“Global Financial Compact”, Special Drawing Rights, Multilateral Banks, Global South: the discussions taking place on June 22 and 23 in Paris between around a hundred countries, of which around fifty are represented by their Head of State or Government, promise to be technical and arid. Martin Kessler, director of the Parisian think tank Finance for Development Lab, deciphers for Le Point Afrique the topics that will be debated.
It all started at the end of the Second World War, in July 1944, when the representatives of the allied countries gathered at a monetary conference organized in the small town of Bretton Woods, located in the State of New Hampshire, in the United States. , decide to lay the foundations for global financing, the objective of which is to help the poorest countries, by means of loans. Three institutions were created: the World Trade Organization (WTO), which deals with trade, and two financial institutions, the International Monetary Fund (IMF) and the World Bank. And each has its own responsibility. The IMF is a bit of a “fireman” who comes to lend money when countries are in crisis or can no longer borrow. This is called “an IMF program”. In exchange, the countries undertake to carry out structural reforms, to reduce their deficits, and therefore their debt.
On the other side, there is the World Bank, whose role is to make long-term loans for development. For a very long time, these loans were tied to infrastructure projects: roads, bridges, railways, energy, etc. In the years 1990-2000, priority was given to education, health and the fight against poverty. From the 1960s, regional banks, such as the African Development Bank or the Inter-American Development Bank, emerged, based on the model of the World Bank but on a regional scale.
The idea of ??a new global financial pact is not new, it is essential today, because of the multiple crises that the world is going through, in particular Covid-19, the war in Ukraine and, in a very slower, the climate crisis. In the light of all these challenges, many believe that the “Bretton Woods” institutions are no longer adapted or equipped to provide strong enough responses, in particular to the climate crisis. Because the climate requires a lot of resources, it is a crisis that affects what are called global public goods, that is to say elements that can cross borders.
Climate change requires changing software. Another reason is the fact that vulnerable countries need immediate aid to respond to major crises, so the conditions for granting loans must be changed.
These reflections are also taking place in a particular context, where the States of the South, in particular the African countries, no longer hesitate to raise their voices against the rich countries, which they consider ready to pay billions of dollars to Ukraine but not always up to their commitments to the continent. I think we all understand the legitimacy of releasing a lot of money for Ukraine, but then why not for African countries when facing a food or climate crisis?
The Global South remains very heterogeneous. At the end of the Second World War, many states in these regions had not yet been decolonized; in fact, they were less represented in international bodies, such as the World Bank or the IMF. These two institutions also operate by quotas, and therefore economic size and financial weight matter enormously. Countries in the South or developing countries mechanically have much less say.
Other institutions, such as the UN, are more democratic in the sense that each country has one voice and therefore one vote. Part of the ambition of this Paris summit is precisely to provide a place for discussion where more voices are represented.
Today, the G20, which has played a major role as a forum for global discussion, is held back by geopolitics. Because Russia is part of it, and all the last G20s have been the scene of “confrontation”, either between Russia and Western countries or between China and the United States.
Development and climate change are very clearly linked. But, sometimes, it can feel like they are opposites. Many countries in the South are afraid that institutions will only focus on climate-related issues and forget the fundamentals of health, education, social protection, etc. We know that the countries most vulnerable to climate change are also the poorest.
In the face of climate change, three actions have been identified to act: mitigation, mitigation, and the whole compensation part for loss and damage. Where development aligns completely with the fight against climate change is on the subject of adaptation. Because if we provide the necessary support to the most vulnerable countries to adapt through more investment, we also help them to develop in a certain way.
I am obviously thinking of the Sahel, which is a very good example, but also of East Africa, where there are also examples of droughts which are very destructive. In the Horn of Africa, in Malawi, Cyclone Freddy which destroyed about 3% of GDP this year. The Caribbean is also the victim of major natural disasters.
The main idea is that global fiscal resources must be found. For a long time, it was thought that, to fight against climate change, it was necessary to tax only the sources of pollution. Now, several new ideas are circulating, such as taxing maritime transport, which is a very polluting sector, often exempt from taxes. The idea is to tax emissions and use the proceeds of this tax to, on the one hand, decarbonize the sector and, on the other hand, compensate the countries most vulnerable to climate change.
Taxes on financial transactions already exist in France, such as the tax on airline tickets, but it is not yet widespread. It has the advantage of being more redistributive, because it is the wealthiest classes who use the plane the most. There is talk at the Paris summit of continuing discussions to globalize it.
The other reflection on this innovative financing, which seems to us a little more technical, and which consists in adapting the debt of poor countries to climate change, by allowing them, for example, not to repay their loans for a given time after a natural disaster. For many countries, it is sometimes double or even triple the pain: they have to deal with a natural disaster, and, almost at the same time, think about reconstruction and repay their debts. Not to mention the increasing debt service.
The idea is therefore to find mechanisms so that they can devote their remaining financial resources to the reconstruction of their countries and postpone repayments to two years, for example, somewhat on the model of the G20 initiative on the suspension of the debt of the most vulnerable countries adopted in 2020, with the difference that this mechanism would be automatic.
“It is indeed a subject that is both very technical, very important and which is important for African countries. The special drawing rights, or SDRs, are an internal currency, held by central banks with the IMF and by certain international institutions, made up of a basket of currencies (the American dollar, the euro, the pound sterling, the yen , the Chinese renminbi), and which allows countries facing a crisis to have liquidity and make international payments.
In the context of the shock of the Covid-19 pandemic, there is a new allocation. The IMF allocated 650 billion dollars on a quota basis, and therefore the rich countries, the biggest holders, committed to paying a part of it to the poorest. The promise was made by the G20, at a summit in Rome in October 2021, to reallocate $100 billion in SDRs to African states, which had only received $33 billion.
Two years later, this promise has not been fully kept, because, in particular, even if it depends on a certain political will, there are real technical constraints. The IMF can borrow its special drawing rights from rich countries and lend them to the poorest, but within a limit of approximately 60 billion, and therefore 40 billion remain to be allocated. The African Development Bank could use them to make development loans to African countries. There is a proposal from the AfDB in this direction, but it takes five countries for this to be possible. This proposal is not yet adopted for technical reasons which are not fully resolved. I think it will take a bit of political will to agree at European level.
Currently, African countries and others, too, are not in a “debt crisis” situation, as many of them continue to repay their loans. The debt crisis is really when a state can no longer repay. Everyone has in mind the period of the 1980s and 1990s, the countries had accumulated arrears and they had stopped repaying their loans. Their level of external indebtedness was much higher, at 70% or even 80% of their GDP. Today, this rate is around 40% on average. It is estimated that the States will be able to continue to repay but the debt service is at its highest. Governments no longer have enough fiscal space for priority development spending, such as education or health, while these sectors have stagnated and even declined in recent years.
There are a few countries whose debt situation has required restructuring, I am thinking of Ghana, Zambia, which are engaged in negotiations with their creditors. But this is not the case for the majority. In reality, today, we are rather faced with a development crisis. And one of the ambitions of the summit in Paris is to succeed in lowering the cost of debt, in order to restore budgetary space to countries to invest in essential sectors and protect their population.
