Making Sense of the IMF’s Interim Review of the Resilience and Sustainability Trust
This month, the International Monetary Fund (IMF) marks its 80th anniversary amid various proposals on how to reform the global financial architecture to make it fit-for-purpose in the 21st century.
Climate change poses a particular, and urgent, opportunity for reform. Many of the IMF’s developing country members are grappling with severe fiscal and debt constraints, even as they face intense pressures to fund significant low-cost capital investments to accelerate the shift to low-carbon economies, enhance climate resilience, address loss and damage, restore biodiversity loss and navigate cross-border spillovers associated with a just global energy transition. As the only multilateral, rules-based institution responsible for promoting global macroeconomic and financial stability, the IMF has a central role to play in helping developing countries to urgently unlock and mobilize substantial and affordable climate financing.
In this respect, the IMF must be commended for integrating aspects of climate change into its surveillance, technical assistance and lending functions, especially expanding and complementing its lending toolkit by creating the Resilience and Sustainability Trust (RST). The RST, through its lending arm, the Resilience and Sustainability Facility (RSF), provides concessional, longer-term financing to help eligible IMF members address key structural challenges such as climate change and pandemic preparedness, while strengthening their prospective balance of payments stability.
When the IMF approved the establishment of the RST in April 2022, the IMF’s Executive Board requested an interim review of member countries’ initial RST experiences within 18 months from when the Trust became operational (October 2022), as well as regular evaluations of the RST’s resource adequacy.
At the end of June, the IMF released its interim review of the RST. While the interim review provides for some operational adjustments to the RST, they are not deep enough to fully actualize the potential of this new lending tool. This blog provides an overview of what was covered in the interim review document and, drawing on previous work from the Task Force on Climate, Development and the IMF, presents five recommendations for catalyzing the RST’s impact.
Experience so far
The interim review found that demand for RST financing has been high, demonstrating the usefulness of the instrument to the IMF’s membership. Eighteen RSF arrangements were rapidly approved and rolled out in the 17 months of operation to March 2024, with financial commitments totaling about SDR 6.3 billion (about $8.4 billion). An additional 30-35 requests for RSF programs are expected in the near term. These RSF arrangements have been paired with a concurrent “upper credit tranche” (UCT)-quality IMF program, as a condition for financing.
All RSF arrangements have, so far, focused on climate-related challenges across a wide range of countries with varying climate profiles and capacity, suggesting that the climate change focus of the RSF has been broadly welcomed by the Fund’s membership. Going forward, the IMF expects future RSF arrangements to include pandemic preparedness, and in this respect, it is finalizing a pandemic coordination framework with the World Bank and the World Health Organization. The interim review, however, did not endorse the inclusion of other new qualifying longer-term structural challenges for RST financing and stated that this expansion would require further consideration.
Structural conditionality is intrinsic to RSF lending programs and is linked to specific policy reform measures that countries are required to implement over the program period. The 18 RSF arrangements are supporting a range of macro-critical climate policy reform measures, with almost half of the 211 reform measures simultaneously targeting a mix of climate actions spanning mitigation, adaptation and transition. About 75 percent of reform measures comprise green public financial management, financial sector and fiscal policy reforms, all areas of Fund expertise. RSF arrangements are also supporting sectoral measures (e.g. water, power and transportation) through collaboration with the World Bank and other regional multilateral development banks (MDBs).
A survey of mission chiefs and country authorities was conducted as part of the interim review process. The survey found that most mission chiefs and country officials agreed that the reform measures in their RSF arrangements were ambitious relative to their country’s development needs and implementation capacity.
Informal feedback, however, found that half of mission chiefs agreed that, in some cases, the RSF reform package could have been greater in ambition, if more time had been available. The interim review found that of the reform measures implemented so far, 40 percent are considered high-depth involving lasting institutional changes, while 41 percent are medium-depth comprising key intermediate and one-off steps towards deeper reforms.
Proposals to enhance operational flexibility of RSF
To enhance the effectiveness of the RST, the interim review proposed fine-tuning of a few key design elements, all of which were accepted by the IMF’s Executive Board. These changes are as follows:
- Early completion of reform measures. Countries under an RSF arrangement can now request early rephasing and disbursement for at most one reform measure completed ahead of schedule per review. Disbursements under RSF arrangements would continue to require completion of the concurrent UCT-quality program reviews.
- Elimination of dual-purpose reforms. Dual-purpose reforms are measures that are identical under both the RSF arrangement (e.g., as a reform measure) and the concurrent program (e.g., as a structural condition) when a single measure is critical to the objectives of both the UCT-quality program and the RSF arrangement. The interim review eliminated these dual-purpose reforms.
- Transitions from back-to-back UCT-quality programs. While the interim review continued to see UCT-quality programs as a necessary complement to RSF arrangements, an RSF arrangement may now continue when a country transitions from one concurrent qualifying UCT-quality program to another, in limited circumstances.
In addition, the interim review provided an updated assessment of the adequacy of RST resources and found that increased near-term fundraising will be required to meet the anticipated strong demand for RSF arrangements.
Policy recommendations for a stronger RST
Regrettably, the interim review simply tweaked a few operational RST design issues and fell far short of recommending changes for the design of future RST loans that are necessary for the RST to fulfill its mandate. Over the past few years, the Task Force on Climate, Development and the IMF has put forth several policy recommendations to ensure that the RST achieves this goal.
These recommendations identify five areas where the IMF should show greater leadership to strengthen the RST so that it aligns with a more development-centered approach to climate change: expanding RST resources, eliminating concurrent UCT-quality programs, aligning RSF program design with ambitious climate and development polices, emphasizing a focus on catalyzing climate finance and institutionalizing collaboration with the World Bank.
Expanding RST resources
The RST is funded through voluntary re-channeling of Special Drawing Rights (SDRs), the Fund’s reserve asset, by the largest economies following the 2021 historic SDR allocation of $650 billion. Progress towards the RST fundraising target of SDR 33 billion has been strong, with SDR 31.9 billion of total RST resources pledged at the time of the interim review. Almost one-fifth of these pledged resources have already been committed to existing RSF arrangements.
Given the anticipated strong demand for RST resources, replenishment of the RST through re-channeled SDRs will be vital in the next five years. Furthermore, an expansion of RST financial resources alone will not be enough. For an additional 30-35 RSF arrangements to successfully come on stream, the IMF will urgently need a commensurate expansion in human resources to support and execute these programs.
Eliminating the requirement for a concurrent IMF program
To qualify for RST financing, eligible countries need, among other things, a concurrent on-track financing or non-financing IMF-supported program with UCT-quality policies and at least 18 months remaining in the program at the time of approval of the RSF arrangement.
The interim review indicated that such a requirement restricts the access of small developing states – which face disproportionate risks from climate change – to the RST, and it even argued for more tailored solutions for these climate-vulnerable countries. However, the interim review did not remove the requirement for a concurrent Fund program, only saying that greater flexibility “could be considered in the future.”
Aligning RSF program design with ambitious policies
Based on informal feedback from IMF mission chiefs, the interim review found that there could be greater ambition in RSF policy reforms. This is consistent with the findings of the Task Force on the early RSF experiences of three climate vulnerable countries – one developing country in Asia (Bangladesh) and two emerging market economies in the Caribbean (Barbados and Jamaica).
The policy brief shows that the degree and durability of structural conditionality in RSF arrangements for all three countries are overwhelmingly of low depth that, in themselves, do not bring about a change but can pave the way for implementation of more critical reforms. This means that most RSF arrangements are not tackling the longer-term structural challenge of climate change. Many of these countries have ambitious nationally determined contributions and climate adaptation strategies, and RSF arrangement conditions should align with and add momentum behind these policies.
Playing a catalytic role
RSF arrangements have an overwhelming reliance on the IMF’s catalytic effect to unlock external financing for investments in climate mitigation and adaptation, even though there is limited empirical evidence to justify this catalytic role. The potential of private finance to help close a country’s climate financing gap is compelling, but the RSF’s catalytic character in making this happen is still unproven.
Again, the Task Force found that the early RSF country experiences of Bangladesh, Barbados and Jamaica demonstrate that the signaling effect of climate policy reforms to spur large-scale private climate investments faces strong headwinds. At the end of 2023, both Barbados and Jamaica had not attracted any private climate finance flows, despite having an RSF arrangement for 12 months and nine months, respectively. Bangladesh received a marginal amount of private climate financing, mainly due to the country platform associated with its Mujib Climate Prosperity Plan.
RSF arrangements are much more likely to play a catalytic role in mobilizing private climate finance if they focus on a few ambitious, high-depth policy reforms that stand a reasonable prospect of successfully generating transformational change or having a long-lasting impact.
Institutionalizing climate collaboration with the World Bank
Catalytic structural conditions require the IMF to closely engage with the World Bank and other regional MDBs. The World Bank’s deep sectoral expertise can provide the analytical foundations to design RSF sectoral policy reforms. To this end, the Task Force welcomes the May 2024 announcement between the IMF and World Bank Group to scale up and deepen their climate collaboration through an enhanced framework.
This collaboration could also allow the IMF to leverage its own climate-related analytics with the technical expertise of the World Bank as reflected in Country Climate and Development Reports. Furthermore, closer collaboration with the World Bank could help increase the catalytic impact of the RST through the design of country-led platforms to mobilize additional climate finance, especially from the private sector.
While the interim review of the RST represents small progress, many of the major shortcomings of the RST remain in place. The comprehensive review of the RST planned for 2026 presents a vital moment to make the RST a transformational part of the global financial architecture and to ensure the Fund’s future relevance.
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