Originally posted in The Daily Star on 8 July 2026
For more than seven decades, multilateral development finance has driven global development by improving a number of indicators. For Bangladesh, development finance has been instrumental in financing roads, energy, climate resilience, healthcare, education, and social protection, among others. However, the Multilateral Development Finance 2026 report, prepared by the Organisation for Economic Co-operation and Development (OECD), warns of this system having reached a critical turning point: declining donor contributions, rising geopolitical tensions, and intensifying competition for limited resources are reshaping development finance today. Rather than a temporary slowdown, the report argues that the world is entering a fundamentally new era with profound implications for developing countries like Bangladesh.
The report identifies three interconnected forces remoulding multilateral development finance. The first is tightening fiscal space in advanced economies. Over the past several years, governments in Europe and North America have been grappling with rising public debt, ageing populations, slower economic growth, and mounting demands for higher defence spending. Foreign aid budgets, once politically protected, are increasingly being viewed through the lens of domestic fiscal consolidation.
In 2024, contributions from OECD’s Development Assistance Committee (DAC) members to multilateral development organisations decreased by over 15 percent. By 2027, these contributions could decline by 23-30 percent. Eleven major donor countries have already announced reductions in official development assistance (ODA). Together, they account for roughly two-thirds of total DAC contributions to multilateral institutions. This reflects a structural change in political priorities.
The second force is geopolitical fragmentation. For decades, multilateral development cooperation has rested on broad international consensus that global challenges require collective solutions. Today, that consensus has weakened. Strategic competition among major powers, regional conflicts, rising nationalism, and a growing emphasis on economic security have shifted governments’ priorities from collective action towards national interests.
The third force is the evolving nature of development. When the Bretton Woods institutions and the United Nations system were established, development finance focused primarily on rebuilding economies and reducing poverty. Today, multilateral institutions are expected to finance climate action, pandemic preparedness, biodiversity conservation, food security, digital transformation, humanitarian emergencies, migration, conflict prevention, and energy transitions.
These are all legitimate priorities. The problem is, they are increasingly competing for a shrinking pool of concessional resources. This creates a difficult policy dilemma. Should scarce concessional resources be directed towards the poorest countries? Should they finance global public goods, such as climate mitigation? Or should they respond to humanitarian crises, the frequency and scale of which continue to increase? There are no easy answers.
Interestingly, the OECD report notes that the total multilateral development finance reached a record $296 billion in 2024 despite declining donor contributions. Much of the recent increase has been driven by multilateral development banks (MDBs), which have expanded lending by drawing on their balance sheets and optimising their capital structures. Despite tighter donor budgets, institutions such as the World Bank and regional development banks have increased their lending capacity.
However, this expansion has limits. Balance sheet optimisation cannot indefinitely compensate for declining capital replenishment. More importantly, grant-based organisations, particularly those within the UN system, are already under financial strain. Humanitarian agencies have begun to reduce operations, delay programmes, freeze recruitment, and narrow their geographic coverage.
Perhaps the most important insight of the OECD report concerns the shifting balance between grants and loans. As grant financing contracts decline and multilateral development banks assume a larger role, development finance risks increasingly becoming debt finance.
For many middle-income countries, this may be manageable. For poorer countries, however, the implications are more serious. Low-income and climate-vulnerable countries have to rely on concessional loans and grants because commercial borrowing is either prohibitively expensive or unavailable. If concessional resources become scarcer, countries with the greatest development needs may face an impossible choice between cutting essential investments and accumulating unsustainable debt.
This concern is particularly relevant given that many developing countries are already experiencing elevated debt burdens. Debt servicing is consuming an increasing share of government budgets. This leaves less fiscal space for education, healthcare, infrastructure, and climate adaptation.
Bangladesh sits at the centre of these emerging challenges. The country is approaching LDC graduation at a time when access to concessional finance will naturally become more limited. Simultaneously, it faces rising investment needs to sustain growth, strengthen climate resilience, modernise infrastructure, improve education and healthcare, and create productive employment for a young labour force. The traditional development financing model, which relies heavily on concessional external finance, is disappearing fast.
In this context, multilateral development banks will remain important partners. Climate finance opportunities may continue to expand. Blended finance mechanisms are likely to become more prominent. Private capital mobilisation will receive greater emphasis. The overall financing environment, however, is becoming more competitive. Therefore, Bangladesh and many other developing countries must rethink their development financing strategies.
The first priority is to strengthen domestic resource mobilisation. Countries that continue to collect less than 10 percent of GDP in tax revenue will find it increasingly difficult to finance ambitious development agendas as external concessional resources decline.
Second, institutional quality will become even more important. International investors and multilateral lenders are increasingly assessing governance, regulatory quality, public financial management, and project implementation capacity alongside macroeconomic indicators. Countries with stronger institutions will be better placed to attract both public and private financing.
Third, developing countries must diversify their sources of finance. Domestic capital markets, green and diaspora bonds, blended finance, public-private partnerships, and institutional investment will all become increasingly important complements to traditional development assistance.
Fourth, climate finance should be integrated into broader development planning rather than treated as a separate funding stream. As climate becomes increasingly central to international financing decisions, countries capable of preparing high-quality, bankable climate projects will enjoy a comparative advantage.
Finally, development planning itself must become more selective. Governments can no longer assume that every worthwhile project will secure concessional financing. Stronger project prioritisation, better cost-benefit analysis, and more efficient public investment management will therefore be essential.
The OECD report concludes that the current crisis should not be viewed merely as a financial contraction but as an opportunity to redesign the multilateral system around clearer mandates, stronger coordination, and more sustainable burden-sharing. It also implicitly conveys another message, particularly relevant for countries like Bangladesh: the future of development finance will increasingly depend not only on what donors are willing to provide but also on how effectively developing countries prepare to mobilise and utilise diverse sources of finance.
Dr Fahmida Khatun is an economist and executive director at the Centre for Policy Dialogue (CPD).
Views expressed in this article are the author’s own.
