Category: Blog
How We Can Put SDRs to Work in the Fight Against Climate Change—The Multilateral Development Bank Option
The world is in economic crisis and climate change is threatening our very existence. Many countries are in desperate need of financing to confront acute needs for energy and food, while at the same time facing huge investment costs to adapt to climate change and retool economies to low-carbon production.
In such times it should be unthinkable to leave any assets unused. But that is just what is happening now: Special Drawing Rights (SDRs) are sitting idle in many countries’ central banks. With a political push and some technical innovation, they can be put to good use at the multilateral development banks (MDBs) to accelerate the fight against climate change.
In a new, 90-second video we lay out how this could work:
Here’s the slightly, longer, more in-depth story:
In August 2021, the International Monetary Fund issued $650 billion of Special Drawing Rights (SDRs) to the countries of the world. SDRs are not a currency, but they can be used to bolster countries foreign exchange reserves and provide a needed cushion against international economic shocks. Every country got a slice of the SDR pie, in proportion to their shareholding in the IMF.
While these emergency funds have proved very useful to low- and middle-income countries (LMICs) in confronting the economic aftermath of the COVID-19 pandemic, wealthier countries really didn’t need their SDRs. And most of the SDRs went to the wealthier countries and these funds are stuck in their central bank—providing extra cushioning where none is needed.
The international finance community has been looking for ways to use the SDRs of the wealthier countries to help LMICs in need of international reserves—a process called recycling. In late 2021, the G20 countries committed to recycling $100 billion of their SDRS. Much of this will be done by loaning SDRs back to the IMF, which will in turn lend them to LMICs through their Poverty Reduction and Growth Trust (PRGT) and the recently established Resilience and Sustainability Trust (RST). But the PRGT and RST cannot absorb $100 billion worth of SDRs. So wealthier countries are looking for other ways that SDRs can be used.
One promising avenue would be to recycle SDRs to the Multilateral Development Banks (MDBs)—institutions like the World Bank, the African Development Bank, the Asian Development Bank, the International Fund for Agricultural Development (IFAD), and others. There are several technical advantages to MDB recycling:
- The MDBs are highly rated financial institutions with a track record of helping LMICs mobilize financial resources.
- Most MDBs are so-called prescribed holders of SDRs, which means they can use them as a financial asset on their balance sheet and as a means of exchange with other international financial institutions and with countries.
- If the SDRs can be counted as capital, the MDBs can leverage the SDRs to mobilize additional funds for the private sector, thus multiplying the firepower of SDRs by as much as five times.
- Or the MDBs can just on-lend SDRs for specific purposes or in specific regions.
In the coming years, LMICs will have to adapt to the effects of climate change that we are already seeing by building new infrastructure, preparing for more frequent and severe climate events (hurricanes, floods, tsunamis). And like all the countries of the work LMICs will need to restructure their economies to be carbon neutral, which will involve huge changes in energy, agriculture, transportation, and many other sectors, all while continuing to invest in education, health, and social services.
And the MDBs can be the leaders in helping LMICs make these changes. Already the MDBs mobilized over $66 billion in 2020 alone and they must commit to doing more. SDRs can provide some of the capital needed to ramp up MDB lending to LMICS for climate change and other critical development tasks.
There are some obstacles to getting SDRs to the MDBs. Most SDRs are owned by central banks and provide a reserve cushion and central bankers want to be able to access that cushion if it is needed. The SDRs lodged at the MDBs will have to be structured in such a way that they could be accessed in an emergency. The IMF has structured the PRGT and RST so this is possible. Something similar can be done at MDBs—with a little technical innovation and flexibility.
But what is needed most right now is a political push to use SDRs at MDBs. Investing SDRs in MDBs is like using the money that you’ve saved for a rainy day to invest in a house. The house will give you protection for years to come, but if another disaster occurs you won’t have your rainy-day savings pot to help you out. In the international arena, it is a political decision how to use SDRs—as rainy-day funds (will worse days come?) or to build a sustainable future (if we don’t there will be no future?). Politicians can make this choice and it seems that investing in MDBs is like building a sturdy house to protect us from impending climate disaster.
How We Can Put SDRs to Work in the Fight Against Climate Change—The Multilateral Development Bank Option
The world is in economic crisis and climate change is threatening our very existence. Many countries are in desperate need of financing to confront acute needs for energy and food, while at the same time facing huge investment costs to adapt to climate change and retool economies to low-carbon production.
In such times it should be unthinkable to leave any assets unused. But that is just what is happening now: Special Drawing Rights (SDRs) are sitting idle in many countries’ central banks. With a political push and some technical innovation, they can be put to good use at the multilateral development banks (MDBs) to accelerate the fight against climate change.
In a new, 90-second video we lay out how this could work:
Here’s the slightly, longer, more in-depth story:
In August 2021, the International Monetary Fund issued $650 billion of Special Drawing Rights (SDRs) to the countries of the world. SDRs are not a currency, but they can be used to bolster countries foreign exchange reserves and provide a needed cushion against international economic shocks. Every country got a slice of the SDR pie, in proportion to their shareholding in the IMF.
While these emergency funds have proved very useful to low- and middle-income countries (LMICs) in confronting the economic aftermath of the COVID-19 pandemic, wealthier countries really didn’t need their SDRs. And most of the SDRs went to the wealthier countries and these funds are stuck in their central bank—providing extra cushioning where none is needed.
The international finance community has been looking for ways to use the SDRs of the wealthier countries to help LMICs in need of international reserves—a process called recycling. In late 2021, the G20 countries committed to recycling $100 billion of their SDRS. Much of this will be done by loaning SDRs back to the IMF, which will in turn lend them to LMICs through their Poverty Reduction and Growth Trust (PRGT) and the recently established Resilience and Sustainability Trust (RST). But the PRGT and RST cannot absorb $100 billion worth of SDRs. So wealthier countries are looking for other ways that SDRs can be used.
One promising avenue would be to recycle SDRs to the Multilateral Development Banks (MDBs)—institutions like the World Bank, the African Development Bank, the Asian Development Bank, the International Fund for Agricultural Development (IFAD), and others. There are several technical advantages to MDB recycling:
- The MDBs are highly rated financial institutions with a track record of helping LMICs mobilize financial resources.
- Most MDBs are so-called prescribed holders of SDRs, which means they can use them as a financial asset on their balance sheet and as a means of exchange with other international financial institutions and with countries.
- If the SDRs can be counted as capital, the MDBs can leverage the SDRs to mobilize additional funds for the private sector, thus multiplying the firepower of SDRs by as much as five times.
- Or the MDBs can just on-lend SDRs for specific purposes or in specific regions.
In the coming years, LMICs will have to adapt to the effects of climate change that we are already seeing by building new infrastructure, preparing for more frequent and severe climate events (hurricanes, floods, tsunamis). And like all the countries of the work LMICs will need to restructure their economies to be carbon neutral, which will involve huge changes in energy, agriculture, transportation, and many other sectors, all while continuing to invest in education, health, and social services.
And the MDBs can be the leaders in helping LMICs make these changes. Already the MDBs mobilized over $66 billion in 2020 alone and they must commit to doing more. SDRs can provide some of the capital needed to ramp up MDB lending to LMICS for climate change and other critical development tasks.
There are some obstacles to getting SDRs to the MDBs. Most SDRs are owned by central banks and provide a reserve cushion and central bankers want to be able to access that cushion if it is needed. The SDRs lodged at the MDBs will have to be structured in such a way that they could be accessed in an emergency. The IMF has structured the PRGT and RST so this is possible. Something similar can be done at MDBs—with a little technical innovation and flexibility.
But what is needed most right now is a political push to use SDRs at MDBs. Investing SDRs in MDBs is like using the money that you’ve saved for a rainy day to invest in a house. The house will give you protection for years to come, but if another disaster occurs you won’t have your rainy-day savings pot to help you out. In the international arena, it is a political decision how to use SDRs—as rainy-day funds (will worse days come?) or to build a sustainable future (if we don’t there will be no future?). Politicians can make this choice and it seems that investing in MDBs is like building a sturdy house to protect us from impending climate disaster.
Message to Donors: The African Development Fund Replenishment Needs Ambition
The stakes are high for this year’s African Development Fund (AfDF) replenishment. The AfDF, the arm of the African Development Bank that targets the region’s poorest countries, is Africa’s only dedicated grant and concessional financing fund. Its mission is deeply relevant with the African continent facing a frightening confluence of severe crises including the economic fallout from COVID, an escalating food crisis, the damage to global growth of the war in Ukraine, the effects of rising global interest rates and inflation, and rapidly accelerating climate change that disproportionately threatens countries throughout the region.
But on the heels of last year’s landmark $93 billion replenishment of the World Bank’s IDA—and with the international community preoccupied with responding to Ukraine—AfDF cannot be an afterthought. Instead, the task for AfDF donors and regional recipients is to use this replenishment to empower the fund to target critical finance gaps—both public and private—that impede progress on climate vulnerability, food security, and poverty reduction and inclusion.
In a new note, we argue a replenishment of $10 billion would enable the AfDF to meet the critical needs of the region, with an emphasis on channeling investment across four key areas:
-
Resilient, green, and inclusive infrastructure ($5 billion). These resources would finance growth-promoting public and public-private infrastructure that builds resilience to climate- and health-related shocks, that strengthens food security and agricultural supply chains, and that is specifically designed to reach and empower excluded populations, including women.
-
Regional integration ($2 billion). Resources would build on AfDF’s already strong track record in growth-enhancing cross-border projects through its regional window that incentivizes infrastructure that creates efficient regional power and transport networks, helps implement the African Continental Free Trade Area (AfCFTA), and supports the region’s rich natural capital, including forests, arable land, biodiversity, and water sources.
-
Climate change adaptation and natural capital ($2 billion). Grants and concessional finance for agricultural adaptation, sustainable livelihoods from forests, fisheries and aquaculture, and tourism and the preservation of natural capital. This window could be augmented and its impact scaled by an additional $1 billion co-financing vehicle that pools contributions from private foundations and philanthropic investors with shared objectives.
-
Sustainable debt enhancement ($1 billion). Finance would be used to scale up the use of green and social policy-based guarantees (PBGs) to help countries reprofile their commercial debt, maintain or expand access to capital markets or incentivize private sector participation in debt restructurings.
A substantial replenishment focused on these areas would sharpen AfDF’s focus–helping distinguish it from IDA–while also increasing the scale of its ambition at a time when the continent desperately needs more financing.
As Washington and other capitals act rapidly to support Ukraine, they must not neglect the range of crises buffeting African countries. With its track record as an effective, regionally led development institution, a scaled-up AfDF would be an effective tool to address new and ongoing crises, from food price spikes to climate change, and provide a concessional complement to other external financing to the continent.
The United States has already committed to remain a steadfast partner to the African Development Bank. The replenishment is a critical opportunity to demonstrate the seriousness of its commitment and motivate other donors.
How Could Country Platforms Facilitate the Delivery of Global Public Goods?
Ongoing and looming global crises such as the COVID-19 pandemic and climate change have brought renewed attention to the delivery of global public goods (GPGs)—goods that benefit the entire world and can only be provided through cooperation between countries, like public health, climate action, and peace and security. At the same time, it has become clear that strong international cooperation will be required to solve challenges associated with preparing for or mitigating these crises. Yet, making progress on this front is proving to be challenging in the face of recent developments that complicate international collective action problems, including the rise of nationalist sentiment, eroding trust in multilateral institutions, and geopolitics. As a result, the global political and economic system has yet to deliver at the scale needed on critical global public goods such as public health, climate action, sustainable development, and peace, as noted by the UN Secretary General.
In addition to international cooperation, national and local actions will be needed to mitigate threats from inadequate delivery of many GPGs. As highlighted by the 2018 Report of the G20 Eminent Persons Group on Global Financial Governance, solving one single threat may require producing several transnational and local public goods. Unlike local public goods, the costs of providing global public goods cannot be expected to be borne by any single country; hence the growing need for, and interest in, developing mechanisms for collaboration within countries to enhance country contributions to GPGs.
Redefining the role of country platforms
In a newly published CGD policy paper, we identify a variety of potential requirements for country platforms to facilitate effective delivery of GPGs. Country platforms are coordinating mechanisms—often composed of several working and steering groups—for government officials and development actors to agree on shared priorities.
First, we propose that existing country platforms be repurposed to coordinate the contribution of domestic and external stakeholders to GPG delivery efforts at the country level. For this proposed approach to be successful, we believe that the following innovations may need to be considered in designing new country platforms or redesigning existing ones:
- Shifting the focus to GPG delivery, rather than aid coordination;
- Linking explicitly country-level efforts to global initiatives to provide GPGs;
- Developing an accountability framework at both the country and global level to help meet global delivery goals.
Second, we propose setting up country and global coordination mechanisms, with relevant agencies assigned to operate them both at the national and international levels. Using relevant country platforms, international financial institutions (IFIs) such as the IMF and multilateral development banks (MDBs) should be mandated with helping developing countries meet the financing needs associated with the provision of GPGs. For instance, a global resilience fund could be established at the IMF to support climate GPGs, creating a pathway for vulnerable countries to mobilize financial support for their energy transition efforts under the Paris and Glasgow agreements.
Third, we suggest that technical support from the IFIs be put on the table to improve the effectiveness of developing countries’ contribution to GPG delivery. In this regard, MDBs can and must play a central role in developing capacities in these countries as part of their own contribution to GPG delivery. We believe that the global community should assign a strong GPG delivery mandate to multilateral institutions, while defining a clear division of responsibilities among them based on their specific expertise and core areas of competence. For instance, an obvious choice may consist in mandating MDBs to coordinate technical assistance and the IMF to help mobilize and allocate funding for GPG delivery, including through its catalytic role.
The main challenge is to ensure adequate alignment and coherence between global and local partnerships aimed at delivering GPGs. Consistent with our proposal, a global coordinating agency preferably under the auspices of the United Nations with the assistance of the IFIs should be designated and tasked with linking explicitly country-level efforts to global net-zero initiatives. Key among the responsibilities of this coordinator would be make sure that public and private finance mobilized as part of net-zero initiatives ultimately benefits developing and emerging countries in a timely manner. This reinforces our call for the need to embed these initiatives into an appropriate framework that guarantees accountability at the national and international levels.
The importance of private sector involvement
Besides IFIs, it would be essential to lay the foundations for the private sector to contribute to GPG delivery efforts. Private sector representatives should be invited to be active participants of relevant country platforms. At the global level, there has already been welcome initiatives to coordinate the private sector’s efforts to achieve the Paris and Glasgow Agreement goals, including the establishment of the Glasgow Financial Alliance for Net Zero (GFANZ) by the United Nations and the COP26 presidency. As part of GFANZ, over 160 firms with $70 trillion in assets have committed to steer the global economy towards net-zero emissions. This includes mobilizing capital to finance decarbonization in emerging and developing countries.
However, private sector participation in country platforms raises several challenging issues that need to be addressed. These include not only the practical challenges related to the inclusion and the representation of private sector representatives within the platform, but also the potential constraints to their effective involvement and concerns about giving the private sector a role in public finance decisions. Still, overcoming these challenges is critical to allow the private sector to play a positive role in the delivery of GPGs, including through investment decisions.
Clearly, country platforms can be useful in helping define shared priorities and a pathway for achieving common objectives in developing countries. While sustaining headways in this direction, the global community should also put them to work for the global good by tapping on their potential to boost the provision of GPGs. A good starting point would be to refocus them on this purpose and ensure that they are appropriately inclusive.