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The Inter-American Development Bank (IDB) plans to sell more sustainable development bonds to fund projects in Latin America and the Caribbean, as the creation of a hybrid capital instrument increases its funding from countries through their special drawing rights (SDRs) maintained by the International Monetary Fund, a bank official said.
“We will issue more debt,” the IDB official said in a background briefing for journalists on the condition of not being named.
The sustainable bonds will be issued either through taps of existing bonds or new global benchmark deals, the person said.
The comments come after the IDB and the African Development Bank (AfDB) said on Wednesday that the IMF’s Executive Board had decided to allow countries to use the hybrid capital instrument to lend their SDRs to multilateral development banks and still account for them as reserves.
IDB’s new debt issues will be backed by the additional capital it receives through the new instrument, the official said.
The lending of the SDRs to multilateral development banks will be in the form of equity, allowing them to issue more debt in the capital markets and spur lending, according to the AfDB.
The AfDB said it aims to sell standard bonds, as well as green, social and sustainable notes.
BIG ON-LENDING POTENTIAL
IDB President Ilan Goldfajn welcomed the new mechanism.
“With the new SDR-based hybrid-capital instrument, we have a cost-efficient way to finance much-needed sustainable development projects to boost climate resilience, reduce poverty and inequality, and lay the foundation for more inclusive growth in many of our countries,” he said in a statement.
The new instrument makes it possible to lend at least $4 for every $1 equivalent of SDRs through multilateral development banks to finance investments such as climate and food security projects, the AfDB and IDB said.
The additional capital from the SDRs, estimated at $60 billion, will increase the cushion for development banks to raise funds in the capital markets to on-lend for projects.
The next step is to secure at least five countries to act as investors to lend their SDRs to the banks, helping to guarantee the liquidity for the new instrument. The IDB official said such an announcement could be made at the annual meetings of the World Bank Group and the IMF in Washington DC from October 25-27.
INVESTOR CANDIDATES
The Latin American countries that could become SDR investors include Brazil, Chile, Mexico and Uruguay, given they have strong external positions in terms of their balance of payments, the official added.
The initiative could fund development projects such as expanding power transmission capacity in Chile, helping Brazil build back from a flooding disaster or improving public education in Peru.
“There is a huge pipeline of projects,” the official said.
The IMF’s most recent general allocation of SDRs to its members was in 2021, when the equivalent of $650 billion was issued to help countries respond to the COVID-19 pandemic.