Making Special Drawing Rights work for climate action and development

By Members of the Task Force on Climate, Development, and the International Monetary Fund1

The International Monetary Fund (IMF) is proposing a Resilience and Sustainability Trust (RST), aimed at helping countries build resilience, respond to climate change and make the necessary transitions that can support both development and climate. With the proper modalities and regular replenishment, and without onerous conditionalities or increasing member country debt burdens, such a facility would strengthen the climate finance architecture and put the IMF on the climate change map.  

The IMF is considering an RST initially financed through ‘re-channelled’ Special Drawing Rights (SDRs) from the recent $650 billion in SDRs approved by the IMF this summer. The 2021 SDR allocation was the largest in history, but given the structure of SDR allocations the vast majority of SDRs will flow to high-income countries that will not need them. Indeed, just over one percent of the SDR allocation will go to the poorest countries. In recognition of these asymmetries, G7 leaders recently pledged to re-channel upwards of $100 billion of their allocations for “step change” in investments, including clean energy and green growth in low-income countries.

The finance required to support decarbonisation in the developing world and foster climate resilience is far greater than even the collective sum of $650 billion, let alone the pledge of $100 billion. Nevertheless, the establishment of an RST presents a major opportunity to help countries foster a green and inclusive recovery from the COVID-19 pandemic.

A well-designed RST would have three important functions: to help climate vulnerable countries respond to climate shocks without significant increases in debt burdens; to catalyse low-cost financing and capacity building for poorer, climate vulnerable countries; and to enhance the ability of middle-income countries to mobilise longer-term financing for just transitions to low-carbon growth paths.

Climate change is macro-critical and vulnerable countries need expanded facilities to respond to the macro-economic aspects of climate risks in a variety of forms. The record number of hurricanes, droughts, wildfires and floods accentuated by climate change cost the world economy $210 billion in 2020. For some countries, such as hurricane-wracked Caribbean countries such as Dominica, those costs can exceed 200 percent of GDP, with clear impacts to their sustainable development path.

The policy response to address climate change is also of macro-critical importance, both in its impact and in the adjustments that it will entail. The European Union and the United States accounted for 75 percent of global carbon emissions between 1850 and 1990 and are thus obligated to act boldly and first to mitigate climate change. However, abrupt policy introductions, such as high carbon taxes coupled with border adjustment taxes, may pose cross-border ‘spillover risks’, driving balance of payments shocks in fossil fuel exporting developing countries dependent on those markets. Aside from these cross-border risks, macro-risk can happen domestically when a country shifts away from fossil fuels in a disorderly way.  Leaving fossil fuels behind also strands assets, investors and contracts in ways that could impact fiscal and financial stability—and communities and workers, as well.

There is also a glaring gap in low-cost financing for investments in the poorest and most climate vulnerable countries for climate adaption and resilience, despite the fact that poorer countries bear the highest costs from climate change. With more than 80 percent of climate finance flowing toward climate change mitigation in more advanced economies, only a trickle goes to the most vulnerable. Meanwhile, climate shocks are increasing the cost of capital for many climate vulnerable countries, making the availability of necessary financing even more scarce or costly. 

Finally, there are middle-income countries that cannot access adequate and affordable levels of financing to accelerate the transition from fossil-fuel energy and grant them the fiscal space to achieve a just transition to a low-carbon economy. Much of the costs of such a transition are unquantifiable, such as the social stress of unemployment and the adjustment costs to move the unemployed into new low carbon sectors – but conservative estimates put the cost of a South African transition for instance, at $210 billion, yet longer term bond yields are close to 10 percent and the country has already had to seek emergency financial assistance from the IMF.

An RST could provide low-cost financing to tackle each of these three problems. Yet, in order for an instrument like an RST to be of use, it has to be used. The RST will not be in high demand if it has many of the onerous conditionalities that come with the IMF’s traditional packages. In addition, as in the case of the IMF’s Poverty Reduction and Growth Trust, modalities have to be put in place to ensure concessional financing and the bearing of credit risk. Finally, eligibility for low-cost finance would have to be broad enough to include climate vulnerable countries and high-carbon emitters that lack the fiscal space to address climate shocks or invest in resilience and low carbon transitions. And the IMF would need to work closely with development banks on the longer-term financing components of the RST, which are beyond the Fund’s mandate and experience, creating opportunities for complementarity. Non-concessional finance and stiff conditionalities coupled with income thresholds will leave out the climate vulnerable rather than crowd them in. 

The establishment of the RST through a rechanneling of the recent SDR allocation is of critical importance. To play a key role in global climate action, the RST will need to be scaled up over time through additional SDR issuances and rechanneling efforts, with replenishment and expansion through hard currency contributions. The scale of the RST needs to be proportionate to the response required by the climate crisis and the development needs of the membership.  The IMF can’t make the global climate crisis adapt to its instrumentation, it must adapt its instrumentation to address the climate crisis and development goals. An ambitious and well-designed RST could do just that.

1. Sara Jane Ahmed, Finance Advisor to the Vulnerable Group of Twenty (V20) Ministers of Finance of the Climate Vulnerable Forum (CVF); Théophile Azomahou is Professor of Economics and Director of Training at the African Research Economic Consortium; Alicia Bárcena, Executive Secretary for the United Nations Commission for Latin America and the Caribbean; Rishikesh Ram Bhandary, Assistant Director of the Global Economic Governance Initiative at the Boston University Global Development Policy Center; Laveesh Bhandari is a Senior Fellow at Centre for Social and Economic Progress, India; Amar Bhattacharya is a Senior Fellow in the Center for Sustainable Development at the Brookings Institution and a Visiting Professor in Practice at the Grantham Research Institute at the London School of Economics; Kevin P. Gallagher, Professor of Global Development Policy at Boston University’s Pardee School of Global Studies and Director of the Boston University Global Development Policy Center; Xiaobei He, Deputy Director of the Macro and Green Finance Lab at the National School of Development, Peking University; Rakesh Mohan, President and Distinguished Fellow at Centre for Social and Economic Progress, India and former Executive Director on the Board of the International Monetary Fund. He was Deputy Governor of the Reserve Bank of India between 2002-2009; Irene Monasterolo, professor, EDHEC Business School, France; Toby Melissa C. Monsod, Professor at the University of the Philippines and Chair Holder of Ruperto P. Alonzo Professorial Chair in Development Economics; Njuguna Ndung’u, Executive Director of the African Economic Research Consortium (AERC), and former Governor of the Central Bank of Kenya; Abebe Shimeles, Director of Research at Africa Economic Research Consortium; Daniel Titelman, Director of the Economic Development Division at the United Nations Economic Commission for Latin America and the Caribbean; Marilou Uy, Director of the Secretariat of the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development (G-24).