IMF ‘Falling Short’ in Climate Crisis
Established in the wake of the Second World War, the IMF has come under increasing criticism that it is not fit for purpose in the climate change era.

The International Monetary Fund’s (IMF) climate change policies are obstructing access to the financing required to prepare for and adapt to climate change in countries on the frontline, a new report by a task force representing finance ministers from climate-vulnerable nations said.

The Task Force on Climate, Development and the International Monetary fund – the group of experts and NGOs that authored the report on behalf of over 70 countries – said the IMF is “falling short of the leadership necessary to accelerate a global and just transition.” 

The report sets out a simple premise: Without access to the money necessary to adapt to climate change, climate-vulnerable countries will be trapped in economic free-fall, unable to recover before the next natural disaster strikes. This makes the IMF’s focus on its core mission –  the pursuit of debt and deficit reduction – self-defeating, as if climate change destroys national economies, nothing will be left to repay outstanding debts. 

“There is no time to waste,” the report said. “The macroeconomic implications of climate change are [already] causing acute stress amid multiple crises in the world economy.”

The task force’s report points to a variety of failings in the IMF’s current policies, including the fund’s over-reliance on carbon pricing to offset the costs of a green transition, hyper-focus on fiscal austerity as a prerequisite for loan eligibility, and lack of flexibility in approaching different national environmental and economic contexts.

Carbon pricing won’t cut it 

The IMF’s one-track focus on carbon pricing as a means to fund a global green transition is the most fundamental criticism laid out in the report. 

Its authors calculated that not only can carbon pricing alone not raise enough money to pay for the trillions of dollars in necessary climate investments, but if the inbuilt incentive to carbon pricing – imposing a cost to steer companies towards reducing their carbon footprint – works, then money generated will continue to fall over time. 

The IMF disputed the report’s finding that it is exclusively reliant on carbon pricing, saying it is open to considering different policy approaches in view of the massive financial investments required to address climate change. 

This is backed up by IMF support for so-called “disaster clauses” which allow countries to freeze debt repayments as they recover from natural disasters. But lived examples of countries like Pakistan show the IMF still has a long way to go. 

Last August, when a third of Pakistan was underwater, its government renegotiated the terms of its debt repayment to the IMF, averting a default that would have collapsed the country’s economy. The $1.17 billion loan pulled the economy from the brink of disaster but came with the requirement to implement harsh austerity policies, shifting the burden of the country’s debt to ordinary Pakistanis.

At a press conference on the sidelines of a United Nations fundraising effort for Pakistan, Secretary General Antonio Guterres called the international financial system “morally bankrupt”. 

“The system routinely denies middle-income countries the debt relief and concessional funding needed to invest in resilience against natural disasters,” he said. “The present system is biased.”

Today, some 60% of developing countries are in what the IMF classifies as “critical” debt. 

“Get out of the way”: private sector investment 

Gigawatt Global’s solar field in Rwanada.

The report, like the vast majority of high-level international discussions on climate financing for developing countries, zeroes in on climate financing mechanisms that pull from national coffers in wealthy countries. 

But some in the private sector say the World Bank and IMF are getting in the way of private money, too, potentially sidelining trillions of dollars from the fight to achieve green transitions in low- and lower-middle income countries. 

Gigawatt Global, a frontier green energy developer that recently completed a 7.5 MW solar project in Burundi and has a 700 MW pipeline of projects in 10 African countries and Gaza, had a solar field project to provide 20 megawatts of energy to Liberia blocked by the World Bank in 2021, seven years into its development. 

“They were afraid that Liberia didn’t have the expertise to negotiate the balance price with a private sector player,” Gigawatt Global CEO Josef Abramovitz told Health Policy Watch in an interview. When Abramovitz told the World Bank his company would accept a benchmarked price for its solar power set by the World Bank, rather than one negotiated with Liberia’s government, nothing changed. 

“They were not nimble,” Abramovitz said. “Other than in blocking every sector.”

While the World Bank does not have a mandate to block private investments outright, the extreme reliance of low- and lower-middle income countries on its development funding give it powerful influence over decisions made by governments. 

“A simple solution [to unlock private investment] would be to make an exception for climate related investments,” Abramovitz said. 

The Road to Bridgetown

Mia Mottley, Prime Minsiter of Barbados, began campaigning for the Bridgetown Initiative at climate talks in Glasgow in 2021.

The task force’s report comes at a time when much of the world – even top-brass at the IMF and World Bank – is in agreement that the international financial system needs to change.

The cascading series of floods, droughts, hurricanes and fires blazing through climate-vulnerable countries has left them in dire need of financial assistance to recover from natural disasters. Yet their debt burdens to institutions like the IMF leave countries constantly behind the ball, unable to get back to square one before the next calamity strikes.   

Proposals to overhaul the two powerful institutions gained steam at the United Nations climate summit (COP27) in Egypt last year, where language calling for reforming the multilateral development banks was included in the final outcome document. No concrete steps have yet been taken to change the way the banks work.

An ambitious blueprint to retool the multilateral development banks set out by Barbados’ Prime Minister Mia Mottley last year – known as the “Bridgetown Initiative” – has received broad support from G7 nations like the US, France and Germany.

In addition to reforming the World Bank and IMF, Mottley’s plan proposes a more flexible sovereign debt architecture to improve liquidity in low- and middle-income countries in order to prevent fiscal crunches, mobilizing private finance for climate adaptation in vulnerable countries, and wider sharing of rich country’s financial resources. 

Documents obtained by Devex indicate that the Bridgetown agenda will be the guiding document of a development finance summit co-hosted by French President Emmanuel Macron and Mottley in Paris this June.

In two weeks, IMF and World Bank leaders will meet in Washington D.C. for the first time since the spotlight hit the institutions in Sharm el-Sheikh.

A historic vote for climate justice

Iririki Island, Vanuatu

The needle also shifted on climate justice this week as the United Nations General Assembly voted by consensus to request an opinion from the International Court of Justice (ICJ) on countries’ legal obligations to protect current and future generations from climate change.

The resolution submitted by the island state of Vanuatu and co-sponsored by 132 countries asks the world’s highest court to decide on the legal consequences for the “acts and omissions” of states that cause climate harm to others, especially small island nations like Vanuatu on the front lines of climate change.

In just three days at the start of March, Vanuatu was struck by two category-four hurricanes.

“The earth is already too hot and unsafe,” former Vanuatu Prime Minister Bob Loughman said as he declared a climate emergency on the island in May last year. “We are in danger now. Vanuatu’s responsibility is to push responsible nations to match the action to the size and urgency of the crisis.”

Loughman’s successor, Alatoi Ishmael Kalsakau, emphasized that the request to the ICJ was only a first step.

“This is not a silver bullet, but can make an important contribution to climate change, climate action,” Kalsakau said. 

ICJ opinions are not binding, but the General Assembly vote lends voice to mounting frustrations about the slow pace climate finance is being made available to the most affected countries – near all of whom have nothing to do with causing the climate crisis in the first place.

United Nations Secretary General Antonio Guterres said the opinion would “assist the General Assembly, the UN and Member States to take the bolder and stronger climate action that our world so desperately needs.” 

For the young generations living on the front line of climate change, the reality that their ancestral homes might disappear is already setting in.

“I don’t want to show a picture to my child one day of my island,” Cynthia Houniuhi, president of Pacific Islands Students Fighting Climate Change and native of the Solomon Islands told the General Assembly. “I want my child to be able to experience the same environment and the same culture that I grew up in.”

Image Credits: IMF, UNCTAD.

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