The Bridgetown Initiative to reform the international financial architecture
By Bodo Ellmers
Mia Mottley, the Prime Minister of Barbados, presented a comprehensive approach to development finance last summer. Developed in collaboration with the United Nations, the Bridgetown Initiative is a three-step plan to mobilize short-term liquidity for crisis response and long-term funding for sustainable development. Originally unveiled in the run-up to the UN climate summit in Sharm El Sheikh, it was not a flash in the pan, but is now being taken up by French President Macron as a blueprint for his idea of a new financial pact with the Global South.
In some ways, it is a response to the reform logjam caused by the multiple postponements of the Fourth International Conference on Financing for Development (FfD4). In part, it fills the glaring gaps in the now-outdated 2015 Addis Ababa Action Agenda and could fertilize the new FfD World Summit that the UN is now finally planning to convene in 2025.
Delivering more and faster liquidity
The Bridgetown Initiative is set in the context of multiple crises. When Mottley introduced it, the COVID-19 crisis was at its peak, the Ukraine crisis with its shocks to food and energy prices had just begun, and the climate crisis was making itself increasingly felt. Countries affected by shocks need large amounts of financial liquidity in the short term to compensate for loss of revenue, massive capital flight, or higher import prices. Barbados itself was affected in the COVID-19 crisis by the total collapse of tourism, which was the most significant source of foreign exchange for the Caribbean island. The energy and food crises have driven many countries into balance-of-payments crises or to the brink of national bankruptcy.
The Bridgetown Initiative envisions four measures:
1. Improved access to International Monetary Fund (IMF) condition-free financing facilities
2. Temporary suspension of IMF interest rate surcharges
3. Rechannelling at least US$100 billion of unused special drawing rights (SDRs) to those who need them
4. Make the resilience and sustainability trust operational by October 2022.
Thus, for the policy measures on liquidity, the IMF is at the center, which is also consistent with its role as the central institution of the financial safety net in the global financial architecture. The first two points concern traditional IMF instruments. Most IMF facilities are extremely unpopular with member countries because they contain massive policy conditionality, thereby undermining democracy and sovereignty. Flaws in conditional design on the part of the IMF have in many cases caused severe economic and social damage in borrower countries. However, the IMF also has facilities that are free of programme-based conditionalities, such as the Rapid Financing Instrument and the Rapid Credit Facility. Better access to these facilities would lower the barrier to access IMF resources in the event of a crisis.
One scandal that has been the subject of recent attention, especially by civil society campaigns, is the IMF's practice of surcharging interest rates. When countries, in times of crisis, borrow larger sums than they would be entitled to under their quotas from the IMF, they are charged penalty interest. This imposes high additional costs on crisis countries precisely when they are in a massive financial crisis and urgently need every cent to support their suffering populations. IMF member states such as Argentina and Pakistan have also massively opposed this IMF practice. The Barbados Initiative helped put pressure on the IMF Executive Board to address the elimination of surcharges. In December 2022, the issue was on the agenda - and failed due to opposition from a few countries, the most powerful of which were the United States and Germany.
The second, and perhaps more significant, IMF scandal in recent times has been the unequal distribution of special drawing rights (SDRs). In August 2021, the IMF disbursed SDRs worth $650 billion to its member countries, essentially creating fresh money. The measure was intended to provide liquidity in times of greatest financial distress to those countries that need it most urgently. IMF chief Georgieva called it "a shot in the arm" to escape the COVID-19 crisis. But the outdated IMF Articles of Agreement stipulate that new SDRs can only be distributed to member countries on a pro-rata basis according to their IMF quota. Since the richer a country, the higher its IMF quota, almost half of the allocation went to the G7 countries, while the 46 least developed countries (LDCs) received a total of only 3%
Since then, debate has raged on how SDRs can be redirected (rechannelled) to countries in need. Both the G7 and G20 have committed to rechannelling at least a portion of their recent SDR allocation. This is the $100 billion target mentioned in the Bridgetown Initiative. To date, almost two years later, not even the G20 countries' pledges meet the target, and the amount of SDRs actually rechannelled is still near zero. France wants SDR rechannelling to become a central component of a new financial pact with Africa, which will put rich countries´ governments under pressure.
To facilitate rechannelling, the IMF's has created the Resilience and Sustainability Facility (RSF) as part of the new Resilience and Sustainability Trust (RST). The new facility, which became operational at the IMF's annual meeting in October 2022, can also issue loans for purposes such as climate action or pandemic response, a novelty for the IMF. This is not without controversy because it represents an expansion of the IMF's mandate. Many parties would have preferred to see SDRs given directly by rich beneficiaries to the actual target group of countries in need. Or at least rechannelling through the other eligible holders (subscribed holders) of SDRs, which include all major multilateral development banks.
Among NGOs, rechannelling through the RST was met with criticism primarily because it would again lose the character of the SDR as a resource that does not create debt and is not subject to policy conditions. Allegedly, however, EU law prohibits EU member states from rechannelling SDRs through channels outside the IMF. Barbados was one of the first countries to apply for funds from the new Resilience and Sustainability Trust.
Concessional loans for sustainable development
The second pillar of the Bridgetown Initiative is to expand development financing, beyond short-term liquidity. Again, the initiative draws on existing ideas and policy processes. The focus is on multilateral development banks (MDBs) and the World Bank in particular, which are expected to disburse US$1 trillion in additional funding. Already during the Italian G20 presidency, a comprehensive analysis had been commissioned on how to increase the lending capacity of MDBs, or to make better use of it. The analysis concluded that MDBs could indeed increase their disbursements.
Reform steps would include simple behavioral changes such as more risk-taking on the part of MDBs, or better communication to positively influence rating agency assessments and reduce MDBs' funding costs. It could also include the increased use of financial innovations and of the callable capital provided by member states to better translate limited resources into disbursed loans. The World Bank reform debate has gained massive momentum since last year; in January 2023, the World Bank itself presented a reform roadmap.
Increasing development financing through MDB lending is certainly a double-edged sword. On the one hand, MDB loans are generally cheaper than other sources of financing provided by private investors. Issuing government bonds on international financial markets is only possible at extremely high interest rates for developing countries. They have become even more expensive with last year’s interest rates turnaround.
On the other hand, many developing countries are now so heavily indebted that even low-interest loans from MDBs could lead to a debt crisis. Moreover, MDB loans are also subject to policy conditions, and cannot always be used for the purposes that the borrowers themselves consider to be priorities. Thus, they are in many ways inferior to other sources of financing, especially domestic tax revenues and savings. It should also be remembered that more than an additional $170 billion would be available annually, mostly in the form of grants, if rich countries met their ODA commitments.
New funds for climate finance
The third pillar of the Bridgetown Initiative made a splash in the run-up to the Sharm El Sheikh climate summit. The Bridgetown Initiative takes up the idea of a Loss and Damage Facility, the establishment of which was actually agreed at the climate summit. An empty institutional shell so far, however, it has yet to be filled with funding. For small island states such as Barbados, the facility is of particular relevance because they are especially affected by rising sea levels and natural disasters such as hurricanes.
The second proposal is to establish a new multilateral instrument for climate finance. It is set in the context of the international community's long-standing inability to mobilize sufficient funds for the Global South. The US$ 100 billion target agreed back in 2009 at the Copenhagen climate summit has not been met in any year to date. Worse still, climate finance currently consists largely of loans, and has thus become one of the driving forces behind the new debt crisis in the Global South.
Therefore, the Bridgetown Initiative proposes that climate finance be financed through SDR allocations, i.e., money creation. It proposes a new allocation of $650 billion to feed a new multilateral instrument. At the climate summit itself, Mottley had even proposed annual SDR allocations to bring in fresh money for climate-related investment spending on a regular basis.
The proposal is ingenious in that it elegantly sidesteps the political incompetence of rich countries to actually deliver the funds they themselves have been pledging for years for climate action in poorer countries. Depositing newly created SDRs into a multilateral fund would also provide a way to allocate SDRs according to need, rather than giving most of the funds to the richest countries. However, such a change in the allocation mechanism would require a change in the IMF's rules and regulations, so it faces some political hurdles, presumably including from some of the IMF’s major shareholders which already stopped the elimination of surcharges. Moreover, some would argue that climate finance should continue to be driven by the polluter pays principle, or should even take on the character of reparations, paid by those who cause climate change to those who are affected by it.
The Bridgetown Initiative is an important contribution on the way to the FfD4 World Summit. It is evidence of how important the Financing for Development agenda is to actors from the Global South, and that it will also be driven by actors from the Global South, including small island states. The international community must find adequate solutions to adapt the international financial architecture to the challenges of multiple crises. The ongoing preparatory process for the FfD4 World Summit, which has its first milestones this year with the UN Financing for Development Forum and the High-Level Dialogue on Financing for Development following the SDG Summit, provides the necessary framework.