One implicit objective in getting multilateral and regional institutions like the World Bank and the Asian Development Bank to accept natural disaster debt suspension clauses is to encourage commercial investors, including hedge funds, to do the same. Interestingly, the Inter-American Development Bank has already announced plans to include a “hurricane clause” in its loan agreements with Central American and Caribbean member states which would defer principal payments for up to two years.
In preparation for November 2022 COP 27 in Sharm El-Sheikh, Egypt, the Barbadian government upped the ante by also proposing important changes to the multilateral lending framework. Labeled the Bridgetown Initiative, these reforms include redirecting up to US$ 100 billion in unused International Monetary Fund (IMF) Special Drawing Rights (SDRs) for SIDS and operationalizing a US$ 45 billion IMF administered Resilience and Sustainability Trust. SDRs are international reserve assets allocated to IMF member countries based on their economic size. It allows member governments to exchange their SDRs to borrow from one another’s central bank reserves at very low interest rates in response to an economic crisis. While the IMF does have a Poverty Reduction and Growth Trust that, in part, utilizes unused SDRs to provide lending to low-income economies at zero percent interest rates, most SIDS are ineligible. That is because, but for eight countries, the remaining 31 SIDS are classified as middle or even high-Income economies.
The Bridgetown Initiative also calls for US$ 1 trillion in multilateral loans at concessional rates to fund climate change adaptation and resiliency in the developing world. It further proposes leveraging an additional US$ 650 billion held by the IMF to set up a Climate Mitigation Trust that, through loan guarantees, would attract much larger private sector capital to directly invest in carbon-free energy projects, for example, and avoid governments incurring even more unsustainable debt.
The Barbadian-led effort has been well received by the U.S. Special Presidential Envoy for Climate Change John Kerry as well as IMF Managing Director Kristalina Georgieva. In response, the World Bank Group launched an Evolution Roadmap in January 2023 to better address challenges including those of a cross-border nature such as climate change, that affect its ability to achieve its mission of economic growth, poverty reduction, and human development. An internal committee completed an initial report on proposed reforms in time for the World Bank Group’s Spring meeting in Washington, DC in mid-April 2023. Furthermore, following the Paris Summit this past June, the World Bank announced that it would suspend loan repayments to the most vulnerable countries hit by catastrophic events as an initial trial that might eventually expand to include all borrowers.
One reason the Barbadian proposals for overhauling the global financial architecture are likely to be adopted is that they are not pleas for no-strings attached compensation or reparations. Instead, they are focused on making the existing multilateral lending system more flexible to better meet the needs of governments to respond to the climate crisis and create incentives for more private sector investment. By contrast, an additional recommendation put forward by Barbados and other developing countries at COP 27 to tax the windfall profits of fossil fuel companies based on their carbon emissions, levy a small fee on airline tickets, and/or impose an international carbon border tax to fund so-called “loss and damage” grants for climate vulnerable developing nations has yet to gain traction.
The proposed resolution that the International Law Section’s drafting group representing various committees is developing not only calls on the ABA to support the suspension of loan payments by low and middle-income SIDS for up to two-years in response to a climate-exacerbated natural catastrophe, but also endorses the Bridgetown Initiative reforms to the multilateral lending system.