Development banks and Covid-19: stepping up in a time of crisis?

Economy

Economic News

29 Jul 2020
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As the coronavirus pandemic continues to pose multiple challenges for governments, development banks are playing an important role in aiding the recovery in emerging markets.

The virus has caused extensive damage to the global economy and trade. To offset some of the negative effects of the forced closure of entire industries and the collapse in consumer demand, governments around the world have made financial support available on an unprecedented scale.

For example, in March Bahrain announced a stimulus package equivalent to 29.6% of GDP, putting it ahead of Germany (24.8%) and Japan (18.2%).

While such support may have been successful in providing immediate relief during a time of crisis, it has not been sufficient to stimulate demand and return economic activity to pre-virus levels.

With national budgets facing significant deficits, governments in emerging markets are increasingly looking to development banks – on a national, regional and multilateral level – as a source of finance to support struggling industries, invest in necessary infrastructure and pave the way out of a recession.

Crisis recovery

There are an estimated 400 development banks worldwide, with combined assets of $11trn. They range from global bodies such as the World Bank, to regional institutions like the Asian Development Bank (ADB) and the Development Bank of Latin America, to national lenders such as the Qatar Development Bank and the Development Bank of the Philippines.

Capitalised primarily by governments, but with some of their lending co-funded by the private sector, development banks generally provide funding on preferential terms for projects that would struggle to secure funds from commercial lenders. Before Covid-19 it was estimated that they committed $2trn per year to various initiatives, representing around 10% of annual global investment.

While development banks provide crucial finance for valuable and often socially beneficial projects, they are particularly important to emerging markets during crises, when they can counteract the pro-cyclical nature of financial markets that constrains credit during economic downturns.

For example, following the 2008 financial crisis development banks significantly increased their lending when other financial institutions were reining in their allocations.

In light of the global disruptions to supply chains and trade associated with Covid-19, these institutions, particularly those of a multilateral nature, are once again stepping up to offer support.

Wide-ranging support

With Africa’s GDP expected to fall by up to 3.4% this year as a result of Covid-19, institutions such as the African Development Bank (AfDB) have been crucial to the continent’s response to the crisis.

In late March the bank raised $3bn from its Fight Covid-19 Social Bond, the largest US dollar-denominated social bond ever listed on international markets, with the proceeds to be put towards alleviating the impact of the pandemic.

This was followed by $2m in emergency assistance to the World Health Organisation, and the announcement on April 8 of a Covid-19 response facility that would provide up to $10bn to African governments and the private sector to combat the public health and economic impacts of the virus.

To date the AfDB has provided around $3.5bn to various national and subregional projects across the continent.

In addition to providing funding to help countries meet their budget requirements, the bank has supported more targeted initiatives, such as a €225m loan for sustainable electricity development in Egypt, $20m to support refugees and their host countries in the Sahel region of central-north-western Africa, and $3m to the Togolese agriculture sector to bolster food security.

Similarly, in April the ADB launched a $20bn support package for member states.

Elsewhere, a number of other multilateral development banks are also playing a significant role in the Covid-19 recovery.

The New Development Bank, which covers the BRICS bloc – Brazil, Russia, India, China and South Africa – has dispersed $1bn to each member country, excluding Russia, with the funds taken out of the bank’s $10bn Emerging Assistance Programme for 2020.

Bolstering trade finance

Aside from supporting state-led initiatives, development banks have sought to bolster private sector attempts to stimulate trade.

In early July the heads of the World Trade Organisation (WTO) and six of the world’s largest multilateral development banks – including the ADB, the AfDB, Islamic Trade Finance Corporation and the Inter-American Development Bank – released a statement pledging to address shortages in trade finance that were threatening cross-border commerce.

This attempt to assist trade finance providers, including both traditional banks and non-bank financial institutions, is the first time multilateral development banks have come together to support trade finance markets, according to Roberto Azevêdo, outgoing director-general of the WTO.

The statement comes as the International Chamber of Commerce warns that $5trn in trade credit market capacity could be needed to return trade volumes to 2019 levels, and that the market would struggle to meet this demand without intervention.

Economists fear that a shortage in capital would adversely affect emerging markets, preventing governments and businesses from making necessary investments and subsequently delaying economic recovery.

It is hoped that with increased support for global trade, emerging markets will be able to improve their response to the pandemic and return to growth in 2021.

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