SDRs from the IMF for Climate Financing?
Please take note of this insightful blog from Liane, co-head of the Washington office of the hbf.
Published on 05.02.2010 by Liane Schalatek
In the past, the International Monetary Fund (IMF) has often been accussed of “mission grab” –its attempt to gain legitimacy, relevance and more international power by assuming tasks it is not well suited for. Well, it seems to have done it again… this time with a daring proposal on climate financing.
This at least is one way to explain the announcement that IMF Managing Director Domique Strauss-Kahn made during the World Economic Forum in Davos just a few days ago that IMF staff is working on a proposal for a “Green Fund” worth billions of dollars, which should help a world shaken up by the global financial crisis to pursue a low-carbon growth strategy going forward.
The idea of a “Green Fund” with up to US$ 100 billion in just a few years sounds vaguely familiar. In fact, didn’t the Copenhagen Accord, the political declaration which kind of saved the COP15 from total failure, talk about a “Copenhagen Green Climate Fund” in just about the same amount? Indeed,seen in this light, the proposal by Mr. Strauss-Kahn almost sounds like a sales pitch: Why, if the world is so bound and intent on creating a Green (Climate) Fund, aren’t you looking at an well-established institution with a stellar reputation such as the IWF to work out the details of such a fund or administer its resources? Especially, since the head of the IMF has an idea how the US$100 billion needed can be raised, at least in part. By the way: this is a sticky point in the Copenhagen Accord: it does not address where the money could or should come from, except in a rather oblique reference to a “wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance.”
So called “Special Drawing Rights” (SDRs) are the solution, according to Strauss-Kahn. Very conveniently, those SDRs, an international reserve asset created by the IMF in 1969 and based on a basket of four key international currencies, are manged internationally by the IMF.
Currently, some US$ 324 billion worth of SDRs are ready for use by countries — a hefty increase, and with this some added importance internationally for the IMF, was approved last fall by the G20 to safeguard against the collapse of the international financial system.
The SDRs proposed for the Green Fund are supposed to be created additionally and be made available to developing countries and industrialized countries saddled with enormous debts from dealing with the global economic crisis in order to confront climate change. It was in Copenhagen just a few weeks earlier were George Soros, the billionaire investor and head of the Open Society Institute had made a similar SDR-based proposal. At the time, IMF officials declared it interesting, but pretty hard to do. Now, IMF head Strauss-Kahn explained the organization’s apparent change of heart during a panel discussion in Davos with his personal reflection about the (non) results of Copenhagen and the need to think “outside the box.” The IMF is planning to quickly start discussions with central banks and finance ministers on the feasibility of such a Green Fund.
The proposed mix of actors — the IMF, central bankers and finance ministers — worries civil society observers. They point out that central bankers, even more so than finance minsiters, would insist on tough conditionalities being fulfilled as prerequisite for countries accessing such a fund. Given the major donor countries’ disdain for the UNFCCC or its financial mechanism, the Global Environment Facility (GEF) — with the latter being seen as largely inefficient and slow –, it is more than unlikely that such a Green Fund would be placed under their control.
One possibility could be the creation of a joint IMF-World Bank control committee, conceivably with participation by the regional development banks, especially since the World Bank already administers a portfolio of climate investment funds. Those, by the way, have garned more pledges and contributions in a short time than several existing UNFCCC adaptation funds, the LDCF and the SCCF, which, to this day, seven years after their establishment, are still awaiting the fulfilment of some rather meager pledges by the industrialized countries . Thus, in such an arrangement the control of donor countries over the Green Fund would be assured.
Of course, such a control structure (based essentially on “one dollar-one vote”) would be unacceptable for many actors in the developing world. Southern activists waste no time pointing out that movements in developing countries will not stand for a role of the IMF in climate finance — the harsh conditionalities of structural adjustment programs and their massive sozial repercussions are still a livid memory. But the rejection of a possible IMF role in climate finance is even more fundamental, based on a normative principle, namely the obligation of the rich countries of the North to repay their climate debt to the South.
Creating SDRs, so the fear of these activists, will just allow Annex 1 countries to “offset” their climate debt, similarly to the way industrialized countries are offsetting their emissions via the CDM. Also, SDRs might be just too tempting for some governments in developing countries to keep in order to bolster their balance sheets instead of disbursing them quickly for climate projects.
So, is there a possible future for SDRs in climate finance? This, of course, depends on whether many open questions and heavy concerns, especially in developing countries, can be dealt with satisfactorily. The intentions of the IMF might become clearer once the organization releases its promised paper in a few weeks detailing the proposal. The debate about the pro and cons of “climate SDRs” will continue in any case.