Economy · June 20, 2022

Lawmakers around the world debate the power of SDRs for global climate finance

On May 3, 2022, members of national legislatures, their staff and leading civil society experts from around the world gathered for a seminar and strategic discussion on how the International Monetary Fund (IMF) Special Drawing Rights (SDR) ) can be used as a powerful tool for global climate justice.

Following the disappointing outcomes of the World Bank and IMF spring meetings, which led to commitments that failed to adequately address the fallout from the COVID-induced economic downturn, much less the costs of mitigating and adapting to the climate crisis , this seminar was organized by the Global Alliance for a Green New Deal, the Center for Economic and Policy Research (CEPR), and the Boston University Global Development Policy Center to discuss alternative solutions that can meet the scale of the challenge facing the countries of the South of the world have to face.

titled “New horizons for global climate finance: parliamentarians, climate justice and the power of the DSPs“, The workshop saw the contributions of:

  • Rep. Jesus “Chuy” García, member of the United States House of Representatives
  • Avinash Persaud, adviser to Prime Minister of Barbados Mia Mottley
  • Caroline Lucas, Member of Parliament, United Kingdom
  • Hon. James Chidakwa, Member of Parliament, Zimbabwe
  • Esther Cuesta Santana, member of the National Assembly, Ecuador
  • Jahiren Noriega, member of the National Assembly, Ecuador
  • Isabel Zuleta, senator, Colombia
  • Jörg Mayer, senior economist at UNCTAD
  • Andrés Arauz, CEPR Senior Researcher, former Ecuadorian Minister of Knowledge and former Director General of the Central Bank
  • Chiara Mariotti, senior policy and advocacy officer, Eurodad
  • Other top civil society experts

The following is a brief summary of the topics covered during the workshop.

What are DSPs?

SDRs are an international reserve asset issued by the IMF, the value of which derives from a basket of currencies consisting of dollars, euros, pounds, yen and renminbi. SDRs can be exchanged for hard currency, used to pay off IMF debts or donated between IMF member countries. In times of crisis, the IMF, with the support of its members, can issue new SDRs, providing countries with an immediate injection of liquidity at virtually no cost and without the often harmful political conditions associated with regular IMF loans.

How have SDRs been used to respond to the global economic fallout of the COVID-19 pandemic?

On August 23, 2021, the IMF issued $ 650 billion in SDRs in an effort to help countries respond to the COVID-19 pandemic and the global economic recession it caused. As the seminar participants made clear, this historic step was a lifeline. According to a recent CEPR report by event attendees Andrés Arauz, Kevin Cashman and Lara Merling, in the first six months after the award, 98 low- and middle-income countries used their shares, including 41 of the 45 countries in sub-Africa. Saharan. SDRs have been used to purchase vaccines, finance public health and social needs in response to the pandemic, repay IMF debt, supplement existing foreign reserves, and more.

However, although the August 2021 allocation was key, many seminar attendees noted that it was insufficient. Since SDRs are distributed on the basis of IMF members’ shares, less than half of the allocation went to low- and middle-income countries, while most went to countries for which SDRs are of little use. To meet the needs of the present moment, not to mention the climate crisis, far more SDRs will be needed.

How can SDRs be redirected to countries that need them?

Given this uneven distribution, participants stressed the urgent need for more SDRs in low- and middle-income countries. However, one of the proposed mechanisms for ‘recanalization’ (ie lending), the IMF’s new Resilience and Sustainability Trust (RST), was criticized by several workshop participants as not only insufficient, but potentially harmful. RTD is a new IMF trust fund, funded by voluntary contributions from SDRs, intended to provide loans to address long-term structural challenges such as climate change. But the RTD funding target is only $ 50 billion, and its project falls far short of the recanalization principles outlined by civil society organizations in September last year: RTD funding comes under form of debt rather than subsidies; includes severe and potentially counterproductive conditions; and it is not open to all climate-vulnerable countries. Instead, the participants noted the need for alternative methods of recanalization, including through regional development banks, and bilateral donations.

How can new SDR issues help promote an equitable global response to the climate crisis?

Although the participants offered suggestions for lending existing SDRs, the main focus of observations from experts and lawmakers was the need for more, larger and repeated DSP-related issues to address the ongoing fallout of the pandemic and also the long-term challenge. end of the climate crisis.

Participants agreed that the climate crisis is an existential threat to the life and well-being of people around the world. But its terrible costs will not be borne in the same way; the peoples of the global South are at the forefront of a climate disaster for which they have little responsibility. A global just transition away from fossil fuels must meet the needs of developing countries as they seek to adapt to new conditions, address the costly consequences of the crisis and advance their development needs, while remaining in line with the goals global climate.

Existing levels and forms of climate finance are wholly inadequate and are not even starting to grapple with the great challenges that lie ahead. Thirteen years ago, at the United Nations Climate Change Conference in Copenhagen, rich nations promised that by 2020 they would provide developing countries with $ 100 billion a year for climate adaptation. This pledge was well below the United Nations’ estimated annual adaptation needs of up to $ 300 billion by 2030 – and actual pledges so far have amounted to a mere fraction of what has been pledged. This is not to mention climate change mitigation. All in all, the gap between available climate finance and what is needed to support a just transition globally is measured in the trillions of dollars a year.

Available financing, meanwhile, often comes in the form of debt – in addition to what is already burdens of global debt at the crisis level – and with costly terms that leave developing countries with less and less political space with which meet people’s needs while responding to climate change. The dominant method of attempting to leverage public sector funds to attract private investment through de-risking and financialization, meanwhile, is proving to be a losing strategy.

SDRs have a crucial role to play in helping to achieve adequate short- and medium-term flows of climate finance. New and larger SDR allocations could mobilize billions of dollars to respond to the upcoming impacts of climate change, alleviating harmful debt burdens and expanding the policy space available to developing countries. Importantly, they would do this at very low cost to richer countries and without the need to solicit voluntary contributions.

For this reason, many participants highlighted the urgency of new issues relating to SDRs. This includes the proposal for an immediate SDR 2 trillion allocation to respond to the current crisis, an idea that has gained significant support from global civil society, but which would require, among other things, the approval of the Congress of States. United. Representative Chuy García, who recorded a video message for the seminar, supported such efforts in the United States Congress and spearheaded the legislation by proposing trillions of new SDRs that was passed by the United States House of Representatives. Participants also expressed broad support for proposals for regular annual SDR emissions that would help meet the needs of developing countries as they address the long-term effects of the climate crisis, Barbados Prime Minister Mia Mottley said in her speech. speech at COP26.

SDRs are not a magic bullet for climate finance. But as part of a bigger picture, they can be a key tool for harnessing the resources needed for global climate justice. As this seminar made clear, political leaders and civil society experts from the North and South of the world are starting to see the potential of the DSP and are eager to work together across borders to ensure it is realized.