Top officials from the International Monetary Fund (IMF) and the World Bank are under scrutiny as they join economic leaders in a two-day summit in Paris to address the interconnected challenges of poverty alleviation and climate change.
Hosted by French President Emmanuel Macron, the summit aims to refocus the global financial architecture to effectively tackle the extensive financing required to achieve the world’s climate targets by the end of the decade.
The discussions have shed light on the climate change policies of the IMF and World Bank, prompting calls for multilateral development banks (MDBs) to play a more significant role in helping developing economies access funds for climate change adaptation and mitigation.
– Insufficient Funding –
In recent years, both the IMF and World Bank have implemented policies to assist countries in managing the transition to a climate-conscious future. The IMF launched the Resilience and Sustainability Trust (RST) last year, with over $40 billion in funds available to provide long-term loans for projects related to climate issues. Bangladesh, Barbados, Costa Rica, and Rwanda have been the initial beneficiaries of this initiative.
Former World Bank President David Malpass celebrated efforts under his leadership to double climate financing to $32 billion and establish a global warming action plan for the period 2021-2025. His successor, Ajay Banga, emphasized the need for the bank to prioritize both climate adaptation and mitigation in his inaugural address.
However, both institutions acknowledge that their current financing capacities are inadequate to meet the needs of developing economies. The IMF estimates that these needs will exceed one trillion dollars per year by 2025.
– Institutional Reforms –
Since late last year, the United States, European Union, and other entities have been advocating for a series of reforms to the IMF and World Bank. These proposed changes include reforming the governance of MDBs to ensure greater involvement from major emerging markets and developing economies, as well as expanding their mandates to incorporate climate change financing.
The objective is to make progress on these reforms before the IMF and World Bank’s annual meeting in October, scheduled to take place in Morocco.
The World Bank’s primary goal is to promote long-term economic development and poverty reduction, while the IMF focuses on fostering global macroeconomic and financial stability through financial and technical assistance and policy advice.
Some developing countries have expressed concerns that these reforms might lead MDBs to prioritize climate change over poverty alleviation.
A significant breakthrough occurred during the IMF and World Bank spring meetings when an agreement was reached to increase the World Bank’s lending capacity by up to $5 billion annually for ten years. However, this was primarily achieved by leveraging the bank’s resources, rather than securing additional funding from member countries.
– More Work to be Done –
Even if the reform process succeeds, leaders of the IMF and World Bank emphasize that international financial institutions alone cannot meet the substantial needs of the most vulnerable countries.
Banga, during his campaign for the World Bank presidency, emphasized the importance of greater private sector involvement in financing the climate transition. He stated that “there is not enough money without the private sector” and proposed the establishment of a system that can share risks or mobilize private funds to achieve the bank’s goals.
Prior to the summit, there were hopes of progress being made on a two-year-old pledge by wealthier countries to allocate $100 billion in IMF special drawing rights (SDRs) from affluent nations to vulnerable economies. SDRs are foreign exchange reserve assets allocated to countries based on their contributions to the IMF.
The plan, which faced resistance from some European countries, involved wealthier nations lending these foreign exchange reserve assets to the IMF, which would then lend them to developing economies.