Unlocking Every Dollar for a World in Crisis
SocietyOp-Ed by Masatsugu Asakawa, President of
the Asian Development Bank
The world is at a tipping point.
The pandemic left a toxic legacy of spiraling poverty, debt distress, and inequality,
all amid a worsening cost-of-living crisis. Even more alarming is climate
change, a long-term existential threat that is already wrecking lives and
costing billions.
Recent climate-related disasters
are a tragic foretaste of the world that awaits if we don’t act now to prevent
these immense and overlapping threats, or polycrises, from
defining our future.
Multilateral development banks
(MDBs) like the Asian Development Bank (ADB), of which I am president, must do
more and act faster to overcome these crises and help people—while there is
still time. Business as usual isn’t an option, especially in Asia and the
Pacific where nearly 70 million people have fallen back into extreme poverty
since the pandemic, and which accounts for more than half of the world’s
greenhouse-gas emissions.
We need bold action to deliver
the estimated $3 trillion needed annually by 2030, according to the G20, to
tackle global challenges and revive progress on the Sustainable Development
Goals (SDGs).
The G20 believes MDBs can help
deliver this finance by wringing every last dollar from their balance sheets. I
agree, and at ADB that process is well underway. In September, we announced
capital management reforms that include optimizing
our prudential level of capitalization.
These
reforms unlock $100 billion in new commitments capacity over
the next 10 years. They expand the bank’s annual new commitments capacity to
more than $36 billion—an increase of approximately $10 billion, or about 40%. This
will make up to $360 billion available over the next decade to expand our
climate investments, spur momentum on the SDGs, and increase our support for
economies still suffering from pandemic impacts. Importantly, the reforms are
designed to ensure ADB’s AAA credit rating is safeguarded.
This is part of a series of
innovations ADB has made to expand its lending capacity. In May, ADB announced
the Innovative Finance Facility for Climate in Asia and the Pacific, which
allows donors to guarantee parts of the existing sovereign loan portfolio on
ADB’s balance sheet, allowing ADB to leverage and generate $5 in climate
finance for every $1 of guarantees. ADB has also entered sovereign exposure
exchange agreements with other MDBs to reduce portfolio concentration risks.
And it won’t be our last step. I
see this as another advance on a continuous path of reform that all MDBs must
take to respond effectively to rapidly evolving challenges like global warming.
To meet these challenges head on,
MDBs need to take urgent actions across three fronts.
First, it is vital that MDBs
expand their capacity to mobilize private investment for climate and
sustainable development programs. MDBs are uniquely placed to catalyze the move
from billions of dollars in development finance to the trillions needed, by leveraging
their balance sheets to generate private investment at all stages of the
project cycle.
This includes promoting policy
development upstream to create an enabling environment for private investment,
creating bankable projects midstream through advisory support, and financing
projects downstream to crowd in private capital.
Second, as many countries can’t
afford to take on debt after spending to manage pandemic impacts, they need to raise
more funds domestically. The G20 estimates that two-thirds of the required $3
trillion for global challenges can be raised through domestic revenue
mobilization and local finance.
Economies must mobilize more tax
revenue, modernize tax authorities through digitalization, and cooperate to
ensure a fair and well-functioning international tax system. Environmental
taxes are one way to increase domestic revenue and contribute to low carbon
development, while a more efficient value-added tax (VAT), including VAT on the
digital economy, could be a key source of income for developing countries. Countries should also revisit policies on fossil fuel
subsidies.
Finally, financial innovation
must continue. ADB is working to deepen the region’s domestic capital markets. Stepping
up the use of blended finance will crowd in private investment. De-risking
instruments such as credit enhancement products through guarantee schemes and
insurance can unlock capital for climate action, as can instruments such as
thematic and sustainable bonds.
We
can further promote climate action by engaging with evolving carbon markets.
ADB’s Climate Action Catalyst Fund provides relevant mitigation projects with upfront
carbon finance through the purchase of carbon credits under Article 6 of the
Paris Agreement. This complements our ongoing work to help our members develop
the policies and skills needed to participate in carbon trading.
Crises can escalate quickly. We must move even faster to
reduce the pain they cause and help secure a bright future for our region and
beyond.