The IMF’s allocation of $ 650 billion in special drawing rights in August has long been encouraged and widely welcomed. But his follow-up proposal to channel finance to the countries most vulnerable to the climate is so flawed that it would exclude many of the most needy.

MANILA / SANTIAGO – The International Monetary Fund appears determined to dilute one of the best examples of global cooperation in response to economic disruption induced by the COVID-19 pandemic and climate change. He needs to change course now, before it’s too late.

The IMF’s allocation of $ 650 billion in Special Drawing Rights (SDRs, the Fund’s reserve assets) in August has long been encouraged and widely welcomed. Given the strict IMF rules, it was clear from the start that the vast majority of SDRs would go to countries that did not need them. As a result, G7 leaders have pledged to reallocate more than $ 100 billion of their allocations to “countries most in need of … pandemic. [support to] stabilize their economies and put in place a green and global recovery… aligned with common development and climate objectives. ”

While these measures seem small compared to the $ 17 trillion rich countries spent to support their economies during the pandemic, they were no less important. In October, just two months after the allocation, the G20 backed an IMF and World Bank plan to develop and implement a Resilience and Sustainability Trust, which would allow rich countries to channel their allocations. to vulnerable low- and middle-income countries. to economic shocks. Because the RST could be used to address the risks of climate change, it would fill a glaring gap in international finance. The IMF has announced that it will have a proposal ready for its 2022 spring meetings.

But will this be enough?

Extreme weather events like floods and hurricanes can trigger financial instability in vulnerable countries as they destroy the stock of capital and sources of foreign exchange. Likewise, countries dependent on fossil fuel exports face fiscal uncertainty as demand for oil and gas declines to meet climate targets. In either case, the ripple effects can negatively affect the trade. Countries facing such conditions must undertake a structural transformation of their economies. But many low- and middle-income countries do not have access to the cost-effective and flexible financing they need.

A well-designed TSR would make the IMF’s criteria for resource allocation and country eligibility more adaptable. Unfortunately, five design flaws in the IMF’s approach would make the planned TSR ineffective for most climate-vulnerable countries.

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The first flaw concerns eligibility. IMF programs discriminate on the basis of income, but not climate change. While the G20 has explicitly called for the establishment of a TSR covering low- and middle-income climate-vulnerable countries, the IMF has adopted a narrow interpretation that middle-income countries would only be eligible if they are they do not exceed a certain income. threshold.

But traditional measures of income are a poor criterion for determining eligibility. The IMF must adapt its thinking to real circumstances and ensure that eligibility is based on climate vulnerability. It should not be controversial to incorporate into the criteria simple measures such as sensitivity to physical climate risks such as floods, droughts and hurricanes, or economic factors such as the share of fossil fuel exports in the total. foreign exchange earnings.

Second, there is a problem with the conditions and the accessibility of funds. Developing countries lack the fiscal space to mobilize domestic resources to cope with the structural changes their economies need. Many also do not have access to external resources on reasonable borrowing terms. But the IMF proposes that RST users be charged the SDR interest rate (currently five basis points and increasing) plus a margin of up to 100 basis points. These rates are not significantly different from what the Fund currently charges middle-income countries. More problematic are the access limits, which are said to be 100% of the quota, or less than the SDR equivalent of $ 1 billion. These guidelines would do little to meet the funding needs of all countries except the smallest.

The third flaw is the IMF’s insistence on conditionality. The Fund views RST as a supplement to existing programs. It is deeply disturbing. According to the IMF’s own research, its existing lending facilities are stigmatized due to their high levels of conditionality and low levels of performance in terms of economic recovery and other social outcomes. RST was meant to be a new instrument that recognizes and channels resources to countries most vulnerable to climate change. But what the IMF is planning is repackaging business as usual.

Figures 1 and 2 show that climate-vulnerable countries did not seek IMF support, even during the pandemic, when the Fund experienced the greatest use of its facilities. Adding a small top-up at the same price and at the same level of conditionality will essentially block the funding needed for climate resilience.

The fourth flaw is that even if the IMF is only developing a climate change strategy, it would lead the RST. Multilateral and regional development banks are also prescribed SDR institutions, and they have a longer-term vision and stronger experience in climate policy. They must be part of the governance of the RST.

Finally, there is the issue of scale. IMF Managing Director Kristalina Georgieva said the RST would be funded initially with around $ 30 billion and then increased to $ 50 billion. While RST alone cannot be expected to replace the funding needed to deal with the increasingly intense effects of climate change, the needs assessment published by the Standing Committee on Finance of the United Nations Framework Convention on Climate Change puts the figure at $ 6 trillion, and other estimates are significantly higher. At the recent United Nations Climate Change Conference (COP26), the Prime Minister of Barbados, Mia Amor Mottley, whose country is one of the most vulnerable in the world, proposed an annual increase in SDRs of 500 billion dollars over 20 years to fund resilience and sustainability.

IMF shareholders and stakeholders need to reconsider the design of the RST. To be successful, it must include all climate-vulnerable developing countries, regardless of their income level. It must provide low-cost financing that does not compromise members’ debt sustainability and is not tied to pre-existing IMF programs with onerous conditionalities. It must be governed by the key players in development finance institutions. And it has to evolve appropriately over time.

The IMF should make the necessary adjustments to its TVD proposal. If it cannot, creditor countries should refrain from capitalizing it.

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