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August 17, 2023

A Global Finance Proposal from the World’s Smallest Countries to Enhance Climate Change Resiliency and Adaptation

Thomas Andrew O’Keefe

At the center of the agenda for the June 22-23, 2023 Summit for a New Global Financing Pact in Paris hosted by French President Emmanuel Macron was a set of important changes to the current multilateral lending infrastructure. Spearheaded by little Barbados, these proposals merit the support and endorsement of the ABA.

In the lead up to the November 2021 United Nations Framework Convention on Climate Change Conference of the Parties in Glasgow, Scotland (COP 26), Barbadian Prime Minister Mia Mottley called for the suspension of debt and interest payments owed to multilateral financial institutions by Small Island Developing States (SIDS) while they respond to climate change exacerbated natural disasters. Already among the world’s most indebted countries per capita because of tiny domestic capital markets, low tax bases, and exorbitantly high interest rates these payments become untenable when SIDS must also devote scarce resources for reconstructing critical infrastructure as well as building up resilience to future disasters. The injustice is compounded by the fact these nations have least contributed to the climate crisis but are most impacted through more frequent and ferocious hurricanes and typhoons, rising sea levels, unpredictable rainfall, and increasingly acidic oceans that wipe out critical food resources. In the Caribbean, the vital tourism industry is also suffering as beaches are inundated with piles of rotting sargassum seaweed.

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.

    Thomas Andrew O’Keefe

    President, Mercosur Consulting Group, Ltd

    Thomas Andrew O’Keefe is the President of Mercosur Consulting Group, Ltd and was Chief of Party of USAID’s Caribbean Business Enabling Environment Reform (CBEE-R) project based in Barbados from July 2022 until July 2023. A dual national of Chile and the United States, he is a co-Chair of the International Energy and Environmental Law Committee.

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