Daniel Titelman and Jwala Rambarran | How IMF can show up on climate for LatAm and the Caribbean

Blistering, record-breaking heat waves, prolonged droughts, deadly floods, unusually warm ocean waters, and more powerful hurricanes are taking lives, causing widespread loss and damage, and eroding hard-earned development gains. Even worse, the countries that are being disproportionately hit by the climate crisis have not only contributed the least to global warming, but are also the least prepared to deal with it.

This is particularly true for Latin America and the Caribbean (LAC), where just one storm can decimate a country’s economy – as was the case with Dominica in 2017 when Hurricane Maria wrought damages totalling 225 per cent of its gross domestic product (GDP).

This vulnerability is further compounded in three ways. First, many LAC countries are reliant on productive sectors particularly vulnerable to climate change like agriculture, and tourism. Second, climate shocks are inhibiting already sluggish growth, and 43 million jobs – 10 per cent of the labour force – could be lost by 2050 without the proper compensatory policies and investments. And third, the levels of investment necessary to structurally transform a region already burdened by low fiscal space, high debt levels and shallow domestic financial markets are tremendous – and out of reach without taking on explosive levels of debt.

In short, we are witnessing the need for urgent, sustained, and concerted international action to combat the impacts of climate change, and the International Monetary Fund (IMF), as the steward of global financial stability, is central to ushering in this new era – but only if the institution itself is transformed.

Our new report Task Force on Climate, Development and the IMF lays out a blueprint for the fund to evolve with a renewed sense of urgency in helping its climate-vulnerable member countries mobilise climate financing in a fiscally sound and financially stable manner. It calls for reforms across three key areas of the IMF: surveillance, lending, and global leadership.

IMF ON CLIMATE SO FAR

We commend IMF Managing Director Kristalina Georgieva, under whose leadership the Fund began integrating aspects of climate change into its operations. Most notably, this included the creation of the Resilience and Sustainability Trust (RST), designed to provide affordable, longer-term financing to help low- and middle-income countries address key challenges like climate change. In fact, three LAC countries – Costa Rica, Jamaica, and Barbados – were among the first ‘pilot’ countries to access financing through this tool.

However, as 2030 nears and progress on the UN 2030 Agenda for Sustainable Development Goals stalls, increased ambition and urgency are paramount, but both are currently lacking.

SHINING LIGHT ON DEBT-CLIMATE NEXUS

The Fund’s work on debt, and in particular its debt sustainability analyses (DSAs), are at the heart of needed surveillance reforms. While highly technical, DSAs are vital to understanding, first, the fiscal health of a country, and second, how much debt should be restructured in the event that a country needs debt relief.

Currently, DSAs do not account for either the risks posed by climate change or the opportunities of green investments, meaning that advice being provided IMF member states is predicated on an incomplete economic picture. New methodologies and more granular data to fully incorporate climate change would facilitate a more robust DSA and by extension, vastly improve the quality of policy advice the fund gives country leaders.

ALIGNING LENDING WITH CLIMATE GOALS

Broadly, the IMF must align its lending with the Paris Agreement and reorient its financing towards green growth rather than locking countries in fossil fuel-intensive pathways or locking up financing with austerity measures that limit public spending.

A concrete way for the IMF to do this would be to revise and expand the Resilience and Sustainability Facility (RSF), the lending arm of the RST. Even a recent interim review of the RSF by the IMF acknowledged that the current eligibility requirement that a country must have a concurrent IMF programme restricts access to the RSF for small developing states like those in the Caribbean.

Moreover, research from the task force on the early experiences of Barbados and Jamaica with the RSF shows that its presumed catalytic effect faces strong headwinds in attracting private-sector financing. For this reason, the IMF should also enable RSF support towards guarantees and other innovative financial instruments.

LEADING ON CLIMATE

Finally, the IMF needs to demonstrate global leadership in underscoring the urgent need for more concessional financing, and Special Drawing Rights (SDRs), the Fund’s global reserve asset, are uniquely positioned to fill this role.

While the IMF approved a historic allocation of SDRs worth $650 billion in August 2021 during the COVID-19 pandemic, only eight per cent of the total SDR allocations went to LAC countries because of the IMF’s unequal governance structure.

In line with Barbados Prime Minister Mia Mottley’s call at last month’s United Nations General Assembly, the task force recommends regular issuance of SDRs to increase global liquidity. It is also vital that SDR allocations are delinked from quota shares so that countries benefit according to their liquidity needs.

It is true that achieving climate and development goals is a daunting task, but it is not an impossible or futile one. Rigorous research shows us that there is a path to a prosperous, climate-resilient future for LAC – and the world. The only question that remains is whether the IMF, and other international financial institutions with it, will evolve to meet the moment.

Daniel Titelman is the director of the Economic Development Division at the United Nations Economic Commission for Latin America and the Caribbean. Jwala Rambarran is the former Central Bank Governor of Trinidad and Tobago. Send feedback to columns@gleanerjm.com.