A Liquidity Line for MDBs: SDR Rechanneling Revisited

World leaders are calling on the multilateral development banks (MDBs) to greatly increase development and climate finance for developing countries using their capital more efficiently. MDBs hold large amounts of liquidity on their balance sheets as well as capital. The International Bank for Reconstruction and Development (IBRD) and the four main regional development banks manage more than US$200 billion of high credit-quality, liquid assets principally from the world’s leading economies. This paper describes how a liquidity line from major central banks backed by SDRs, a natural liquidity instrument, could save MDBs money. A US$50 billion line, about 8 percent of the top 20 central banks’ SDR holdings, could boost MDB net income between US$413 million and US$792 million per year under normal market conditions. This would deploy unused SDRs, assist G20 countries comply with their SDR rechanneling commitments, be a step forward towards a more coherent and integrated MDB system, as recommended by various G20 committees, and promote international financial stability. If the savings were retained as additional MDB capital, it could drive between US$31.3 billion to US$60.4 billion of additional development lending over 20 years, complementing other reforms to enhance balance sheet efficiency.