Some development banks are worsening public debt in poorer countries, according to World Bank chief David Malpass, raising questions about their lending habits to emerging markets and the changing nature of development finance.

Malpass said at a US debt forum last month that the Asian Development Bank (ADB) is “pushing billions of dollars” into an economically fragile Pakistan, and that the African Development Bank (AfDB) was doing the same in Nigeria and South Africa. He added: “We have a situation where other international financial institutions and to some extent development finance institutions as a whole, certainly the official export credit agencies, have a tendency to lend too quickly and to add to the debt problem of the countries.”

Pakistan turned to the International Monetary Fund (IMF) for a US$6bn loan programme in July 2019 – with an immediate disbursal of US$1bn to help the country deal with its high debt-to-GDP ratio, which at the time was around 88%. At the end of September, it had decreased to 84.7%, according to an IMF report published in December. “Pakistan’s programme is on track and has started to bear fruit. However, risks remain elevated,” said David Lipton, IMF’s first deputy managing director, adding: “The authorities are committed to sustaining the progress on fiscal adjustment to place debt on a downward path.”

In December, the ADB came to Pakistan’s aid, approving US$1bn in immediate budget support to the country to shore up its public finances as well as a US$300mn loan for energy reforms. The IMF said the immediate budget support “would further strengthen the BOP [balance of payments]”.

Not everyone agrees with Malpass’ comments. Scott Morris, director at the US Development Policy Initiative and senior fellow at the Center for Global Development (CGD), a think tank, wrote in a CGD blog post that loan terms are a key factor in determining fair development finance: “ADB loans to Pakistan have 2% interest rates, 25-year maturities, and five-year grace periods, which are comparable to the World Bank’s own terms for Pakistan,” adding that “there is no evidence to suggest that the ADB’s project portfolio in Pakistan performs better or worse than the World Bank’s”.

The AfDB also hit back at the World Bank chief, saying that “this statement is inaccurate and not fact-based”, adding that “it impugns the integrity of the African Development Bank, undermines our governance systems, and incorrectly insinuates that we operate under different standards from the World Bank. The very notion goes against the spirit of multilateralism and our collaborative work”. It says that the bank recognises and closely monitors the debt trend of higher risk nations. Though, it adds that there is no systemic risk of debt distress.

However, Sarah Fowler, international economy analyst at Oxford Analytica tells GTR that development finance is becoming more competitive.

“It [Malpass’ comments] highlights that at the moment global co-operation is decreasing and more dangerous debt deals have been allowed to occur, which is becoming a problem that should be paid more attention.” She adds that in some cases development finance institutions “are maybe slightly losing site of their mandate to develop these countries and are just trying to compete with each other”.


Debt vulnerabilities increase

In June, the Global Economic Prospect, a biannual report examining global growth by the World Bank, stressed that unsustainable accumulation of public debt has become an increasing concern.

IMF data shows that over the period 2010-19, the average public debt in Sub-Saharan Africa had increased from 29.6% to 53.1% of GDP. Public debt in Nigeria was 29.8% of GDP last year, up from 27.3% in 2018 and in South Africa, debt reached 59.9% of GDP in 2019, increased from 56.7% the previous year.

The 2020 African Economic Outlook, published in January by AfDB says that the structure of African public debt has changed, relying less on loans from multilateral banks and more on loans from bilateral creditors. “African governments have had a structural shift in the composition of debt, with less reliance on concessional lending from multilateral institutions and official Paris Club creditors, broader access to long-term finance from international capital markets, and financing from emerging bilateral creditors, such as China.”

China’s Belt and Road Initiative (BRI), which aims to connect Asia with Africa and Europe, has seen the country plough billions of dollars into infrastructure projects in both Africa and Pakistan. Morris says that: “Chinese government lending terms average about 4% with average maturities of just under 16 years and grace periods under five years. As a leading creditor to Pakistan, China’s terms suggest that Pakistan’s bilateral loans as a whole are less concessional than those of the MDBs.”


A slice of the development finance pie

As development banks’ lending habits are – rightly or wrongly – called into question, JP Morgan, meanwhile, has set up its own development finance institution within its corporate and investment bank.

While the ADB’s mandate, for example, is to achieve “a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty”, the JPM DFI says it will operate on a commercial basis and “assist clients in structuring products with various risk-return profiles aimed at meeting return hurdles and other financial and credit criteria of our investor and lender clients”.

JP Morgan’s DFI will make deals and then distribute them to other investors, rather than holding them on its own balance sheet. “The JPM DFI will seek to originate assets for the purpose of distribution to market participants with the aim of mobilising capital and formalising development finance as a traded asset class,” the bank says on its website.

It adds that its institution will not compete in geographies where there is an overlap with other development finance institutions as its products “may complement the risk mitigation products provided by the multilateral development banks to deliver sustainable solutions for clients in those developing markets”.

Nevertheless, Oxford Analytica’s Fowler offers an opinion: “I would be concerned that its main mandate is to make a profit for its shareholders, so it is probably going to exacerbate this trend of more competition in the sector and less co-operation.”

The bank has published a methodology as to what qualifies transactions as development finance orientated and says it “intends to work with existing clients, both governments and those in the private sector, as well as prospective clients across the capital markets”.

Fowler adds that better co-ordination among development finance institutions would help some countries from becoming tied to risky deals, adding that there needs to be a body setting overall standards.

ADB and JP Morgan declined requests from GTR to comment.