Multilateral Development Finance 2022

Executive summary

Nearly three years after the outbreak of the COVID-19 pandemic, a succession of mutually reinforcing crises and a challenging global context are putting the multilateral development system under pressure. The world is facing the most challenging confluence of crises in contemporary history, jeopardising decades of progress in some key development areas, such as poverty reduction, access to quality health and education and other global goals. In this context, multilateral organisations are being asked to help tackle an ever-increasing number of humanitarian and development challenges.

This report provides an overview of the complex and evolving challenges faced by the multilateral development system, and makes policy recommendations for ensuring it is fit for purpose to continue delivering on the 2030 Agenda and supporting the recovery in developing countries.

The multilateral development system faces a triple test in a challenging global context

Recent crises, such as the COVID-19 pandemic, the food and energy crises triggered by Russia’s invasion of Ukraine, and climate change, have highlighted the central and growing role played by the multilateral development system in the global development agenda. In 2020, 41% of total ODA was channelled through the multilateral development system, up from 36% in 2010. The multilateral development system has a significant multiplier effect on DAC members’ multilateral contributions, allowing them to pool resources with other donors (public or private) and to leverage private finance for sustainable development. It also offers multidisciplinary expertise and a global reach.

Yet the unstable global context is ushering in a more uncertain and challenging period for the governance of the multilateral development system. A trio of forces (contextual, institutional and political) is putting it to the test. First, the entry into a more shock-prone era is stretching the capacity of the system. Second, geopolitical polarisation is leading to growing tensions in the multilateral space due to competing values and priorities. Third, the legitimacy of the rules-based multilateral order inherited from the post-Second World War era is increasingly being challenged. Failure to recognise and adjust to these forces could expose the multilateral development system to a triple crisis of capacity, legitimacy and identity.

Recent crises have evidenced the need to adequately resource the multilateral development system, spurring new calls to expand the financial capacity of the major international financial institutions. However, while most stakeholders agree on the need to strengthen the system, the focus on short-term emergency response and the return of great power politics could slow down progress on other areas of the multilateral reform agenda. In recent years, for example, reform initiatives such as the UN Funding Compact have seen mixed progress, and the multilateral architecture has become more crowded, complex and fragmented than ever with new multilateral funds continuing to be established in response to emerging development challenges, such as the threat of pandemics and climate change.

Multilateral organisations are under pressure to optimise and diversify their funding

Despite tightening budget constraints, official providers’ contributions to the multilateral system continued to grow in 2020, reaching an all-time high of USD 76.4 billion. In parallel, multilateral organisations have deftly tapped into alternative sources to raise exceptional amounts of finance.

However, these positive trends mask a set of intensifying funding vulnerabilities. In line with the pattern observed over the past two decades, the share of multilateral contributions earmarked for specific objectives has continued to rise. Between 2015 and 2020, for example, the share of DAC members’ earmarked contributions in their total ODA grew from 13% to 16%. Although this trend partly results from the need to respond to more frequent crises, it is increasing the volatility of multilateral organisations’ funding and exacerbating the rigidities in the system.

As multilateral organisations seek ways to diversify and optimise their funding sources to fulfil growing financing needs, they increasingly rely on the private sector. The organisations that are part of the UN development system are seeing an increase in contributions from private donors, such as philanthropies, while the multilateral development banks (MDBs) face calls to better leverage their balance sheets in order to mobilise a larger share of their funding from capital markets. The G20 Independent Review of MDBs’ Capital Adequacy Frameworks released in July 2022, for example, encouraged shareholders to consider adaptations to current frameworks in order to maximise MDBs' financing capacity, potentially unlocking hundreds of billions of dollars in additional lending.

Greater effectiveness and prioritisation of multilateral development finance is required to support an inclusive and sustainable recovery in developing countries

In recent years, the multilateral development system has provided record volumes of financing to support developing countries’ responses to the COVID-19 pandemic, amounting to a total of USD 185.1 billion in 2020, an increase of 31% from 2019. A series of exceptional measures taken by MDBs largely contributed to this surge; all together, MDBs accounted for 79% of the total USD 61.5 billion increase in multilateral financing in 2020.

Despite considerable efforts deployed by multilateral organisations, resources are still insufficient to meet the magnitude of the challenges faced by developing countries. In 2022, UN humanitarian assistance had a record funding shortfall (around USD 31.4 billion, corresponding to a 63% financing gap).

Multilateral organisations’ ability to adapt to shifting priorities during the crisis was key to avoiding further economic and social damage in developing countries. In 2020, some multilateral organisations repurposed parts of their portfolios towards activities directly relevant to the crisis response. While this revealed some much-needed agility on the part of organisations often criticised for their slow and bureaucratic processes, it also added to the challenge of achieving greater coherence across the system.

Keeping focused: On reform, sustainability and inclusiveness

Ensuring greater effectiveness and prioritisation of multilateral development finance will be particularly important to make the most of stretched resources. In the context of growing financing needs and constrained development budgets, avoiding overlaps and redundancies across multilateral organisations’ mandates and portfolios, ensuring complementarity between multilateral and bilateral efforts, and addressing the lack of whole-of-system accountability will be key to achieving the greatest development impact. Equally important will be to ensure that multilateral development finance helps realise the promise of building back better in developing countries by contributing to both pillars of the recovery – social inclusiveness and environmental sustainability. Increasing the multilateral focus on those furthest behind and on areas where it can have the greatest impact, such as the climate agenda, can be an effective way to maximise multilateral development finance.

Based on this review of the trends in and pressures on the multilateral development system, this report makes a series of recommendations for the main funders and shareholders of the system (the members of the Development Assistance Committee) and for multilateral development organisations, summarised as follows:

• Develop a holistic vision for the multilateral system to ensure its fitness to meet new global development challenges.

• Provide sustainable and predictable funding to multilateral organisations for a more resilient system, and support the implementation of innovative approaches to improve its financial capacity.

• Improve co-ordination across the system to increase the coherence and complementarity of multilateral efforts.

• Ensure that the needs and priorities of the poor and marginalised become a priority in multilateral investments.

• Mainstream climate and biodiversity further in multilateral development finance.