Important climate finance issues at COP28

The world is faced with not only the existential threat of climate change crisis, but the impact it is producing in terms of creating a situation of polycrisis, which requires ample climate finance, while it suffers from lack of climate change preparedness due to years of neoliberal- and austerity policies’ assault, where the latter also contributed significantly to increasing global debt distress.

With regard to this, noted economist Nouriel Roubini in his recent article ‘Our megathreatened age’ with Project Syndicate indicated that while on one hand ‘Everyone now acknowledges that economic, monetary, and financial threats are rising and interacting in dangerous ways with various other social, political, geopolitical, environmental, health, and technological developments’, on the other debt distress in the wake of the pandemic has also acutely increased, whereby ‘high and rising private and public debt ratios, which reached 330% of GDP globally in 2022 (420% in advanced economies and over 300% in China), mark a dramatic shift from the pre-2021 period, when debt ratios were high, but debt-service ratios were low.’

In the ongoing COP28 meetings in Dubai, there has finally been financial acknowledgement of responsibility by countries with carbon footprint towards highly climate change affected countries.

Having said that, the resources that have trickled into the ‘loss and damage’ fund have been very little, given climate finance estimates needed for making climate resilient economies, and for keeping average annual temperatures below 1.5°C range in trillions of dollars for the next number of years.

According to a recently published article ‘First cash pledged for countries devastated by climate change: COP28 starts with historic decision’ by Nature magazine, ‘Of 197 countries represented at COP28, the UAE and Germany have pledged $100 million each to the fund; other European Union member states have together promised $125 million, and the United Kingdom pledged around $50 million. The United States pledged $17.5 million and Japan $10 million. The fund will be administered from the World Bank in Washington DC until a more permanent home can be found.’

There has also been emphasis on carbon pricing as an important source for climate finance in the Cop28 meetings. In this regard, the comments of Kristalina Georgieva, managing director of International Monetary Fund (IMF), at the meetings were highlighted by a December 07, Guardian article ‘Carbon pricing would raise trillions needed to tackle climate crisis, says IMF’ as follows: ‘Diverting the trillions of dollars by which the world subsidises fossil fuel production each year, and putting an implicit price on carbon emissions, would generate the vast amounts of cash needed to tackle the climate crisis, the head of the International Monetary Fund has said.’

Although a step that surely needs to be taken, but the extent depends on the impact of such levy on overall cost-push inflation in countries, especially those which are net importers of oil, like Pakistan.

An important source for making sure that countries have greater fiscal space to make much-needed climate change related expenditures, especially developing countries like Pakistan, which are also highly debt distressed – while currently the number of debt distressed countries stands at more than fifty – is first an enhanced allocation of special drawing rights (SDRs) to the tune of maximum limit available with IMF at $650 billion.

This demand is quite long overdue, since the last such allocation was made during the time of Covid pandemic in August 2021. Moreover, given the long-tenured nature of spending needed to make the transition to a green global economy, there should also be discussion at the meetings to make a yearly climate change-related SDR allocation – as advised under the ‘Bridgetown Initiative’ – for high climate change vulnerable countries.

As a very important corollary to discussion at the COP28 meetings regarding making available SDRs is the usage of appropriate allocation mechanism. As things stand, and as for instance they were made during the August 2021 allocation, and that is based on quota, under which most of the enhanced SDR allocations of 2021 went to already rich countries.

This is indeed unfair, given quota or contribution of a particular country to the overall pool of resources at the IMF, favours the already rich countries, since their contributions are greater than developing countries’.

Hence, instead, allocation needs to be made based on the climate change vulnerability of a particular country, and not how much it contributes to IMF’s resources.

Another important issue at hand, and which needs greater traction at COP28 meetings, is doing away with IMF’s surcharge policies, which put extra repayment burden on countries that are already challenged with regard to balance of payments crisis, and having difficult debt repayments situation.

Hence, two issues are at hand: one is the application of a quota system that mainly takes into account how much countries contribute to the pool of resources at the Fund, which in a world of existential threats, mainly the climate change crisis, requires a shift away to inculcating other factors that reflect, for instance, the level of fiscal space with a country, the level of debt distress it faces, and the extent of exposure to climate change.

At COP28 a needed reform of the global financial architecture could include identifying ways in which austerity policies could be reduced, and also the reform of the quota system under which SDRs are allocated among countries.

Second is the continuation of IMF surcharges as levy on late repayments of non-concessional lending, which makes little sense, given the high level of debt distress already leaves countries with little to spend on climate resilience, and disaster management, and overall sustainable development goals (SDGs).

In fact, the United States should take a lead on these surcharges, since this similar to what the US President, Joe Biden reportedly sees as ‘junk fees’, as a February 2023 Market Watch article ‘Biden wants to outlaw ‘junk’ fees for Americans, but his administration can also stop hidden charges that hurt poor countries’ indicated the following: ‘In his State of the Union Address, President Joe Biden made a trenchant call to eliminate “junk” fees from businesses including airlines, banks, and credit card companies – “those hidden surcharges,” as Biden put it, that “too many businesses use to make you pay more.” …But while Biden is going after exploitative, hidden fees domestically, there are other exploitative, hidden fees impacting the lives of hundreds of millions of people around the world that the US has the ability to help end immediately. …the IMF controversially imposes additional fees on its most heavily indebted borrowers, fees that it calls surcharges.

These surcharges siphon valuable resources away from where they’re needed most, such as pandemic and disaster response, climate preparedness, providing adequate nutrition and health care, and development, while punishing countries that are already struggling with major debt burdens. Surcharges collectively cost impacted countries an estimated $1 billion per year, and increase the cost of borrowing from the IMF by 64%.’

In its official explanation, IMF points out that it applies a) ‘level-based surcharges’ whereby ‘200 basis points are applied on the portion of GRA credit outstanding greater than 187.5 percent of quota’, and b) ‘time-based surcharges’ according to which ‘100 basis points are applied on the portion of credit exceeding the threshold for more than 36 months (51 months in case of borrowings under the Extended Fund Facility (EFF))’.

According to European Network on Debt and Development (Eurodad), in its December 2, 2021 published ‘A guide to IMF surcharges’ by Daniel Munevar pointed out ‘While countries are struggling to tackle the pandemic, the IMF is set to experience a financial windfall linked to surcharges.

Projected interest payments by countries affected by surcharges are set to reach US$ 12.9 billion between 2021 and 2028. 39 per cent of this amount is linked to regular GRA service fees and charges paid by all countries borrowing from the IMF.

The remaining 61 per cent would be due to surcharges. These could reach as much as US$ 7.9 billion over this period, with most of the payments scheduled to take place between 2021 and 2023.’

In the case of Pakistan, for instance, the country in its EFF programme it negotiated with IMF in 2013 at 425 percent of its quota, was subjected to IMF surcharges.

Moreover, Pakistan entered another EFF programme in 2019, where it obtained loan at 210 percent of its quota; once again subjecting it to IMF surcharges.

According to the same Eurodad report, Pakistan faced surcharges at $49 million (2021), $130 million (2022), $122 million (2023), $69 million (2024), and $22 million (2025).

Copyright Business Recorder, 2023