The IMF’s allocation of $ 650 billion in Special Drawing Rights in August was long encouraged and widely welcomed. But his follow-up proposal to channel finance to climate-vulnerable countries is so flawed that it would exclude many of those most in need.

MANILA / SANTIAGO – The International Monetary Fund (IMF) seems determined to dilute one of the best examples of global cooperation in responding to the economic disruptions caused by the Covid-19 pandemic and climate change. You must change course before it is too late.

The allocation of $ 650 billion in Special Drawing Rights (SDRs, the IMF’s reserve asset) that took place in August had been called for for a long time, and was very well received. From the beginning it was clear that, given the strict rules of the IMF, the vast majority of SDRs were going to go to countries that did not need them. That is why the G7 leaders pledged to redirect up to 100 billion dollars of their allocations to the “countries most in need of (support to face) the pandemic, stabilize their economies, and carry out a green and global recovery (…) aligned with shared development and climate goals ”.

These actions seem small compared to the $ 17 trillion that rich countries spent to sustain their economies during the pandemic, but they are significant. In October, just two months after the allocation, the G20 endorsed an IMF and World Bank plan to design and implement a Resilience and Sustainability Fund (FRS), through which rich countries can channel their SDR to countries of low and middle income vulnerable to economic shocks. As this tool could be used to deal with risks related to climate change, it would solve an obvious flaw in the international financing system. The IMF announced that it would have a proposal ready for its April 2022 meeting.

But will it be enough?

Extreme weather events (eg floods and hurricanes) can cause financial instability in vulnerable countries by eliminating stocks of capital and sources of foreign currency. And the decline in demand for gas and oil to meet climate targets creates fiscal uncertainty in countries dependent on the export of fossil fuels. In both cases, trade can be affected and a structural transformation of the economy will be necessary. But many low- and middle-income countries do not have access to flexible and cost-effective sources of finance to enable them to do so.

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A good design of the FRS demands greater adaptability of the criteria used by the IMF for the allocation of resources and for the selection of the recipient countries. Unfortunately, the IMF proposal contains five design errors that make it ineffective for most climate-vulnerable countries.

The first flaw has to do with the selection criteria. IMF programs are income dependent, but climate change does not make those distinctions. The G20 explicitly called for an FRS that takes into account climate-vulnerable low- and middle-income countries, but the IMF adopted a narrow interpretation that excludes middle-income countries above a certain threshold.

Traditional income indicators are not a good selection criterion. The IMF must adapt to real circumstances and take into account climate vulnerability. The incorporation of simple indicators such as susceptibility to climatic risks of a physical nature (floods, droughts, hurricanes, etc.) or economic factors such as the share of fossil fuels in total foreign exchange earnings should not be controversial.

The second problem has to do with the conditions and accessibility of the funds. Developing countries do not have fiscal room for maneuver to mobilize domestic resources to enable them to make the structural changes that their economies need. Many also lack access to external resources on reasonable financial terms. But under the IMF proposal, FRS users would have to pay the SDR interest rate (which is now five basis points and rising) plus a spread of up to 100 basis points. These are not very different rates from what the Fund is charging middle-income countries. More problematic still is the access limit, which would be 100% of the quota, or less than the SDR equivalent of $ 1 billion. With these rules, the program will only help solve the financial needs of the smallest countries.

The third flaw is the IMF’s insistence on conditionality. The Fund views the FRS as an add-on scheme to its pre-existing programs, and this is very concerning. According to research by the IMF itself, its current credit mechanisms have a bad reputation due to the high levels of conditionality and the poor performance they show in terms of economic recovery and other social indicators. The FRS was supposed to be a new instrument to recognize and channel resources to the countries most vulnerable to climate change. But the IMF proposal is the same old thing in another way.

Climate-vulnerable countries did not ask for IMF help even during the pandemic, when use of the Fund’s mechanisms was at peak levels. Adding a small additional program for the same price and with the same level of conditionality essentially immobilizes funds that are much needed to finance climate resilience measures.

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The fourth flaw is that the FRS will be under the leadership of the IMF, which is just beginning to design a strategy for climate change. Multilateral and regional development banks are also authorized holders of SDRs, and they have a longer-term outlook and better track record on climate policy. They have to be part of the governance structure of the FRS.

The last problem is one of scale. IMF Managing Director Kristalina Georgieva said the FRS will have an initial budget of about $ 30 billion which will later be increased to $ 50 billion. Leaving aside the fact that the FRS cannot be a substitute for the financing needed to deal with the increasingly intense effects of climate change, an evaluation by the permanent commission on financing of the United Nations Framework Convention on Climate Change estimates that the figure needed is $ 6 trillion (and there are other estimates considerably higher).

At the recent United Nations Climate Change Conference (COP26), the Prime Minister of Barbados (one of the most vulnerable countries) Mia Amor Mottley proposed an annual increase in SDR by 500,000 million dollars over 20 years to finance measures of resilience and sustainability.

IMF shareholders and stakeholders need to reconsider the design of the FRS. Its success depends on including all climate-vulnerable developing countries, whatever their income level. It must provide low-cost financing that does not make member countries’ debts unsustainable and is not tied to pre-existing IMF programs subject to heavy conditionality. It should be under the direction of key stakeholders in development finance agencies. And its volume has to adapt over time.

The IMF should make the necessary changes to its FRS proposal; if it cannot do so, creditor countries should refrain from capitalizing it.

* The authors are members of the Working Group on Climate, Development of the International Monetary Fund.

The authors

Sara Jane Ahmed is Financial Advisor on Vulnerability to the G20 Finance Ministers.

Alicia Bárcena is the Executive Secretary of ECLAC.

Daniel Titelman is director of the Economic Development Division of the United Nations Economic Commission for Latin America and the Caribbean.

Copyright: Project Syndicate, 2020

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