Resilience and Sustainability Trust’s first loans promote climate PPPs, raising concerns they may create fiscal risks

5 April 2023

IMF Managing Director Kristalina Georgieva and Rwanda finance minister Dr Uzziel Ndagijimana participate in a roundtable on “Building a Resilient and Inclusive Future; Supporting Africa’s Climate Agenda” in Kigali, Rwanda, in January. Credit: Kim Haughton/IMF.

The first series of loan agreements from the IMF’s new Resilience and Sustainability Trust (RST), which became operational in October (see Dispatch Annuals 2022), has doubled down on the Bretton Woods Institutions’ support for crowding in private finance, an agenda also strongly supported by their Group of Seven (G7) shareholders and a key pillar of the World Bank’s emerging ‘evolution roadmap’ process (see Observer Spring 2023).

The RST, a new trust capitalised by on-lent Special Drawing Rights from better-off IMF member countries, is designed to support policy changes which address potential future balance of payments issues related to climate change (see Inside the Institutions, What are Special Drawing Rights (SDRs)?). The IMF’s board has now approved five financing packages since November for Costa Rica, Barbados, Rwanda, Bangladesh and Jamaica, respectively – topping $3.3 billion in total.

Lending programmes from the RST require countries to have another IMF funding programme in place, meaning that countries accessing the trust need to negotiate a wider set of macroeconomic conditionalities with the Fund, which are typically based on fiscal consolidation – potentially limiting their fiscal and policy space to address their vulnerability to climate impacts (see Observer Summer 2022, Spring 2022).

No evidence supports the RST rationale that an ‘enabling environment’ can close the gap in climate finance through volatile private fundingFederico Sjaba, Recourse

Climate PPPs: Opening fiscal space, or fool’s gold?

The conditionality agreed between the IMF and member countries to secure RST financing thus far strongly favours the expanded use of public-private partnerships (PPPs) for climate action. This raises questions about whether the RST’s policy reforms are fit for the purpose of helping states mitigate potential balance of payments issues related to climate change, given the risks associated with the PPPs financing model, which have been repeatedly highlighted by civil society in recent years (see Observer Autumn 2022, Spring 2019, Winter 2017-2018).

For instance, Bangladesh’s $1.4 billion in RST financing, approved by the IMF’s board on 30 January, is premised on helping “leverage private sector climate finance,” including a plan to “update the PPP policy and framework to reflect climate risks.” Similarly, Rwanda’s RST ‘qualifying reforms’ – linked to $319 million in financing – include efforts to increase ‘fiscal space’ via PPPs, while Barbados’ $189 million RST programme notes the country will seek to “significantly scale up private climate financing in the next three years,” including through reforms to its power sector licensing system to allow renewable energy PPPs. In Costa Rica’s $710 million RST programme – the first approved under the trust – agreed reforms include, “simplifying administrative procedures for private participation in power generation from renewables.”

Jamaica’s $764 million RST financing package, approved by the IMF’s board on 2 March, likewise notes, “the PPP framework will be further amended to include climate requirements in PPP agreements from project identification to contract management.”

In contrast to the recent spate of RST loan conditionality, an IMF staff note released in August warned, “public-private partnership investment implies potentially large public debt increases through the crystallization of contingent liabilities” (see Observer Autumn 2022). “No evidence supports the RST rationale that an ‘enabling environment’ can close the gap in climate finance through volatile private funding,” said Federico Sjaba of Netherlands-based CSO Recourse. “The IMF should guarantee more conditionality-free SDRs for debt-stricken Global South countries to address the balance of payment issues that arise from just transitions.”