Challenging the Narrative on Development Finance: Addressing Domestic Capital and Currency Risk in IDA Countries

Martin Wolf highlights the importance of a significant replenishment by donors for the International Development Association’s upcoming round. Concessional finance is crucial in helping IDA countries reduce extreme poverty and achieve social and economic development. However, there are two points in Wolf’s argument that need to be challenged.

Firstly, it is not entirely accurate to say that IDA countries lack domestic capital pools. For example, Nigeria and four east African countries have sizable pension assets that are growing rapidly. The challenge lies in finding effective ways to channel these resources into productive investments. Development finance institutions, like the World Bank Group, need to take a more proactive approach in supporting private-sector led investment solutions.

Secondly, while IDA funding terms may be concessional in terms of pricing and loan tenure, the currency risk remains with the recipient country. This can lead to difficulties in servicing the debt over the long term. The upcoming IDA replenishment should address this issue to ensure sustainable and affordable financing for recipient countries.

To address these challenges, it is time for a shift in the narrative around development finance, with a focus on leveraging domestic capital pools and addressing currency risk in concessional loans. The World Bank must lead the way in supporting sustainable and inclusive development in IDA countries by taking a more proactive approach towards promoting private-sector led investment solutions and addressing currency risk concerns.

Overall, it is crucial to recognize that concessional finance plays an important role in achieving development goals; however, we must also acknowledge that there are limitations to this approach. By focusing on leveraging domestic capital pools and addressing currency risk concerns, we can create a more sustainable and inclusive development model that benefits both donors and recipients alike.