Spotlight: Amid the coronavirus crisis, IDB, CAF face a key challenge

Multilateral development banks play a key counter-cyclical role amid crises such as the coronavirus storm battering Latin America and crimping access to private capital markets.

Among them are regional players IDB and CAF, the latter of which has tightened its focus on infrastructure investment.

But with more demand for resources in the region, providing this support involves challenges, chief among them boosting capital.

Development banks were capitalized following the financial crash of 2008 – and some now need fresh injections.

This is one of the “major, major challenges” during the current crisis, former Colombian finance minister José Antonio Ocampo said. 

“CAF and IDB are the two institutions that need additional capitalization in order to play the role they should during the current COVID-19 crisis,” Ocampo told a webcast hosted by the Canadian Council for the Americas, a private sector link between Canada and Latin America and the Caribbean. Central America-focused development bank Cabei was capitalized earlier this year, the webcast was told.

The IDB – which has a private sector arm, IDB Invest – is Latin America’s largest regional lender and is poised to approve a total of US$20bn in loans this year, the webcast heard, with the bulk focused on healthcare initiatives. 

Ocampo said it needed more resources in order to play a bigger role in the region, whose economy is expected to contract sharply this year, fueling rises in unemployment, labor informality and poverty.

Guillermo Rishchynski, former executive director for Canada at the IDB, said: “The bank [IDB] needs more capital. And for whoever is president of the bank in 2021, this is going to be the first order of business.”

IDB’s board of governors is due to elect a new president in September. Breaking with tradition, the US has said it would put forward a candidate.

The US – a non-borrowing member – owns around 30% of the bank’s shares, followed by Argentina and Brazil with around 11% each and Mexico with about 7% 

“Increased US influence over the largest source of development financing for Latin America and the Caribbean would also give the United States a leg up on China in a part of the world where Beijing’s economic influence has been rapidly growing,” US daily The Washington Post reported.

Ocampo said IDB should continue to be led by a citizen from the region, citing the experience, insight and knowledge such a candidate would bring.

Meanwhile, on the financing front, Rishchynski said IDB has a strong ability to crowd the likes of commercial lenders into development projects. He said: “The bank is a magnet for those types of initiatives. Today, development projects increasingly require large-scale syndication given the size… nobody has the kind of money that is necessary, the trillions that are necessary, to meet the challenges of development.” 

For smaller countries in Latin America in particular, the bank “is usually the first door that they are knocking on from the point of view of trying to put together capital to support a specific development undertaking, whether it’s in health or infrastructure.” 

Rishchynski said the bank was in a unique position to coordinate the global effort to support Latin America, citing the potential of collaborating with Chinese lenders on specific initiatives. 

“The bank has been successful in largely avoiding the politization of its work. That doesn’t mean that politics doesn’t enter the equation… but we have not seen the bank fall into the trap of ideological rigidity and things of this nature.”

Lending by China, a non-borrowing member of the IDB, to Latin America has decelerated in recent years. Past Chinese financing has focused on Venezuela, Brazil, Argentina and Ecuador.

Nancy Birdsall, president emeritus at US think-tank the Center for Global Development and former executive vice-president of the IDB, said: “I hope that the IDB doesn’t get dragged into the sort of tit-for-tat right now going on between China and the US, which is really about broader geopolitical and security issues.  

“The IDB should go on welcoming whatever financial support and whatever ideas about development can come from the many people in China who are working on development issues and have experience and interest and, of course, money."