Over the past two years, the converging global crises of Covid-19, climate and hunger have demonstrated that the current global financial system is falling short. All too regularly, international financial institutions, both public and private, are unwilling and unable to provide sufficient credit and liquidity to the countries that need it most, when they need it the most.
If we are to effectively lift people out of poverty and put developing countries back on the path to sustainable development, we need to overhaul the global financial system. During the Covid-19 pandemic in 2020, wealthy countries spent more than $16-trillion in stimulus funding to support their populations and economies. In contrast, on average, sub-Saharan African countries’ stimulus packages were less than 3% of their much smaller GDPs, compared to 22% for the G20. An absence of fiscal space left them far less able to offer the necessary health, social and economic protections their populations needed to weather the pandemic.
In addition to the global public health crisis we’ve been living through these past two years, much of the Global South has also experienced the brunt of the climate crisis. The frontline of climate change impact today lies between the Tropic of Cancer and the Tropic of Capricorn, home to many developing countries and poor people, even though they contributed least to climate change.
African countries are accountable for only 4% of new carbon emissions and a smaller fraction of the stock; the Caribbean far less again. Still, the tropical areas of our planet are suffering increasingly severe droughts, desertification, and extreme weather tied to climate change. Despite these impacts, only 15% of international climate financing goes to climate-vulnerable countries.
The pre-existing strain on global food systems, due to the combined effects of climate change, protracted droughts, Covid-19 and limited resources for food security, has resulted in the world facing its first food crisis since 2008. Russia’s invasion of Ukraine has further exacerbated a problem already in the making. Before the war, famine already threatened the lives of 49-million people worldwide, and this figure could now rise by an additional 6.9-million.
Escalating fertiliser, fuel and transportation costs further exacerbate food costs in low-income countries. In a new report, the ratings agency S&P warns that “the negative economic or political fallout of the food shock could contribute to rating downgrades”. Such an outcome would only worsen the economic outlook and capacities of developing countries even further into the future.
The existing global financial systems and structures are inadequate for the growing crises of our times. We need G7 and G20 leaders to take swift, targeted action that will direct financial assistance to those who need it most. We offer two solutions that should only mark the beginning of a more extensive overhaul:
- Re-channel at least $100-billion in special drawing rights by October 2022
Last year, the International Monetary Fund (IMF) issued $650-billion worth of its currency, called special drawing rights (SDRs), to provide more liquidity and ease member countries’ financial strains. However, because the IMF distributes SDRs based on member shareholdings, advanced economies that don’t need monetary support received 68% of the new SDRs, while the world’s 44 poorest countries only received 7%. To rectify this imbalance, the G7 and G20 committed to collectively sharing at least $100-billion of their SDRs with developing countries, yet only an estimated $60-billion has been committed to date.
We urge G20 leaders to meet that $100-billion goal by the IMF/World Bank annual meetings in October 2022 and to maximise the development impact of these funds, reallocating some of these SDRs to partners with established track records of tackling poverty, such as our regional development banks.
2. Rethink debt architecture
It is far too difficult for developing countries to access financing at affordable rates. While Ghana’s debt-to-GDP ratio (83.%) is far lower than Greece’s (206.7%), the main credit rating agencies rate the creditworthiness of Ghana’s government bonds several notches below those of Greece, and Ghana has to pay seven times more for 10-year borrowing than Greece. Greece’s access to borrowing from the EU accounts for some of the difference; this stark example highlights that we need urgent action to increase access to affordable financing for developing countries.
Eligibility for concessional public finance to better adapt countries to climate change needs to be widened to include climate vulnerability. In terms of private credit flows, Barbados-style natural disaster clauses in government bonds need to become the norm. These clauses help the financial system absorb shocks. When an independent agency declares a material disaster has hit, debt service is automatically suspended for two years and then added back at the end of the term with interest so that lenders are no worse off.
Finally, the debt for climate adaptation cannot rest on the small balance sheets of tropical, developing countries when they did not contribute meaningfully to the stock of greenhouse gases. We need an international balance sheet to finance the response to a problem caused internationally.
We must do much more to modernise our financial systems so that they serve everyone, not just the wealthiest nations. The time is now to put economic justice at the centre of the global financial system, to fund essential needs and global challenges, and to break down the systemic barriers that keep people in poverty.
Mia Mottley is Prime Minister of Barbados and Hakainde Hichilema is President of Zambia. They are both supporters of international advocacy organisation Global Citizen and its End Extreme Poverty NOW campaign, an urgent call for world leaders to empower girls, break systemic barriers, and take climate action.