Summit for a New Global Financing Pact: What it is and why it matters

Paris will host a one-of-a-kind ‘Summit for a New Global Financing Pact’ on 22-23 June to secure financing for Global South development aid and climate transition.

The gathering, under the joint patronage of French President Emmanuel Macron and Barbados Prime Minister Mia Mottley, is “vital”, according to the Elysée, which insists that only “dialogue and solidarity” will ensure “no country has to choose between fighting poverty and fighting climate change”.

Among the attendees, there will be UN Secretary-General António Guterres, European Commission president Ursula von der Leyen, German Chancellor Olaf Scholz and Gabon’s President Ali Bondo Ondimba, plus other heads of state and civil society organisations.

Urgent action needed

The need for action is urgent, as the International Monetary Fund (IMF) classified 39 low-income countries as undergoing ‘debt distress’, and a conversation over potential renegotiation or write-downs is badly needed, as the increase in interest rates worldwide is felt first and worst in low-income countries.

These nations have close to no fiscal leeway, all the while facing the urgency of financing a green and sustainable transition.

A report published during the COP27 in November 2022 estimated that $2.4 trillion of external financing is necessary annually up to 2030 to finance the green transition in emerging markets.

This number could reach $4 trillion, according to the Institute for Climate Economics’ (I4CE) calculations.

This means that besides debt relief and multilateral development aid, private capital flows are also urgently needed, although they are struggling to reach the countries most in need.

At the same time, trust between developed countries and the Global South has “eroded”, the Elysée said after the 2009 commitment for G20 countries to spend $100 billion a year for the climate transition fell through. The OECD found that by 2020, the total amount was over $15 billion short.

The Brief — Whose aid is it anyway?

There was surprise earlier this year when the Swedish Migration Minister Maria Malmer Stenergard – whose government holds the six-month rotating presidency of the EU Council – told reporters that trade access and aid could be denied to countries who refuse to cooperate on migrant returns.

Reforming the system

While the summit will not result in any formal international agreement, it is expected to “reconcile the way different financial actors” work together, Claire Eschalier, senior project manager at I4CE, told EURACTIV.

According to her, this should be underpinned by a radical overhaul of how the financial system works so public funds can maximise leverage of private funds and ensure the money is spent most efficiently.

“We need to bring money where we can expect a systemic change”, Eschalier said, warning that these investments may not be the most profitable and would need governments’ backing.

At the same time, a much thought has gone into fleshing out what form a multilateral banking system reform could take.

“Both the IMF and the World Bank were created a long time ago, and they now need reform”, David McNair, executive director at the ONE Campaign, told EURACTIV, pointing at their slow-moving bureaucracy and failure to allocate funding to high-impact projects.

On top of this, European countries hold the majority of voting shares in these institutions, which created a ‘democratic deficit’ in the representation of Global South countries.

According to McNair, World Bank or IMF reform is unlikely, a G20 seat for the African Union has a better probability of success in the short term. Meanwhile, he argued that European countries could use their shareholding power to help reduce the cost of capital.

Though the Elysée remains quiet on the outcome of the negotiations, debates could look into reducing international development banks’ capital adequacy ratios to enable riskier investments.

Scholz backs African Union bid for G20 seat on second trip to continent

Germany supports the African Union’s bid to get a seat at the G20 group of large economies, Chancellor Olaf Scholz said on 4 May, as the West seeks to woo the continent away from growing rivals like China.

Debt suspension and ‘Special Drawing Rights’

The summit should also help review the G20 common framework on debt service suspension, which has been requested by Chad, Ethiopia, and Zambia but has faced delays in its implementation and failed to mobilise private creditors.

“If a country requests debt treatment under the current framework, it is penalised. You see the credit rating agencies downgrading them and countries waiting almost two years to get treatment,” said former IMF executive director Daouda Sembene, arguing for more incentives pushing private creditors to “move fast” in granting debt restructuring deals to these countries.

The summit is also raising expectations regarding the reallocation of the Special Drawing Rights (SDRs), an international reserve asset created by the IMF to provide liquidity to countries in times of crisis and mobilised back in 2021 to absorb the economic fallouts of the pandemic.

Since SDRs are apportioned based on the scale of each country’s shareholding in the IMF, they mostly ended up in the economies that did not fully need them, and the G20 agreed to recycle $100 billion of SDRs to vulnerable countries, with around $75 billion committed through the IMF so far.

The idea is to rechannel the SDRs through development banks like the African Development Bank to provide low-cost lending to vulnerable countries.

“The African Development Bank presented a proposal to help using the SDRs to boost lending, but more countries need to pledge,” explained Sembene, who hopes the summit will encourage more nations to chip in.

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All financing options on the table

Given the magnitude of the needs for the Global South, already strained by the pandemic and Ukraine war, experts said all options should be on the table, including a new shipping levy and Barbados’ proposal to pause loan repayments for two years in case of climate disasters or pandemics.

At the same time, a workable solution is only possible if all creditors sit at the table and cooperate.

“Competition doesn’t help. Multilateral, bilateral and private creditors need to join forces,” Sembene said.

This also applies to China, one of the major bilateral creditors in Africa, owning 12% of the continent’s debt and playing a key role in infrastructure financing, primarily due to its unrivalled speed in lending.

Yet, cooperation is slow. Analysts say that China and Russia are bolstering their presence in Africa to tap its rich natural resources amid grave warnings from UN agencies that “Everyone is pointing fingers to the others and saying ‘you move first’,” McNair told EURACTIV.

Africa pays the price as China and Russia muscle in

China and Russia are bolstering their presence in Africa to tap its rich natural resources, analysts say, amid grave warnings from UN agencies the world’s poorest countries face accumulating crippling debts.

“Yet another summit”?

Another concern ahead of the summit is the lack of specific actions and measures.

“The risk is that this will be yet another summit,” McNair said, adding that countries in the Global South don’t need pledges but investment.

Faten Aggad, advisor at the African Climate Foundation, expressed concern about the low level of commitment in the Summit among heads of state and the growing frustration among African leaders.

“The outcome will say the right things, but we are more concerned about the follow-up,” she said.

Sembene, on the other hand, is more optimistic, maybe due to his lower expectations for the summit.

“The Summit is not supposed to be a decision-making opportunity, and we hope it will help make progress towards major decisions and build some momentum.”

[Edited by János Allenbach-Ammann/Alice Taylor]

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