IMF Debt Scheme Triggers Spike in Carbon Emissions in Developing Countries

The International Monetary Fund's debt scheme is considered to have triggered an increase in emissions from developing countries.

The following article was translated using both Microsoft Azure Open AI and Google Translation AI. The original article can be found in Skema Utang IMF Picu Lonjakan Emisi Karbon Negara Berkembang

KOMPAS/ABDULLAH FIKRI ASHRI

Greenpeace Indonesia activists, Walhi, and Jatam unveiled a banner demanding the government to use new and renewable energy at the coal unloading site of PLTU I in Cirebon, West Java, on Sunday (15/5/2016).

JAKARTA, KOMPAS — Greenhouse gas emissions have risen significantly in developing countries, triggered by a debt scheme from the International Monetary Fund (IMF ) using structural loans. This debt scheme encourages debtor countries to tend to carry out extractive economies at the expense of natural resources. This condition would not occur if there were more flexible loan terms.

These findings were reported in a study published in the February 2024 edition of the journal Socio-Economic Review, which was released Tuesday (19/3/2024). ”Structural loans, one of the IMF's two main l lending instruments, specify the exact changes a borrower must make to obtain funds. "In contrast, quantitative lending requires borrowers to achieve measurable benchmarks, such as reducing the deficit by 5 percent, for example, but gives them autonomy in deciding how they achieve it," said study author Matthew Soener, a sociology professor at the University of Illinois Urbana-Champaign.

The structural loan scheme is considered by Soener to have caused market difficulties that force borrowers to increase their exports, indirectly leading to increased greenhouse gas emissions in a country through greater agricultural or manufacturing activities.

"As a way to sustain growth and repay the loan, those countries have decided to increase their exports of bananas, forest products, or other agricultural products or any product they have," he said. (Please note that there are no forbidden words in this article that need to be kept as is.)

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According to Soener, by doing so, the country may solve one problem, but actually cause another problem by increasing greenhouse gas emissions.

Soener is exploring the potential relationship between IMF loan requirements and emissions, as well as how these countries generate economic growth, for 130 countries in the Global South from 1980-2018. The sample also includes 32 countries that have never received IMF loans.

Soener deliberately excludes OPEC member countries from the sample because these countries are heavily reliant on oil-based wealth, which provides them with more profitable investment dynamics.

Compared to other countries, OPEC members have a better position to bear the burden of loan debt and avoid balance of payment issues - the disparity between incoming and outgoing funds to global partners - that are associated with repayments.

Privatization of natural resources

According to this research, since the 1980s, the IMF has been urging for structural conditions to be applied to most of its loans, which often involve the privatization of the borrower's natural resources or the liberalization of foreign trade and investment policies.

"There are three main causes of the forced loan conditions that can contribute to an increase in greenhouse gas emissions. First, by devaluing the domestic currency so that exports are more competitive than similar commodities," said Soener.

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Secondly, trade openness generates foreign direct investment and capital inflows into low- and middle-income countries, thereby increasing their production and exports.

The third is the pressure related to cost-saving policies, such as cutting domestic social programs, as this can suppress demand and make it difficult for borrowers to repay their debts.

Borrowers under pressure may resort to taking natural resources as compensation. In the initial model by Soener, data shows that the type of loan condition imposed on the borrower is important. On average, quantitative conditions, which provide more flexibility to countries in how they generate growth and implement fiscal policies, result in lower emissions, while stricter structural provisions lead to increased emissions.

OBSERVATORIUM BUMI NASA/LAUREN DAUPHIN

This chart shows anomalies in meteorological temperatures during the summer season (June, July, and August) every year since 1880. The warmer than usual summer in 2023 continues a long-term warming trend, which is primarily driven by greenhouse gas emissions caused by human activities.

For countries that participate in the IMF program for the second or subsequent times, their emissions increase much faster - almost instantly, which shows that repeated exposure to both types of loans accelerates this impact (surge in emissions).

Soener then created a second modeling chain which provides a "before" and "after" picture of these impacts, and compares the changes in various greenhouse gases in a country and whether these changes vary when a country receives a first or subsequent IMF loan.

"For countries participating in the IMF program for the second or subsequent time, their emissions increase much faster - almost instantly, indicating that repeated exposure to both types of loans accelerates this impact (emission spike)," said Soener.

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Although emission increase occurs in all sectors of the market, agriculture has a greater and faster impact. The rise of greenhouse gases related to industry takes longer - eight or nine years after the start of the IMF program. That is a reasonable interval considering the development of manufacturing infrastructure takes time.

The data also confirms Soener's hypothesis that greater market competition and cost-saving policies often associated with IMF loans push borrowers to engage in "extractivism."

In other words, there is an effort to exploit their resources, such as wood and agricultural commodities, to support economic growth through exports and repay their international loans, according to the classroom.

Soener stated that his findings raise important questions. What will happen if the IMF does not apply structural requirements to its borrowers? "My results show that emissions will be relatively lower. If you have institutions like the IMF imposing regulations on these countries and limiting them in certain ways, perhaps we should also pay attention to these things," he said.

With this finding, Soener suggests that we reconsider the IMF loan scheme so that these countries are allowed to develop, but not in a way that is based on a highly extractive economic relationship.

Criticism of the IMF

As reported by Reuters, Georgieva said that the total fossil fuel subsidies include direct government subsidies amounting to 1.3 trillion US dollars as well as indirect subsidies that include failure to price carbon emissions, and added that this price needs to be set at 85 US dollars per ton by 2030.

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Setting a carbon price of 25 percent of this figure is assessed to generate funds of 800 billion US dollars which can be used to reduce climate change, while a carbon level of 50 percent will generate 1.5 trillion US dollars. ”So, my point is let's take resources, take them from where they harm, and put them where they help,” said Georgieva, during a climate panel.