In 2021, the International Monetary Fund (IMF) issued a historic allocation of Special Drawing Rights (SDRs) equivalent to $650 billion. These supplementary international reserve assets were allocated to help meet the liquidity bottlenecks facing many countries due to the COVID-19 pandemic. However, because of the IMF’s quota-based decision-making structure, SDRs primarily flowed to more advanced economies, even though they aren’t facing the same economic pressure as developing countries. In response, Group of Seven (G7) nations agreed to re-channel $100 billion in SDRs to the countries that need them, roughly 20 percent of those SDRs allocated to G7 countries. China has pledged to provide $10 billion of its SDRs to Africa, at 25 percent of its allocation.
As a vehicle to facilitate SDR re-channeling, the IMF announced it was looking to establish a ‘Resilience and Sustainability Trust’ (RST). In October 2021, the Group of 20 (G20) also called on the IMF to establish such a Trust, with a very clear mandate of providing climate vulnerable nations with access to short-term and long-term financing in face of the climate crisis.
This unprecedented and much needed financing instrument could address a glaring gap in the international finance architecture. At this writing, however, the design particulars of the RST would deem this financing unattractive to much of the IMF membership, essentially locking up billions in climate- and pandemic-fighting resources.
To that end, the Task Force on Climate, Development and the IMF has published a new policy brief underscoring five design features critical to ensuring the RST can have the transformational impact that developing countries need.
The RST should:
- Broaden eligibility and scope. Eligibility criteria should ensure access to countries vulnerable to both physical and transition risks of climate change. Income-based measures do not capture the acute exposure to climate risks many higher-income climate vulnerable nations are facing.
- Provide concessional terms with no requirement of existing IMF programs. Concessional rates would protect developing countries that are already overburdened with debt from shouldering more. Pre-conditioning the RST on a country having an existing IMF program would also exclude most vulnerable countries
- Prioritize country ownership and avoid conditionalities. The IMF should actively work with countries to help achieve nationally determined contributions, while also playing a leadership role in global policy coordination and capacity building. Additionally, onerous conditionalities would ultimately dampen demand and undermine the effectiveness of the RST.
- Ensure collaborative governance. The IMF should actively involve the World Bank and other multilateral development banks (MDBs), as well as outside experts and civil society, in the RST’s governance. MDBs’ experience with climate programming and longer-term investments and disaster risk financing will be vital.
- Build to scale with self-replenishment mechanisms. The RST should be scaled in a manner commensurate to the needs of member states in building resilient and sustainable economies. This includes effectively capitalizing the RST and establishing mechanisms to trigger SDR replenishment.
At the Paris Peace Forum in November 2021, IMF Managing Director Kristalina Georgieva said the design of the RST would be ready for IMF Board approval by the 2022 IMF and World Bank Spring Meetings, with the goal of making the RST operational by the Annual Meetings in the fall. There is still time to improve the design of the RST to make it an important, transformational instrument for resilience and sustainability in the world economy.
