Distorting commercial debt markets vs. attracting private investment

The trillions needed to achieve the Sustainable Development Goals (SDGs) by 2030 cannot come from Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs) alone. Mobilizing private capital towards SDGs and frontier markets is essential. But private capital only invests where they feel the return adequately compensates for the risks. To crowd-in the private sector and create sustainable capital markets, DFIs and MDBs need to adopt market-based pricing.

Benchmarking challenges

Market-based pricing means benchmarking as many observable datapoints in the capital markets as possible for debt products of a similar structure, credit profile and tenor, envisaging the price of the DFI financing will match the return requirement of the private capital.

However, DFIs and MDBs operate in markets where in general such benchmarks and datapoints are limited. When disciplinary capital markets fail to guide DFIs and MDBs, the risk is that short term development impact can be preferred and (long term) market distortion is taken as collateral damage. As distorted markets are unfavorable for mobilizing private capital, DFIs and MDBs should put both outcomes in perspective when providing financing in fragile markets.

Market-pricing as standard

DFIs set high standards for their operations. We believe market-based pricing should be an integral part of these standards, as off-market pricing distorts commercial debt markets, thereby in the long-run undermining the DFI’s mission.

We have therefore taken the lead within the EDFI community to establish high-level principles for market-based pricing. Using self-regulation to avoid market distortion, providing guidance on pricing, and creating accountability and transparency towards private market players.