The World Bank’s General Capital Increase will strengthen prospects for development in the coming decade but increasing, managing and maximising domestic revenues must remain a priority for governments looking to accelerate their self-sufficiency and prosperity.Our Partnerships Manager Duncan Hart from the World Bank and IMF Spring Meetings in Washington DC.
How do we leverage billions of dollars of aid to unlock trillions of dollars of development finance? This is one of the burning questions in Washington this week. That’s not surprising given the current UN estimate of a $2.5 trillion funding gap if the world is to meet the ambitious objectives contained in the Sustainable Development Goals.
When it comes to bridging this gap every dollar counts. One solution is for development financiers like the World Bank to combine traditional aid with private investment in order to maximise the financing available for large and high-impact projects. The omens so far this week are good for the World Bank’s plan to secure a ‘general capital increase’ (GCI) but if we’re serious about accelerating self-sufficiency then countries can’t afford to lose sight of the role domestic revenues will have to play in supplying finance for development.
At the heart of the GCI is the idea that all 189-member countries of the World Bank increase their contributions, enabling the Bank to borrow more money and lend this money on to middle-income countries and the private sector. A deal for a GCI has long been a priority for President Kim of the World Bank and may yet be agreed after a softening in the US position.
A GCI is a powerful tool in supporting countries to smoothly transition from lower to middle income status. Currently when countries graduate from lower income status they are no longer eligible for financing from a significant arm of the World Bank, the International Development Association (IDA), which provides cheap loans and grants to low-income countries. Often this loss of cheap finance comes just when self-sufficiency and sustainable growth are within touching distance for emerging economies. A GCI will unlock finance for these graduate countries as they will be able to access more IBRD funding. The US has also called for more funding for lower-middle income countries as part of any GCI deal. Yet the financing gap is one that a GCI alone cannot solve.
That’s why we have to work alongside those governments transitioning from lower to middle income status to increase, better manage and maximise domestic revenue. At Crown Agents, we work with governments around the world to do this by reforming customs, improving financial management and getting value from public services through streamlining procurement and debt management.
These three approaches can transform government resources and drive self-sufficiency for a country as it transitions away from IDA financing:
I have seen time and time again the transformative impact of this governance work for countries across the globe. The benefit of implementing a project to increase domestic revenue through better taxation or customs far outweighs the cost of the project itself. The efficiencies delivered through better quality procurement systems kick into the long-grass the minimal cost of the technical assistance and capacity building needed. As EBRD’s Francis Malige recently reflected, “reforming procurement systems gives arguably the highest rate of return on any governance investment”.
I agree Francis! The figures are ones that many finance ministers must dream of. One example of our work at Crown Agents is our partnership with the Ghanaian Ministry of Finance over the last couple of decades, identifying savings across public sector capital contracts through carrying out value for money assessments. To date, we’ve identified savings totalling US $1 billion across 125 contracts with an aggregate contract value of US$5.6 billion. For a newly middle-income country like Ghana, savings like these are of paramount importance when faced with declining aid flows.
I will be keeping my fingers firmly crossed over the next 72 hours that the World Bank secures the GCI it needs, and in turn the graduating countries are able to access additional lending from the IBRD. Yet ensuring this lending is judicious will be critical. Alongside this additional external investment, we must support governments to maximise domestic revenues and enable the delivery of effective public services that drive self-sufficiency and prosperity for all.