The Asian Development Bank (ADB) has approved capital management reforms that unlock $100 billion in new funding capacity over the next decade to address the region’s overlapping, simultaneous crises. The expansion of available funds will be further leveraged through mobilizing private and domestic capital to move from the billions to trillions required to tackle the climate crisis.
The reforms were introduced through an update of ADB’s Capital Adequacy Framework (CAF). They expand the bank’s annual new commitments capacity to more than $36 billion—an increase of approximately $10 billion, or about 40%. The expansion is achieved by optimizing ADB’s prudential level of capitalization while maintaining its overall risk appetite. The reforms also create a Countercyclical Lending Buffer to support ADB developing member countries (DMCs) facing unexpected crises.
The measures, which will enable ADB to provide up to $360 billion of its own financing to its DMCs and private sector clients over the next decade, are designed to ensure ADB maintains its AAA credit rating and its ability to provide DMCs with funding at low cost and with long maturities. The reforms further safeguard ADB’s AAA credit rating through the introduction of a recovery plan that would prevent capital erosion during periods of financial stress. ADB’s capital adequacy framework is reviewed every 3 years.
“These important reforms will significantly expand ADB’s ability to support a broad range of critical development efforts across Asia and the Pacific, including greater concessional resources for our vulnerable members,” said ADB President Masatsugu Asakawa. “Our decision today is part of ADB’s response to the call for multilateral development banks (MDBs) to do more with our resources and faster. These resources will help the region manage a complex set of overlapping crises, address gender inequality, and provide for basic needs in the context of the existential challenge of climate change. This extra lending power will be extended and leveraged further by renewed efforts to mobilize private and domestic capital and maximize the impact of our work.”
Private capital mobilization will play a critical role in leveraging billions to trillions, by expanding private sector involvement in the development agenda. Upstream actions will help improve macroeconomic policy and the institutional and enabling environment for private sector investment, spurring increased domestic and foreign investment. Midstream advisory support will help create project pipelines and prepare bankable projects that can attract private sector investment. Downstream financing will be structured to crowd in private capital in development projects, including de-risking for the private sector. Upstream enablement, and mid and downstream mobilization, will leverage ADB’s balance sheet, multiplying the resources available for the region’s development.
Economies must also mobilize more tax revenue, modernize tax authorities through digitalization, and cooperate to ensure a fair and well-functioning international tax system. Domestic resource mobilization is vital in the effort to address debt sustainability and to achieve the Sustainable Development Goals. ADB established the Asia Pacific Tax Hub in 2021 to provide an open and inclusive platform for strategic policy dialogue, knowledge sharing, and development coordination among ADB, its members, and development partners.
Asia and the Pacific’s poor and vulnerable are acutely exposed to escalating and interconnected crises that jeopardize their health, educational outcomes, and livelihoods. An estimated 155 million people, or 3.9% of the region’s population, lived in extreme poverty in 2022 and many, in particular women, face a cost-of-living crisis that has made food and other essential commodities and services unaffordable.
The updated CAF is the latest of several initiatives by ADB to increase its lending capacity. In May, ADB established the Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP), which allows donors to guarantee parts of the existing sovereign loan portfolio on ADB’s balance sheet, thereby releasing capital for new climate projects. ADB has also entered into sovereign exposure exchange agreements with other MDBs to reduce portfolio concentration risks and leads the MDBs’ participation in the International Finance Facility for Education.
ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.
This article was first published by ADB on 29 September 2023.
