Macrofinancial Risks in Climate Vulnerable Developing Countries and the Role of the IMF
Climate vulnerable countries face considerable macrofinancial risks that threaten debt sustainability, worsen sovereign risk, and harm investment and development prospects. This paper reviews the macrofinancial implications and risks of climate change, in particular the impacts of climate vulnerability on sovereign risk and the cost of capital, with special consideration to challenges facing the V20, a group of 48 climate vulnerable countries that are home to 1.2 billion people. It also examines the International Monetary Fund (IMF)’s responsiveness to these challenges to date and recommends ten initial areas for a joint V20-IMF Action Agenda. The IMF can play an important role in supporting climate vulnerable countries in mitigating and managing macrofinancial risks stemming from the physical and transition impacts of climate change, leveraging opportunities from climate policies to boost growth, investment and resilience. While the IMF’s attention to climate issues has increased markedly, including through research produced by IMF staff, the Fund has been rather slow to address climate-related financial risks in its operational work, comprised of surveillance, technical assistance and training, and emergency lending and crisis support. A non-representative survey among finance ministries and central banks of V20 countries indicates the desire for more support from the IMF in addressing climate risks and vulnerabilities. The views expressed by V20 members suggest that the IMF should integrate climate risk analysis in its surveillance activities, including Article IV consultations as well as Financial Sector Assessment Program assessments and Debt Sustainability Framework analysis conducted with the World Bank; scale up technical support; and explore options for developing its toolkit for climate emergency financing.
- Publisher: Centre for sustainable finance, Global centre on adaptation, MCII
- Author(s): Ulrich Volz and Sara Jane Ahmed Download