Nueva Arquitectura Financiera

LATINDADD at the Spring Meetings and the ECOSOC Forum on Financing for Development

The IMF and the World Bank, together with the G20, are once again showing a lax stance in the face of urgent economic, social and environmental needs in the midst of simultaneous crises and risks that will increase if timely action is not taken. The demand for a reform of the international financial architecture continues to grow, which could begin by opening up decision-making spaces within the United Nations.

A. Looking back at the results of the annual meetings of the World Bank and the IMF

CSPF Panel: «Uses and impacts of Special Drawing Rights in developing countries» – Spring Meetings 2023.

The IMF and World Bank Spring Meetings, held between April 10th and 14th in Washington DC, have shown a weak response to the multiple challenges and risks that the world and, in particular, developing economies are facing. The cost of living, debt and climate crises, among others, have been at the centre of discussions and debates during the week.

In a scenario of weak economic growth, uncertainty, inflation and debt risks, the responses suggested by multilateral organizations and the G20 focus on a return to fiscal rules, fiscal adjustment measures, increased borrowing through the extension of IMF and Multilateral Development Bank loans, as well as increased private financing. The IMF and the World Bank (WB) point out that global uncertainty is part of the collateral effects of the war and that, compared to what they expected last fall, the economy seems to have been more resilient, and the worst macroeconomic risks would not have materialised. However, this outlook should not relax the sense of urgency in addressing the needs of the global south countries in particular, which have witnessed a deepening of their multiple vulnerabilities.

Forecasts for LAC reflect growth decelerating from 4% in 2022 to 1.6% in 2023. Despite this, the IMF points out that reducing the fiscal deficit can alleviate the cost of living crisis by slowing domestic demand to control inflation. This type of contractionary and pro-cyclical measures in a context of slowdown, climate crisis, rising poverty and unemployment, and tightening financial conditions, will be counterproductive.

Three issues were central to the spring meeting week: i) inflation and financial stability; ii) public debt and austerity; iii) environmental crisis and climate finance.

Inflation and austerity

Among the most urgent challenges discussed by the IMF is to reduce inflation, while safeguarding international financial stability. High inflation is much more rigid than anticipated, especially core inflation. Core inflation is said to have not yet peaked in many countries. As a result, the IMF believes that «a larger or more protracted monetary policy tightening than currently anticipated may be required». Although this situation could bring greater risks to the financial system, the IMF states that all the tools are in place to control them (the Silicon Valley Bank case would be isolated), although this does not mean that the risks do not exist as they explain that the situation is still fragile. This financial tightening would also affect lending conditions and make the debt of emerging and developing countries more expensive. The IMF-driven approach towards reducing inflation fails to consider that the problem lies in the real sector. In addition to the effects on unemployment and monetary policy costs, economic inequality could be exacerbated (through financial sector windfall profits).

As for the region, in line with the Fiscal Monitor and the recommendations of other reports, fiscal policy is considered to be responsible for reducing spending and contracting domestic demand in order to support inflation control. Specifically, it notes that economic authorities no longer face the macroeconomic trade-off between curbing inflation and the need to boost recovery. Furthermore, they point out that «the policy objective must now be to slow demand to bring it in line with potential output. This inevitably requires cooling the labour market.»

Consistent with the historical principles of structural adjustment or austerity, fiscal rules are being reapplied after a relaxation during the first years of the pandemic and, as usually explained by the IMF, fiscal adjustments should seek a better targeting of public and social policy. However, this does not take into account the potential effects of pro-cyclical policies on the most vulnerable populations at a time of slowdown and, in a context of crisis, aggravates the problems of inequality in the South regions, where there is more poverty, less social security, wider gaps and high climate vulnerability.

Austerity to ensure public debt sustainability: Why has it not worked?

One of the current problems that requires greater attention from institutions such as the IMF and the World Bank is the high levels of debt that are causing increasing restrictions on public finances, in the midst of an adverse international financial context. According to the IMF, 39 countries already suffer, or are about to suffer, over-indebtedness tensions, but other estimates point to an increasing number of countries with severe debt problems, as indicated by UNDP estimates, with 54 countries in this situation.

It is quite worrying that the IMF does not consider that several countries are already in a situation of debt crisis, and civil society has questioned the fact that a crisis is only determined to exist when creditor countries are affected.

Despite the acknowledgement that fiscal consolidation fails to significantly reduce the debt-to-GDP ratio in the same way that economic growth does, policy recommendations continue to be geared towards promoting austerity measures that undermine growth (necessary to reduce debt levels), but also accelerate social and environmental setbacks.

During the Fiscal Monitor presentation, it was stated that global public debt is projected to growth in the coming years at a faster rate than that observed before the pandemic. It was also noted that the probability of a generalized global sovereign debt crisis, in an extreme adverse scenario, is 15% (referring to the World Economic Outlook report).

In the global outlook report, an entire chapter is devoted to examining the effectiveness of different approaches to reducing debt-to-GDP ratios. This chapter is based primarily on econometric analyses that lead to three conclusions. According to the IMF, first, «properly timed and designed» fiscal consolidations have a high probability of durably reducing debt ratios. However, they do not, by themselves, reduce debt.

Second, when a country is in a critical situation of debt distress, there is a need to combine consolidation with major debt restructuring, as well as to boost economic growth, which seems counter-intuitive to austerity. Third, it is mentioned that economic growth and inflation have also contributed to lower debt ratios.

However, the only response to the crisis has been the implementation of new debt instruments. According to the World Food Program, the number of food insecure people will increase to 345 million in 2023, more than two times higher than in 2020. However, the IMF’s response to the cost-of-living crisis and particularly food inflation and food security has been the new food shock window (FSW), which has already become operational with six approvals, including Haiti. In addition, five countries (Barbados, Costa Rica, Jamaica, Bangladesh and Rwanda) have also reached agreements under the Resilience and Sustainability Trust (RST) as a mechanism to rechannel unused Special Drawing Rights (SDRs) from advanced economies. Furthermore, it was noted that 44 others have expressed interest.

Regarding non-debt financing alternatives, one point in the G24 communiqué can be salvaged, which calls for new SDR allocations. They add that «an additional SDR allocation would mitigate balance of payments and debt crises, including by lowering countries’ borrowing costs.» However, they also point out that any new SDR allocations must be accompanied by a commitment to rechannelling from the countries that receive more and will not use them to those countries most in need.

In this regard, LATINDADD considers that a new annual allocation of SDRs could be key to alleviate debt problems, as well as to finance the climate agenda and the 2030 agenda, however, it is proposed to use new distribution criteria based on the need and/or vulnerability of countries, so that priority can be given to countries that are facing greater problems in the context of the current multiple crises. On the issue of SDR rechannelling, LATINDADD noted that the RST is not an appropriate mechanism, as it uses loans and entails conditionalities for countries in the global south.

Finally, the meeting of the Global Sovereign Debt Roundtable (GSDR) also took place, announcing that a workshop on how to assess and apply comparability of treatment (in restructuring processes) will be organised in the coming weeks. Further work will be done on other aspects of the Common Framework, such as «the principles relating to deadlines, the formal suspension of debt service at the beginning of the process, delays and the size of the debt to be restructured, including domestic debt. This work will also help clarify possible schedules for accelerating debt restructurings.»

None of the ways out proposed by the IMF provide a lasting solution for countries. They increase the debt burden and do not seek timely responses, for example, to facilitate debt workouts in countries that are already close to default regardless of their per capita income level. In short, the G20 Common Framework and the Global Sovereign Debt Roundtable are not leading to a fair solution for countries in need. It is necessary to move towards a reform of the international debt and financial architecture.

Climate crisis at the centre of discussions

Debt, the climate crisis and financing the energy transition were central to the spring meetings and panels organized by civil society.

The World Bank’s Evolution Roadmapwas presented as an opportunity for reform and change in the approach to development finance solutions and an adequate response to increasingly severe climate problems, which ironically affect the countries and groups least responsible for this global problem. However, the truth is that alternatives that will achieve lasting impacts will not be promoted, since there was talk of increasing the level of lending and promoting a greater boost to private investment. This does not address the need for more concessional finance for countries vulnerable to the climate crisis, regardless of their income level.

The role of multilateral development banks in climate finance must change significantly, considering that, for example, according to an OECD report, 91% of the climate finance they mobilised in 2020 to countries in the global south was through loans, mostly non-concessional (75%). In this sense, they should honour their name and take a more active role in providing concessional finance to low- and middle-income countries to invest in measures aligned with the climate agenda and the 2030 sustainable development agenda.

Civil society voices have once again been the most proactive in highlighting a sense of urgency regarding the current context, on the inadequacy of the current instruments of the economic and financial system, and the raising of proposals and viable alternatives that allow multiple problems to be solved simultaneously. LATINDADD was part of the organisation of different panels within the Civil Society Policy Forum concerning the debt problem and how to find mechanisms that work in the short and long term to provide timely, transparent and effective debt treatment. In addition, alternative analyses and approaches to the IMF and World Bank debt analysis were raised, in order to include considerations related to climate risks and financing needs.

Finally, a preview of a forthcoming LATINDADD’s publication was presented with the follow-up on the use of SDRs in the world, and particularly in Latin America. Once again, the IMF and the World Bank have not been able to maintain concordance between the diagnosis and the economic policies they promote.

As Jayati Gosh has recently called it, there seems to be a schizophrenia at the IMF. There is a need for reform not only in the governance of the international financial institutions, but also in the international financial architecture, which can begin by opening up decision-making spaces within the United Nations.

B. What happened at the ECOSOC Forum on Financing for Development?

The Financing for Development (FfD) Forum at the United Nations, organised by ECOSOC, took place just one week after the IMF and WB spring meetings in New York City, marking a singular moment in the discussions related to economic and financial issues at the international level aimed at seeking solutions to the multiple crises that afflict us. Although official circles do not necessarily recognise the existence of these crises, there is strong resistance from certain countries from the global north and certain sectors to maintain the status quo, instead of opening up the necessary and appropriate spaces to seek systemic reforms under a democratic framework such as the United Nations.

The 2023 FfD forum was marked by a number of elements in favour and against the objective of mobilising sufficient resources to meet the Sustainable Development Goals (SDGs) and other urgent needs of developing countries. In this context, the international civil society following these issues participated and intervened in the official meetings and organised side events, raising demands and proposals for a new governance and justice in the international economic and financial system.

This Forum also addressed the three problems discussed above, as well as other issues related to development cooperation, private investment, financing for industrial transformations, international tax cooperation, food security and integrated national financing frameworks within the 2030 Agenda.

This year’s positive element is that member states adopted a resolution at the United Nations at the end of last year to strengthen international tax cooperation, which was promoted by the group of African countries and supported by the majority of developing countries. This marks an important milestone to start counteracting the OECD’s domination on these issues and is key for movements seeking tax justice. However, actions must be directed towards a true democratic space for the fight against tax evasion and illicit financial flows, such as the establishment of a Tax Convention, proposed at the Forum by civil society.

On the other hand, the non-recognition of a debt crisis by organisations such as the IMF a few days ago, signalled that this issue would receive little attention and set aside aspirations raised by civil society to solve countries’ financial problems through the establishment of a sovereign debt resolution mechanism to be installed at the United Nations. Despite the failure of the mechanisms in place to solve the debt originated by the pandemic crisis -and worsening with the rise in interest rates-, there is no indication of any intention to seek real alternatives to the recipes proposed by the Bretton Woods institutions. Instead, a neutral space with no conflict of interest should be in charge of proposing solutions for debtors who fall into financial problems, a function that could be carried out by UNCTAD, a United Nations body that has analysed the issue and has been working on a proposal. 

As for country interventions in the general debates, African countries made outstanding statements, especially on taxation issues, reinforcing the need to change the rules of the game, as well as Cuba, which presented the statement of the Group of 77 and China, highlighting the need for a reform of the international financial architecture. This reform presented by the G77 includes elements such as: governance reform for International Financial Institutions (IFIs), improvement in the sovereign debt architecture, rechannelling and new issuance of SDRs, an inclusive and effective platform to design and discuss international tax rules at the UN, and a recapitalisation of Multilateral Development Banks. The interventions of countries from the region were also noteworthy, such as Argentina, Colombia, Honduras and the Dominican Republic, which emphasised the need to solve problems related to climate finance, surcharges, debt, the failure of countries from the global north to comply with their international commitments on Official Development Assistance, among other issues.

Despite many delegations mentioned repeatedly the need to reform financial architecture, it was also expressed that private investment and financial markets need to participate to close the SDGs financing gap and the climate agenda. This is a concern for civil society, which exposed the risks of leaving investment related to development and the fight against the climate crisis in the hands of the markets and the private sector.

The aspirations of organised civil society are many, but very little progress has been made in the negotiations, making it more important than ever to rescue the spirit of the Monterrey Consensus, which sets the path for a new economic governance and the reform of the international financial architecture. We are concerned about the initiatives proposed to be carried out between this year and next, both at the United Nations itself and in other spaces -such as the Summit of the Future, the SDG Summit, the Bridgetown Initiative, the Summit for a New Global Financial Pact promoted by France, the Global Sovereign Debt Roundtable, among others-, for attempting to set the agenda and dilute possible agreements on issues of importance towards the next 4th FfD Conference in 2025. However, this should not distract us from our strategic action and continue to push for reforms that seek greater equity between the global south and north.