Making the global financial architecture work for emerging markets and developing countries (EMDE) — a global issue
  • opinion Written by Hafez Ghanem (Paris)
  • interpress service

The fight against climate change is lost and the world Failed to meet Paris Agreement goals Keep global warming below 1.5℃. We are also off track to reach . Sustainable Development Goals (SDGs).

Achieving the goals of the Paris Agreement and the SDGs will require the entire world, especially EMDE, to accelerate climate and development investments. This poses a major funding challenge for EMDE (excluding China). According to the Independent High-Level Expert Group on Climate Finance By 2030, we will need to invest $2.4 trillion annually just to combat climate change, bringing the total investment to approximately $5.4 trillion, of which $1 trillion will require external financing.

The current global financial structure is not suitable for EMDE. Official development assistance (ODA) is too low, net private capital flows are negative, and EMDE faces debt sustainability issues. According to the Organization for Economic Co-operation and Development (OECD) ODA in 2022 will be $204 billion, far short of the $1 trillion needed.

Additionally, the $204 billion figure includes $29.3 billion in donor domestic refugee costs and $16.1 billion in aid to Ukraine. So his actual ODA, so-called country programmable aid, to the EMDEs was much less than $200 billion. At the same time, private capital is flowing out of EMDE.

calculation by Crow and Rivard (2024) In 2022, net private capital flows to EMDE were negative $125 billion, and that negative amount increased to negative $193 billion in 2023.

This is happening in the face of growing sovereign debt problems.by world bank About half of the world’s poorest countries are in debt crisis or at high risk of debt crisis. In some countries, debt service costs are higher than health and education budgets.

In light of this situation, the UN Secretary-General (SG) (and many voices in the Global South) is calling for reforms to multilateralism, including the global financial architecture.

The United Nations is scheduled to hold a Future Summit in September 2024 to discuss possible reforms and has published our report. common agenda with friends Policy overview Regarding reform of the global financial structure.

The Brookings Institution’s Global Economics Program has organized a series of roundtables to discuss the United Nations proposal and has published its own roundtable. report Contains a series of recommendations to reform the global financial architecture.

Recommendations cover: (1) system governance; (2) increasing climate and development financing and addressing unsustainable debt. (3) Expand the global financial safety net. (4) International tax reform.

The remainder of this blog summarizes some recommendations for increasing financing for climate change and the SDGs.

The first reform considered concerns expanding the lending capacity of multilateral development banks (MDBs).

The G20 has been very active in this area and has supported several studies. The latest ones are: 2022 Independent Review of Multilateral Development Bank (MDB) Capital Adequacy Framework (CAF); 2023 Report on Further MDB Reform “triple agenda”; And finally in 2023 Roadmap for implementation of CAF report.

Implementation of the capital adequacy framework recommendations, which would increase MDB lending capacity by $196.5 billion, is currently being implemented. In addition to these reforms, there is a need to increase the capital of MDBs.

The G20 is calling for $100 billion worth of IMF special drawing rights (SDRs) to be recycled to EMDEs through MDBs.

In 2021, the Fund injected $650 billion worth of SDRs into the global economy to help countries cope with the economic impact of the pandemic. Countries received SDRs in proportion to their IMF allocations. Therefore, according to Georgieva et al. (2023) Rich countries, which already had sufficient foreign exchange reserves, received $350 billion in additional liquidity they did not need. Therefore, it remains “dormant”.

The first recycling of SDRs took place through the IMF’s Poverty Reduction and Growth Trust (PRGT) and Resilience and Sustainability Trust (RST). However, so far no recycling has taken place through the MDB. However, MDBs (unlike PRGTs and RSTs) can utilize recycled SDRs.

Using the ratios from the G20 Triple Agenda Report, recycling $100 billion of SDRs as hybrid MDB capital would raise $1.5 trillion in additional financing: $700 billion in direct financing and $800 billion in private indirect financing. will be done.

Expanding the lending capacity of MDBs is important, but not sufficient to meet all climate financing requirements.

There is a need to distinguish between climate change investments, which are national public goods (estimated to require $600 billion a year for adaptation and loss and damage) and are largely financed by public funds. And mitigation is a global public good that should be primarily financed by the private sector.

Mitigation is estimated to require approximately $1.8 trillion annually. About $1.5 trillion for energy transition and $300 billion for agriculture and natural capital. Existing systems of MDBs can adapt and deal with loss and damage. However, as suggested, Ghanem (2023) Financing mitigation will require a new institution, a green bank, which could be fully independent or part of the World Bank Group.

Green banks differ from existing MDBs because they are public-private partnerships in which private shareholders participate in financing and governance. Furthermore, it would only finance private sector climate change mitigation projects (through equity and loans).

Many proposals to reform the global financial architecture are being discussed and debated.

In this short blog, I have decided to focus on those aimed at increasing the capacity of the system to finance climate and development.

These are important challenges that the international financial system currently appears unable to adequately address. Among the reforms presented here, there is consensus on the need to implement the CAF recommendations, and the recommendations appear to be underway.

There remains resistance to the idea of ​​recycling “dormant” SDRs through MDBs, and decisions on this issue have been postponed multiple times.

The green bank proposal has not yet received much attention as many people are concerned about the creation of another international organization.

However, I would like to point out that there are currently 62 multilateral climate funds, which spend only $3-4 billion a year and are not well coordinated. It would make sense to close most of these funds and replace them with one green bank that can mobilize private support and the trillions of dollars needed and be held accountable for results.

Hafez GhanemHe is a former World Bank Vice President for Africa, a nonresident senior fellow in the Global Economic Development Program at the Brookings Institution, and a senior fellow at the Center for New Southern Policy.

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