This article inaugurates a five-part series featuring insights from Dalberg’s Finance & Investment Practice, focused on the future of capital flows and development finance. Subsequent pieces will explore the evolution of innovative financial mechanisms in anticipation of FFD4 and share insights from engagements at the nexus of finance and impact, including reflections on UNGA, COP30, and the G20.  

The 2025 Spring Meetings of the World Bank Group and the IMF Conference come at a moment in which the world navigates heightened macroeconomic, geopolitical and ecological volatility—a realignment of global economic rules and norms, ongoing and renewed military tension, and accelerating extreme weather events. Despite these headwinds, multilateral and domestic leaders will convene to discuss the continuity of critical reforms to the international financial architecture and on the pressing need to build resiliency within markets to navigate current and future shocks.

These conversations kickstart a pivotal year for the world of development finance, and as global finance leaders meet for this week’s Spring Meetings, a central question looms: How can we enable capital to flow not only faster but smarter toward the world’s most urgent impact priorities?

For many of the public finance institutions we work alongside, whether multilateral development banks (MDBs), development finance institutions (DFIs), ministries of finance, or donor agencies, the barriers to scaled and sustainable capital flows are not just technical. They are systemic.

In our advisory work at Dalberg, these barriers show up time and again in a few ways:

• Sovereign debt traps continue to erode fiscal space and domestic institutional agency at a faster pace than development gains can take hold.
• Multilateral reforms risk stalling amid shifting shareholder politics.
• The slow pace of change to the toolkit with which risk is calibrated hinders the flow of quality institutional capital outside of perceived ‘safe’ markets.

Drawing on our experience across geographies, we share three system-level priorities we believe are essential to address based on the operational challenges facing teams today.

Shifting from Sovereign Debt Diplomacy to Sovereign Debt Justice

Fiscal stress continues to slow down much needed public investment across many emerging economies, perpetuated by the COVID-19 shock, subsequent supply chain disruptions, and ongoing currency volatility. But even as new restructuring mechanisms have emerged in recent years, they have often fallen short of breaking the cycle. Countries return to debt markets without sufficient breathing room for growth or development priorities.

A key constraint has been the speed and effectiveness of sovereign debt restructurings—especially in mobilizing private creditor participation and enforcing collective solutions.

Despite the availability of tools like the Collective Action Clause (CAC)—a provision in sovereign bond contracts that allows a supermajority of bondholders to approve restructuring terms that become binding on all holders, thereby reducing the risk of litigation from minority creditors and promoting faster, more coordinated outcomes — CACs remain inconsistently used across debt issuances—limiting their impact.

Part of this may be explained by the fact that current legal frameworks don’t always allow indebted countries to hold safe and productive debt renegotiations with private creditors—the limited success of initiatives like the G20’s Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatment has been grounded in many countries’ disincentive to negotiate, out of fear of receiving credit rating downgrades when doing so.

Yet recent developments signal possible momentum toward change. Earlier this month, the United Kingdom introduced legislation designed to accelerate restructurings for low-income countries and prevent litigation from private holdout creditors—a response to cases like Zambia’s three-year restructuring process, which exposed the limitations of the G20 Common Framework.

The growing integration of instruments like policy-based guarantees (PBGs), moreover, can facilitate the efficient retirement of costly short-term debt, unlock new at-scale liquidity, and enhance countries’ standings in the eyes of creditors. A recent paper by the Finance for Development Lab profiles the broader macroeconomic effects generated by the application of a PBG as part of a debt swap in Côte d’Ivoire, showing that the liability management operation made possible by the PBG reduced the country’s interest rate burden by over 30 basis points.

It is important to design debt strategies that align financing with long-term development objectives and build structural features that protect against fragmentation and delays in future restructuring efforts. This is particularly the case in a context in which the cost of capital continues to be a significant bottleneck for emerging economies—a recent paper by CCSI spotlights the fact that emerging markets and developing economies (EMDEs) often face 3–5x higher borrowing costs than advanced economies.

Sovereign debt cycles can no longer be seen as a technocratic problem—they are a structural issue linked more and more to how power is held and wielded in negotiations and codified in legal frameworks, and one made even more relevant as countries across the globe turn to a transactional deal-making approach grounded in perceived strength and leverage.

Protecting and Reforming MDB and DFI Capacity Despite Resource Fragmentation

As stewards of development progress and mobilizers of at-scale capital, multilateral development banks are often asked to take on greater development risk while preserving their institutional strength. However, global political shifts and credit rating volatility test the foundations that make that possible, including their own ability to deploy resources at scale.

A significant effort is underway to rethink MDB capital adequacy and reform balance sheet approaches in line with 21st-century challenges. In late 2024, the G20 endorsed a coordinated roadmap to help MDBs become ‘Better, Bigger, and More Effective’ by modernizing risk frameworks and enhancing capital headroom.

Recent analyses have shown that multilateral institutions have already achieved the hardest of tasks—ensuring substantial capital adequacy ratios, meeting AAA solvency standards and cementing their Preferred Creditor Treatment in their sovereign lending. Yet lending behavior from MDBs to non-sovereigns is still risk-averse and limited in scale; and credit rating agencies like S&P and Fitch remain highly conservative in their treatment of MDB assets, limiting their flexibility just as global needs are accelerating.

Emerging political risks further complicate the landscape. For instance, proposed reductions in capital contributions by major shareholders, such as the U.S., may undermine callable capital strength and trigger rating downgrades. As detailed in recent Fitch Ratings research, proposed withdrawals or reductions in capital contributions by major shareholders (such as the U.S.) could have a chilling effect on deployment capacity and creditworthiness. While institutions like the IBRD and ADB have built resilient standalone credit profiles, others—including IDB, EBRD, and NADB—face heightened downgrade risks.

The implications are serious: MDBs may become more risk-averse at a time when reform momentum is finally translating into bolder commitments. Without safeguards to protect callable capital and creditworthiness, the sector could regress shrinking the space for risk-taking just when it’s most needed.

Yet signs of hope stand out. Much-welcomed progress in the channeling of Special Drawing Rights (SDRs) through MDBs is set to continue, even if legal and political obstacles remain. And innovations in the optimization of MDB balance sheets continue—the onset of a new wave of large-scale multilateral-led securitizations will hopefully open up a new role for capital deployment to high-quality multilateral assets. IDB Invest’s landmark ‘Scaling4Impact’ USD 1 billion transaction has mobilized institutional capital while freeing up to half a billion in additional lending capacity for new projects. This builds on a new and compelling ‘originate to share’ business model that can position MDBs and DFIs no longer as ‘holders’ but as ‘poolers’ of assets.

Moreover, the strengthening of Southern-led MDBs as anchors of the development finance discussion in the geographies they lead in will bring greater quality and accuracy to local solution development, stronger political buy-in to sustain outcomes, and more robust origination capacity in the markets where vetted pipelines are scarce.

These challenges and opportunities all point us to a single call to action—we must continue to encourage MDB and DFI strategic risk-taking, measure risk better, and shift expectations from within. Dalberg’s own recent evaluation of the USDFC’s Portfolio for Impact and Innovation (PI2) illustrated how an intentionally risk-taking portfolio can deliver developmental impact and additionality alongside positive financial returns while managing elevated financial risk.

Deepening the Toolkit for More Accurate Risk Calibration

Even when capital is available across key public finance institutions and investment enablers, capital rarely flows to where it’s most needed. One reason: risk is often misperceived—especially in emerging markets, where global benchmarks do not capture subnational or asset-level realities. In addition to shifting our own expectations and creating a strategic permission structure to be intentionally catalytic, we must also rebuild the infrastructure for how risk is calibrated in the first place—this ranges from driving credit rating agency reform to investing in higher quality localized data to build investor confidence and facilitate market development.

Critics point to how the decision-making processes and in-built bias of the global credit rating infrastructure play a role generating uneven outcomes in the creditworthiness status of many emerging economies. Reforms required include increased transparency, deeper oversight, and greater inclusion in how global credit rating methodologies are designed and implemented. We must also push for the strengthening of local credit rating agencies (CRAs), bolstered by evidence of their critical role in generating sustained economic impact.

Several proposals are gaining traction to support this shift. For instance, African finance ministers have proposed the establishment of an African Credit Rating Agency (AfCRA) to improve regional credit assessments and address perceived biases by major global credit rating agencies. Investments in tools like the Credit Rating Online Data Platform, with support from the African Development Bank (AfDB) and Prosper Africa, can focus on tackling underlying data quality and assurance issues and boosting data generation capacity.

Addressing the misperception of risk in emerging markets requires a multifaceted approach. By investing in localized data infrastructures and reforming credit rating agency practices, institutions can better capture subnational and asset-level realities.

Conclusion

Capital won’t flow smarter on its own. It takes deliberate choices in how we manage debt, reform institutions, and recalibrate risk. All three of these actions can ultimately help the international financial architecture—as it is currently set up—to better set and manage expectations around private capital mobilization, and drive a more sustained, higher-quality (even if not always higher-volume) flow of capital to the markets that need it most.

At Dalberg, we’re working with public finance leaders to turn these priorities into practical, scalable solutions. To learn more about how to partner with us contact: