Poorer countries getting indebted for concessional financing being sidelined

Profit-driven models of multilateral financing worries South Asian nations, including Bangladesh, as they getting indebted for concessional funding being sidelined, reveals a report sponsored by OECD.
At the report-launching function Sunday, it was also observed that multilateral development system faces mounting challenges due to political crisis, geopolitical shifts, and ongoing reforms in the global financial architecture.
The report unveils a shift toward scale and financial leverage is creating risks, particularly for the poorest nations, as concessional financing -- critical for the most vulnerable -- is sidelined in favour of larger-scale, profit-driven models.
Multilateral finance for education, for example, saw a sharp 30-percent drop (USD 3 billion) between 2021 and 2022, signalling potential underfunding of essential development sectors.
The findings were presented during a webinar co-organized by the Centre for Policy Dialogue (CPD) and the Organisation for Economic Co-operation and Development (OECD).The event marked the national launch of the 'Multilateral Development Finance 2024' report, which was internationally released on 5 September 2024.
In her welcome address, Dr Fahmida Khatun, Executive Director of the CPD, emphasized the critical role of multilateral finance in promoting sustainable development.
OECD data show that the share of multilateral finance within total official development assistance ODA) has grown significantly, rising from 45 per cent in 2012 to 61 per cent in 2022.
However, to meet the rising demand, both the multilateral finance system and Multilateral Development Banks (MDBs) must expand their capacities, necessitating comprehensive reforms," she stated.
In his keynote presentation, Mr. Abdoulaye Fabregas, Economist in the Architecture and Analysis Unit of the OECD Development Co-operation Directorate, highlighted the increasing influence of emerging and non-traditional donors, stressing the need for greater cooperation between OECD DAC members and these new players.
"We believe it is time to strengthen dialogue on multilateral cooperation between traditional and emerging donors. Existing OECD platforms, such as Regional Policy Dialogues, could facilitate this much-needed discussion," Fabregas remarked.
He has identified three major challenges facing the multilateral system. Firstly, multilateral development finance has seen substantial growth, with contributions from OECD members reaching record highs in 2022. As a growing proportion of ODA flows through multilateral institutions, this channel may soon become primary mode of delivering development assistance.
Secondly, crisis-driven funding -- spurred by humanitarian needs, the COVID-19 pandemic, and the war in Ukraine -- has been a major contributor to this increase. However, there are growing concerns that the focus on short-term crises may overshadow long-term development priorities.
Thirdly, mounting pressure for reform across the multilateral system continues, with the creation of new entities and ongoing restructuring of MDBs demanding close attention.
The rise of emerging donors, particularly China, is highlighted in his paper as both an opportunity and a source of fragmentation within the system. China is now one of the largest and fastest-growing contributors to the UN Development System (UNDS).
Ms. Dikshya Singh, Programme Coordinator at the South Asia Watch on Trade, Economics, and Environment (SAWTEE), notes that in Nepal, loans have increasingly overtaken grants in development finance. "Over the past decade, around 75 to 80% of the ODA Nepal receives is now in the form of loans, which must be repaid with interest. This has marked a significant shift from earlier trends when grants often equalled or exceeded loans."
Addressing concerns regarding donor-funded projects, Dr. Nisha Arunatilake, Director of Research at the Institute of Policy Studies (IPS) of Sri Lanka, stressed that while high-impact funding mechanisms are critical, measuring the impact of such projects, especially in social development, remains challenging.
"Interventions aimed at changing social norms or habits take time, and their success is not immediately visible. However, their importance cannot be overstated as outcomes depend on factors like economic policies, social conditions, and political stability," she said, citing Sri Lanka as a case in point.
Dr Sabyasachi Saha, Associate Professor at the Research and Information System for Developing Countries (RIS), echoed concerns about unmet expectations for scaling multilateral finance. He pointed out that key bottlenecks, such as capacity constraints, reporting mechanisms, and credit rating challenges identified in previous OECD reports, remained unresolved.
Dr Rishikesh Ram Bhandary, Assistant Director at the Global Economic Governance Initiative, Boston University, underscored the need for scaled-up multilateral finance in South Asia, particularly in clean energy investments. "The high cost of capital and limited market access make it imperative for South Asian countries to access multilateral finance, but current investments are disproportionately concentrated in advanced economies and select emerging markets, leaving others behind," he observed.
Muhammad Asif Iqbal, Managing Director of the Social Policy and Development Centre (SPDC), noted that while multilateral organizations provide South Asian countries with valuable resources and technical expertise, the growing complexity and fragmentation of the system present significant challenges. "Countries with limited administrative capacity often struggle to manage reporting and evaluation requirements from multiple institutions, leading to delays in project implementation."
On the issue of external debt, Syed Yusuf Saadat, Research Fellow at the CPD, warned that Bangladesh's increasing reliance on external borrowing could lead to economic vulnerabilities.
"Bangladesh has accumulated more external debt in recent years than in the first few decades after independence, raising concerns about the sustainability of its debt," he noted.

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