A call for innovative development finance solutions: Addressing currency risk and unlocking domestic capital pools to support extreme poverty reduction

Martin Wolf argues that the next replenishment for the International Development Association (IDA) must be significant in order to support progress towards eliminating extreme poverty and promoting social and economic development. While concessional finance plays a crucial role in this, there are a couple of points in Wolf’s assessment that need to be addressed.

One point to challenge is the assumption that the IDA countries lack domestic capital pools. In fact, countries like Nigeria and several east African nations have significant domestic pension assets totaling billions of dollars. These capital pools are growing rapidly but there is a need for scalable solutions to channel them into productive investments. The World Bank Group, as a leader in development finance, should take the lead in supporting these private-sector-led investment solutions rather than solely focusing on foreign capital flows.

Another issue is the currency risk associated with IDA funding. While the terms may be concessional in terms of pricing and loan tenure, the currency risk of the loan component still falls on the recipient country. This can lead to difficulties in servicing debts over the long term. The upcoming IDA replenishment must address this mismatch to ensure that countries receiving funding are not burdened by unaffordable debt servicing in local currency terms.

In conclusion, it is crucial for development finance institutions, particularly the World Bank Group, to take a leadership role in promoting domestic investment solutions and addressing currency risk in IDA funding. By focusing on these issues, the next replenishment round can better support the world’s poorest countries in their efforts to achieve sustainable development and poverty reduction.