Three years after the International Monetary Fund (IMF) identified climate change as macro-critical and a threat to macroeconomic and financial stability, the debate about whether it falls within the IMF’s mandate can be deemed to be over. It is now a question of how the IMF should address climate change.
Accelerating stalled development, shock-proofing vulnerable economies and shifting to a clean energy economy will require a global investment push undertaken in a fiscally sound and financially stable manner. A transformed IMF, along with the corresponding actions of the multilateral development banks, will be necessary if the global economy is to keep the UN’s 2030 Agenda for Sustainable Development and the Paris Agreement alive.
Steps like establishing the Resilience and Sustainability Trust (RST) and the increased attention to climate change in IMF surveillance are welcome, but ambition remains limited. An IMF that is a force for spending cuts, rather than growth-generating green investments, is fundamentally at odds with staying below 1.5°C of warming.
To fulfill its mandate, the IMF must urgently evolve across its three key areas: surveillance, lending and global leadership. A new report from the Task Force on Climate, Development and the IMF, of which I am a member, lays out a detailed action agenda to carry this work forward.
Making IMF surveillance work for climate
The IMF must embed high-quality climate analysis throughout its bilateral and multilateral surveillance so that members can have an accurate understanding of the economic environment confronting them. Not only will increasingly frequent climate-related disasters and events like droughts strain members’ finances, but cross-border spillovers, like the effects of carbon border adjustment mechanisms, will have negative impacts on developing and emerging market economies.
But climate change is not only a story of risks. The IMF also must take account of the benefits of climate action, particularly in its debt sustainability analyses. The IMF’s policy advice should recognise that investments in climate action both prevent longer-term climate risks and can generate economic growth, even if it raises some issues regarding short-term prospects.
As the IMF advises countries on how they can finance these climate investments, it must acknowledge that carbon pricing is only a partial solution. Countries will also need to scale up progressive domestic resource mobilisation and have access to external finance at greater volumes and better terms, but on a macro-consistent basis, ensuring how external capital flows can be absorbed through appropriate current account deficits, along with maintaining financial stability.
Scaling IMF lending for climate
Further, the IMF must improve its own lending. As a starting point, the IMF needs sufficient firepower, and future analyses of the adequacy of IMF resources should incorporate the potential of climate shocks and overlapping crises. One immediate priority should be to replenish the Catastrophe Containment and Relief Trust and expand its eligibility criteria, enabling vital debt relief for countries recovering from climate shocks. The RST will also need additional resources to keep up with demand. Removing the requirement of a concurrent IMF programme will enable access to countries aspiring to build resilience to prospective shocks.
Moreover, the IMF must ensure its own programmes are aligned with the Paris Agreement and do not exacerbate borrowing countries’ vulnerabilities. These programmes must ensure that countries’ proposed growth paths do not leave them exposed to severe risks from the energy transition down the line.
The IMF should also strive to reduce the cost of borrowing and further reduce surcharges, which punish countries with little to no access to alternative sources of finance. Crucially, if the IMF is to facilitate a push for global climate and development investment, rather than inhibit it, programme conditionalities should prioritise resource mobilisation along with fiscal consolidation.
Enhancing IMF global leadership on climate
The IMF is a powerful voice on economic decision-making, and it should clearly communicate the benefits of climate action and the dangers of climate inaction. IMF analysis may find that the scale of investment needed to meet global goals would push countries above debt sustainability thresholds.
It must then call for greater international action on international taxation, debt relief, and the provision of grant-based and concessional resources, while advising a fiscal consolidation path that enables the actions required for climate change mitigation and adaptation, as well as economic and social development. The IMF can itself contribute to this resource mobilisation by accelerating the re-channeling of special drawing rights and moving towards a new issuance.
All together, these changes would amount to a transformed IMF. Calls for this transformation are growing, including the recent declaration from the 68 members of the Climate Vulnerable Forum. Other global calls, from the communiqués of the Group of 24 to the Bridgetown Initiative to the Nairobi Declaration, have echoed many of the elements of this IMF transformation agenda.
The global community does not want to reach 2030 and find that the chance to build a stable, healthy and prosperous world has disappeared. These challenges, while sizeable, are in fact surmountable – but only with action that is sufficiently urgent, ambitious and empirically driven.
Today’s IMF is not ready to play its role in that response, but a transformed IMF could.
This page was last updated November 14, 2024
Written by
Rakesh Mohan is a former executive director of the International Monetary Fund board and former deputy governor of the Reserve Bank of India. He is currently president emeritus and a distinguished fellow at the Centre for Social and Economic Progress.
