Despite the urgency of the crisis, the Summit fell short of agreeing on a decisive debt relief plan to tackle the pressing challenges faced by indebted developing and emerging economies. Nevertheless, important alliances were announced during the event.
by Sarah Ribbert (Project Coordinator) and Arabella Wintermayr (Editor)
Dear Reader,
At the end of June the Summit for a New Global Financing Pact took place in Paris, bringing together policymakers from around the world for a conversation on reforming the international financial architecture to stay below 1.5C of global warming. Inspired by the Bridgetown Initiative, and growing frustration over the unmet $100 billion climate finance commitment from advanced economies, the Summit stated goal was to build a new contract between the Global North and the South to address the crises of debt and climate change.
A crucial issue that gained prominence was the growing debt crisis in the Global South, emerging at the precise moment when substantial investment is needed to meet shared climate and development goals. In fact, new research from the DRGR Project shows that more than 61 countries, many of them among the most climate vulnerable, are acutely at or near debt distress and need immediate debt relief alongside other measures. Based on an analysis of historic examples, more than $812 billion in debt may need to be restructured across all creditor classes.
“The Summit fell short of agreeing on a decisive debt relief plan. Nevertheless, important alliances were announced during the event.”
Despite the urgency of the crisis, the Summit fell short of agreeing on a decisive debt relief plan to tackle the pressing challenges faced by indebted developing and emerging economies. Nevertheless, important alliances were announced during the event.
Most notably, the Vulnerable Twenty Group of Finance Ministers (V20) of the Climate Vulnerable Forum launched a coalition of developing countries to triangulate the multilateral system, private sector (including credit rating agencies) and philanthropies, “for win-win solutions on climate, debt and development.”
According to the statement which was supported by the DRGR Project, the coalition shall bring together developing countries to speak with a unified voice to the Group of 20 (G20), the Global Sovereign Debt Roundtable (GDSR) and other fora. The ultimate goal of the “Emergency Coalition for Debt Sustainability and Climate Prosperity” is to reform and align the sovereign debt architecture with development and climate goals.
Additionally, Colombian President Gustavo Petro and Kenyan President William Ruto proposed the establishment of a “Global Expert Review on Debt, Nature, and Climate.” This expert group shall be established by 2023 United Nations Climate Change Conference or Conference of the Parties of the UNFCCC, known as COP28, to comprehensively assess how sovereign debt impacts the ability of low- and middle-income countries to address climate change, conserve nature and decarbonize their economies.
This initiative received support from France and made it into the official Chairs Summary and Roadmap. It was welcomed by the V20 Finance Ministers and could help advance the international discussion on the debt-climate nexus, including the DRGR proposal.
Worth mentioning is also that the World Bank and a number of other multilateral banks and countries plan to start using natural disaster clauses in debt contracts, which will allow developing countries to pause their debt repayments if they are hit by a climate disaster. These clauses will however only apply to new debt. Climate vulnerability including climate-focused resource mobilization shall further be included in the International Monetary Fund (IMF) and World Bank debt sustainability analyses, a move the DRGR Project has been calling for quite some time.
“It is now or never for the international community – including the World Bank, the IMF and G20 – to take decisive action.”
Despite these promising developments, the Summit concluded with minimal attention to the fundamental obstacles hindering developing countries’ ability to invest in crucial development and climate initiatives, specifically the crippling burden of their debt levels.
The announcement of Zambia’s debt restructuring agreement with its creditors falls also in this context, after two and half years of negotiating under the G20 Common Framework for Debt Treatments without debt relief. Against the backdrop of a growing recognition that the G20 Common Framework has failed to engage all creditor classes or link debt relief to climate and development, the DRGR Project continues to advocate for its immediate adjustment. The new proposal, which is in many ways a modern-day version of the Brady Plan and the Highly Indebted Poor Countries (HIPC) Initiative of the 1990s combined, can serve as the foundation for reform discussions.
As DRGR Project Co-Chair Kevin P. Gallagher recently wrote for the Financial Times Alphaville, “The World Bank and the IMF finally did the right thing with HIPC, only after exhausting all the alternatives. Now we face not only a drag on economic growth and lost decades of poverty, but we also face the existential threat of climate change.”
In short, as the United Nations Environment Program has warned, it is now or never for the international community – including the World Bank, the IMF and G20 – to take decisive action.
While the past Summit in Paris was a significant event in itself, it also serves as preparation for the upcoming G20 Summit and the World Bank and IMF Annual Meetings later this year. These are the fora where important decisions on the international debt architecture are traditionally made. An important step towards this will be the G20 Finance Ministers and Central Bank Governors meeting in July.
Thanks for reading and until next time. Drop us a line with your thoughts: ribbert@boell.de