Development banks must evolve

Multilateral development banks (MDB), chief among them the World Bank, were established to provide capital to developing countries that couldn't raise it at home or on affordable terms abroad.

- TANU M GOYAL SHEKHAR AIYAR

For decades, they filled that gap. But as more countries move from low- to middle-income status (according to the World Bank's classification), and the global financial environment becomes more challenging, the role of MDBs must evolve, too.

Consider India, where there is no longer an appreciable gap for MDBs to fill. In 1991, according to our calculations, external finance covered about 15% of the central government's fiscal deficit; by 2025-26, that figure had fallen to 1.5%. In the intervening years, the country's capital markets have deepened significantly to the point that domestic market borrowing now covers more than 70% of the deficit.

In this, India is simply a prominent example of a more general rule: as middle-income countries develop more sophisticated financial systems, the case for MDB finance grows progressively weaker. The World Bank does not lend to middle-income countries with the long maturities and heavily subsidised rates provided to low-income countries, but on close to commercial terms. At a time when rising global interest rates and depreciating local currencies have made dollar-denominated external debt more expensive to service, price is no longer the chief attraction of MDB finance.

If they are to retain or even strengthen their relevance to middle-income countries, MDBs need to rethink their proper role. India's experience suggests that they should be primarily in the business of providing knowledge, not capital.