Stephany Griffith-Jones and Dirk Willem te Velde, March 2020
Developing countries are facing considerable financing shortfalls as the global economy is going into a steep recession. Immediate challenges exist with regard to financing firms and workers in the poorest countries, including in Africa. If these firms collapse, and others stop investing, some of the major engines of a country’s transformation path may not survive, and will start shedding jobs. Traditional trade finance solutions that emerged during the 2008 global financial crisis will not solve these problems, as there is little trade now.
Development finance institutions (DFIs, such as IFC, CDC, FMO and DEG) provide finance (loans, equity, guarantees) and technical assistance to the private sector in low- and middle-income countries. The majority shareholders are governments. The mandates of DFIs usually combine provision of finance on commercial terms, additional to the market, earning a financial return and contributing to development.
DFIs should be more counter-cyclical in the current crisis. This may involve them abandoning conservative lending practices, if shareholders allow potential future losses on a portion of DFI portfolios. This is urgently needed, as businesses across the developing world are, or are at risk of, going under. A subsidised Bounce Back Better facility will have major returns in protecting workers and investments. It may facilitate future higher payments by businesses, if it leads to quicker growth.
Photo: Empty street in Nairobi, Kenya. World Bank / Sambrian Mbaabu. Licence: (CC BY-NC-ND 2.0)