Daily Management Review

The IMF And Others Should Provide A $100 Billion Foreign Exchange Guarantee: Document


The IMF And Others Should Provide A $100 Billion Foreign Exchange Guarantee: Document
According to a document seen by Reuters, a high-level gathering in Paris next month will spell out a $100 billion proposal to encourage investors to put more money into climate and development finance in less developed nations by offering currency guarantees.
Prior to the "Summit for a New Global Financing Pact" in Paris in June, the Bridgetown Initiative, led by Mia Mottley, the leader of Barbados, forwarded the unreported plan to all of the world's countries.
The plan, outlined in a consultation document dated April 2023, is part of escalating efforts to overhaul the global financial system and would rely on the strength of the International Monetary Fund (IMF) and other multilateral development banks (MDBs).
The IMF and other MDBs would "cut the excessive macro-risk premia on developing countries with $100 billion per year of foreign exchange guarantees" for financing in more volatile native currencies instead of the dollar or euro.
The "just green transition investments" that would be covered by the guarantees, according to a source familiar with the proposals, may include "blue" bonds that are ocean-focused and sustainability-linked bonds in addition to "green" bonds that are centred on environmentally favourable initiatives.
Their advantage is that if the involved countries devalued its currency, therefore reducing the dollar-value of its bond payments, the MDBs would intervene and repay foreign investors in those bonds.
It should dramatically lower the rates of interest that governments must pay by removing that risk for investors. For some, it might even provide the push they need to reclaim their lost access to the world's money markets following the COVID pandemic.
According to a research presented at the COP27 climate conference, developing nations would require $1 trillion in public and private funding yearly by 2030 to combat global warming, but capital inflows to date are only a small portion of what is required.
According to a report by the World Bank and other significant multilateral lenders, they contributed $51 billion in 2021 in addition to $13 billion in private funding.
Numerous world leaders and representatives from major international organisations like the IMF and UN will attend the Paris summit, which will be hosted by French President Emmanuel Macron on June 22–23.
The important groups preparing the discussions over the past few weeks have received summaries of the ideas.
Along with the proposed currency, the document provides further information on the Bridgetown Initiative's Version 2.0's primary goals, which have grown in importance over the past 18 months in talks about the world's climate and sustainability.
"This is a call to arms" the source said, referring to the document and its intention to galvanise more concrete action from the IMF and multilateral lenders.
The notion that fundamental reform is required to aid in more money flowing to developing countries in the battle against climate change has gained traction in recent years and was a major topic of discussion at the recent global climate conference.
Since then, the World Bank has appointed Ajay Banga, a former CEO of Mastercard, as its new president and issued a reform plan that would increase lending by $5 billion annually. However, Mottley and other advocates want the institution to improve considerably more.
At the upcoming round of yearly climate talks in Dubai later this year, developing countries are likely to rely heavily on the ideas made in the April document, which also calls for redistributing other IMF funds.