In a global financial system underpinned by the US dollar, the Federal Reserve’s interest rate hikes can push much of the global South to the brink of a full-blown debt crisis. The exposure of Southern countries to such external risks, as well as their need to incur dollar-denominated debts, result from an uneven and broken international financial architecture. How this crisis unfolds could have lasting consequences for the global energy transition. Not only does debt limit a country’s ability to finance an ambitious climate agenda, but now, it also makes the institution often at the center of debt negotiations—the International Monetary Fund (IMF)—increasingly relevant for global climate policy.
Countries of the global South have few options for dealing with debt distress. Seeking relief generally means that the debtor nation must enter into an IMF agreement, and most negotiations around restructuring rely heavily on the IMF’s debt sustainability assessments. Support from the IMF comes with strings attached. Its programs carry strict policy conditionality and impose harsh austerity measures, demanding its borrowers undergo “structural adjustments.”
At this time, forty-four countries have an IMF program in place. Many more could follow soon, given that roughly two-thirds of low- and middle-income countries are at risk of debt distress. This could expand the influence of the IMF on the policy agendas and economic frameworks across the global South to levels not seen in decades. The IMF’s inclusion of climate-related conditionality and policy advice could cement its new role at the forefront of global climate policy, dictating the course of the green transition for its borrowers and beyond.
The global debt crisis of the 1980s, which followed the Volcker shocks, created the conditions for the IMF to usher in an era of structural adjustment programs and impose the “Washington Consensus” policy package onto large parts of the world, severely hampering long-term development prospects. Though in recent years there have been shifts in the IMF’s rhetoric, little has changed in terms of the policies imposed through its lending programs and the frameworks that underpin them. Rather than acting as a fair arbiter in a debt-resolution mechanism, the IMF is an enforcer on behalf of creditors, with its adjustment programs prioritizing debt repayment over the welfare of the population.
When it comes to the IMF’s climate agenda, those calling the shots represent the same group of countries that bear the responsibility for causing the climate crisis. The policy agenda put forward risks allowing large, historical polluters to eschew accountability, thus dashing the hopes for a just energy transition. Without other reforms to its governance structures and frameworks, how can the IMF’s climate agenda move beyond “greenwashing” its austerity framework?
Financial subordination and debt traps
The build-up of unsustainable debts in the global South is a core feature of the uneven international financial architecture. In a system that operates mostly in US dollars, and where most trade and cross-border transactions take place in dollars, many countries in the global South are forced to take on dollar-denominated loans from northern creditors. Shifts in financial flows, generally triggered by events outside the control of borrowers can result in solvency issues and debt crises. In 2022, external debt service costs for developing countries exceeded $443 billion, doubling from the previous year due to higher interest costs triggered by the Federal Reserve’s monetary tightening.
Over 3 billion people live in countries that spend more on interest payments to their foreign creditors than on health and education. Yet so far, only a handful of countries have formally sought to restructure their debts, as the rest continue to service debts, often long after it becomes clear that doing so is unsustainable. For countries that can no longer keep up with their debt payments, turning to the IMF is generally the only option. Countries often delay this step—even when it means they might be unable to pay salaries, as was the case in Kenya and in Nigeria, where in 2022 almost all government revenues were being spent on debt service.
The imbalance of power within global governance structures has enshrined a system that severely limits the fiscal and policy space for countries in the global South. The climate crisis further compounds these problems. The growing debt burdens of countries in the global South make it difficult for these countries to prioritize investments in support of their climate and development goals, as well as to finance necessary public services.
The climate finance provided by countries in the North primarily comprises additional loans. Of the $100 billion yearly that wealthy countries committed to “mobilize” for climate finance in 2020, 73 percent has been delivered in the form of additional debt. At the same time, financing gaps to meet climate targets and achieve the Sustainable Development Goals (SDGs) continue to widen.
Countries become trapped in a vicious cycle that keeps them indebted, perpetuates underdevelopment, and increases vulnerability in the face of shocks. Growing debt burdens—which force an even larger share of revenue to be directed toward debt service—erode governments’ capacity to invest in resilience. The cycle becomes difficult to break, as has been the case in Chad, Suriname, and Ecuador, which have become reliant on extraction and fossil-fuel exports in order to earn the hard currency needed to service their dollar-denominated debts. In Argentina, the IMF is encouraging an expansion of fracking to create more revenue for debt repayment.
While international forums have acknowledged that the countries least responsible for the climate crisis should not shoulder the cost of its effects, financial support for countries in the South to address losses and damages from more frequent and severe climate-related disasters has yet to materialize. Instead, countries affected by climate disasters must often borrow funds to deal with the aftermath. When Pakistan, already struggling with an economic crisis and debt distress, was hit by record-setting floods in 2022, headlines emphasized the international community’s pledges for support. Again, most of that support came in the form of additional loans.
Likewise, the Covid-19 pandemic shed light on the inequalities that underlie the financial architecture. Wealthy countries, which are issuers of hard currencies, responded to the shock by increasing their discretionary spending to about 10 percent of their GDP. Developing countries, while starting with lower overall debt levels than their wealthier counterparts, increased their discretionary spending to only around 3–4 percent of GDP. In most cases, wealthy countries also enjoyed access to liquidity support through a network of swap arrangements between central banks, which carry low costs and no conditionality.
“Greenwashing” structural adjustment
In recent years, the IMF has publicly recognized climate change as a threat to livelihoods and economic stability. It was not until 2021 that the institution adopted a climate strategy—a positive step in the sense that it raises awareness about the need for policymakers to address climate risks. But given the IMF’s role as a global lender of last resort for developing countries, combined with its conditionality-driven approach, the Fund has gained outsized influence in the design and implementation of climate policies on a global scale. The question remains: should the IMF be the institution leading climate policy, particularly in developing countries?
The IMF has made efforts to soften its image, expanding the topics covered by its research department and publishing critiques of its own structural reforms and austerity measures. It has also adopted a gender strategy and engaged with questions about social protection and inequality. Its rhetoric, however, does not reflect its policies.
Countries’ reluctance to seek IMF support speaks to the institution’s unpopularity among borrowers. Prolonged economic downturns, civil unrest, and sharp increases in poverty are the norm among IMF borrowers. The IMF’s climate policy cannot be separated from this track record. Structural adjustment programs remain the norm for IMF lending, with no plans to overhaul this framework or move away from the combination of austerity measures and market reforms.
The IMF’s climate strategy and its climate-related guidance show cause for concern. The documents offer suggestions on repackaging its policy agenda with climate-related language. The approach to climate policy centers on price-based and market mechanisms, namely global carbon pricing. The logic is that by “getting the price right,” and “creating an enabling environment for investors” markets will respond accordingly and take the necessary steps to address climate change.
However, the IMF’s own modeling exercises suggest that the benefits of carbon pricing are limited to certain scenarios—specifically when the revenue generated is reinvested in climate and social programs to mitigate the regressive effects of introducing carbon taxes. The reality, however, is that the IMF primarily wields its influence over developing countries that are already implementing austerity programs, which implies less investment, not more. Furthermore, the IMF’s influence over large, wealthy countries is minimal. Without significant emission reductions in these economies, the contributions of developing countries to global emission reductions will remain insufficient for a global energy transition.
The overall green reform agenda is eerily similar to the old Washington Consensus package—where austerity measures were paired with a push for deregulation of labor markets and product markets, alongside the liberalization of trade and finance. This approach reflects the IMF’s vision for what constitutes the most efficient growth strategy, with a more recent acknowledgement that some trade-offs to mitigate negative social effects should be considered. The belief in this investor-friendly environment was supported by neoclassical economists and validated through modeling exercises set on growth targets. But such models rely on flawed assumptions about how an economy operates, many of which are not backed by empirical evidence.
The IMF provides all members with country-level advice on a regular basis through its surveillance reports, known as Article IV consultations. These reports often lay the groundwork for loan programs, where the IMF’s advice takes the form of conditionalities for the borrower. A recent report on South Africa illustrates how climate language can reframe traditional structural adjustment measures in a more favorable light.
The report proposes a path for a “just transition” away from fossil fuels that suggests labor reforms to promote labor market flexibility, erode protections for workers, and reduce wages. Such measures directly undermine the rights of workers and lean on questionable analyses of labor markets. The document also recommends privatizing utilities and for deregulating product and labor markets on the basis that these measures would increase growth, a prerequisite for a “green and climate-resilient future.”
The IMF has also launched a new lending facility, the Resilience and Sustainability Facility (RSF), as part of its climate engagement. It aims to offer loans with longer maturities for countries to implement reforms that strengthen their resilience to long-term risks such as climate change. There is one big caveat: only countries with a concurrent regular IMF loan can access this facility. Pairing the RSF to the standard austerity-minded IMF programs renders it ineffective, as governments remain incapable of meeting the financing challenges of the energy transition.
Even if the IMF were to tweak climate-related advice and move away from the carbon pricing model, traditional IMF conditionalities would continue to undermine a just transition. The IMF’s climate policy allows it to brand its programs as “green” and deflect criticism, but it still pursues business as usual.
Systemic change
The structures of the IMF and World Bank are remnants of the world order established at the Bretton Woods Conference eighty years ago. While these institutions were created to promote global stability, this “rules-based” multilateral system has excluded developing countries from having a meaningful voice in shaping those rules. The track record of the IMF and World Bank, and their reluctance to change, is rooted in the fundamental governance of the international financial system. These institutions are thus shielded from accountability to their borrowers.
For instance, the UN Framework Convention on Climate Change (UNFCCC) holds historical polluters responsible for providing financial support to developing countries for the energy transition—the financial burden is meant to be distributed across countries in proportion to their historical contributions to climate change. The countries classified by the IMF as “advanced economies”—a group that significantly overlaps with the countries classified as large historical emitters under the UNFCCC—control nearly 60 percent of the IMF’s voting power, allowing them to make the decisions on climate policy.
The allocation of $650 billion worth of Special Drawing Rights (SDRs) by the IMF in 2021 proves that it is possible to provide financial support without strings attached. This allocation can serve as the starting point for a global mechanism to provide liquidity and scale up financing available to developing countries. But again, the trajectory of SDRs demonstrates that governance reforms are imperative. Thus far, the United States alone has been able to veto calls for an additional SDRs allocation, as well as block efforts for improving their distribution mechanism.
Ultimately, the IMF’s elusive goal of “catalyzing” private investment warrants skepticism. Reforms centered on deregulation, liberalization, and privatization, paired with an austerity framework, severely limit the policy space for developing countries. Green industrial policy and public sector-led transitions remain out of reach. Recent development success stories, such as the “Asian Tigers” in the 1980s and more recently China, have a common theme: these countries moved up the income ladder through industrial-policy strategies and successfully avoided the prescriptions of structural adjustment.
Countries of the global South understand the need for systemic reform. The Group of 77 (a group that currently includes 134 developing countries) has convened a “Fourth Financing for Development Conference” (FfD 4) at the UN, scheduled for 2025. At the heart of the agenda are systemic reforms of the international financial architecture, curbs on global tax evasion, necessary technology transfers for the energy transition, and changes to trade agreements.
The agenda seeks a multilateral framework for debt relief through the UN, ensuring that countries with unsustainable debt burdens can seek relief outside of the IMF, with a process less biased towards creditors. FfD 4 also proposes long-term and affordable financing sources on terms similar to those available to wealthy countries. With these changes, alongside a rebalanced governance structure, the IMF can reprise its original role of offering emergency liquidity support and shed the conditionality framework it adopted in the 1980s.
FfD 4 is a viable alternative to the IMF’s “green” structural adjustments, but it will test the global North’s rhetorical commitment to multilateralism and the rules-based order. Addressing these systemic problems within the global financial architecture is a prerequisite for any future climate-related action.
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