Frontier and Growth Markets | March 31, 2020

How development finance leaders can help emerging-market economies survive the COVID-19 crisis

Edwin Macharia, Jesse Baver, Kusi Hornberger and Rachna Saxena
Guest Author

Edwin Macharia

Guest Author

Jesse Baver

Guest Author

Kusi Hornberger

Guest Author

Rachna Saxena

As fast as the COVID-19 crisis is unfolding, leaders of development finance institutions (DFIs) must move faster. 

While it is impossible to know the full economic consequences of the public health and economic crisis we face, we do know that governments are beginning to take needed corrective actions to avert devastation from the approaching economic tsunami and its potential lasting impacts on all our lives. 

Many DFIs are already taking critical actions. The International Finance Corp., for example, has announced $8 billion in additional lending to help existing clients meet needs related to COVID-19, cover banks’ payment risks, replenish capital to pay bills and wages, and share banks’ risks in serving small and medium-sized enterprises (SMEs). 

The African Development Bank issued a three-year $3 billion social bond to alleviate the economic and social impact of pandemic. The Inter-American Development Bank and the IDB Group will make $3.2 billion available to affected countries, while IDB Invest is readying a $500 million facility which will provide short term loans to small and medium-sized companies. 

Bilateral DFIs such as CDC are working with companies to help them develop impact mitigation strategies and to ease liquidity issues if they arise. 

Across OECD countries, unprecedented domestic economic stimulus packages are taking shape. 

As the crisis unfolds in emerging markets, governments face their own fiscal challenges, including liquidity and ability to borrow. The economic ramifications, particularly on small businesses and the poorest and most vulnerable, will be devastating. 

Emerging market governments, many of which are already heavily indebted, will face further reduced liquidity and ability to borrow due to slower demand for exports, less foreign direct investment, lower remittances, and currency depreciation. All of these effects will severely hamper their domestic financial resources, keeping them from stepping up to the extent required by the pending economic crisis.

Leading with impact

DFI leaders must act not only quickly but creatively to fill this gap with an inclusive perspective. 

Much more will be needed, however, and funding must be done in a way that guarantees that benefits from the financial relief packages are passed down to small businesses, workers, and the self-employed.

The following five actions should be prioritized, in our estimation, by all DFI leaders considering responses to the crisis that will help emerging markets and their populations survive the catastrophe and thrive afterwards:

1. Scale up strategic and coordinated liquidity models. DFIs can play a critical role in providing additional financing to emerging market private sectors to help them not just survive the crisis but also grow. Instead of retreating from emerging markets, as most private investor capital has done in the last few weeks, DFIs should increase their exposure significantly. They should do so, however, with a deep understanding of the needs and challenges of the borrowers they will be supporting. 

An option being explored in the United States, for example, converts bridge loans to grants if certain economic performance indicators are met. This approach should be explored in emerging markets as well. This is also a unique opportunity for both bilateral and multilateral DFIs to increase coordination, sharing key insights from their investees on the ground on what financial support is needed and sharing deal flow with one another.

2. Guarantee that concessional financing focuses on the most vulnerable. DFIs should consider placing conditions on any concessional liquidity or flexibility in funding they provide to ensure that the financial intermediaries they lend to meet requirements to focus on SME borrowers, protect jobs, as well as “pass on” the concessional financing they may receive to their own borrowers. 

Strategic partnerships between DFIs and donor agencies to provide further economic incentive and risk reduction for DFI investees that take on social protection mandates will help this strategy go even further and ensure that the dollars deployed are used most effectively and to the benefit of the populations most in need of support during and after the crisis.

3. Expedite deal processing times. The next two years will not be business as usual for most DFIs. The need for additional financing will exist across all emerging markets, and to respond to the increased demand DFI leaders must advance reforms for expediting investment approvals and disbursements.

This effort can include creating differentiated deal process windows for specialized needs, for example, those of SMEs. Other necessary steps include increasing the cadence or varying the format of investment approval meetings or, even more importantly, removing steps from the approval processes themselves, including, in some cases, elements of board delegation on final approvals. To increase liquidity, these reforms will be critical.

4. Assess and manage portfolio company risks with an impact-first lens. DFI leaders have immediately begun working with portfolio companies to understand the consequences for their businesses of the COVID-19 crisis. They should also consider the impacts of the longer-term downturn, however. The classic prioritization of levers to cut costs and reduce risk within businesses should be counterbalanced with a focus on how the most vulnerable in their supply chains, such as contract laborers and small businesses, will be affected.

Once customized plans for each portfolio company are developed, DFI leaders could work to direct their technical assistance funding and programs toward working with these companies to support the workers and self-employed people in the investees’ supply chains. For example, a DFI with an agribusiness investee could work with that business to set up contractual and technical arrangements to ensure that farmers in the supply chain maintain their incomes this season and access to inputs for next season’s production even if short-term demand for their products is reduced.

5. Adapt priorities while also doubling down on impact agendas that will endure. DFIs are correctly focusing on getting deals done to increase liquidity and create jobs in emerging markets where they are most needed. This should not come at the cost of other impact priorities, such as climate change and gender. 

For instance, there is clear evidence that public health emergencies such as COVID can increase challenges for women – from the risk they face as the majority of frontline healthcare workers to the increased unpaid care work responsibilities they will likely shoulder. Thus, more than ever, DFIs will need to incorporate a gender lens across new deals and support to existing investees. Keeping this and other priorities top of mind will lead to outsized impacts and benefits. 

The COVID-19 pandemic represents an unprecedented crisis throughout the world. DFI leaders who act fast to implement these five actions can help to avert the worst economic consequences of the catastrophe we face and shape aid and financing packages that alleviate rather than exacerbate the underlying economic inequities that have plagued emerging market countries for far too long. We at Dalberg look forward to playing our part to ensure they do. 


Edwin Macharia, Jesse Baver, Kusi Hornberger and Rachna Saxena are partners with Dalberg Advisors Finance & Investment practice. They are based in Nairobi, London, Washington, DC and New York, respectively.