Low- and middle-income countries (LMICs) are grappling with sustainably financing their development priorities, amidst sluggish growth, high debt levels, and geoeconomic fragmentation. The IMF has described this situation as posing a policy trilemma. Growth in the low income countries is projected to remain below pre-pandemic levels at 4–4.5% over the next five years. Debt, on the other hand, is expected to continue rising. At the end of 2023, debt owed by LMICs stood at USD 8.8 trillion. International Development Association (IDA) eligible countries saw the highest proportional rise of debt to USD 1.1 trillion, an 18% increase since the pandemic, and this is expected to rise another 11% by 2028.
A large component of the current financing for development question is the debt situation countries are facing, the scale of any available financing sources, and the cost of that financing. Nearly two-thirds of the countries eligible for the Debt Service Suspension Initiative (DSSI) are at high risk of, or already in, debt distress. Debt servicing costs are the biggest culprit driving this pressure. This has been brought about by the fact that the current creditor landscape for low income and lower-middle income countries has become more diversified, with private creditors occupying a bigger portion of external debt portfolios.
This shift is a direct result of a confluence of factors—the low interest rate regime that followed the financial crisis in 2008, the rise of China as a bilateral lender, the appetite for large scale infrastructure investments aimed at powering economic growth, and a discontent with the Bretton Woods institutions and their structural adjustment policy conditionalities that accompanied the lending operations of the 1990s. For the least developed countries, however, multilateral development bank (MDB) loans remain the biggest part of debt portfolios, particularly debt owed to the World Bank. For the 73 DSSI-eligible countries, their debt book includes: MDBs at 46%, bilateral debts at 34.5%, and commercial creditors at 19.5%.
In the face of this trilemma, unlocking all sources of financing for development is an imperative. Multilateral development banks (MDBs) are critical players in this space. Regional MDBs are of specific interest. A great deal of focus has been placed on the World Bank as a global MDB, with a lot of effort and attention drawn towards its effectiveness and efficiency. Conversely, regional MDBs have received much less attention, especially on the global stage.
To unpack their timely relevance, this paper traces the evolution of regional MDBs and the role they continue to play in the international financial architecture. It then seeks to specifically draw out ways in which MDBs are of particular value added based on their unique characteristics. This is particularly relevant as international development actors negotiate a 4th Financing for Development framework in Seville, Spain, in July 2025.
Read the full background note: Regional development banks in the broader multilateral development bank reforms