What did the Summit for a New Global Financing Pact change?
From June 22nd to 23rd, 2023, Paris played host to an international conference: the Summit for a New Global Financing Pact. The summit featured leaders from across the world, as well as heads of important international financial institutions and organizations. Discussions between these leaders focused on the need to fundamentally update the global financial system.
Developing countries are facing a growing number of threats, from climate change to health crises, as well as changing political and military situations affecting regional and global stability - this is why the need for a new global financial pact is now stronger than ever.
👉 In this article we’ll explore why a new global financial system is needed, and what achievements were delivered by the Summit for a New Global Financing Pact.
Why is a new global financial pact needed?
The current international financial system consists of a number of institutions in addition to government treasuries, central banks and private international banks - most notably the International Monetary Fund (IMF) and the World Bank.
These global institutions date back to the end of the second world war, and in the subsequent decades they have worked to achieve sustainable growth and prosperity for all. However, changes in geopolitical order, and the emergence of new world ‘superpowers’ have prompted calls for a reform of these international institutions and a change to existing financial mechanisms.
Many believe that the way that the current global financial system works is outdated, exacerbates inequalities, and is unable to respond to the emerging global challenges that we now face - for example climate change, issues of food supply, threats to biodiversity etc.
The call for changes to the international financial system also reflects growing dissatisfaction and mistrust at the global level due to the failure to materialize the €100 billion a year of pledged climate financing. The effects of climate change are beginning to accelerate and those who are worst affected by the impacts tend to be developing countries - it’s essential that they have access to funding and financial support as they adapt to these challenges, especially since they tend to be the least responsible for global warming.
👉 The Summit for a New Global Financing Pact offers a unique opportunity to reassess the international finance system, which currently benefits rich nations while being biased against developing countries.
What is the Summit for a New Global Financial Pact?
The Summit for a New Global Financial Pact brought together Heads of State and Governments, Heads of multilateral development banks, 129 NGOS, 70 private sector partners and 40 international organizations.
Between the 22nd and 23rd of June, participants took part in a series of round tables where they discussed the establishment of a new financial system that could better support developing countries and create a more equitable international financial order.
There were four main objectives for the summit, namely:
- Improve the offer of international financial institutions - this objective has the intention of offering “fiscal space to countries faced with difficult situations in the short term, especially the most indebted countries”. A particular area of focus was a review of debt and debt relief in periods of crisis.
- Stimulation of private sector development in low-income countries - this objective focuses on the mobilization of resources such as local financing, public institutions, and private funds, alongside initiatives such as the Alliance for Entrepreneurship in Africa, in order to stimulate the private sector.
- Promotion of green infrastructure to support the energy transition in emerging and developing countries - future development of infrastructure needs to take environmental considerations into account and so this objective focuses on the question of how can we best facilitate investment in sustainable infrastructure?
- Mobilization of financing for countries who are the most vulnerable to climate change - innovative financial mechanisms can facilitate additional resources for countries that are vulnerable to the impacts of climate change, for example: carbon credits, taxes on profits, debt instruments that account for climate disasters (for example, repayments are delayed when a country is affected by a climate related disaster).
Poverty and decarbonisation go hand in hand
A central component of the Summit for a New Global Financial Pact is that climate change and poverty are inextricably linked and poverty cannot be eradicated without also addressing climate change.
“The fight against poverty, the decarbonisation of our economy in order to achieve carbon neutrality by 2050, and the protection of biodiversity, are closely intertwined. We therefore need to agree together on the best means to address these challenges in the poor and emerging countries of the developing world, when it comes to the amount of investment, to comprehensive reform of infrastructure like the World Bank, the International Monetary Fund, and public and private funds, and how to set a new process in motion.” - French President Macron.
When financing a development project, future climate conditions and sustainability considerations must be taken into account. Equally, when supporting the decarbonisation of a country, attention must also be paid to ensure that the transition is socially just and that it brings benefits to all of society.
What happened at the Summit for a New Global Financing Pact?
The summit was hosted by French President Macron, alongside Barbados’ Prime Minister, Mia Mottley. The duo called for “transformation, not reform” of the global financial system.
Prime Minister Mottley is also known for her financing plan, known as the Bridetown agenda, which aims to significantly expand the funding available to developing countries - particularly those affected by climate change. Prime Minister Mottley has been a vocal critic of the IMF and the World Bank - institutions that were formed at the end of the second world war, and which she believes are no longer fit for purpose in the 21st century.
And Prime Minister Mottley isn’t alone in this thinking - in fact many countries, including the US, the UK and those within the EU, have called for an overhaul of the World Bank.
Other initiatives that Prime Minister Mottley brought to the table at the summit include the mobilization of an additional 1 trillion USD to be made available to developing countries to increase their climate resilience, a new fund called the Climate Mitigation Trust with access to 3 trillion USD from the private sector and 500 billion in Special Drawing Rights, debt relief for the most indebted nations, and long-term finance solutions to allow developing countries to adapt to the impacts of climate change.
President Emmanuel Macron also brought his own proposals to the table - proposed initiatives include global taxes on shipping, aviation, and wealth, to fund climate action.
So did the Summit for a New Global Financing Pact deliver?
Debt servicing for developing countries is at its highest since the 1990’s and around 93% of countries who are considered to be the most vulnerable to climate change are either over-indebted or close to this.
This prevents these countries from investing in essential infrastructure and public services, and holds them back from being able to effectively mitigate and adapt to climate change.
This issue was one of the main focuses of the summit, and the topic advanced somewhat with the World Bank agreeing to pause debt repayments for countries that are struggling with climate related disasters. It should be noted however, this will only apply to new loans only, not existing World Bank loans.
Another headline achievement from the summit was the agreement to make 100 billion in USD available to developing nations through an international reserve asset known as the SDR.
The SDR (Special Drawing Rights) was created by the IMF as a way of supplementing fund member’s foreign exchange reserves, thereby allowing countries to limit their reliance on more expensive domestic or external debt offerings.
SDR functions by allocating SDRs to each member country based on their IMF quota shares. The stronger a country's economy, the higher quota shares that it has. This means that developing nations and poorer countries will have access to considerably less SDRs.
However, a group of developed nations including France, the UK, and Japan have pledged varying portions of their SDRs to poorer countries, amounting to a total of 80 billion USD. A further 21 billion USD may come from the US if Congress agrees.
Taxes on shipping aren’t in the bag quite yet, but the idea was floated by President Macron, and the US treasury secretary indicated that the Biden administration would also consider the proposal (even if she stopped short of actually endorsing it).
The International Maritime Organization is due to meet in July to discuss the potential new tax and if an agreement can be reached on maritime taxes, between 60 and 80 billion USD could be generated annually. Money that can then be used to either help decarbonise the maritime industry, or contribute to other international climate change funds.
The ball is rolling
In terms of concrete actions the Summit for a New Global Financing Pact is admittedly scant on agreements. And it’s easy to understand why climate change and poverty activists claim that the results fall short of what is needed for real change.
However, the summit is a good first step and has got the ball rolling - something that will hopefully lead to more fundamental changes in the future. The summit was successful in creating consensus amongst leaders who agree that a change to the global investment approach is needed in order to reduce poverty, provide effective overseas aid, and mitigate and adapt to climate change. It was agreed that a roadmap should now be created for fresh discussions on how to achieve these goals.
Another significant advancement is that there is now general consensus amongst countries that in order to eradicate poverty and effectively mitigate and adapt to climate change, financing will reach into the trillions - not billions - and that the private sector will need to be mobilized to provide this.
The Summit for a New Global Financing Pact has raised a number of important issues that are now the center of international discussions. It is hoped that these conversations will be continued at upcoming events including the G20 summit in India this September, annual meetings of the IMF and the World Bank, and COP28 in December.
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