Guarantees have several characteristics that bring advantages over the more traditional lending operations of multilateral development banks (MDBs), such as targeting certain specific classes of risk and helping ‘crowd in’ other funding sources.
Guarantees for development have grown in relevance, as many emerging economies are more focused on accessing private sources of finance than traditional development loans, and instruments like guarantees can leverage external resources beyond the lending capacity of MDBs.
MDBs face a number of major impediments to using guarantees more extensively, linked to their capital structure, financial and operational policies and staff skill sets. A number of options exist to promote greater guarantee usage by MDBs, but all come with trade-offs.
Measuring guarantees as developmental aid will require a different approach because guarantees are not a flow, unless they are called. Instead, measurement should take into account the opportunity cost for the bilateral agency and development finance institution to issue guarantees.
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