The IMF has identified domestic resource mobilization as an area where it can help. As part of the plan, the IMF will start a new programme with the World Bank on tax, quality of spending and local currencies and bond markets next year to help developing economies tap their tax potential to finance development goals. Its objective is to set the target between a 0.5% and 1% increase in the tax-to-GDP ratio based on better policy and stronger institutions using digitalization. Georgieva said the IMF is also interested in debt-for- climate swaps to help developing economies with climate change adaptation and mitigation. She said many developing economies have difficulty attracting private investors because of complex regulations. So, the IMF is working on moving more financing to developing countries, not only through direct contribution but also by bringing development finance and private financiers together to discuss opportunities.
To accelerate decarbonization and meet the 1.5 degree celsius target, Georgieva suggested countries, including India introduce carbon prices for trading. Though carbon price in the last 10 years has jumped from $20 per tonne on average, IMF analysis shows that it has to go up to $85 by 2030 to be impactful. Direct and indirect subsidies worth $7.1 trillion must be deployed to fight climate change, said Georgieva. Edited excerpts:
Managing expensive budgets and costs can be difficult for developing countries. What are the solutions?
Yes, it is difficult in a world that has gone from one shot to another with the consequence being fiscal space in countries has shrunk in some countries. The fight against inflation means that interest rates are high, and for countries with a high level of debt that eats up resources. On top of it, with advanced economies now moving towards industrial policy and green subsidies—which overall is a good track to accelerate decarbonization—they become more attractive for private investors because it’s easier to invest in the developed world.
So, in that environment, it is difficult for emerging markets and developing economies to invest in climate action. And yet, if they don’t, the world is cooked because even if the US, Europe, Japan and Australia bring their emissions down to zero, two-thirds of the emission increase comes from fast-growing emerging markets in developing economies.
So, what do we do in that difficult context?
First, we recognize that the developing economies do need to do more domestically to raise financing and also to deepen domestic capital markets. We have identified domestic resource mobilization as an area where the fund can do quite a lot. Next year, we will start a very big programme on tax, quality of spending local currencies, and bond markets in collaboration with the World Bank. I talked to leaders from Africa, and they completely embrace our objective of setting a target somewhere between 0.5% and 1% increase of tax to GDP based on better policy, and stronger institutions using digitalization.
Second, we know that many developing economies have difficulty attracting private investors because of complicated regulations and red tape. So, we have built again, a big programme in that area. Help countries to stand tall for private investors to see them.
Third, we work concretely on moving more financing to developing countries, not only through the RST (Resilience and Sustainability Trust). The RST is our most direct contribution, but also by bringing development finance and private financiers together to discuss opportunities.
We are also very loud that we need more money from the rich world. You promised $100 billion a year. Where is it? Please show us the money. So, it’s not going to be one thing, it will be a combination of factors. And when countries have strong fundamentals, good things happen.
What is the IMF bringing to COP28?
We bring our assessment of how far we are in implementing the Paris Agreement. The emission reductions are not at par with what is necessary for the world to remain on track for 1.5 degrees Celsius on the increase of temperatures. Our research shows that nationally determined contributions, taken together, are likely to deliver in this decade only an 11% reduction vis-a-vis 2019. To stay on track for 1.5 degree, or at least for 2 degrees, we need between 25% and 50% emission reduction this decade
Second, we have done a lot of analysis on economic incentives that are necessary to accelerate decarbonisation to reduce and over time eliminate harmful subsidies, fossil fuel subsidies.
There, what we have seen over the last two years is an increase in subsidies because of the cost-of-living crisis. Governments everywhere for understandable reasons are helping people, but by helping people they are creating more subsidies that are not helping our fight for climate change.
The number of direct subsidies last year was $1.3 trillion. If you take into consideration the indirect subsidies that come from not pricing carbon but from health impacts and the loss of productivity, then we are getting $7.1 trillion of direct and indirect subsidies. Just think what we can do with $7 trillion if we were to deploy that in the fight against climate change.
We also look at the most important incentive to accelerate decarbonization and it is the carbon price. There is some good news. The number of jurisdictions that have included either tax or trade has increased. Now we have about 50 countries and there are some 20 plus sub-national jurisdictions like California.
The coverage of carbon with carbon price in the last 10 years has jumped from 10% to 25%. But we still have 75% to go and the price of carbon of the emissions that are priced. So, this 25% where we have a price is on an average of $20 a tonne. Our analysis shows that it has to go up to $85 a tonne by 2030 to be impactful to the degree that is necessary.
Considering 25% being covered, if you take the whole emission bulk than the price, the average price falls to $5 a tonne. So, we have work to do and what we are proposing from the IMF is to go fairly in the direction of richer countries, putting an increasing price as, for example, what Switzerland or Canada is doing is much higher than middle-income countries and then for low-income countries, either very low price or either fragile country, no price, you recognize that these countries are in a very difficult place. We call this international carbon price floor at different levels and then we want to build a very inclusive space for carbon pricing that would recognize tax trade, but also indirect pricing through regulatory standards to regulatory measures.
Indonesia’s introduction of a carbon price is commendable. More countries must do it. India hasn’t done it, but it should because if you want to tell consumers and producers that high carbon intensity is bad pricing, nothing works as well as that price signal.
The third issue for us here at COP28 is to advocate for more collaboration because the world is now more fragmented yet in the fight against climate change, we need each other. So, we are loud on please join forces, countries work together, and international organizations work together. We work with the World Bank, regional development banks, and standard-setting institutions. So collectively, we can have a higher impact.
What we bring in terms of our contribution to meeting commitments is we have delivered everything we promised in previous COPs. We created the resiliency and sustainability trust worth $41 billion against the $40 billion promised. We are currently financing 11 programmes under the resiliency and sustainability trust and for the next year, it has twice as many in preparation. We share analysis very actively and work with others to be an example of collaboration as promised. All we want is to say to everybody, please make commitments and then honour them. Your only space vis a vis your commitments is to do more, but not less. So, this is how we prepared for COP.
How does the IMF plan to simplify access to climate finance?
This institution is different from the World Bank regional banks; they have a huge responsibility to support their members to take advantage of an integrated global economy but also to counter the forces of fragmentation that you now feel. All these institutions were created a long time ago. The world has changed. That means we need to change. And for us at the front, this means two things. One, make sure that we have sufficient financial strength to meet the needs of our members and agility in how we deploy our instruments. This is the heart of your question. And to legitimacy, be inclusive and represent the world as it is today.
On the first issue at the front, we have engaged our membership intensively and the result is very positive. Despite the geopolitical tensions, we have received the support of our members to increase our quota resources by 50%. This is to just give you a sense of what is 50% of our quarters. This is about close to $320 billion. We have additional predictable resources now as borrowed resources. They have been there for five years.
We also got a very important boost to our concessional financing. We got $55 billion of lending capacity for our zero-interest rate Poverty Reduction and Growth trust significantly. Now we can lend five times more than we did before covid at zero interest rate, and we got, as I mentioned, the financing for the resilience and sustainability trust. So, the fund is supported by the members. So, you know, they help us to help them.
You’re asking how you can be more agile in how we make use of these resources. What we have done over the last few years is quite remarkable. We have deepened the deployment of our emergency financing. This is the fastest liquidity provision there is in the whole world. When covid hit, WHO (World Health Organisation) announced a covid emergency. One week after that, we made our first emergency financing, disbursement, not approval, but money in the bank. We have changed our instruments. So precautionary instruments are more flexible for countries that have strong fundamentals. It is now easier to get a buffer from the fund.
We also changed the use of our non-financial instruments because we can support countries with money. We can support countries without money but put a stamp of IMF approval saying your economy’s doing great. So, we changed that to be more flexible, and more agile. We also have made some progress on the legitimacy of the fact by getting a third chair to represent Sub-Saharan Africa on our board of directors. So, there is more voice for Sub-Saharan Africa, which is now a big, big consumer of IMF support. What we want to see is also more representation of economies that have grown, and our membership committed by mid-2025 to come up with a new mechanism for redistribution of waters, and that is going to lead to underrepresented economies going up at the expense of over-represented.
People think that over-represented economies are only rich countries, not true. South Africa is represented. It’s all relative because of countries moving up and down with the GDP numbers over time. This is the fund, but a much bigger question is how we work as a system.
You might have seen it or not, but we came together with the president of the World Bank putting out a statement saying our institutions prioritize three areas where we work very closely together—climate, digital, and debt. Now that takes me to your question of decarbonization, and that, it’s very difficult for countries with high levels of debt. Fortunately, the number of countries that are in debt distress is relatively small. But the number of countries that are close to that distress is significant. And we see those levels going up by one percentage point over the next years.
What I said before, I would go back to it, there is no magic. We have to make countries, developing emerging economies, much more attractive for private capital, and that is an effort from their side. Clear up obstacles to investments and it is also an effort for multilateral development banks at the IMF to provide fiscal space.
So, the public sector can diminish the risk for the private sector to invest in these countries. In other words, lend concessional money that you can use to tell the private sector ‘Please come, we are going to secure the conditions’, whether it is roads or charging stations, or whatever it is for private investment investments to take place.
We were very keen to do that together. Because like in Costa Rica, we work with the Inter-American Development Bank. When we bring resources, we punch more effectively when we bring them together. We also are very interested in debt for climate swaps. We haven’t yet found the formula for how to do that.
The success stories so far have been project-specific. What we want is to come up with key performance indicators so countries can, if they wish, project their climate actions forward and get relief to fund the actions. So, stay tuned. We are not there yet. But we are thinking about it.
Please elaborate on the IMF fund in supporting vulnerable countries, especially when it comes to the Resilience and Sustainability Trust, and the process, and how you monitor all this money coming and going.
We need countries to constantly strive to have policies and stronger economic fundamentals because then private finance is like a river. It flows there rather than somewhere else. In my life, I have been very interested in helping poor countries become rich, universal treaties, and infrastructure. Today that would include digital infrastructure, education, and the rule of law. If you don’t have one of those three, you can’t break out of poverty.
When it comes to climate, we are virtually welcomed against time, and this is why institutions like the IMF must mobilize financing and make it available quickly. This is what we have done with the Resilience and Sustainability Trust. Of the 11 countries that we have already approved, six are on the continent of Africa. It is because we strongly believe that Africa has done nothing to create this problem but is more similarly affected, and that takes us to how we help vulnerable countries.
First, we provide zero-interest rate loans. Second, when vulnerable countries are under pressure of debt, we work hard to help them negotiate that resolution. It’s not easy in today’s world because the sources of financing are so diverse, but we are working on that.
We have a very unique instrument called catastrophic containment and unique Trust. We use it to give grants to poor countries that are affected by exogenous shock, by external shock, so they don’t have to pay us. They use these grants to offset their obligations to the fund. We provided nearly $1 billion in these kinds of grants to 29 countries during covid. I sense that another way we can help, and we haven’t gotten it yet, is to work harder on defining vulnerability so we can then be more, if you wish, preventive in helping countries.
We adopted the strategy of the fund for fragile and conflict-affected states for the first time because we see this, especially these countries as very tough to support but so much in need that they require us to put more attention to putting out better people.
So, there are multiple ways in which we engage. We are more attuned to what is happening there. Vulnerability comes from many aspects. It’s not just climate, but climate makes it so much harder, and we do it directly with governments, we work directly with governments. We will disperse into government, and this is why we care so much about the capacity of the government to make good use of money.
We only work with other organizations to assess what the problem is. We work with the World Bank to assess what are the necessary policy adjustments for climate. They do very comprehensive reports and then that fits into what the fund will provide. We work with the UN now, with UNICEF, and with UNHCR because in conflict-affected states, they have a better sense of what the problems are and that informs how the fund ages. We had the head of UNICEF, and the head of the International Committee of the Red Cross, speaking to our board of directors. So that’s new.
Five years ago, even you wouldn’t see these characters in our neighbourhoods. But it is a more shock-prone world we live in and that requires the fund to sharpen the way we can assess what is going on, what can be done to prevent problems, and what can be done to resolve it.