Development Finance Institutions’ Muddled Model

As OPIC in the US and other long-established bilateral development finance specialists look to revamp their missions in the face of new global competitors and issue-business challenges, a comprehensive study by Washington and London think tanks traces the broad history and recommends future activity and policy concentration. Their combined commitments were $70 billion as of 2014, half of total overseas direct aid, and they focus on investment support in low and middle-income economies rather than broad anti-poverty and sustainability goals. Tools encompass a range of loan guarantees, equity and insurance and outside fund manager engagement. Blended instruments with pure private sector funding are increasingly popular, and may be well-suited for big regional, energy and environmental projects, according to the authors. However executives in charge tend to focus on technical deal-making instead of larger issues and themes often inviting disconnect with traditional assistance agencies. The 2015 Financing for Development conference in Addis Ababa emphasized the importance of FDI risk reduction mechanisms, especially for marginalized fragile states. Local capital markets where they exist are often shallow and spurn small and midsize firm needs. In 2015 European DFIs had a total portfolio of $35 billion, and both OPIC and the World Bank’s IFC arm each mobilized $20 billion. China’s policy banks had outstanding credit of $685 billion, and Brazil’s state development lender’s was $275 billion. The new BRICS bank will extend and consolidate these efforts, along with the infrastructure focused AIIB based in Beijing with extra-regional shareholders. Europe’s providers have quantified their impact by citing creation of 4 million jobs and $10 billion in local tax revenue and participation must always meet the “additionality” test, namely that transactions would not occur otherwise. Financial services, power and transport are among priority sectors, and Sub-Sahara Africa is a chief target region. The institutions are often called upon to spur innovations such as in women-run enterprises and to carry out urgent crisis relief such as in battling the Ebola virus or funding post-Arab Spring economic transition. Evidence suggests that this investment can be counter-cyclical, but poverty and environmental results are rarely measured explicitly even as these operations are responsible for achieving the 2030 Sustainable Development Goals.

The paper concludes that “core competencies” should continue, but advises a shift from micro to macro themes and greater transparency in approval and evaluation processes. Risk tolerance should rise along with endowed capital as many DFIs remain small, and failure lessons must be more widely shared for academic and practical purposes. Africa attention will expand in the near-term with commodity exporter strain as debt-GDP ratios in many countries exceed 40 percent. Nigeria, where oil contributes three-quarters of fiscal revenue, has reached out to these sources after naira devaluation for commercial backing without resort to a companion IMF adjustment program,, while Zambia post-election will tap both after tightening fiscal and monetary stances. Its new budget will present figures on an accrual basis as GDP growth should come in this year at 3 percent, and banks grapple with higher bad loan loads which could be mitigated by outside forms of copper-bottomed protection.

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