Asian Development Bank faces critical tests in the next five years
Ahead of its May annual meeting in Japan celebrating the Asian Development Bank’s 50th anniversary, bank President Takehiko Nakao, made the rounds of the IMF-World Bank spring gathering this month trying to promote new capacity and direction.
International financial institutions now pledge to cooperate and act as “honest brokers” to bring in the private sector through their expertise and facilities, with the focus on infrastructure, poorer economies, and common interests such as climate change. The ADB faces a direct regional challenger in China’s Asian Infrastructure Investment Bank (AIIB) and has struggled to define its comparative advantage, as the US — a founding shareholder — previewed appropriations cuts in the Trump administration’s first budget.
The ADB’s total commitments were US$17 billion in 2016 with a goal of reaching $20 billion by decade’s end. But emerging bond and stock markets routinely tapped by member countries can raise this sum in a month without the heavy administration and reporting associated with official lenders. While the 50-year mark is an achievement, the next five years will be a critical test of whether slogans like “partnership and knowledge exchange” translate into real balance-sheet and living-standard results to justify franchise extension.
According to the ADB annual report, 1.5 billion people in the region still live in poverty, earning US$3 or less a day, so education and social services are priorities for “inclusive growth.” Environmental sustainability as a broad heading drew US$11 billion to 80 projects last year, including for clean energy and sanitation and transport upgrades. Agriculture and financial-sector allocation, totaling US$3 billion, concentrated on marginalized rural and small business areas. Trade and supply-chain finance programs came to another US$2 billion through recent private-sector windows breaking with the original exclusive sovereign borrowing mission.
Pakistan’s performance outshines its neighbors’
Central and West Asia had a “difficult year,” with weak fiscal and current accounts at hydrocarbon exporters Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan. Armenia, Georgia, and Tajikistan had remittance drops from Russia. Pakistan was an outlier with 5% GDP growth despite geopolitical and terror threats, and energy and public-sector management accounted for half the US$4.75-billion area portfolio.
Cross-border linkages were emphasized through an 11-member regional cooperation program, which has drawn credit also from the Asian infrastructure and European investment banks. The financial sector was one-tenth of activity geared toward debt management and micro-finance. Mongolia is in the East Asia bucket but became an urgent target after turning to the IMF for crisis budget and balance-of-payments rescue. Early technical assistance is for state enterprise restructuring, and millions of dollars in grants also went for an updated macroeconomic database and natural-disaster response after the harsh winter.
South Asia, comprising India, Bangladesh, Sri Lanka and Nepal, grew at a rapid 6.5% pace in 2016, but basic banking and urban infrastructure are still lacking as the biggest chunk of US$4.5 billion in lending. Sri Lanka got US$250 million for capital-markets development after recent external sovereign bond issues raised investor scrutiny of local access and regulation. This Morgan Stanley Capital International frontier index market had received bilateral and multilateral aid from the US and Europe and then the country became embroiled in civil war and a tentative aftermath which tipped it again into debt trouble. In Southeast Asia, improved governance absorbed the ADB’s US$3 billion, with the Philippines and Vietnam getting infusions for school and energy-project oversight and planning.
The public-private partnership office entered its second year with five new transaction advisory mandates, and normal financing and co-financing operations came to more than US$8 billion. Agricultural and socially-responsible credit was expanded in South Asia, a US$20 million venture capital fund was set up for mid-market companies across the Mekong region, and an international microfinance ratings agency was launched. Specialized debt and equity products were applied in commercial infrastructure through a new US$1.5 billion Japanese initiative, but such engineering will not succeed without the underlying machinery.
As the ADB begins another half-century, participants at the IMF-World Bank spring meetings urged it not to follow fashion but return to underlying banking and capital-market modernization roots for an “honest broker” role in the literal sense.