2023-06-22 06:30:00
On Thursday 22 and Friday 23 June, France is hosting the “Summit for a new global financial pact” in Paris. Heads of State, financiers and climate experts are expected to adapt the financial system to climate change and the fight once morest poverty.
The Bretton Woods agreements in 1944 drew the main lines of the international financial system following the Second World War. But these agreements are increasingly contested on their ability to adapt, in particular to climate change, geopolitical fragmentation, the debt crisis and the achievement of the Sustainable Development Goals (SDGs).
In this context, Emmanuel Macron launched in November 2022, during COP27 in Egypt, an initiative with the Prime Minister of Barbados Mia Mottley, in order to reform the global financial system. On June 22 and 23 in Paris, a first “Summit for a new global financial pact” will bring together around a hundred countries, including around fifty Heads of State or Government, outside the formal G7 or G20 processes. The objective is to achieve “building a new consensus for a more united international financial system”indicates the event program.
For a more united international financial system
Reform of institutions, debt restructuring, allocation of special drawing rights, increased mobilization of the private sector, international taxes, evolution of the model of multilateral development banks… Highly technical subjects are on the menu of this two-day summit at the Palais Brongniart .
Friederike Roder, Vice President of Development Finance and Climate Advocacy at Global Citizen, explains: “This summit is the start of a process that will enable progress to be made over the next 18 months. We hope to see Friday [23 juin, ndlr] a concrete roadmap around a few commitments that will enable this in-depth reform of the system to be initiated, with clear coalitions and above all deadlines for the implementation of these commitments. »
The minimum: assume past commitments
Developed countries have still not kept their promise made in 2009 to mobilize 100 billion dollars each year from 2020 to help poor countries in the face of global warming. While this promise should materialize this year, the rapport Stern – Songwe, presented at COP27, showed that developing countries – excluding China – will have to spend 2.4 trillion dollars each year to fight climate change by 2030. It underlines the need to mobilize 1.0 trillion dollars each year via external investors from developed countries and multilateral institutions. This summit should lead to a new roadmap for climate finance in order to mobilize external investments commensurate with these challenges.
In addition, in August 2021, the International Monetary Fund (IMF) allocated approximately €590 billion in special drawing rights (SDRs) to help governments deal with the economic consequences of the Covid-19 pandemic. While these SDRs have been distributed disproportionately to the richest countries, the G20 countries have pledged to “reallocate” the equivalent of $100 billion in SDRs to the most vulnerable countries. The mobilization of these SDRs requires going through two IMF funds. But these remain undersized to manage the needs. “We need technical solutions so that the multilateral development banks can also reallocate”defends Martin Kessler, executive director of the Finance for Development Lab at the Paris School of Economics.
Take on more financial risk
In order to find new financing, several avenues are on the table. While the financial system remains subject to risk, the first concrete track aims to reform the multilateral development banks. This summit should make it possible to “transform the role of development banks into a guarantee framework to attract private capital”, shares Laurence Tubiana, Director General of the European Climate Foundation. It is the whole system that must “collectively agree to bear more risks”she points out.
“All multilateral banks must contribute to this process and set themselves a financial objective, considers for his part Friederike Roder. In return, countries like the United States, France, Germany and Japan should ensure that they recapitalize them, thus giving them additional financing. »
Facing Multiple Crises and Debt
Following the Covid-19 pandemic, public debt is weighing more and more on the budgets of developing countries. One-third of developing countries and two-thirds of low-income countries are now at high risk of debt distress. At the same time, the poorest countries increasingly need to finance adaptation to climate change. “Developing countries are facing a problem of their international borrowing capacity drying up with rising interest rates, shares Laurence Tubiana. At least 53 are at risk of defaulting on their debt. »
As a result, countries exhaust their sources of flexibility. “Dip into foreign exchange reserves, borrow from the domestic market, borrow from the central bank, turn to the IMF”, here is an overview of the tools at their disposal, lists Martin Kessler. The summit will have to find solutions to allow new financing with lower interest rates, for example from the World Bank.
So that the debt is not a brake on resilience, the idea of suspending the payment of the debt in the event of a natural disaster is also gaining ground. “In the event of a hurricane or a new pandemic, countries might suspend debt payments for two years to have a little more liquidity to respond to external shocks to the crisis”, summarizes Friederike Roder. A very concrete measure that might be taken up by the World Bank.
A matter of international tax
Finally, the issue of international solidarity taxes is back on the negotiating table. In particular, an international tax on carbon emissions from the shipping industry might finally see the light of day. “We need a political impetus from a large number of leaders in favor of this tax, and for a large part of the revenue from this tax to go to vulnerable countries”, warns Friederike Roder. Working in international waters, this sector remains exempt from taxation on its emissions, but also on its income. “Many of these companies are located in tax havens”notes Laurence Tubiana.
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