Reaction to the Paris Summit: no landing zone in sight for the debt and climate crises

The international financial institutions (IFIs) have consistently failed to stop financing fossil fuels, to scale up concessional long-term finance, and to provide a response to the debt crisis, so it’s no surprise that the ambition during the 23-24 June Summit for a New Global Financing Pact in Paris were incredibly low.

Despite the inspiring words by President Ruto of Kenya and President Petro of Colombia, who actively confronted the IMF Managing Director and the European Commission’s President, G7 countries were reluctant to support a real transformation to the international financial architecture that is up to the challenge of financing fair and just climate action. 

Failure to address the debt crisis. Climate vulnerable countries are increasingly vulnerable to debt distress, which further accelerates the impacts of climate change on most at risk communities. The main tool to resolve national debt crises has been the G20’s Common Framework, which excludes vulnerable middle income countries, excludes private creditors and has been incredibly slow. G7 countries have historically failed to support a proper debt workout mechanism which can effectively ensure countries move out of debt unsustainability while guaranteeing human rights. 

The only solutions endorsed by G7 countries to change this have been: a user manual on the Common Framework, a statement on the need for more coordination for middle-income countries, the support for debt swaps that entail various risks and debt clauses that may delay servicing only for new contracts (which means countries suffering extreme climate events now wouldn’t see their debt servicing delayed). 

We welcome the proposal by Colombia and Kenya for an Expert Review on Debt, Nature and Climate and on including climate vulnerability in debt sustainability analysis. 

Failure to support a new Special Drawing Rights (SDRs) issuance. SDRs are extremely valuable for Global South countries, as they can either be used as reserve assets or exchanged to hard currency and provide conditionality-free liquidity. The extraordinary 2021 SDR issuance provided huge relief to Global South countries in the aftermath of the pandemic, and civil society has been asking for a new allocation in light of the debt and climate crises, something which was also raised by the President of Colombia. However, G7 countries’ ambition in this field is extremely low: governments are only willing to discuss how to use SDRs to scale up IFI loans, rather than allocating more debt- and conditionality-free new ones. 

This is highly problematic as the current design of the International Monetary Fund’s (IMF’s) Resilience and Sustainability Trust (RST) can be used to support fossil-based Nationally Determined Contributions (national climate policy strategies presented in light of the Paris Agreement) and includes conditionalities which lead to public spending cuts, as was the case in Bangladesh (read Recourse’s latest report). This can also be the case with arrangements under the IMF’s Poverty Reduction and Growth Trust (PRGT): Uganda’s PRGT financed its Extended Credit Facility, under which the IMF sponsors the country’s oil expansion, despite the huge social, environmental and climate negative impacts. 

Failure to phase out fossil fuels. The Summit was another missed opportunity to require multilateral development banks (MDBs) to rapidly evolve into institutions that play a leadership role in the just energy transition. Disappointedly, phasing out finance to support fossil fuel expansion was not on the agenda. The Summit should have addressed the much needed shift of finance from the industries most responsible for our climate and inequality crises. Yet the World Bank and other MDBs still provide billions of public taxpayers money, through both direct investments and indirect support, for example via financial intermediaries, policy finance and technical assistance, to coal, oil and fossil gas expansion. 

Most notably there was no recognition that fossil gas, including liquefied natural gas (LNG), must be ruled out as a so-called transition fuel. In fact, in spite of the science which shows that keeping global warming below 1.5°C means no support for fossil fuels in any of its forms, this challenge was not addressed at the Summit. Even more under the radar was finance that continues to flow to carbon-intensive projects, ports and storage facilities that facilitate trade in LNG thus entrenching countries in a fossil fuel model of development.

Failure to scale up public finance for renewables. The announcement of the €2.5 billion Just Energy Transition Partnership (JETP) for Senegal was heralded as a major new initiative at the Paris Summit. The JETP was launched by a group of European nations and Canada. President Sall of Senegal said the deal would enable Senegal to attain 40% of its electricity from renewables by 2030, up from about 30% now, which is a modest increase given the scale of the investment. It must be noted that Senegal in the past has excelled in ramping up its renewable energy capacity. This changed between 2014 to 2017 when new massive on and off-shore oil and gas reservoirs were discovered prompting a shift of focus towards fossil gas and oil effectively stalling renewables deployment in the country.

The JETP will include private investors as well as MDBs (including the World Bank Group) and government funding, so it will by no means be  based on grant-based finance. The share of grants as opposed to loans and the terms of those loans is hotly contested by civil society experts who are urging JETP backers not to add to Senegal’s debt burden. 

At the same time, the World Bank’s Country Partnership Framework (CPF) with Senegal pushes the government to maximise revenues from its newly-found gas reserves. The role of gas in Senegal is a significant challenge, with the joint statement citing President Sall’s commitment to “securing our energy system thanks to all our natural resources in line with the Paris Agreement”, despite the International Energy Agency’s recommendations in its net zero scenario by 2050 that exclude new fossil fuel projects. With the country committed to using gas and imported gas for its development, it is likely that Senegal will become entrenched in a gas-based energy model that will lock the country into highly polluting carbon emitting gas for the next decades.

Recourse will continue its efforts to ensure a true IFI reform process takes place, ensuring Global South and civil society participation, wide economic transformation and an overhaul of the international financial architecture to ensure that countries can support their development pathways in a rights based and sustainable way, aligned with the Paris Agreement’s 1.5°C goal.