Development Finance Institutions and Covid-19: Time to reset

A new analysis of how Development Finance Institutions are responding to the Covid-19 crisis suggests they are unable to foster inclusive and sustainable businesses and spur a much needed transition to low-carbon economies.

Between 9 and 12 November 2020, over 400 Public Development Banks (PDBs) will be gathering (virtually) at the first Finance in Common summit to discuss how they will contribute to the global Covid-19 recovery effort. Development Finance Institutions (DFIs) – an important part of the diverse PDB landscape – are called upon by policy makers to play a key role in these efforts, fostering growth and job creation. However, an analysis of how DFIs are responding to the Covid-19 crisis suggests they are unable to foster inclusive and sustainable businesses and spur a muchneeded transition to low-carbon economies.

As the world struggles to contain the coronavirus and recover from its social and economic impacts, DFIs are positioning themselves as the “vital frontline in the struggle to preserve [firms]” in developing countries and calling on government shareholders to increase funding capital. Similarly, proponents of the DFIs role in development argue for more risk taking by DFIs, loosening credit criteria and scaling-up blended finance. Policy makers are also looking at DFIs to play a leading role in supporting the private sector, reducing risks and improving the business environment under the broad headline of ‘building back better’.

The rise of DFIs is not new. In past decades they have become a key part of the development finance architecture as a consequence of a broader shift in the development narrative and practice prioritising the private sector. Between 2003 and 2018 the consolidated portfolio of European DFIs has increased fivefold. In 2018, five bilateral DFIs in the US, UK, Germany, France and the Netherlands committed over US$12 billion to private sector companies, an equivalent of over ten per cent of total Official Development Assistance (ODA) from these countries.

Eurodad has criticised this trend underlining the risk of diverting scarce development resources away from interventions and modalities that have proven to be effective in delivering development results. The role of DFIs as development actors has been called into question as evidence highlights a lack of development impact, as well as a lack of alignment with effectiveness and responsible financing principles, including poor accountability and transparency, potential aid tying, increasing debt burdens and contributing to unfair tax practices. Moreover, DFI interventions should be seen as complementary to much broader systemic measures such as broadening and deepening debt relief that could create the fiscal space for countries to develop domestic schemes to support those who are losing their jobs and livelihoods and strengthen the companies with the potential to bring economies to a sustainable path.

This briefing offers an analysis of the response of five major DFIs to the pandemic since March and finds that DFIs struggle to ‘demonstrate their value as development actors’. This briefing also finds that these institutions and their business models are insufficiently equipped to demonstrate additionality and support those local economic actors that are worst affected by the pandemic and are crucial for a people-centred recovery that puts developing countries on a more sustainable and inclusive pathway. This briefing concludes by presenting key elements of an urgent reform agenda for DFI’s as development actors.