Exclusive: The IMF and others should provide a $100 billion climate foreign-exchange guarantee, according to a document.

Reuters || Shining BD

Published: 5/28/2023 5:18:32 AM

According to a document seen by Reuters, a top-level meeting in Paris next month will lay out a $100 billion plan to drive more money into climate and development finance in poorer countries by providing currency guarantees to investors.


 

The Bridgetown Initiative, led by Barbados' Prime Minister Mia Mottley, sent the plan to the world's governments ahead of the "Summit for a New Global Financing Pact" in Paris in June.
The proposal, outlined in an April 2023 consultation document, would rely on the firepower of the International Monetary Fund (IMF) and other multilateral development banks (MDBs), and is part of broader efforts to reform the international financial system.

It calls for the IMF and other multilateral development banks to "cut the excessive macro-risk premia on developing countries with $100 billion per year of foreign exchange guarantees" for financing in more volatile domestic currencies rather than the dollar or euro.

The guarantees would be for "just green transition investments," which according to one source involved in the plans could include "green" bonds focused on environmentally friendly projects, as well as others such as ocean-focused "blue" bonds and sustainability-linked bonds.
The MDBs would step in and compensate international buyers of those bonds if the country involved devalued its currency, effectively reducing the dollar-value of its bond payments.

By removing that risk for investors, it should significantly lower the interest rates that governments must pay. For some, it may be the impetus required to reclaim access to global capital markets lost during the COVID pandemic.

According to a report released at the COP27 climate talks, developing countries will require $1 trillion in public and private funds annually by 2030 to combat global warming, but capital flows to date have been a fraction of what is required.

According to a World Bank and other major multilateral lenders report, they will contribute $51 billion in 2021, with private finance contributing $13 billion.

The Paris summit, which will be hosted by French President Emmanuel Macron on June 22-23, will be attended by a number of world leaders as well as representatives from key global institutions such as the IMF and the United Nations.

Over the last few weeks, outlines of the proposals have been sent to the key groups preparing the discussions.

THE CALL TO ARMS

In addition to the currency concept, the document goes into greater detail about the main goals of Version 2.0 of the Bridgetown Initiative, which has become a heavyweight voice in global climate and sustainability discussions over the last 18 months.

"This is a call to arms," the source said of the document and its intention to elicit more concrete action from the IMF and multilateral lenders.

Following a sluggish start, the notion that fundamental change is required to help more money flow to developing countries in the fight against climate change has gained traction in the last year and was a key focus of global climate talks in November.

Since then, the World Bank has appointed a new President, former Mastercard CEO Ajay Banga, and released a reform plan that would increase lending by $5 billion per year, though Mottley and others would like to see the system go much further.

The proposals in the April document, which also include redistributing other IMF funds, are likely to be a key part of developing countries' negotiating position at the next round of annual climate talks in Dubai later this year.

Shining BD