The International Monetary Fund and Deforestation: Analyzing the Environmental Consequences of Conditional Lending

International financial institutions (IFIs) have in recent years increased the volume of their financing in an effort to support national and global policy challenges—yet surprisingly little is known about the environmental impacts of their finance.

A new technical paper from the Task Force on Climate, Development and the IMF investigates the environmental implications of the International Monetary Fund (IMF)’s lending toolkit by documenting its advice on forest management and examining the association between IMF programs and deforestation. It finds that each IMF loan is, on average, associated with a decrease in forest area of 258km², almost the size of the Maldives.

Deforestation is a key driver of biodiversity loss and the third largest source of carbon dioxide emissions in the world economy.

Key findings:

• The IMF rarely targets forest management in its programs. Of 35,915 conditions administered to low- and middle-income countries in the last four decades, only 34 pertain explicitly to forest management.
• Between 2000-2020, IMF programs are, on average, associated with an increase in the level of annual deforestation by 9.2 percent.
  • Assuming an average three-year duration of an IMF program, this implies that each IMF loan is associated with a decrease in forest area of 258km², almost the size of the Maldives.
• While IMF programs may not be explicitly designed to increase deforestation, they are associated with borrowing countries extracting economic value from deforestation as they face fiscal consolidation.
  • Put another way, the estimates suggest that some deforestation in emerging market and developing economies has taken place over the last two decades which may not have occurred in the absence of an IMF program.

The authors ultimately argue that IFIs, as they revamp their operations in line with climate and development goals, need to explicitly model the environmental impact in their program design to ensure alignment with the Paris Agreement.