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The Global South Is Confronting a Debt Crisis, and the IMF Is Responding With Half Measures

Poor countries need debt relief fast. The International Monetary Fund’s new “sustainability” idea probably won’t help and might even make the climate crisis worse.

The IMF's new chief economist Pierre-Olivier Gourinchas speaks in front of a banner announcing the IMF's annual meeting.
Pierre-Olivier Gourinchas, new chief economist at the International Monetary Fund, speaks during an interview on April 19.

If you live in the United States, chances are you missed the fact that the International Monetary Fund (IMF) and the World Bank are convening in Washington, D.C., this week for their annual spring meetings. There’s a war on in Ukraine, after all. Prices for life’s essentials are skyrocketing, and the planet is rapidly warming. Attentions are focused elsewhere. 

If they wanted to, though, the IMF and the World Bank could almost instantaneously put hundreds of billions of dollars toward confronting some of the world’s most pressing crises. They’re doing no such thing.

Stateside coverage of this week’s meetings has mostly focused on whether the United States and Russia will agree to be in the same room with one another as Vladimir Putin’s invasion of Ukraine continues. Poorer countries, though, have other reasons for following the meetings closely: Right now, they face the prospect of a global debt crisis big enough to rival the one that rocked the developing world in the 1980s. 

Sixty percent of the lowest-income countries either are already in debt crises or could be there soon. Many of them are already being hit hard by climate change and were devastated by the pandemic, too, thanks largely to a vaccine apartheid that has put much of the Global South on the losing end of a harshly uneven global recovery from Covid-19.

The IMF’s main answer to this year’s explosive challenges has been to create something called the Resilience and Sustainability Trust (RST), pitched in the fund’s press release on its executive board approval last week as a way to “help countries build resilience to external shocks and ensure sustainable growth, contributing to their long-term balance of payments stability.” But the $50 billion lending trust is—as University of Massachusetts Amherst economist Jayati Ghosh told me—a “drop in the bucket” compared with the trillions of dollars’ worth of need and is expected to raise just $45 billion in voluntary contributions this week. “It’s not that I’m a big fan of the IMF, but there is a lot they could do,” she told me. “Nobody seems to recognize the urgency and enormity of the problem.”

In reality, the RST was created to solve a very particular problem. Facing international pressure last year, the IMF issued $650 billion in Special Drawing Rights (SDRs), “an international currency created out of thin air and distributed to sovereign nations around the world,” explained economist Andrés Arauz, former general director of banking at the Central Bank of Ecuador, who also served in Rafael Correa’s left-wing government and mounted an unsuccessful presidential campaign in 2021, losing in a runoff.*

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SDRs, Arauz said, can be a “force for good”: Unlike IMF loans, SDRs don’t come with strings that require countries to lower their debt-to-GDP ratio or make themselves more attractive to foreign investors through brutal labor reforms and privatization schemes. A new Oxfam report finds that 87 percent of loans extended through IMF pandemic support programs require countries to undertake austerity measures. In exchange for a $2.3 billion IMF loan in 2021, Kenya implemented a three-year public sector pay freeze and raised taxes on food and gas. SDRs are distributed without such requirements, though in accordance with IMF quotas. The IMF quotas, however, mean the world’s biggest economies get most of the SDRs—around $400 billion in the last issuance. In rich countries like the U.S., those SDRs mostly languish on balance sheets. Poorer countries generally put them to use. According to a new report from Arauz and Kevin Cashman, for the Center for Economic and Policy Research, more than half of low-income countries used the SDRs issued last year, including roughly 90 percent of countries in Sub-Saharan Africa.

The new RST will redistribute whatever SDRs rich countries decide to donate via loans of not more than $1 billion SDRs each. Although theoretically open to three-quarters of IMF, the trust, experts believe, will only be available to countries with existing IMF loans and will “depend on countries’ debt sustainability and commitment to making structural changes,” per Bloomberg. So, though in theory the IMF would be extending further credit to cash-strapped countries, in practice that could mean that money ostensibly intended for climate programs and pandemic recovery will be funneled toward paying down existing IMF debt.

Precisely what conditions will be placed on RST loans is still unclear. Lara Merling, senior policy adviser at the Global Development Policy Center at Boston University, worries that the terms of the new loans could require borrowers to adopt the IMF’s preferred climate policies: carbon taxes and reducing consumer-side fossil fuel subsidies, each of which have fueled massive protests in recent years. “It’s not enough money to actually meet adaptation needs or mitigation needs,” she says of the RST. “But using it means the IMF could shape your policy agenda.” 

Ghosh added that the small size of the fund makes it more likely that governments—especially those already under pressure from the IMF to court private investment—will use its funds to “de-risk” corporate profits, using public funds to shoulder the risk of private sector green spending while investors reap the rewards. As IMF managing director Kristalina Georgeiva stated, “Reforms supported by the trust are also intended to catalyze increased financing from the private sector, donors, and other international financial institutions.” What remains to be seen, as well, is whether rich countries will count donations to the RST toward their still-unfulfilled pledge to deliver $100 billion a year in climate finance to developing countries. Around 80 percent of the climate finance furnished under that pledge has been in the form of loans, Oxfam found.

The new trust is a very far cry from what idle SDRs could be doing. “If rich countries decided to donate only 25 percent of their SDR holdings,” Arauz said, “they could strike out the entire world’s debt to the IMF.” He’s weary of waiting for that to happen or for the fund to develop a more just redistribution facility than the RST. Similarly to Barbados Prime Minister Mia Mottley—who advocated for an annual $500 billion SDR issuance at COP 26—Arauz argues that the priority should be on getting more SDRs out the door on a continual basis. “Even with the unjust distribution,” he said, “if you had a sizable creation of SDRs, a certain amount will reach those in need.” Arauz also suggests that allowing existing bodies like the UN-created Green Climate Fund to become a “prescribed holder” of SDRs—like the European Central Bank or African Development Bank—could help them flow more easily toward mitigation projects.

The need for additional SDRs is especially acute as the U.S. Federal Reserve considers raising interest rates. In the name of combating domestic inflation, dramatic rate hikes from Washington over the coming months could make the world’s reserve currency harder to come by—and make debts denominated in U.S. dollars much harder to pay. For many countries, including Ecuador, fossil fuel reserves are a relatively quick way to pay off creditors and fund basic services. 

This pits short-term needs against long-term sustainability in more ways than one. There’s the obvious climate implications of doubling down extraction: Some of the countries worst hit by the climate crisis are also the most indebted and more likely to tap reserves that will continue to fuel the problem. And as Foreign Policy’s Catherine Osborn points out, high-cost oil producers like Ecuador could also see fossil fuel revenues dry up much earlier than Gulf oil producers, for instance, for whom drilling is as easy as sticking a straw in the ground.

Besides failing to tackle the real supply constraints and profiteering that are fueling rising price in the U.S., a Fed interest rate hike, Ghosh explains, threatens to create a “negative downward spiral.” As rates climb, she says, investors will retreat back to safe havens in the U.S. and Europe, leading to an outflow of dollars from the Global South. “Meanwhile you have to pay more for food or fuel, so you need more dollars, but it’s harder to get them. Then it becomes more difficult to pay debts. And because of the capital outflow the currency depreciates,” she told me. Late last month, the Egyptian pound plunged by 17 percent against the dollar as wheat prices skyrocketed. The country—which will host COP 27 later this year—is the world’s largest wheat importer and relies on Russia and Ukraine for 85 percent of its staple crops. Egypt has received $20 billion in loans from the IMF since 2016, and representatives will reportedly request as much as $12 billion more this week.

In its own way, the Resilience and Sustainability Trust approved last week encapsulates the worst of climate finance: Countries with hundreds of billions of dollars to spare can garner good press for making token pledges. Poorer countries that desperately need cash can only access the funds if they sign on to potentially onerous loan conditions, and they’ll have to pay that money back eventually. Meanwhile, the U.S.—the country that bears the most historical responsibility for the climate crisis—could be doing a lot more, even without congressional approval. U.S. veto power over the IMF means it could push for another $650 million SDR issuance and stop encouraging countries to support new fossil fuel production with its loan packages.  Thanks to our grossly unequal global financial order, though, the IMF this week seems on track to reflect the whims of its most powerful members. “It is so evident that they have completely forgotten about the climate issue,” Ghosh said of the U.S. and the EU. “They are all going back to fossil fuels like no tomorrow.”

* This piece originally misstated the number of Special Drawing Rights issued by the IMF last year.