The International Monetary Fund (IMF) and the World Bank Group Spring Meetings commenced this year with the revelation of two astonishing discoveries. According to the World Bank, a third of economically disadvantaged nations have experienced a decline in their economic status since the beginning of the novel Coronavirus (COVID-19) pandemic. Furthermore, in 2023, developing nations experienced a deficit of $200 billion in funds received from international financial institutions compared to the amount they gave in bond and loan repayments.
These challenging circumstances influence the backdrop of this year’s UN climate discussions (COP29) scheduled for November in Baku, Azerbaijan. Governments are expected to reach a consensus on a fresh climate funding objective during this event. For this objective to be successful, it is imperative to implement changes to the global financial system, such as restructuring the World Bank and IMF.
During the 2015 UN climate negotiations in Paris, governments agreed to develop a new goal for climate finance by 2025, which would replace the current target of $100 billion per year by 2020. According to the OECD, the governments of developed nations mobilised just $89.6 billion in climate funding in 2021. They were expected to achieve the objective of $100 billion in 2022. This public finance aimed to facilitate the mobilisation of substantial private finance by strengthening local financial markets and establishing a favourable environment for private investment, as outlined in the World Bank’s “ from billions to trillions” initiative. Nevertheless, the IMF projected that in 2022, multilateral development banks (MDBs) could generate only 1.2 times the number of private resources they had initially pledged.
Although the monetary aspect of the climate finance objective will be a significant point of emphasis at COP29, the climate finance negotiations in Baku should incorporate two components that necessitate involvement from the wider global financial framework. Fiscal limitations exert pressure on governments’ capacity to allocate resources towards development and addressing climate change. These limitations should be eliminated by implementing a proficient framework for managing national debt. Furthermore, a fresh climate financing objective should be implemented, although it will not be sufficient in isolation. This objective will require the backing of expanded MDB funding, which is inexpensive and has an extended duration.
An ineffective framework for restructuring national debt has been impeding investment and hindering advancements in climate-change objectives
Given these benchmarks, what were the outcomes of the 2024 Spring Meetings, and what actions must be taken before the COP29? Starting in October 2022, the World Bank has implemented a series of internal policy adjustments to tackle the issues of the 21st century. These tactics involve expanding its balance sheet to increase the money that can be loaned using shareholder cash. During the Spring Meetings, the World Bank provided an update on the internal financial reforms it has started to undertake to streamline the increasing loan increase process. For instance, implementing the new equity-to-loan ratio will allow the bank to provide an additional $40 billion in loans in the next decade. In addition, it garnered a recent influx of pledges amounting to $11 billion, which will enhance its ability to increase its lending capabilities.
Nevertheless, the World Bank and other MDBs will need to surpass these steps to optimise their financial position and obtain the necessary level of funding which aligns with the development and climate goals of the countries they serve. Shareholders must provide these banks with new capital, and the World Bank’s concessional lending arm needs significant replenishment. Another report indicates that emerging markets and developing nations (excluding China) will need approximately $3 trillion in yearly funding by 2030 to achieve common climate and development objectives. Based on these statistics, the Independent Expert Group of the G20 predicts that MDBs must provide $260 billion in loans: three times more than their current lending capacity.
Numerous countries worldwide are currently experiencing the adverse effects of the debt crisis. Out of the 66 economically vulnerable nations, 47 will exceed their solvency limits if they allocate the required resources to achieve the objectives of the Paris Climate Agreement and the UN SDGs. This fact lends credence to previous reports that most low-income countries do not have the financial capability to execute their national climate adaptation strategies. In broader terms, an ineffective framework for restructuring national debt has been impeding investment and hindering advancements in climate-change objectives.
Climate finance talks frequently centre on modifying the risk-and-return characteristics of projects. The macroeconomic and budgetary framework that surrounds the situation is often overlooked. As this transformation occurs, climate financing should be widely accepted and included in discussions about restructuring debt. The financial requirements for climate investments, and the overall economic consequences of climate hazards, must be given due consideration.
Countries should further determine how to enhance their climate commitment if the international community offers appropriate debt reduction and concessional credit. The UN climate process has a track record of countries putting forward “conditional” targets that governments commit to achieving only if certain conditions, such as money, are fulfilled.
It is imperative to enhance the resilience of the international financial infrastructure to climatic shocks. The World Bank has introduced climate-resilient debt provisions to assist borrowing governments in managing the impact of climate-related shocks. The European Bank for Reconstruction and Development (EBRD) has also adopted similar measures. Nevertheless, these provisions are far from being established as customary elements of loan agreements.
Climate financing should be widely accepted and included in discussions about restructuring debt
UN climate chief Simon Stiell highlighted that the IMF’s Catastrophe Containment and Relief Trust is a pre-existing mechanism that might assist nations in managing the economic consequences of climate-related events. The trust offers debt relief to qualifying IMF borrowers, allowing them to prioritise reconstruction and recovery efforts without repaying the IMF’s valuable monies. It can be a crucial tool in the international community’s efforts to tackle loss and damage. Nevertheless, confidence is diminishing as only $100 million is available to alleviate debt: IMF members should allocate additional resources to the trust.
Upon adopting the Paris Agreement, there was considerable optimism over the “billions to trillions” objective in effectively providing climate funding. However, since debt repayments are exceeding new financial inflows, countries are experiencing a situation where there is a significant outflow of billions of dollars and an inflow of only millions. For climate finance to have a significant effect, the anticipated new goals in Baku should be supported by substantial modifications of the global financial structure.