OPEC Fund Annual Report 2023

02 | THE OUTLOOK – DEVELOPMENT FINANCE ARCHITECTURE

DEVELOPMENT FINANCE ARCHITECTURE

Within the many different opinions about how to reform the global development financial architecture, there is growing consensus that a root-and-branch reform of the existing system can no longer be post- poned. Indeed, the challenges are so diverse and the required funds so large that a broad reorganization of global development finance is already taking shape. After all, this is one of the most important pre requisites for securing the future, particularly if the Sustainable Development Goals (SDGs) are to be met by 2030. Over the past few years, the global development financial architecture has transformed significantly and now comprises six main elements, according to the United Nations Secretariat 8 . Each part contains its own complexities and connections to the other elements: • Development banks and other official creditors; • Sovereign borrowing and debt sustainability; • Global financial safety net; • Global economic governance; • Global financial system rules and regulations; and • Global tax cooperation. Recognizing that reform is crucial if sustainable devel- opment is to be delivered, major country groupings such as the G7 have embarked on several processes to bring about change. In September 2023, African leaders unanimously adopt- ed the “Nairobi Declaration”, for the first time reaching a joint position on climate change and climate policy and calling for the reform of the global financial system,

noting that the cost of borrowing is eight times higher in Africa than in Europe.

As the sponsor of the 2030 Agenda for Sustainable Development, the United Nations also highlighted the high cost of borrowing. A policy brief published in May 2023 9 underscores the massive variations in countries’ access to liquidity, vast underinvestment in global public goods and volatile financial markets and capital flows as further “deep rooted” inequities of the existing architecture. In order to overcome these imbalances, developing countries are looking for a substantial increase in de- velopment financing and improved terms of lending in order to be able to adapt to and mitigate climate change in addition to meeting other interconnected develop- ment challenges. A key question here is the “capital adequacy framework” with multilateral development banks (MDBs) tasked with optimizing their frameworks to deliver increased lending, while not jeopardizing their ability to mobilize low cost resources from capital markets, which is facilitated by strong credit ratings. Studying this approach, the G20 published a report in 2022 10 that calls on MDBs to enhance their risk capacity through a combination of reforms that increase their lending capacity and strengthen their risk assessment “to align their risk tolerance with their development priorities.” This was followed by the July 2023 publication of a roadmap 11 which stated that initial measures could yield an estimated additional lending headroom of approximately US$200 billion over the next decade.