The choice between development or climate finance is false one

April 12, 2024|Written by Saliem Fakir
A woman leans over a standpipe to fill a water bottle from the tap. A solar panel array stands in the background.
Finance can be provided to global south countries to deliver on both development and climate goals. © Nabin Baral / IWMI

Spring in the northern hemisphere heralds another round of meetings hosted by the World Bank and the International Monetary Fund (IMF), and climate finance will once again be on the agenda. Discussions on how to channel funds towards global south countries to deal with the climate crisis will inevitably be split by a false dichotomy: whether to finance development, or to invest in transitioning these countries to net zero.

However, it is not a binary choice between economic growth and resolving climate challenges – they ought to be within one seamless jurisdiction. Unprecedented temperature rises and frequent severe weather events are degrading development gains, especially in developing countries. In this context, the World Bank’s new vision of ending poverty on a liveable planet is a welcome reaffirmation of the importance of balancing development with climate and broader environmental objectives.

While this vision can serve as a compass, the reform process needs to deliver more value for low-income countries to make a significant dent on resolving debt, improving fiscal sovereignty and mobilising resources for climate action. It must also be noted that the World Bank’s official development assistance has consistently declined, thereby pushing economies towards commercial markets at onerous costs.

Making climate risks part of mainstream debate

The debt sustainability assessments and credit ratings have not helped ameliorate the plight of these countries. To this end, the spring meetings should provide a moment to reflect on wider systemic issues and explore how MDBs can play a more constructive role, thinking out of the box to develop novel solutions.

First and foremost, the priority is to communicate in no ambiguous terms that central banks and other financial institutions need to develop frameworks to mainstream climate-related financial risks on account of both the physical and transition risks. While the former refers to the impact of climate-related events on lives, livelihoods and infrastructure, the latter captures a broad swathe of risks in terms of regulatory, technological, reputational and operational risks that can collectively lead to an escalation in insurance costs and raise the spectre of stranded assets.

Making climate risks part of mainstream debate will establish broad ownership within the financial ecosystem and establish accountability on how capital gets allocated towards realising a just and equitable transition away from fossil fuels.

Secondly, the meeting needs to communicate that it is equally focused on both the ends and the means. It can do so by committing to significantly widen the canvas of climate finance. In 2022, MDBs invested US$99.7bn in climate finance: of this, $60.9bn was made available for low and middle-income countries (LMICs), and $38.8bn for high-income countries. Just over a quarter of the overall investment was made available for adaptation. However, the G20 declaration from September 2023 recognises that this finance needs to be massively increased, “from billions to trillions of dollars globally from all sources”.

The spring meetings therefore need to provide clarity on how the scale of climate finance will be increased, how the unbalanced allocation between mitigation and adaptation will be addressed and how its delivery can be assured, irrespective of the geopolitical turbulence that we find ourselves in.

Accelerating the implementation of capital adequacy reforms based on recommendations made by an independent review of MDB’s capital adequacy frameworks (CAF) would be useful in this regard, especially on issues such as callable capital and hybrid capital issuance.It is estimated that implementing CAF measures alone could yield additional lending headroom of about $200bn over the next decade.

Providing climate finance without increasing debt burden

Thirdly, with great power comes great responsibility. If MDBs muster the power to make trillions of dollars available for climate finance, then they also have to bear the responsibility of not escalating debt vulnerabilities in LMICs. The efforts of global south nations to raise their adaptation capacity does not attract sufficient climate finance, leaving them and their developmental gains vulnerable to the vagaries of a rapidly changing climate. This increases their debt dependency, especially for middle-income countries that are not eligible for concessional finance.

The Global Sovereign Debt Monitor report shows that 136 of 152 global south countries are critically indebted. Almost the whole of sub-Saharan Africa, with the exception of Botswana and Eswatini, are under some degree of debt distress.

Therefore, it is not just the quantity but the quality of climate finance that matters. This would involve making climate finance for LMICs predictable, transparent and available at adequately or highly concessional terms. The Triple Agenda Report of the G20 Independent Experts Group has already made a strong case for a larger fraction of concessional finance to be channelled through MDBs. Delivery of finance while factoring in the needs and priorities of LMICs is therefore critical to resolve this jigsaw puzzle.

Finally, the meeting needs to fuse a long-term vision with an explicit recognition of developing countries’ needs and priorities to realise two important benefits. It will go a long way towards overcoming the growing schism between the west and the global south by addressing the growing perceptions of double standards and hypocrisy practised by the former.

In addition, the World Bank and IMF will also strategically and proactively align themselves with a decision by the UN’s climate body to set up a new collective quantified goal (NCQG) on climate finance, which calls for the needs and priorities of developing countries to be taken into account. This will not only ensure a shared ownership on how climate finance should be utilised in a given country context, but also enable the World Bank and IMF to hit the ground running once the negotiations on the NCQG are hopefully resolved at Cop29 later this year.

Using special drawing rights for climate finance

On our end, the African Climate Foundation is working on a proposal that would also push for concrete outcomes and turn discussions on global financial architecture reform into real solutions. In partnership with Financial Sector Deepening Africa, we have embarked on an exploratory effort to help think through ways to place Africa in a stronger position in the global financial architecture following the formation of the African Union financial institutions in February 2024.

Our proposal would argue for utilising pledged and rechannelled special drawing rights (SDR) in the IMF’s Resilience and Sustainability Trust to bolster crisis prevention on the continent. As of 1 March 2024, $41bn in SDR contributions had been received by the trust to achieve a variety of climate outcomes.

Much has been said about how SDRs are allocated between countries in the global north and south. However, more needs to be done to turn the SDRs given to African countries into ways to enhance financing pathways for climate solutions on the continent and reduce the impact of external shocks in countries that are already under debt distress.

Public finance Institutions should prioritise investment platforms that provide structured and politically aligned solutions for mobilising public and private capital behind credible programmes for simultaneous realisation of climate and development objectives. The spring meetings should forcefully reinforce this key message.

This page was last updated April 12, 2024

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