It’s the IMF’s Turn: An Evolution for Development and Climate Change Goals
By Marilou Uy and Rishikesh Ram Bhandary
Policymakers, especially from the Global South, now agree that achieving both climate goals and the United Nations 2030 Sustainable Development Goals will require reforming the international financial architecture.
While the World Bank’s ‘evolution’ process that kickstarted at the 2022 International Monetary Fund (IMF)/World Bank Annual Meetings reflects a sharper focus on climate change, its twin institution, the IMF, remains lacking in ambition and urgency despite some notable strides in integrating climate into its operations. As the leading multilateral institution charged with maintaining financial health of the global economy, however, the IMF must be central to the effort in supporting an investment push that is both fiscally sound and financially stable. In 2021, the IMF rightly confirmed climate change as a “macro-critical” policy challenge, and mitigating severe macroeconomic consequences of climate change in the future demands urgent and immediate action now.
In a new report, the Task Force on Climate, Development and the IMF builds on three years of rigorous research and presents a vision for a transformed IMF that prioritizes a development-centered approach to climate and facilitates the ‘big investment push’ needed to meet development and climate goals. The report includes an Action Agenda that details 22 concrete policy reforms the IMF should undertake within the next 12 months across its three key areas of surveillance, lending and global leadership.
The Action Agenda requires a swift reinvigoration of the Fund’s vision and purpose given the role it must play in supporting the transition to a climate-resilient economy. The IMF must be ready to support members grappling with climate shocks and intersecting crises as well as facilitate the rapid mobilization of resources.
Reforming surveillance
Currently, the IMF’s surveillance – wherein it engages in regular health checks of member states’ economies – does not account for the full range of climate risks and opportunities. Without these additional dimensions, the policy advice that the IMF is providing is not complete.
Core to recalibrating the Fund’s surveillance activities will be reforming debt sustainability analyses (DSAs), which should include not only climate risks – how might drought, for example, strain a country’s economy? – but also the opportunities presented by green investments. While the IMF has taken steps in this regard, it needs to incorporate realism about the prospects of mobilizing the private sector and the continued salience of domestic and international public finance.
Additionally, the IMF has, to date, taken a “one-size-fits-all” approach that relies on carbon pricing. Previous Task Force research, however, shows that getting the price right on carbon alone will not solve climate change, particularly because it will not be sufficient to offset the financial strain countries will bear as they transition away from fossil fuels. While an effective tool, carbon pricing must be used in tandem with investments in electricity transmission; affordable technologies in iron, steel and cement; and other policies specific to country circumstance.
The IMF’s October 2023 Fiscal Monitor highlighted a trilemma that policymakers face in trying to optimize climate ambition, political feasibility (in terms of taxation and public spending) and debt sustainability. A key factor driving the trilemma, however, is the cost of borrowing. Affordable and predictable long-term finance will have to play a major role in making sure that countries can make those investments without undermining their fiscal health. For many countries this means far greater and easier access to concessional and debt-free financing.
Finally, given its global mandate, the IMF has a special responsibility to identify cross-border effects of climate change, including how national policy responses have spillover consequences. While the IMF has started to track these risks, it will need a far more systematic approach to climate-related spillovers.
Aligning the lending toolkit
With climate impacts intensifying and the risks of a disorderly transition, the IMF will need to be prepared to play the role of a shock absorber and support countries in managing medium-term risks. It can do this through its lending toolkit.
First, the IMF should explicitly commit to align itself with the Paris Agreement. Its program conditions should not entrench fossil fuel infrastructure in developing economies, leaving them more open to transition risks, nor should the IMF advise cutting spending on climate resilience, which would in turn leave countries unprepared for intensifying climate impacts.
Second, it should revise and enhance its existing tools. The Resilience and Sustainability Facility (RSF) has become a major pillar of the IMF’s support on climate change, though existing eligibility requirements limits what countries can access it. These requirements should be relaxed, and program conditions should support ambitious action, rather than surface-level reforms.
Furthermore, embedding debt pause clauses in financing arrangements would provide borrowing countries with the space to focus on economic recovery in the aftermath of catastrophic events. The Fund’s Catastrophe Containment and Relief Trust also has substantial potential, as it provides debt relief for poor countries hit by natural disasters, but it is in immediate need of replenishment.
Finally, the IMF’s program design should support a big investment push. The IMF’s existing approach of contractionary fiscal consolidation programs have not shown to generate the growth necessary to buttress a sustainable recovery. It needs to revise its approach to conditionalities in a way that supports resource mobilization to achieve development and climate change goals.
Enhancing global leadership
The need for such an unprecedented investment push demands far greater international collective action, and that is where the IMF has an important global leadership role. Critically, the IMF should underscore the investment gap that exists and regularly assess progress made in filling the gap. Furthermore, through its flagship reports, it could also help identify the concessional and grant resources required to ensure that countries are able to meet their climate investments without accentuating fiscal and financial risks. The IMF should also consider issuing Special Drawing Rights (SDRs) on a regular basis to support liquidity needs across developing economies.
The IMF is particularly well-positioned to inform sovereign debt restructuring negotiations. The Fund, especially through its platform in the Global Sovereign Debt Roundtable, should build the case to embed climate and development investments at the heart of all debt restructuring exercises.
It is worth noting that the Task Force acknowledges that scale of the reforms that the Action Agenda puts forward, but by the same token, it also acknowledges the urgency of the climate crisis. To help hold the IMF to this urgent timeline, the Task Force calls on the IMF Managing Director to deliver a progress report at the 2025 Annual Meetings. It is critical that member states equip IMF management with the requisite support and resources to embark on this ambitious new evolution. There is no fit-for-purpose international financial architecture without a transformed IMF.
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