INTERNATIONAL MONETARY FUND update

 

Dear maria, We just published a new blog—please find the full text below.  How Blended Finance Can Support Climate Transition in Emerging and Developing Economies (Photo: Adobe Stock) By Bo Li, Fabio Natalucci, and Prasad Ananthakrishnan Emerging market and developing economies account for two-thirds of global greenhouse gas emissions, and many are highly vulnerable to climate hazards. These economies will need significant financing in coming years to reduce emissions and adapt to the physical effects of climate change. Many also have high debt and constrained budgets because of the pandemic and face higher government borrowing costs amid rising interest rates around the world, making it especially difficult for public finance to meet pressing climate financing needs. These factors mean mobilizing private capital on a large scale will be key to achieving their climate objectives. Financial markets alone can’t do the job, but combining public and private capital offers unique advantages by reducing investment risk and attracting greater funding. Multilateral development banks and international financial institutions can provide support through creating blended financing structures to alter the risk-return profile for the climate transition in emerging economies . It’s important to start by establishing an attractive investment climate and policies to incentivize private participation. Climate policies and finance are complementary because better policies attract private investment, in turn helping meet policy objectives. Carbon pricing is the most effective tool to make high emitters pay for the climate costs they impose and thereby channel private investment toward projects that emit less. More generally, climate policies and commitments like the Paris Agreement’s Nationally Determined Contributions can signal to investors to direct investment to a low-carbon economy. Establishing a strong climate information architecture for data, taxonomies, and disclosures also will help. Opportunity for impact Unfortunately, private climate finance faces multiple constraints, from future policy uncertainty and technological costs that raise the cost of capital to other barriers such as data limitations and unattractive risk-return profiles. Despite these challenges, private climate finance can help emerging economies meet Paris Agreement goals. Innovative financing instruments can attract investors with different risk profiles and investment horizons, as we noted in our October Global Financial Stability Report. In larger emerging markets with functioning bond markets, investment vehicles such as green bond funds can help broaden the investor base by drawing in institutional participants like insurance companies and pension funds. Multilateral development banks and international financial institutions have a crucial role to play to attract much larger sums of private capital. They can provide technical assistance, helping develop projects, improve governments’ institutional capacity, and build the local currency bond markets to broaden the set of domestic investors. By agreeing to be first to endure losses in green funding vehicles and securitizations, development banks can increase the expected risk-adjusted return for private investors. With appropriate governance, public backing can help avoid moral hazard associated with guarantees, which involve risk that gains are privatized while losses socialized. Advanced economies could back public equity as a way of delivering on their annual $100 billion commitment to emerging and developing economies. In addition, equity investment can effectively leverage public money. Commitments by development banks are matched by less than a third of the amount from private sources, for emerging and developing economies, on average. That contrasts with smaller deals by the World Bank Group’s International Finance Corporation and Amundi SA, Europe's largest asset manager. The IFC-Amundi structured fund attracted 16 times as much private investment. For less-developed economies, green infrastructure projects will remain a key instrument, and development banks will naturally play a central and enduring role. More climate financing could be channeled through development banks to support such projects by increasing their capital base and through partnerships with the private sector. Public money, including from development banks and international financial institutions, can help launch green or climate structured funds where risk is distributed among lower tranches of such funds, which could attract much more private capital to take the senior tranches. Blended support In addition, if green or climate funds invest in the equity of climate projects, development banks and commercial lenders may be more willing to lend. As such, public money provides incentives at the fund and project level, and both can be blended with public and private money. The IMF can play an important role through its surveillance, capacity development, risk assessments, and climate diagnostic tools. Our first ever long-term financing tool, the Resilience and Sustainability Trust, now has more than $40 billion in funding pledges, and staff-level agreements with Barbados, Costa Rica, and Rwanda. Under the RST, lending by the Resilience and Sustainability Facility can help boost private financing. Fund staff will work with governments, development banks and investors to identify financing constraints and further explore how to scale up private financing. We’ll also continue to promote carbon pricing, along with alternatives that can achieve equivalent outcomes, such as feebates and regulations. And, finally, the IMF will continue to strengthen the climate information architecture and help emerging economies promote private climate finance.   Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here. Take good care!

Latin America Costa Rica to Tackle Climate Change with New Resilience and Sustainability Facility Photo credit: Esdelval/Getty Images Español Costa Rica has been a pioneer in greening its economy, and its efforts to fight climate change and restore ecosystems have earned the country international recognition. But climate change continues to pose important risks, most acutely through natural disasters. Costa Rica is now the first country to benefit from the IMF’s new Resilient and Sustainability Facility to support the country’s climate change reforms. In an interview with Country Focus, Manuela Goretti, IMF Mission Chief (right), and Nogui Acosta Jaén (left), Costa Rica’s Minister of Finance, talk about the new facility.   What are the key challenges Costa Rica is facing from climate change and what is your strategy to tackle them? Minister Acosta Jaén: Due to its geographical location, Costa Rica is highly exposed to climate change risks and is ranked as 61st out of 182 countries by the ND-GAIN index. Although Costa Rica is in a better position than its neighboring countries, estimates from the Ministry of National Planning and Economic Policy indicate that, in the last three decades, the direct cost of climate change disasters was about half a percent of GDP per year, mainly related to infrastructure. Costa Rica has worked on many initiatives to mitigate the effects of climate change and adapt to risks, while protecting the most vulnerable. We already have relatively low emissions due to our environmentally friendly economic model, with significant growth in sectors like sustainable tourism and hydropower generation. Almost 100 percent of the country’s electricity is from renewable sources. But we’re still aiming to transition to a net zero emission economy over the next three decades, consistent with our National Decarbonization Plan. What is the IMF’s new Resilient and Sustainability Facility (RSF)? Manuela Goretti: The facility, created under the Resilience and Sustainability Trust, is a new financing tool to help low-income and vulnerable middle-income countries build resilience to external shocks and ensure sustainable growth. It complements the IMF’s existing lending facilities by providing longer-term, affordable financing to address challenges such as climate change and pandemic preparedness. Costa Rica is an excellent fit for the RSF given its vulnerability to the effects of climate change and its ambitious climate change reform agenda. How will the newly approved RSF support Costa Rica’s efforts? Minister Acosta Jaén: The RSF will have both a direct and indirect positive impact. Working with the IMF will help us better assess climate change risks to public investment projects, which will mitigate costs in the medium term. Also, the additional resources provided through the RSF will improve our financing mix, giving us fiscal space to spend more on education, health, or other areas that help improve the lives of our citizens. Given the very large financing needs to fight climate change, how can the country catalyze more resources at affordable terms? Minister Acosta Jaén: The fact that we are the first country to receive this type of financing from the IMF confirms Costa Rica’s strong commitment to inclusive and environmentally sustainable economic growth. This in itself has a significant catalytic effect. But beyond that, other international organizations and investors who delve into the specific reforms underpinning the RSF financing will appreciate the comprehensiveness and ambition of our climate agenda. As part of our financing strategy, we intend to leverage this Fund-supported climate change reform program to issue environmental, social and governance (ESG) bonds. We also believe that this can set an example for neighboring countries or those facing similar climate risks, as the RSF is an instrument that responds to a real need and has a significant impact in the medium and long term. RELATED LINKS Costa Rica and the IMF The IMF and Climate Change

Dear maria, Today, the global population passed 8 billion. The progression from 7 to 8 billion people took a mere 12 years, conjuring up long-standing fears associated with rapid population growth, write Harvard’s David Bloom and Leo Zucker in an F&D online exclusive. But the most formidable demographic challenge facing the world is population aging. Thoughtful preparedness can enable countries to meet the challenge and take advantage of the opportunities presented by demographic change, they write. “Population aging presents, together with its challenges, opportunities for societies to reorient and reinvigorate.” Read the full article Finance & Development, the IMF's flagship magazine and online editorial platform, publishes cutting-edge analysis and insight on the latest trends and research in international finance, economics, and development. It is written by both IMF staff and prominent international experts, and is read by leading policymakers, academics, economic practitioners, and other decisionmakers around the world. Want to get a print copy delivered to your home or office? Click here to subscribe.   Have Your Say What do you think of this article? Please write to us directly and let us know your thoughts. We would love to hear from you. Nick Owen Senior Editor F&D Magazine nowen@IMF.org