As the International Monetary Fund is poised to inject $650 billion into the global economy, indebted low and middle-income countries are exploring ways to leverage the relief into green investments.
In recent months, the plea of vulnerable nations for financial support has risen to the top of the international agenda.
Revenues from the commodity trade and tourism collapsed in 2020, leaving many nations struggling to meet their basic needs, let alone invest in sustainable development.
Cash-strapped governments in Africa, Latin America and the Caribbean do not have the luxury of borrowing cheaply to finance a green recovery from the coronavirus pandemic.
More than half of developing countries are estimated to be in debt distress, with interest payments accounting for at least a quarter of governments’ tax revenues in 2020 and raising to 40% in some countries, according to Jubilee USA Network.
And the costs of dealing with intensifying climate impacts such as drought, flooding and tropical storms have not gone away.
In some African countries, up to 10% of GDP has been diverted to adapting to climate change, African finance ministers said in a statement this week. “Our fiscal buffers are now truly depleted,” they wrote.
“The most consequential climate decision made in the next few months to five years will be made by the IMF, the G7, the G20 and the US Treasury as part of global pandemic response policies,” Eric LeCompte, executive director of Jubilee USA Network, told Climate Home News.
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A debt repayment suspension initiative by the G20 has brought some relief, but excludes middle-income countries, such as small island states, that have been hit hard by the pandemic and climate impacts.
In Belize, which suffered intense flooding following the passage of hurricanes Eta and Iota last year, crops were washed away and homes and road infrastructure destroyed. Its debt-to-GDP ratio reached 130%, yet international support has been limited.
“We find ourselves underwater and at risk of sinking even deeper,” Christopher Coye, a minister of state in Belize’s finance ministry, told Climate Home News in an email, describing the response from international financial institutions as “lethargic” and “constrained”.
Unless the global community acts “fast, proportionally and comprehensively,” the health crisis could turn into a debt crisis, Mia Mottley, prime minister of Barbados, told a conference of African ministers on Monday.
“We simply do not have the money, the fiscal space nor the policy space needed to build the green, resilient and inclusive development of which we speak,” she said.
With around three quarters of climate finance delivered as loans, support to address the climate crisis adds to the debt burden of recipient countries.
Short-term debt relief may provide “a momentary boost in climate action but at the same time we are spiralling countries in a debt trap,” Zaheer Fakir, chief policy advisor in South Africa’s environment ministry, told Climate Home News.
Mottley, of Barbados, has previously made the case for climate and debt vulnerabilities to replace GDP as central criteria for accessing concessional finance.
“If we have to set but one goal over the course of the next two years… then the most important goal is to be able to settle the issue of vulnerability criteria because that is the only thing that is going to unlock access to oxygen, namely finance,” she said.
Debt relief is one of four priorities at a UK-hosted virtual summit on climate and development on 31 March. The event is expected to identify practical ways to support climate-friendly investment in poorer countries, in preparation for UN climate negotiations in Glasgow this November.
Anne-Marie Trevelyan, a UK energy minister and Cop26 champion on adaptation and resilience, recognised there was an “enduring sense of anxiety” over debt challenges and access to climate finance among developing nations.
Defining vulnerability criteria for accessing concessional finance “will be part of the discussions” at next Wednesday’s event, she said. “These are some of the issues we need to think differently and much more holistically about in order to help our climate vulnerable friends and partners.”
The outcomes of the event, Trevelyan said, will be carried forward by prime minister Boris Johnson and chancellor Rishi Sunak to the G7, G20 and the Commonwealth heads of government meeting ahead of Cop26.
Rachel Kyte, dean of the Fletcher School and former sustainable energy representative for the UN secretary general, told Climate Home News debt relief was “a pre-requisite” for success in Glasgow.
“We need to think big and invest at scale,” she said. “I don’t see how Cop26 works politically without a commensurate effort to invest in infrastructure, agriculture and resilience.”
The election of Joe Biden to the White House puts more options on the table. In one of his first executive orders, Biden mandated treasury secretary Janet Yellen to develop a strategy to align climate finance policy, including debt relief initiatives, with the goals of the Paris climate agreement.
With US backing, the International Monetary Fund (IMF) is discussing issuing the equivalent of $650 billion in liquidity, known as special drawing rights (SDRs) into the global economy. As the US holds the largest voting power at the IMF, no decision can be made without its approval.
Great news: IMF Executive Directors conveyed broad support for considering an SDR allocation of ~$650 billion!
Key step to ensure all members, particularly those hardest hit in the crisis, have higher reserve buffers and more capacity to help their people and support recovery.
— Kristalina Georgieva (@KGeorgieva) March 23, 2021
The IMF has issued emergency SDRs only four times before, most recently in 2009.
This allocation of IMF reserve assets would provide a short-term response to the liquidity crisis and free up funds to pay for vaccines and food imports for example, or pay off debt.
The proposal pales in comparison to campaigners’ demands. More than 200 civil society groups have called for SDR allocation of up to $3 trillion dollars to meet countries’ needs in a “decisive and sustainable way”. The IMF conservatively estimated emerging economies’ need $2.5 trillion to bounce back from the pandemic.
By default, SDRs are allocated to countries proportionally to the size of their economy, which means richer nations would receive most of the support. Developing countries would automatically receive an estimated $220 billion they could use without conditionality.
Last week, G7 finance ministers agreed to work with the IMF to explore how wealthy countries could voluntarily redistribute their share to emerging markets and low-income nations.
IMF head Kristalina Georgieva said she would present a formal proposal by June. The issue will take centre stage at the IMF spring meeting next month.
Climate and debt vulnerability should be key criteria for reallocating support. That was among the top recommendations by experts consulted during workshops last month ahead of the UK ministerial summit.
This would allow climate vulnerable middle-income countries, such as small island states which have limited access to concessional finance, to benefit.
African finance ministers described the issuance of IMF reserve assets as “imperative” to “help the continent access the trillions of dollars needed for a green recovery”.
Jean-Paul Adam, a former minister in the Seychelles and director of climate change at the United Nations Economic Commission for Africa (ECA), told Climate Home News this injection of liquidity could support investment in energy, food security and nature-based solutions.
ECA proposes creating a liquidity and sustainability facility that would use IMF’s SDRs to subsidise private sector investments and shave off higher borrowing cost faced by African countries.
This could unlock some of the 39,000MW of renewable energy projects in planning across the continent, Adam said.
Another option is to attach green criteria to money channeled through existing IMF initiatives such as the Poverty Growth Reduction Trust.
Avinash Persaud, professor at Gresham College in London, has suggested distributing SDRs though an IMF-administered global disaster mechanism. Countries suffering loss and damages caused by climate change or a natural disasters greater than 5% of their GDP would receive fast and unconditional funds.
Barbadian prime minister Mottley has proposed allocating half the money to governments to pay off debts and half to regional development banks. This would allow development banks to identify where sustainable development needs lay, without requiring country-by-country vulnerability assessments.
The Caribbean Development Bank has an “intimate perspective” on what a green recovery in the region looks like, said Tumasie Blair, of Antigua and Barbuda, lead negotiator on climate finance for the Alliance of Small Island States.
For Belizean minister Coye, none of these proposals get to the heart of the matter. “Our poor and vulnerable countries, plain and simple need debt cancellation and debt forgiveness,” he said.
Injecting liquidity may ease the immediate crisis, agreed Jason Braganza, executive director of the African Forum and Network on Debt and Development (Afrodad), “but it does not go far enough to deal with the systematic and systemic structural issues of the global debt architecture”.
Part of the challenge is the political shame and embarrassment countries may face when renegotiating their debt, Braganza said. In some instances, debt relief can lead to a downgrade from credit rating agencies — increasing the cost of borrowing.
Finance and development experts are calling for a more comprehensive approach.
A global debt relief blueprint “for a green and inclusive recovery” has been backed by Mottley and UK former prime minister Gordon Brown.
It calls for debt relief to go beyond repayment suspension and include both public and private creditors, low and middle-income countries with support conditional on recipient nations committing to align their policies with the Paris Agreement and global development goals.
It includes proposals for green recovery bonds and for nations with sufficient fiscal space to invest their debt service payments into local climate and nature protection projects, known as debt swaps.
For Braganza, of Afrodad, this must be the moment to address the power imbalance between rich and poor nations. The voice of African governments has to be included “as an equal player and a decision-maker rather than a decision-taker,” he said.