Promises unfulfilled – the IMF’s climate policy advice is falling short of reflecting the climate emergency

The IMF’s policy advice to countries in the global south are influential in how they deal with the challenges of mitigating and adapting to climate change. In two new studies published today, Recourse looks at two key forms of IMF policy advice: surveillance reports and technical assistance, to assess whether the IMF is living up to recent climate commitments.

At last week’s COP26 summit in Glasgow, leaders and global institutions appeared to believe that commitments are equivalent to concrete actions. In January this year, IMF Managing Director Kristalina Georgieva set out the IMF’s approach to supporting efforts to confront the climate crisis.

She announced that the Fund would “embrace the transition to the new climate economy”, helping its member countries to “fight the causes of climate change and adapt to its consequences” because the changing climate is a “fundamental risk to economic and financial stability”.

IMF’s advisory roles are often poorly understood. Yet they are highly influential aspects of the IMF’s mandate, especially for poorer and more vulnerable states. In the Global South, IMF surveillance conclusions can be critical. The purpose of surveillance, which is required annually in every member country, is to identify economic and financial risks and advise countries to adopt appropriate policies to manage that uncertainty. They affect investors’ perceptions and shape the terms on which IMF lending may be provided at a future date. Given the sheer number of countries turning to the IMF for loans since the pandemic and the attempt to integrate climate, the importance of IMF surveillance is perhaps greater than it has ever been.

Recourse set out to assess what upholding Georgieva’s promises would mean for how the IMF conducts its work and for countries’ abilities to meet their commitments – known as Nationally Determined Contributions (NDCs), dating from the 2015 Paris COP meeting. We commissioned two studies that analysed six countries with recent IMF capacity building and annual bilateral surveillance reports. These reports represent two of the IMF’s roles that Georgieva highlighted as critical to fulfilling the promises from her January speech to the Global Climate Adaptation Summit.

Missing Links – How climate change remains peripheral to IMF economic surveillance activities

Recourse’s analysis  of bilateral surveillance: Missing links – How climate change remains peripheral to IMF economic surveillance activities – assesses the extent of climate change integration into IMF Article IV consultations. The IMF is only just beginning to grapple with how climate change will transform its approach to bilateral surveillance so these conclusions should help to shape how climate is treated in future.

The studies considered any discussion of physical risks (from climate change related damage), energy-related policy affecting national emissions targets and commitments in NDCs, as well as transition risks. Transition risks are defined as the financial and economic risks that result from policy changes. For example, fossil fuel-dependent countries’ financial systems may be compromised by commitments to reduce fossil fuel use that leave behind worthless ‘stranded assets’.

We examined recent IMF bilateral surveillance reports on the Philippines, Vietnam and Indonesia, given those countries’ vulnerabilities to climate change and their role as contributors to greenhouse gas emissions. Our findings point to faultlines in the IMF’s ability to meet the Managing Director’s commitments to use IMF policy advice to support the transition away from fossil fuels. We found that only the Vietnam consultation discussed the trade-offs countries confront when seeking to commit to adaptation. Nor did the IMF adequately consider transition risks – which the IMF’s most recent comprehensive surveillance review accepted the IMF must address. This is a surprising blindspot given the obvious risks countries such as Indonesia, a fossil fuel exporter, face from a global transition away from coal and other polluting fossil fuels. The IMF’s surveillance also failed effectively to integrate national climate and emissions-related commitments. Together, these findings suggest the IMF has a long way to go before it can congratulate itself on an effective contribution to confronting climate change.

The 2019 IMF bilateral surveillance consultation on Indonesia did not directly consider any climate change issues. This consultation occurred four years after Indonesia’s 2016 NDC pledge to reduce emissions by 29% when relying on its own resources (and by 41% if receiving international support). By the 2020 Article IV consultation, the IMF encouraged “a comprehensive transition plan towards a greener economy” be adopted, but left specific discussions as to how to integrate these measures to an accompanying ‘Selected Issues’ paper.

The IMF did include discussion of increasing physical risks from climate change to Indonesia in the surveillance report while noting that energy subsidy reforms had high potential for reform despite potential social and inequality impacts. However, Fund advice about how to effectively manage those impacts defaulted to encouraging targeted compensation, something that civil society and the labour movement has long pointed out is inadequate and ineffective. Moreover, it often leads to political pushback and delegitimization of efforts to reduce subsidies on fossil fuels, something the IMF itself has noted.

The IMF’s most recent Comprehensive Surveillance Review (CSR) was completed in May of this year. The review updates IMF practices and aims to “better help policymakers respond to risks and uncertainty, protect global financial stability, strengthen inclusive growth, and better understand how the financial sector and the economy affect one another.” It included ambitious commitments to climate change, and in particular to incorporate transition risk analysis. This is welcome given our studies echo previous research by ActionAid and the Bretton Woods Project demonstrating that without systematic integration of climate change into surveillance the IMF’s work can disregard countries’ climate objectives and commitments.

Out of the Shadows – Integrating climate change into capacity building

The IMF has provided technical assistance – its term for capacity building – in some form to all its member countries. However, the principal beneficiaries that request Technical Assistance (TA) reports from the IMF are in the global south. According to the IMF’s Independent Evaluation Office, in 2020, 96 per cent of the budget for IMF capacity development was devoted to low-income countries and middle-income countries. The IEO also found that the IMF’s expertise is trusted by the recipients, as well as by donor countries who often fund countries’ requests for TA reports, amplifying the impact of the IMF’s conclusions.

The IMF envisages a significant increase in countries’ requesting Technical Assistance (TA) to meet new climate ambitions. The Fund has noted that it already supports countries to meet climate priorities via TA focusing on issues such as environmental tax reforms, energy pricing, financial management to build resilience to natural disasters and monitoring risk of financial instability from climate change shocks.

Recourse’s companion study on IMF policy advice examined TA reports. Out of the Shadows: Integrating climate change into IMF Technical Assistance looked at four countries that had requested TA in recent years: Uganda, the Philippines, the Maldives and Georgia. It considered whether the IMF took account of those countries’ existing climate commitments, including their NDC pledges and the climate related risks they face.

In Georgia, we found that two TA reports from 2019 missed opportunities to integrate climate change issues. One focused on six state-owned enterprises (SOEs), five in sectors directly contributing to Georgia’s emissions targets as set out in its NDC. The SOEs considered included the Georgian Oil and Gas corporation and the Georgian State Electrosystem. The IMF’s assessment of financial risks to these SOEs did not mention climate related risks at all.

A 2019 TA report requested by Uganda to support its public investment management systems also did not consider the country’s existing pledges set out in its NDC. The narrow framing of the TA report meant that its recommendations on how to conduct basic public investment failed to incorporate consideration of climate risks in public investment projects. The IMF’s own prior surveillance consultation had encouraged the expansion of the Ugandan oil sector, implying the commitment of significant public investment in developing it as a source of external revenues. This incoherence also poses specific risks to Uganda in a scenario where the country and importers transition away from fossil fuels, leaving Uganda with stranded assets that the country can ill-afford.

The majority of the IMF’s TA reports are not disclosed publicly, though this is at the discretion of the countries that requested them. As few as 5% of the reports are published, making it impossible for civil society and other stakeholders to hold the IMF to account for the recommendations it makes. IMF staff indicated to us that they see TA as narrowly focused on institution-building and not necessarily an instrument to fulfil IMF policy goals, be they climate or other issues. TA reports are undeniably influential, particularly in sectors that matter for how developing countries will tackle climate change. This is why TA advice must be subject to public scrutiny.

Lessons for the IMF’s climate approach

Our studies may only be a snapshot, but they indicate that there is a long way to go before the IMF’s claims to support countries’ transitions are anything but words. If the Managing Director’s commitments to climate change are to be meaningful, the policy advice it provides via its Article IV obligations and Technical Assistance will have to change drastically.

It is welcome that the IMF’s leadership accepts its obligation to consider, and even support, countries’ climate related policy needs. In July, the IMF published a policy paper setting out a strategy and budget request to augment its internal capacity on climate so as to respond to the increasing climate change-related policy needs of its members.

To transform its policy advice so that it is useful to developing countries’ climate transition needs, we recommend that:

• The IMF should publish a list of the TA reports it provides, identifying the topics addressed and the countries that requested them. Where possible, the IMF should disclose TA reports. Our research relied on selecting reports from the 5% of those that are published.
• The IMF’s proposed strategy to support member countries’ climate objectives, published in July but subject to ongoing budget decisions by the executive board, should prioritise integration of climate change systematically, including via development of a guidance note for the 2021 CSR decision.
• The IMF should develop publicly available policy toolkits and guidance for staff in dealing with the macroeconomic implications of climate change, that examines specific risks related to fossil fuel dependence in coal, and other sectors, tailored to issues including energy strategy, replacing lost export revenues and investment in renewable energy alternatives
• IMF missions for TA and bilateral surveillance should be required to consider national climate commitments made by member countries, including but not restricted to their Nationally Determined Contributions
• The time horizon of bilateral surveillance, including assessing risks, should be extended to ensure that climate related risks and priorities are not sacrificed to short-term pressures that embed unsustainable reliance on fossil fuels and contradict the countries’ own efforts to combat climate change