisis have now postponed this objective to the
end of 2015.
Following graduation, the Bank will consider selective
post-graduation operations in a manner consistent with its
mandate.
A new role for EBRD as an environmental bank?





The development of energy efficient and low carbon economies
remains a major transition challenge for the EBRD region.
The Bank has promoted energy efficiency since the early
1990s, in view of the serious energy inefficiencies in the
region’s capital stock.
The EBRD’s mandate and business model has allowed it to
develop great expertise, especially in the area of mitigation.
The Sustainable Energy Initiative: through the initiative,
launched in 2006, the EBRD is already achieving emission
reductions at a large scale (similar to that of France) and at
attractive economic terms.
The international community has now endorsed the need for
deep cuts in global carbon emissions and some shareholders
would like EBRD to be more and more involved in climate
change mitigation.