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4th Mar 2024

Analysis

Can Barbados PM forge climate-finance pact in Paris?

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Over 50 world leaders are meeting in Paris this week to tackle one of the biggest problems of the age: how to raise enough money for the global south to catch up in climate investments.

The UN estimates that climate investments in developing countries (excluding China) must reach $2.4 trillion [€2.2tn] annually by 2030.

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  • High borrowing cost in developing nations is dampening climate investment according to Avinash Persaud. (Photo: Climate Policy Initiative)

But gotal global aid expenditure is less than one-tenth of this, and developing countries lack the resources to pay for it.

Barbados prime minister Mia Amor Mottley and French president Emmanuel Macron launched this week's summit, which will take place on Thursday and Friday (22 and 23 June), to find "means and ways of increasing financial solidarity with the South."

Guests discussing the 'New Global Financing Pact' include president Lula da Silva of Brazil, Chinese premier Li Qiang and German chancellor Olaf Scholz, besides France only other Group of Seven member attending

US president Joe Biden is also not attending, but US treasury secretary Janet Yellen is going on his behalf.

Following years of broken climate financing promises, developing countries now seek tangible progress from the Paris summit.

Some items on the agenda are a global tax on fossil fuel extraction and shipping fuel, as well as deeper reform of the International Monetary Fund (IMF) and World Bank, which are dominated by the EU and the US.

Much will depend on Barbados' Mottley.

As one of the leading champions for reform and the opening speaker on Thursday, she will try to gain support for her 'Bridgetown Initiative' — an ambitious set of reforms to bring down borrowing costs for green investments in poor countries.

And even Barbadian superstar Rihanna this week called on Yellen to "make bold commitments to finance and debt reforms."

But critics warn that wealthy countries may already be losing interest in reform promises. Germany and France are the only Group of Seven members represented at the highest level, and others point out that some of the brightest ideas for reform have already become bogged down in technicalities.

The cost of capital

The brain behind the Bridgetown Initiative is Mottley's financial advisor Avinash Persaud.

As a former London banker who moved back to Barbados in 2007, he is taken seriously by the global financial elite and has become a major driving force behind the push for financial reform.

According to Persaud, speaking on 14 June in an online debate attended by EUobserver, the "biggest problem facing developing nations is the cost of capital."

Borrowing money for projects in developing countries is two to three times more expensive than in wealthy nations. This has a dampening effect on climate projects.

The UN Finance for Climate Action expert group recently reported that the annual return required from a solar project in Argentina to be deemed investable is 53 percent — in India it is 17 percent; in Germany only seven.

"That's why climate investments aren't happening [in the Global South]," Persaud said.

Investors typically claim these costs are a reflection of real risk, but in a recent paper, Persaud argued that markets regularly overstate risk of investing in foreign currency, forcing investors to hedge against currency devaluations that never happen. On average, 'overpayment' for these hedges is 2.2 percent but can reach 4.7 percent.

The effect is especially noticeable in Africa, where borrowing costs are €68bn above what makes economic sense — more than twice the total amount of aid given to the continent — as recently noted by the United Nations Economic and Social Council.

To address this, Persaud proposes to create a $100bn [€90bn] currency-exchange guarantee backed up by the firepower of the IMF and other multilateral development banks (MDBs).

This would reduce the costs of foreign currency risk for investing in developing countries, lowering borrowing costs, he says.

Debt and climate

A problem linked to high borrowing costs is debt. Low-income countries have to raise €2.5 trillion in the next five years just to pay off creditors.

Some 30 percent of the annual revenue of Zambia goes to creditors, for instance. Nigeria also paid 96 percent of its total 2022 income to foreign creditors.

The chronic lack of money amplifies the destructive effects of climate change as little is spent to protect against flash floods, droughts or other consequences, forcing them to borrow even more when a crisis hits.

Persaud seeks to address both problems at once through the widespread adoption of natural disaster clauses in sovereign-bond contracts with private investors or public lenders, which would automatically suspend debt repayments for two years in the event of an environmental catastrophe, such as floods, hurricanes or pandemics.

There is little indication wealthy countries are planning to adopt such clauses at scale, but it is easy to imagine the impact.

Pakistan, for example, hit by a flood last year with estimated damages of €26bn, was hampered in its reconstruction efforts as it saw 50 percent of its annual revenue go to foreign creditors.

Postponing debt payments for two years would free up a year's revenue for disaster clean-up and reconstruction.

But while such bonds can have an impact, they are not a substitute for debt relief.

Looking at the big picture, researchers recently found that the 61 countries at high risk of debt distress will need at least €735bn of their arrears restructured — jargon for written off — to achieve "sustainable levels" of debt.

Will Paris deliver?

The question is what will come of these ideas in Paris. Critics have noted that many of the most progressive elements of the Bridgetown Initiative have already been watered down.

"What happened is: the Mottley initiative has become the Macron initiative," Jason Braganza, executive director of Afrodad, a civil society organisation headquartered in Zimbabwe, told EUobserver.

A key part of the initiative was establishing a $500bn [€458bn] trust for low-interest loans, paid for by rechanneling IMF's mostly unused reserve assets — the so-called Special Drawing Rights (SDRs).

In November, Persaud and Mottley were still "quietly confident" wealthy countries would support it as it would not cost them anything.

But the scheme has since run into opposition in Europe and the US and has been scrapped in the final iteration of the plan.

The far less ambitious €90bn currency-guarantee scheme that replaces it will only be discussed at the Paris summit, not endorsed.

Even the rechanelling of $100bn [€90bn] of a portion of the SDRs, which has already been promised by wealthy countries in 2021 and will not cost taxpayers anything, is held back due to a technicality at the European Central Bank (ECB).

"Everybody agrees that international financial architecture needs reform, including [ECB president] Christine Lagarde," said Jayati Ghosh, who is a professor of economics at the University of Massachusetts Amherst.

"But when it comes down to it, it's just stagnant," she said on 16 June in a debate in Brussels organised by Eurodad, a civil society organisation.

Persaud said the summit would not immediately result in significant reforms but suggested it would allow key players to "populate" a more progressive financial agenda.

"We are moving towards what I would call a Bridgetown System of finance," he said.

Sounding less hopeful, Ghosh suggested the summit in Paris may just be part of an "endless pageantry" that will not lead to the changes developing countries are calling for.

Debt relief

Feeding the cynicism is the decision to remove debt relief as a central pillar of the proceedings.

As recently as April, the IMF, the World Bank and G20 leaders met in Washington to develop a common system for debt relief, which currently doesn't exist.

These talks were expected to continue in Paris, but critics say the topic has all but been relegated to the background.

"Debt [restructuring] has completely fallen off the agenda," said Braganza. "For a so-called global pact to pay so little attention to such an important topic makes you wonder whose views are being represented," he added.

This week, a coalition of civil society organisations from the Global South published a letter warning that wealthy countries have "usurped" the agenda.

"Many of the ideas on the table are excellent and could easily be done with a tiny bit of political will," Ghosh said. "The problem is that it just isn't there. "

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