Towards
an emerging consensus?Summary of the
joint SIIS-FDL workshop:
“Common
Solutions for Global Sustainable Development Finance:
Perspectives
and Case Studies”
On
11 and 12 November, the Shanghai Institutesfor International Studies (SIIS) and the Finance for Development Lab
(FDL) jointly hosted a high-level workshop focused on development
finance. This conference was an
opportunity to share perspectives across continents, spanning various
sectors, and viewson the challenges within the development finance architecture.
Participants from China, which included think-tank researchers,
academics, and officials, discussed the recent developments in debt
and financing issues with their counterparts from Europe, the
Americas, Africa, and Asia. The striking conclusion is the extent to
which perspectives have converged, but also the long journey ahead to
address the challenges that lie before us.![]()
During
the six conference sessions, four central themes emerged, each of
which highlighted broad areas of consensus but also showed challenges
in translating agreements into action. The
narrative that sparked the most discussions among economists and
practitioners from various geographies can be summarized as follows:Numerous
countries are experiencing diminished growth prospects under current
economic models. Fostering growth will require different financing
strategies, focusing more on investment and export diversification.
However, high debt levels limit these options, and new financing
must be somewhat aligned between project support and budget needs to
prevent excessive fragmentation.
In
some cases, restructuring is necessary. However, there is a general
dissatisfaction with current existing frameworks. There has been
mutual learning and progress across borrowing countries, bilateral
creditors (Paris Club, China, and others), multilateral
institutions, and the private sector, but a shift in approach is
necessary to resolve future cases with the appropriate depth and
speed.
For
other cases, liquidity provision is essential, and all creditors and
potential finance providers must play their part. Key questions
remain, including moral hazard for borrowing countries and the role
of private creditors.
Overall,
the multilateral landscape is becoming more diverse, presenting
opportunities for new approaches, but there
are also growing challenges in
fragmentation.
The
objective of this conference was to spark new conversations and
continue building consensus between think-tanks and practitioners.The
macroeconomic environment signals reduced growth perspectives, which
must translate into different financing strategies
This
has direct implications for a range of countries: there is an urgency
to find new growth opportunities to avoid a systemic debt crisis. On
the financing side, it implies more sustainable flows, including
Foreign Direct Investments, the reform of MDBs, and the emergence of
new actors.The
scene-setting session took stock of major global trends: a
deteriorated macro-financial environment with slowing growth
perspectives and dwindling export opportunities for emerging markets
and developing countries.
In addition, the cost of debt has been growing, and interest expenses
are now higher than they have ever been. In many ways, this is
reminiscent of the Latin American experience of the 1980s and its
lost decade. The parallels include both private flows (in the 1980s,
commercial banks and in the 2000s, Eurobonds) and bilateral lending
(Japan and other OECD countries in the 1980s, China in the 2000s).Several
speakers highlighted the need to shift to an FDI-based model of
financial engagement and to generate more foreign earnings from
investments.
A point of discussion was how the infrastructure-based lending spree
could lead to a resurgence of growth. How can diversification
progress? China’s case can provide lessons for
other developing countries, but it also has specific characteristics
that are hard to replicate. Infrastructure loans have had significant
economic returns but were not always self-sustaining financially. It
will also be important to improve the “localisation” of economic
activities to create more jobs in these countries. This year’s
FOCAC also included new areas of focus: peace, security, technology,
and women's issues. It also emphasized smaller projects, where
development, local impact and reputation will be primary objectives.Defining
where and how aid and development finance will be delivered remains
the key challenge. There
are contrasting views: Chinese policymakers tend to consider that
project financing is growth-enhancing while budget support can be
inefficient. In contrast, bond investors provide funding that is not
tied to specific uses. To some extent, OECD policymakers and some
MDBs have sought to increase the share of budget support. In a way,
these channels can be complementary: infrastructure financing and the
flexibility linked with direct budget financing are both useful.
However, this creates difficult trade-offs for policy-makers. Indeed,
interactions between Chinese and private investments are complex:
bond investors tend to react negatively to news of large Chinese
investments.Countries
with debt overhang must restructure early and rely on the progress
made through multilateral action.
Major
gaps remain on how to better integrate a new major actor such as
China; and how to better use the gains from a multilateral approach
for Chinese actors.Participants
agreed that global treatments are still insufficient. The
cases of Sri Lanka and Ethiopia were presented: Sri Lanka as an
example where treatment was too shallow; and Ethiopia as one where
treatment was too long and generated considerable uncertainty.
China’s engagement with the Common Framework or with the
multilateral system in the case of Sri Lanka has shown that
multilateral approaches can work, albeit imperfectly. Chinese
institutions and loans do not fit the categories defined for Paris
Club countries, and understanding and adapting concepts of COT, NPV,
and other complex technical topics has required time and efforts. The
learning curve has been significant, and China has adopted some of
the rules of restructuring.Global
systems could evolve to reflect the new landscape.
In particular, the Debt Sustainability Analysis and its ability to
reflect the realities of debt-carrying capacity for countries like
Sri Lanka and Pakistan were discussed. Participants suggested that
these rules should evolve and that China has an opportunity to
actively drive change in these rules. There are also instances where
China prefers a bilateral approach, although this could potentially
be against its own interests, ultimately ending up subsidizing other
creditors, whereas a multilateral approach could make treatment morecomparable. It
should also raise important questions: Can
COT be applied when a specific project is attached to it? Other
participants suggested that China should pay more attention to the
specifics of restructuring: the role of short-term debt, the
domestic/external distinctions, and other parameters that delay
restructuring processes.Many
questioned the willingness of the private sector to participate in
restructuring. Is
COT an equitable framework? Various views were expressed: on the one
hand, private lending tends to be at a higher rate; but on the other
hand, official lenders use their loans not only for financial reasons
but also for trade or geopolitical reasons. Defining fair criteria
remains a difficult task. The question of whether re-entry into the
Eurobonds market is premature was also raised. The emergence of new
instruments with better liquidity protection could help mitigate
risks.Options
facing countries with acute liquidity tensions are limited.
Concerted action will help, but no concrete framework has emerged
yet
A
major challenge in the coming years is to support growth in a world
with high interest rates.IMF programs and targets are
seen as somewhat arbitrary and fragile. New concerted action can help
support growth prospects and reduce liquidity risks in the short and
medium term. The symposium outlined how China and others could
advance on such challenges.Research
from a Chinese institute highlighted how the pressure of high debt
service has become a direct threat to more than 20 countries. The
combination of high rollover needs and high US interest rates creates
a complex environment to navigate. Despite the mobilisation of
multilateral actors, net flows to many developing countries have
turned negative. The case of Pakistan was discussed to illustrate how
such a treatment could make the macro-financial framework more
realistic than the current IMF program, thus enabling higher public
spending while driving significant revenue mobilisation.Chinese
creditors show significant interest in generating coordinated
solutions. Speakers
supported the idea of an expanded financial safety net, with
scaled-up ODA and concessional funds. They also highlighted the role
of emerging donors and Sovereign Wealth Funds in driving liquidity
provision. A key question is how China can contribute given that it
does not provide direct financial support (to the important exception
of currency swap lines). It cannot act as a lender of last resort,
but its role in fostering productive infrastructure is important.Key
questions remain to turn those plans into action. Participants
were concerned about possible moral hazard issues: will countries be
able to drive the necessary reforms? Who will monitor them? The
importance of regional financial safety nets was also highlighted.
Some participants pointed out that they worked in steps with the IMF,
as was the case during the European debt crisis, especially since IMF
technical knowledge and ability to request difficult measures were
irreplaceable. At the same time, programs should better identify
growth opportunities.Private
sector participation is also a key issue. Participants
noted the different incentives faced by private actors.Current
Eurobond structures create liquidity problems when they amortize,
especially since high interest rates limit the ability of countries
to refinance on private markets. Nascent “resilient instruments”
could help but are still limited to a few emerging markets.The overall
financing landscape is fragmenting, creating problems but also
opportunities
Demand
for concessional financing is increasing, but supply will be limited.The
aid landscape is fragmenting, with donors preferring trust funds and
vertical funds in recent years, while their support for horizontal
institutions such as IDA has stagnated. From a recipient country’s
point of view, this creates inefficiencies, with a multitude of
providers and insufficient coordination.At
the same time, institutions such as the World Bank and the Asian
Development Bank (and others) are reforming fast, while new MDBs
bring new approaches. Senior
staff from several MDBs presented their approaches to mitigate these
risks, relying on faster approvals, streamlined decision-making, more
concerted approaches with countries, as well as enhanced
collaborations among MDBs. The role of local currency financing was
highlighted, especially in the case of the New Development Bank, for
which it is a central aspect of its strategy. This is also a key
part of the strategy to position Public Development Banks as
essential actors and co-investors alongside multilateral and
bilateral lenders.Speakers
from several lending institutions emphasized their consideration of
countries’ capacities,including through capacity building, to manage projects; and extend
funding timelines for projects with long profitability horizons. They
also highlighted the fact that collaboration with multilateral
institutions was increasingly necessary, and discussed how they would
strengthen their evaluation practices.At
the same time, key questions remained: the
role of private sector mobilization in project financing is seen as
essential by some, but its risks were highlighted by others.The risks of subsidizing
private profits were emphasized. The role of conditionality is also
disputed: China prefers to fund projects directly and avoid policy
conditions, while traditional MDBs focus on governance. While there
can be complementarities, this can also lead to tensions and forum
shopping.This
conference highlighted how far the global financial system has
evolved in the last few years, as well as the major challenges it
faces. This will likely require major reforms in the multilateral
systems, OECD countries, the private sector, and Chinese
institutions. How to coordinate these reforms should be the subject
of much more collaborative research.![]()
