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COP27: How the IMF could help the Global South fight climate change [1]
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Date: 2023-01
Converging debt and the climate crisis are hammering countries in the Global South, which have contributed far less to climate change than those in the Global North.
Egypt, the host of COP27, this year’s flagship UN climate conference, claims debt obligations are limiting its climate action, as 45% of its revenue is directed towards paying off loans. The country is far from alone – 53 others are also in need of immediate debt relief, according to the UN. The International Monetary Fund (IMF) also claims that about 60% of low-income countries are in or near ‘debt distress’.
Recent measures imposed by central banks in advanced economies are making these debt burdens even more acute. As countries such as the US hike interest rates to reduce inflation at home, it becomes even harder for lower-income countries to pay back their foreign debts, let alone invest in climate action.
But the IMF has one powerful tool it can use to assist this debt distress: special drawing rights (SDRs) – sometimes described as the ‘IMF’s currency’. These are international reserve assets, whose value is based on a basket of major currencies – including the US dollar, Japanese yen, euro, pound sterling and Chinese renminbi – which are allocated during times of global economic hardship.
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While SDRs are not themselves money – they cannot be used to buy things and private entities are not allowed to hold them – they are the IMF’s unit of account: member states can use SDRs to pay off loans they owe to the IMF or exchange them with other IMF members for hard currencies.
SDRs are meant to provide additional liquidity. Once allocated, they automatically supplement a country’s foreign exchange reserves, potentially obviating the need to issue more expensive debt in order to obtain hard currency.
Crucially, unlike IMF loans, countries do not have to agree to implement certain policies in order to receive their SDR allocation. IMF members can exchange SDRs for a currency in the SDR basket to pay for, say, oil imports or Covid vaccines, as was the case in August 2021, when the IMF allocated $650bn worth of SDRs to help countries in the Global South pay for vaccines and ride out restrictions.
Now, a year later, another issuance of SDRs could help countries both adapt to climate change and avert debt defaults.
From Covid to the climate crisis
It was not just countries in the Global South that received SDRs during the pandemic. In fact, those in the Global North received the lion’s share: the US, for example, received $71bn worth – compared to $310m for Afghanistan.
This is because SDRs are allocated on the basis of members’ quotas, or shares, in the IMF, rather than by financial need.
But since rich countries are generally able to manage liquidity challenges on their own or by swapping currencies among themselves, they mostly left their 2021 SDRs unused, sitting on their central banks’ books.
Many Global South countries, on the other hand, faced urgent financial problems and quickly used their proportionately lower amounts. Fifty-five countries used SDRs to reduce their debts owed to the IMF, while others converted their SDR allocations into hard currency to purchase imports or to back public spending.
In fact, more countries have drawn on the 2021 allocation of SDRs than in the last round in 2009, when $250bn of SDRs were given out in the wake of the financial crisis.
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[1] Url:
https://www.opendemocracy.net/en/oureconomy/climate-change-cop27-imf-global-south-debt-special-drawing-rights/
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