MDBs and the IMF: Who's in charge of what?
Multilateral development banks (MDBs) and international financial institutions like the International Monetary Fund (IMF), were created for one reason: to promote development with the aim of eradicating extreme poverty.
Swiss-headquartered Climeworks is the first climate finance outfit to deploy a carbon capture plant in the African continent, springboarding their continental ambitions from Kenya. (Halldor Kolbeins/AFP)
MDBs became very specialized over the decades with a focus on infrastructure development, social protection, private sector development, and environmental safeguards to support and maintain gains in prosperity.
Today, however, a very interesting debate has emerged on several fronts about the future role and functions of both MDBs and the IMF. Let’s take the area of climate action, for one.
The IMF has always been the go to institution for countries running into, and attempting to solve, different forms of financial crises. The IMF’s standby agreements, extended fund facilities, flexible credit lines, and exogenous shock facilities, allow member countries to find the financial resources necessary to manage financial and monetary crises, and to overcome challenges of different types.
This is the IMF’s comparative advantage, their raison d’être. But, today the Fund seems consumed with the topic of climate change. This is not a typical coverage area for this very important international financial institution.
The IMF has developed its core strengths in supporting the stability of the world’s financial infrastructure since its inception in 1945. Traditionally, climate action has not been an area of comparative advantage for the Fund. The very important work of climate change has typically been the mandate of MDBs, spearheaded by entities like the World Bank, and a cohort of regional development banks.
MDBs, over many decades, developed the capacity, both human and financial, to take on the critical work of climate finance. MDBs provide their member nations with the financial facilities necessary for their green transition, and to ensure that every country is working in tandem in the fight against global warming and decarbonization.
Until recently, no one challenged the role of MDBs in the climate finance space. This, however, is no longer the case as the IMF begins to aggressively venture into climate finance.
The IMF is now arguing that analysis of risks and vulnerabilities associated to climate change, along with advising its members on macro related financial policies, are at the core of the IMF’s mandate. The IMF contends that their attempt to integrate climate change into their activities is critical given the magnitude and global nature of the risks facing the world.
The IMF has begun collaborating with its member countries to develop an analytical framework for assessing climate related risks, a function that was carried out by MDBs in the past. The IMF asserts that they need to play a key role in comprehensive climate stress testing with central banks to develop better data. Further, the IMF wants to support both the public and private sector in their decarbonization efforts, similar to MDBs.
The IMF is also venturing into areas like carbon taxation, green bonds, and measures to reduce the emission of greenhouse gases. They attest that their role in these areas is crucial for the benefit of future generations.
The IMF wants to use the Special Drawing Rights (SDRs), that are sitting idle in many nation’s central banks, to accelerate the fight against climate change. But, the work of recycling SDRs for this purpose has always been the job of MDBs who have a clear comparative advantage in this regard.
The more troubling problem with the overlap that is developing between MDBs and the IMF in climate finance is the limited number of well seasoned professionals active in this area. If the IMF were to expand its work program in climate finance, it would need to attract professionals with knowledge and expertise in this field. This expertise exists primarily in the larger MDBs, and the poaching of talent across sister Breton Woods institutions has already begun. With the additional resources the IMF is deploying in climate finance, this will likely degrade the capacity of MDBs in one form or another.
The new President of the World Bank has already repeatedly stated that his primary focus will be on climate change, climate finance and decarbonization. The climate finance agenda of the IMF, the World Bank, and other MDBs, seems to have become a question about who does what.
What we are hearing less about from both MDBs and the IMF is how they plan to renew their strategies to combat extreme poverty in less developed countries as development gains continue to evaporate. Gone from the forefront is a vision for abating rural poverty, addressing runaway urbanization, deteriorating Gini Coefficients, and wealth creation to end the scourge of people who live off less than $2 a day.
This is not the time for the world’s most prominent MDBs and the IMF to be encroaching on each others areas of comparative advantage. A rethink of the way forward is clearly necessary, with both MDBs and the IMF needing renewed focus on their bread and butter priorities. Job one for everyone is eradicating extreme poverty. Job two is figuring out who does what.