Webinar Summary: Make or Break? Mainstreaming Climate Policy at the IMF

With its universal role and influence over economic policy, the International Monetary Fund (IMF) can make or break countries’ climate-related commitments. The IMF has the mandate to safeguard the stability of the global financial and monetary system. How the IMF pursues its mandate while facilitating action on climate change is a cornerstone policy challenge.

On Thursday, November 18, 2021, the Boston University Global Development Policy Center and Recourse hosted a webinar featuring Sara Jane Ahmed, Shona Riach, Sargon Nissan, Daniel Titelman and Laveesh Bhandari to discuss how the IMF can mainstream climate change policy into its work and, capitalizing on the 2021 United Nations Climate Change Conference (COP26), which priorities should shape the IMF’s new climate strategy. Additionally, the panel considered how the international community can ensure the IMF’s approach protects a green and inclusive recovery, above all in developing countries?

To begin, Sara Jane Ahmed, Finance Advisor to the Vulnerable Group of Twenty (V20) and a Member of the Task Force on Climate, Development and the IMF, emphasized the importance of pre-arranged financing and investing early in resilience. Waiting for physical shocks to transmit through the financial system would not only be too costly, but would also roll back hard-won development gains. She also underscored the need to focus on de-risking investments and credit enhancements to ensure the trillions of dollars in climate finance discussed at COP26 reach the most vulnerable countries.

Ahmed then identified three clear roles for the IMF. First, the IMF can alert governments on how their climate inaction not only impacts the most vulnerable communities, but also puts their own economies at risk. Second, the IMF can engage in independent tracking of climate finance delivery. Third, IMF advice can help inform the most efficient composition of climate finance, while considering debt sustainability and climate investment needs.

Responding to a question about where the IMF can most add value, Daniel Titelman, Director of the Economic Development Division of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) and a Member of the Task Force on Climate, Development and the IMF, stressed the need for the IMF to adopt a holistic vision of development – one that integrates macroeconomic and financial aspects with development. He urged viewing macroeconomic stability not simply as an end to itself, but with the larger goal of supporting development in mind.

Titelman emphasized the need to go beyond surveillance and incorporate climate change into the IMF’s lending programs. He also called for greater attention to how the IMF can help mobilize resources, the kinds of instruments that can be used to deploy finance, the need to expand time horizons and pressed for convergence on a definition of international climate finance.

Next, Sargon Nissan, IMF Programme Lead at Recourse, shared two recent studies by Recourse on the integration of climate policy into the IMF’s work. One study found that IMF efforts on bilateral surveillance were unsystematic and ad hoc, and the other shows the Fund’s capacity building efforts have left an accountability gap among stakeholders. As a result, he argues mainstreaming climate will require integration of IMF climate policy positions into bilateral surveillance approaches and far greater transparency about the IMF’s climate policy content.

Nissan then described the IMF’s recent efforts to incorporate climate change as a positive step, noting the integration of climate change into the IMF’s Comprehensive Surveillance Review earlier this year included some positive reforms.

Agreeing with Titelman, Nissan underscored the importance of longer-term horizons being embedded into all IMF work, including lending.

To fulfill its mandate on climate change, Nissan said the IMF will require a dramatic shift in its accountability structures, transparency, expertise and ability to partner with other financial institutions. He also pointed to the need to embed climate into the Fund’s work in a manner that does not rely on exceptional commitments of the senior leadership.

Following this, Shona Riach, UK Executive Director for the IMF, said the Fund’s primary responsibility is protecting and promoting economic and financial stability. She said the Fund has recognized that climate change poses systemic risks. Agreeing with Titelman, Riach noted the importance of addressing both short- and longer-term macroeconomic stability questions.

She also highlighted the need to embed climate change systematically into the IMF’s work. The UK Executive Director welcomed the new staff recruitment effort and stressed that it would have a major positive impact. She underscored the importance of providing a macroeconomic case for climate action and said the Fund’s surveillance and technical assistance work would assist with this.

Riach also noted that all international organizations need to hasten and play their part to tackle climate change and said the IMF had responded to the calls from its membership to step up.

During the discussion session, Ahmed stressed the importance of generating analytics to help the international community understand how risks are transmitted through the financial and economic systems. She identified pre-arranged disaster risk financing as a vital tool and said the IMF’s early engagement in disaster financing would help foster a cost-effective response.

Titelman noted the IMF’s key role in defining fiscal and financial frameworks and said the central challenge is to address stability in the context of systemic risks, calling for greater analytical studies to understand this issue. Citing an example of fossil fuel exporters, he also said transitioning towards a net-zero economy would create fiscal challenges, while simultaneously increasing investment needs for clean energy.

Nissan then called on the IMF to broaden its engagement with stakeholders in its surveillance and technical assistance activities. He said the Fund should take into account not just nationally determined contributions (NDCs), but also broader national climate policies.

Riach said the IMF’s approach to climate change has the broad backing of its membership. She emphasized the centrality of surveillance in the Fund’s work on climate change and said lending still requires a closer look. She emphasized the need to understand where the IMF’s lending would most add value relative to the lending activities of other international institutions.

Riach said the Fund was already moving in the right direction when it came to its Article IV reports and noted there has been significant ongoing work to ensure IMF staff have the requisite skill and expertise.

Responding to a question on the IMF’s new Resilience and Sustainability Trust (RST), Riach said the RST should play a complementary role to existing institutions and programs. By providing financing on a longer-term basis than currently available, countries would embark upon structural change and make longer-term investments. A recent policy brief by the Task Force on Climate, Development and the IMF presented a possible design for the RST to help distribute the IMF’s historic $650 billion in Special Drawing Rights (SDRs) for rebuilding the global economy.

Titelman, responding to a question about the challenges for low-income countries and vulnerable states, said these countries face the dual task of addressing historical, structural challenges and climate change. He drew attention to the impact that limited fiscal space has on the ability of countries to invest in climate change mitigation and adaptation. He noted that while Caribbean Small Island Developing States have public debt management challenges, they did not reflect the quality of macroeconomic risk management in those countries. Rather, these countries have had to acquire debt to rebuild after disasters strike.

Ahmed also called on greater attention to the factors that prevent countries from investing in adaptation. She said RST eligibility should be accorded to both low-income countries and middle-income countries, and noted that the RST should not be confined to those with existing IMF programs.

Echoing Barbados Prime Minister Mia Mottley’s recent call for an allocation of $500 billion in SDRs every year for 20 years, Ahmed noted that this amount is just a fraction of the $25 trillion spent by advanced economies in quantitative easing programs.

Riach said the RST’s resources would help increase the total amount of financing in an IMF program. This RST top-up would have a longer maturity. She also said that the RST needs to be viewed as a part of a broader picture and won’t be the whole answer to the problems of climate change.

Riach also said that to date, the design of the RST has not been settled. She expected pre-existing programs would qualify, including preventive programs, such as the Flexible Credit Line. On the use of conditionalities, she said that like all IMF programs, the RST would include targeted conditionality. She also noted that while some countries may want to re-allocate their SDRs to the RST, others may recycle theirs into the IMF’s Poverty Reduction & Growth Trust, the Fund’s lending arm to the poorest countries.

Noting that about two-thirds of SDRs will flow towards richer countries, Nissan suggested viewing them akin to the problem of vaccine hoarding. As long as only limited amounts of finance are available to respond to the crisis, the world will continue to experience the consequences of the climate risk.

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