Reform the global financial system to support transformational adaptation

Arriving home in St Andrew, Jamaica from the Bonn intersessional, I learnt that our island had experienced so much rain over the two weeks I was away, that the loss and damage to our agriculture and services reportedly ran to around US$100 million.

And just a few days after my return, other Caribbean islands were preparing for another impending storm that threatened to ground flights and have similar catastrophic impacts on their economies.

This is the nature of climate change. Its impacts on our lives and livelihoods are relentless, and on our systems, cyclical. Huge debt burdens build as we seek to address the fallout from the last event, and then another comes along before we’ve had the chance to get back on our feet.

The downward debt spiral

The 58 Small Island Developing States (SIDS) and 46 least developed countries (LDCs) caught in these downward spirals of debt and economic shocks are in a critical situation, exacerbated by the extreme impact of climate change and unsuitability of the global financial system.

Some countries’ external debt is more than 70% of their gross domestic product, and some SIDS and LDC governments spend more than 40% of their total expenditure on servicing those debts.

IIED analysis released in June 2023 found that many countries are paying more in debt service than they receive in climate finance support, with a set of SIDS and LDCs spending $33 billion on debt repayments in 2021 and receiving only $20 billion in climate finance. This not only stifles help for the poor and vulnerable, it prohibits meaningful action to strengthen resilience.

In April 2022, the International Monetary Fund warned that 60% of low-income countries were at risk of, or already in, debt distress. And, despite the urgent threats they face, the mechanisms that should support these countries are too slow and inefficient. It has taken three years for Zambia to reach a debt treatment agreement through the G20’s Common Framework for Debt Treatment.

Mia Mottley’s Bridgetown Agenda

As Mia Mottley, prime minister of Barbados, has made clear, the world’s financing architecture is no longer fit for purpose. Many global financial institutions, such as the World Bank, were established in 1945 under very different circumstances, and certainly before the rapid growth of climate change impacts (and noting that climate change is in itself a result of the problematic set up of our systems).

For the financial system to be effective against today’s global challenges – including the cyclical nature of climate change – updating these institutions is vital. Key to this is addressing institutional issues of governance, voice, representation and access to finance.

The Bridgetown Agenda calls for these and other reforms to improve liquidity and fiscal space for low-income countries, address debt spirals and seek consensus for coherent global efforts to meet the Paris Agreement goals. Climate-vulnerable groups across the world – such as through the V20 Accra-Marrakesh Agenda, representing finance ministries from 58 climate-vulnerable countries – echo these calls.

The Paris Summit for a New Global Financial Pact

The Paris summit earlier this month intended to move forward these urgent reforms in the world’s financial systems. The meeting saw progress in discussions around rechannelling special drawing rights, climate finance, increasing multilateral development bank lending capacity, suspending debt and debt treatments and coordination of financial institutions.

These discussions have been a useful first step towards a new global finance system. The world’s leaders are aligning behind these reforms. As well as having to wait to see how this translates to action, these are just initial steps. Much more is needed from the international financial system.

Getting support to those that need it most

These international-level reforms are essential for improving access to, and delivery of, finance to the people who need it most. That is at the core of all of this – to ensure that communities on the ground have the resources and means to protect themselves.

The Bridgetown Agenda seeks an international financial system that is fit for the needs of today, and that needs to be matched by efforts at all levels and across all actors to ensure that financing supports locally led action.

A lot of work remains to be done to improve the terms on which LDCs and SIDS receive financing, including ease of access, what we can use it for (and who decides) and how much we can use to build our institutions and capabilities rather than focus on delivering neat outcomes for the providers. These ongoing issues need to be addressed to bring systems into the modern era and ensure that they justly serve people and communities. Tina Stege, climate envoy for the Marshall Islands, will explore these issues in an upcoming blog.

Many LDCs and SIDS are charting courses forwards through building national platforms to coordinate climate responses through a whole-of-society approach, underpinned by long-term strategic planning. We call on climate, and development, finance providers to align their support behind these efforts, structures and nationally-identified long-term needs. Gebru Jember Endalew, technical lead of the LDC Initiative for Effective Adaptation and Resilience (LIFE-AR) and regional lead, MRV and climate diplomacy, GGGI, will explore these issues in another blog.

Delivering for LDCs and SIDS: leadership matters

Within the current system, the explicit recognition of special circumstances of SIDS and LDCs as being particularly vulnerable has not delivered anything tangible. Going forward this recognition will need to be meaningful if we, as SIDS, LDCs, and the global community, are to make the changes we need at the scale and pace that is now needed. We need an international financing system that does not perpetuate and exacerbate spirals of debt and inequality.

Although the 2023 UN climate change conference (COP28) in Dubai is not considered a decision COP, the Global Stocktake and increasing consensus around reforming international systems provide the perfect staging for delivering major commitments. We now need leadership that is willing to take to that stage.

With thanks to Sejal Patel for contributions to this blog.