January 12, 2024
Inter Press Service
The world faces the existential threat of a climate change crisis, and it is becoming increasingly clear that the latest UN climate summit, COP28 — hosted as it was by the CEO of one of the world’s largest oil companies, and filled with a record number of fossil fuel lobbyists — is not going to do much to change that. Even calls to “phase-out” fossil fuels were met with foot-dragging from the COP28 president and Saudi Arabian delegates. Meanwhile, highlighting the gravity of the challenge at hand, the World Meteorological Organization (WMO) pointed out that last decade (2011-2020) ‘was the warmest decade on record’. This could have significantly affected life and livelihood, not to mention the strong link between climate change and COVID pandemic, together likely contributing to an increase in absolute poverty.
A key question that COP28 was supposed to tackle is how low- and middle-income countries will be able to pay for climate crisis response and adaptation. The International Monetary Fund (IMF) has been thrust into a key role in this regard, but it should not escape criticism for its own climate hypocrisy. For the Fund to truly begin to join the fight against the climate crisis, it must first end its pointless, unfair, and damaging surcharge policy. Instead, the Biden administration could ensure that the Fund plays a crucial role in responding to climate challenges by supporting a major new issuance of IMF reserve assets.
Instead, the IMF’s solution is to offer more debt to already severely debt-burdened countries. An October paper from the United Nations Development Programme Global Policy Network noted: “At least 54 developing economies are suffering from severe debt problems,” of which 28 are among “the world’s top-50 most climate vulnerable countries.” And more than 70 percent of climate finance for these countries has been in the form of loans, as a new letter from 141 civil society groups points out.
Moreover, a Development Finance International-led report points out the lopsided spending priorities being forced on developing countries, many of which are highly vulnerable to climate change. Among these countries, “debt service is 12.5 times higher than the amount spent on climate adaptation,” a number projected to “rise to 13.2 times” next year.
Contributions to the “loss and damage” climate fund have also been far from satisfactory. Reports note that the US, the EU, and other rich countries have failed to meet their pledges to provide $100 billion per year. Meanwhile, high-level UN officials estimate that these countries will actually need to spend about $1 trillion per year on climate response by 2025, and about $2.4 trillion per year by 2030.
These countries face debt distress partly because the IMF demands they follow overly board austerity policies as conditions to receive the loans. This is an avoidable problem, considering that the IMF possesses a ready and appropriate alternative: Special Drawing Rights (SDRs), a reserve asset intended to be issued during times of crisis. The Fund last allocated $650 billion worth of SDRs in August 2021, in response to the COVID pandemic. But now even countries battered by the climate crisis, such as Pakistan, a third of which was flooded last year, are being pushed to take on more debt while the US Treasury Department refuses to green-light a new major SDRs issuance.
This points to the root of the problem: the governance structures of the IMF and World Bank. These are determined by which countries contribute the most, giving the US effective veto power. Critics point out that most of the 2021 SDRs went to rich countries, since they provided the most to the IMF’s resources; while efforts to rechannel those SDRs have also been wanting both in terms of speed and quantity. Worse, the IMF’s rechanneling mechanisms turn the SDRs into loans, with conditions attached. This is why researchers at CEPR, among others, are proposing reforming the quota system. Countries that have contributed the least to climate change would be rewarded, while high carbon-footprint nations would no longer have such an outsized role in determining how to respond.
The IMF is contributing to the global debt crisis in other ways. It continues to levy surcharges, essentially, “junk fees” added onto its non-concessional lending. Writing for Eurodad, Daniel Munevar highlighted how climate crisis-ravaged Pakistan faced surcharges of $122 million in 2023, and another $69 million in 2024. A country that faced catastrophic flooding in 2022, that is one of the most vulnerable to climate change, and which was simultaneously facing possible default, should not be forced to pay surcharges. Moreover, many countries in similar circumstances, such as Armenia, Jordan, and even war-torn Ukraine, also face surcharges. A recent CEPR report noted, “The IMF will charge over $2 billion per year in surcharges through 2025,” which is unnecessary and counterproductive, given the already constrained fiscal space of developing countries.
Time is quickly running out. The IMF must be brought into the twenty-first century if it is to play a constructive role in ending the climate crisis. The quota system governing this institution must be reformed, adjusted to account for historic climate emissions. The IMF should end its punitive, unnecessary, and counterproductive surcharge policy. And there must be a new major allocation of SDRs to enable developing countries to better deal with debt distress and meet their goals for climate-resilient spending.
This will require leadership by President Biden, since the US is the largest contributor to IMF resources and has the greatest say in IMF decisions. The COP meetings could even be used for timing a yearly release of climate-related SDR allocations to highly climate vulnerable countries, as suggested under Barbados’s “Bridgetown Initiative.” These steps would at least show that the Fund is addressing the climate crisis with the leadership and seriousness required.
