20 Oct 2023
Transitioning to a clean and resilient economy will require transforming the world’s economic system. Navigating this transition, coupled with the impact of climate disasters, will affect macro-financial stability and have global financial impacts. How international financial institutions evolve to support their members will be a crucial component of supporting the stability of a transitioning global economy.
Standing at the centre of the international financial safety net is the International Monetary Fund (IMF), which functions as:
- A lender of a last resource for many economies;
- A convener of the key decision makers both at the international and national level – the ministries of finance and central bankers;
- A standard setter recognised as a thought leader in economic and financial management;
- An influencer of the international financial system, including credit rating agencies, creditor countries and debt restructuring.
This institution is a key advisor to countries, steering them to better macroeconomic outcomes. As decarbonisation deepens and spreads to encompass the whole economy, critical decisions on the pace and scale of climate action are increasingly being made on the economy–wide level, rather than as part of sectoral policy in energy, transport, and agricultural sectors. This means that the IMF must be responsive to anticipate potential macroeconomic issues in the future.
The current IMF Managing Director, Kristalina Georgieva, quickly elevated climate change to one of the Fund’s top priorities by considering it a systemic risk for the stability of the global economy and financial system. This has led to progress in several areas:
- A climate strategy, published in 2021. Climate mitigation efforts in the 20 largest greenhouse gas-emitting countries are included in Article IV consultations, every six to seven years.
- Strategy for transition management will be reviewed every five to six years. This covers eight to nine countries per year, with greater frequency for large emitters and vulnerable countries. For adaptation and resilience, the Fund will prioritise the 60 most vulnerable countries. It builds climate risks into the Financial Sector Assessment Program, depending on the materiality of climate risks.
- The Fund’s lending tools were expanded, with the Resilience and Sustainability Trust (RST) put in place in record time. It increases countries’ resilience to climate by providing long-term financing to low-income and vulnerable middle-income countries. The IMF has started five pilot programs (Costa Rica, Barbados, Rwanda, Bangladesh, Jamaica), and there might be a huge demand from 44 countries to access these funds – despite this being a small sum of resources in comparison to MDBs.
- A commitment to enhance collaboration with the World Bank on climate issues. This renewed partnership on climate comes alongside the establishment of a new Bank-Fund Climate Advisory Group, tasked with ensuring coordination of both their climate-related work streams.
- Including climate in the main flagship reports, such as the Fiscal Monitor and the Global Financial Stability Report.
As the IMF moves from setting targets to implementation, it will need to consider how tackling the climate crisis may run counter to its usual ‘crisis response mode’. Previous IMF interventions may have reduced a country’s ability to invest in transition. Now, the IMF’s response to, or management of, an economic crisis must also consider solutions that are not building the fragilities of the future.
Entering uncharted waters
There have been numerous criticisms about whether the IMF is providing the right advice and tailored advice to countries, whether the RST is delivering what it intended, and whether the IMF is overpromising.
Some shareholders are also calling for the IMF to ‘stay in its lane’ instead of trying to become a global climate expert which they believe strays from the core mandate of custodian of global financial and economic stability.
Therefore, the question arises: will the IMF sustain momentum in its climate endeavours? Will the brave climate sails come down? The next five years are critical in determining the capacity of the IMF to be part of the solution to the climate crisis, not part of the problem. To succeed, the IMF must accelerate the pace of mainstreaming climate into its tools; increase transparency, including the principles driving policy change; increase consultation with civil society organisations; and ensure principles are both fair and ambitious. The IMF is facing a steep learning curve. For the institution to succeed, it will need support from its leadership, guidance from its shareholders, and strong technical expertise that questions whether the solutions of the past can build the clean economy of the future.