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Macrofinancial Risks in Climate Vulnerable Developing Countries and the Role of the IMF – Towards a Joint V20-IMF Action Agenda

Macrofinancial Risks in Climate Vulnerable Developing Countries and the Role of the IMF – Towards a Joint V20-IMF Action Agenda

Climate vulnerable countries face considerable macrofinancial risks that threaten debt sustainability, worsen sovereign risk, and harm investment and development prospects. Prepared in collaboration with the SOAS Centre for Sustainable Finance and the V20 Secretariat, this  paper  reviews  the  macrofinancial  implications  and  risks  of  climate  change,  in  particular the impacts of climate vulnerability on sovereign risk and the cost of capital, with  special  consideration  to  challenges  facing  the  V20.   It   also   examines   the   International  Monetary  Fund  (IMF)’s  responsiveness  to  these  challenges  to  date  and  recommends ten initial areas for a joint V20-IMF Action Agenda.

The  IMF  can  play  an  important  role  in  supporting  climate  vulnerable  countries  in  mitigating  and  managing  macrofinancial  risks  stemming  from  the  physical  and  transition impacts of climate change, leveraging opportunities from climate policies to boost growth, investment and resilience. While the IMF’s attention to climate issues has increased  markedly,  including  through  research  produced  by  IMF  staff,  the  Fund  has  been  rather  slow  to  address  climate-related  financial  risks  in  its  operational  work,  comprised  of  surveillance,  technical  assistance  and  training,  and  emergency  lending  and crisis support.

A  non-representative  survey  among  finance  ministries  and  central  banks  of  V20  countries  indicates  the  desire  for  more  support  from  the  IMF  in  addressing  climate  risks  and  vulnerabilities.  The  views  expressed  by  V20  members  suggest  that  the  IMF  should  integrate  climate  risk  analysis  in  its  surveillance  activities,  including  Article  IV  consultations as well as Financial Sector Assessment Program assessments and Debt Sustainability Framework analysis conducted with the World Bank; scale up technical support; and explore options for developing its toolkit for climate emergency financing.

To  address  the  needs  of  climate  vulnerable  economies  and  support  them  in  building  resilience    through    improved    mitigation    and    management    of    climate-related    macrofinancial  risks  and  enhanced  conditions  for  critical  investments  in  adaptation  and  development,  the  paper  suggests  ten  potential  action  areas  for  a  joint  V20-IMF  Action Agenda:

  • Mainstreaming systematic and transparent assessments of climate-related financial risks in all IMF operations
  • Consistent, systematic, and universal appraisal and treatment of physical climate risks and transition risks for all countries in Article IV consultations and Financial Sector Assessment Programs
  • Advancing disclosure of climate-related financial risks and promoting sustainable finance and investment practices
  • Exploring synergies between fiscal and monetary policies
  • Mainstreaming of climate risk analysis in public financial management and supporting the development of a climate disaster risk financing and insurance architecture
  • Supporting climate vulnerable countries with debt sustainability problems
  • Developing the IMF toolkit for climate emergency financing
  • Exploring options to use Special Drawing Rights (SDRs) to support climate vulnerable countries
  • Supporting the design and implementation of carbon pricing mechanisms
  • Institutionalizing collaboration between the Fund and the V20

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