1.2.1 Debt, Debt Sustainability, and Climate Risks

The IMF’s growing engagement with climate issues takes place against a backdrop of deepening debt problems in developing countries. This is important because of the many transmission channels between climate risk and debt. First, climate change has a range of follow-on implications for fiscal sustainability, financial sector stability, and overall macroeconomic health, which in turn affect debt sustainability (Ramos et al. Reference Ramos, Gallagher, Stephenson and Monasterolo2022a; Volz and Ahmed Reference Volz and Ahmed2020a). Second, countries with high degrees of climate vulnerability also have to pay risk premiums on their sovereign debt, which inevitably increases their overall debt burden (Kling et al. Reference Kling, Volz, Murinde and Ayas2021). Indicatively, V20 countries – a group of climate-vulnerable nations – faced average real interest rates of 9% in the mid-2010s, compared to 6% for G20 members, the group of twenty richest economies in the world (Volz and Ahmed Reference Volz and Ahmed2020a). Third, high levels of debt service hamper the introduction of green transition policies, as public funds get directed to paying off external debt rather than financing climate change adaptation or mitigation projects (Ramos et al. Reference Ramos, Bhandary, Gallagher and Ray2022c). Debt problems also prompt countries into development trajectories that are antithetical to green transition objectives. Civil society has pointed to “a debt – fossil fuel production trap, whereby countries rely on fossil fuel revenues to repay debt, and anticipated revenues from fossil fuels are often overinflated and require huge investments to reach expected returns, leading to further debt, eroding long-term development prospects, and causing devastating environmental and human harms” (Woolfenden Reference Woolfenden2023a).

In other words, there is a deep and reciprocal relationship between climate change and debt, whereby climate risks contribute to debt problems, and debt problems make dealing with climate risks even more difficult in resource-constrained environments (ActionAid International 2023). A closer look at debt service statistics of climate-vulnerable countries reveals the scale of the problem. Figure 1 shows the average of external debt service (as a share of GDP and excluding debt to the IMF) over the decade preceding the pandemic (circle) and compares it to its level in 2024 (diamond). While countries at all levels of climate vulnerability have registered increases in their external debt service, this phenomenon is most pronounced for those that are highly vulnerable. The average highly climate vulnerable country directed 1.2% of its GDP to debt service in the 2010s but now spends 3% for the same function. This inevitably raises important questions around fiscal priorities and suggests that the approach of policymakers to debt problems also matters for their ability to pursue green transition objectives. In a time of ballooning debt service, longer-term investments – like those necessary for meeting climate goals – could be the first to be scaled back.

Figure 1 External debt service, disaggregated by countries’ climate vulnerability

Source: Authors, using data from the IMF (2023j) and the University of Notre Dame (2023). External debt service includes public and publicly guaranteed debt but excludes IMF charges and repurchases.

Figure 1Long descriptions

The dot plot shows external debt service (% of GDP) for countries with high, medium, and low climate vulnerability. Blue dots represent the 2010–2019 average, and red diamonds represent 2024. Debt service has risen across all categories, with the sharpest increase for highly vulnerable countries. The approximate data are as follows: 1. Countries with low climate vulnerability: external debt service at 2.4% of GDP on average between 2010–2019, and at 3.5% in 2024. Countries with medium climate vulnerability: external debt service at 2.5% of GDP on average between 2010–2019, and at 3% in 2024. Countries with high climate vulnerability: external debt service at 1.2% of GDP on average between 2010–2019, and at 3% in 2024.

Helping countries deal with such debt problems is a core function of the IMF. To this end, the organization employs Debt Sustainability Analyses (DSAs) to shape its activities in this area. The methodology for these analyses depends on the income classification of the evaluated country: one methodology applies to low-income countries, while another to the remaining so-called ‘market access’ countries. These evaluations are important because if the IMF considers a country’s debt unsustainable, it must stop lending and propose debt restructuring. Yet, such negative assessments are uncommon (Rehbein Reference Rehbein2023). A pre-pandemic review at the IMF showed that highly debt-vulnerable countries generally did not pursue restructurings, even though the latter were associated with a greater probability of the IMF’s lending being successful (IMF 2019a).

Given the macroeconomic implications of the climate crisis, the IMF has started incorporating climate issues within DSAs. For example, the recently updated framework for market access countries (‘Sovereign Risk and Debt Sustainability Framework’) has introduced a two-part climate change module (IMF 2022m). The first component examines the impact of adaptation investments, and the other focuses on mitigation policies. Based on the scenarios pursued in these modules, the outcome is projections for debt-to-GDP and gross financing needs-to-GDP ratios, which – in turn – illustrate debt-related risks from green transition policies. These projections also shape the kinds of reforms that are advocated within IMF lending programs, thus foregrounding the centrality of this debt toolkit in the IMF’s engagement with climate issues.

The analyses and assumptions included in DSAs remain the subject of sustained debate. In relation to climate issues, a recent analysis pointed out the limited consideration of different physical or transition risk scenarios in the IMF’s modelling efforts (Maldonado and Gallagher Reference Maldonado and Gallagher2022). This matters because once different risks are considered, and the introduction of baseline or greener transition policies modeled, then the findings on government financing needs and public debt can vary considerably. Beyond the inclusion of climate issues, debt sustainability analyses are not an exact science but an exercise that entails a high degree of subjective judgement by IMF staff (Hagan Reference Hagan2023), and also one that is heavily politicized due to its momentous implications for opening up a path for debt restructuring (Wheatley Reference Wheatley2023).

The climate module within DSAs is not the only set of analytical modules that the IMF has put forth. In recent years, the IMF introduced the Debt–Investment–Growth and Natural Disasters (DIGNAD) toolkit, which examines the economic implications of physical risks. In relation to debt, this toolkit enables an assessment of debt vulnerabilities in scenarios of both the aftermath of a natural disaster and the introduction of “ex-ante policies, such as building adaptation infrastructure, increasing fiscal buffers, or improving public investment efficiency” (IMF 2024c).

The build-up of growing debt vulnerabilities combined with inadequate analytical toolkits pose major challenges for crafting development policies and pre-empting debt crises. Indeed, the forthcoming review of the DSA framework for low-income countries is expected to grapple with how to expand the remit of analysis and make this instrument fit for purpose, in light of the economic challenges posed by climate change (Fresnillo Reference Fresnillo2024). In following this path, however, the IMF is not alone. In recent years, the World Bank has assumed an ever-greater role in analyzing how countries can integrate the fight against climate change with the pursuit of developmental objectives. In particular, in 2021 the Bank launched its own climate-related evaluations through the Country Climate and Development Reports (CCDR).Footnote ¹ This matters because many of the IMF’s climate-related measures are drawn directly from these reports.

1.2.2 Fiscal Consolidation, Market-Based Approaches to the Green Transition, and Their Limits

There is a fundamental tension in IMF lending: the organization’s programs demand that borrowers introduce far-ranging fiscal consolidation measures – commonly known as ‘austerity’ – with the hope of improving their macroeconomic positions, yet these are the policies that constrain countries’ ability to introduce green transition policies. This occurs through several pathways. First, and most obviously, austerity measures limit available public financing for climate change adaptation and mitigation. Public funds to support a range of green policies – like phasing out coal, incentivizing a switch to cleaner energy sources, scaling up production of renewable energy sources, or providing green subsidies – are likely unavailable for countries introducing extensive budget cuts, and that need to decide between cuts to politically sensitive areas of public spending (e.g., education and health) versus policies that only have a pay-off in the medium- to long-run.

Second, austerity measures are also likely to stunt the introduction of any green industrial policies. Such policies include incentives for research and development and tax relief for green investments by the private sector and require active state policies to appropriately and effectively channel green investments. Absent such investments, countries run the risk of relying primarily on private finance to pursue a green transformation, which may not find it sufficiently profitable to do so or on the financing available through multilateral institutions and bilateral donors, which may come with strings attached.

Finally, austerity also has more insidious effects on the likelihood of the green transition. A long-established strand of academic scholarship has shown that the economic performance of countries implementing IMF programs tends to suffer (Dreher Reference Dreher2006). There are many reasons for this, and they go beyond the observation that countries that resort to IMF programs are generally already going through crisis before resorting to the organization’s lending. Ineffective or overambitious IMF-designed policies, inappropriate pacing of reforms, and poor analytical frameworks (e.g., in estimating the fiscal multipliers that inform the design of austerity measures) can all deepen and prolong pre-existing economic troubles (Blanchard and Leigh Reference Blanchard and Leigh2014; Blyth Reference Blyth2013; Kentikelenis and Stubbs Reference Kentikelenis and Stubbs2023). Depressed economic activity has climate-damaging follow-on implications. Households find it unaffordable to shift to greener consumption patterns, with low-income ones being particularly hard-pressed. Private firms struggle to invest in green technologies and adaptation measures, thereby increasing their vulnerability to climate shocks and forestalling reductions in their emissions. And the public sector is further starved of revenue sources.

Beyond fiscal policy, IMF programs also target a broader set of policies that seek to alter countries’ economic policy profiles and the relative role of the state versus the market in shaping development policies. For example, the IMF has a track record of promoting carbon pricing as a key policy to underpin climate change adaptation and mitigation. Such policies can indeed be powerful tools in the fight against climate change, but they can only be one part of a broader approach toward the green transition. As the IMF’s own research has shown, implementing green transition policies in developing countries also entails increasing low-carbon manufacturing capabilities domestically (Prasad et al. Reference Prasad, Loukoianova, Xiaochen Feng and Oman2022) and providing public support for research and development (Bettarelli et al. Reference Bettarelli, Furceri, Pizzuto and Shakoor2023).

1.2.3 Subsidies and Social Spending: Tools for a Just Green Transition?

In the IMF’s view, removing energy subsidies forms a key plank of the proposed path toward the green transition (de Mooij, Keen, and Parry Reference de Mooij, Keen and Parry2012). This is because such a reduction purportedly has doubly positive effects: it reduces the fiscal deficit by removing a drain on the public budget, and it reduces energy consumption by ensuring that prices reflect the true cost of carbon. While the economic logic of subsidy removal might be compelling and these policies are commonly included in IMF loan conditionality, such measures have clear social and political implications. Indeed, recent political turmoil in Ecuador and Sri Lanka is linked directly to government decisions to remove subsidies (International Crisis Group 2024; Ioanes Reference Ioanes2023).

Discussion of subsidies needs to distinguish between two types of intended recipients. First, subsidies can be directed to firms to support their productive activities and protect them from high energy prices. As a sort of industrial policy, this approach can have beneficial effects on economic activity, even if it does not expose firms to the true price of carbon. But there is no guarantee that this in-kind support to producers will even be reinvested into productive, development-enhancing activities – they may just end up accumulating profits. Consequently, policymakers face two simultaneous challenges: how to phase out energy subsidies to producers while also ensuring that the additional costs are not passed on to consumers (here, taxation of past hyper-profits in the form of windfall taxes can help raise public revenues to compensate consumers for higher prices); and how to ensure that new industrial policies are ‘green,’ thus not hampering domestic or global efforts to combat climate change.

Second, energy subsidies can be directed to consumers, which is a de facto social policy in many developing countries where other forms of redistribution and social provision are severely constrained (Hosan et al. Reference Hosan, Sen and Matiar Rahman2023). A common problem is that these subsidies are often not targeted, thus favoring those with higher incomes in absolute terms and contributing to widened inequalities. Even so, individuals with lower incomes still benefit substantially from these policies, as fuel expenditure tends to be a high proportion of their overall spending and these subsidies may be the only type of support they receive from the government (IMF 2020c). Thus, even though fuel subsidies do not expose individuals to the true cost of carbon, they help maintain social peace and provide substantial support to low-income individuals. However, while energy subsidy removal can be an important tool to combat excessive fuel consumption, the IMF’s approach to fuel subsidies is their wholesale elimination and replacement by targeted social assistance measures.

2.3.1 Kenya’s 2023 Loan

Kenya was among the first countries to receive an RSF loan. In July 2023, the IMF approved a twenty-month loan for $551mil, designed to complement the country’s existing $2.3bn Extended Credit Facility and Extended Fund Facility (ECF-EFF) loan that was in place since 2021. The main focus of the original program was to reduce debt vulnerabilities through multi-year fiscal consolidation measures, strengthening governance arrangements, and enhancing the monetary and financial sector framework (IMF 2021f). This was a domestically controversial program, as it was briefly interrupted in early 2022 due to opposition surrounding reforms mandating new tax measures amounting to 0.4 percentage points of GDP, including income tax changes, excise rate increases, and value-added tax exemption removals – some of which parliament elected to amend or remove (IMF 2022i). Against this backdrop, the 2023 RSF component of the IMF’s lending to Kenya aimed to incorporate climate risks into fiscal planning and the investment framework, reduce emissions through carbon pricing, enhance existing frameworks to mobilize climate finance, and strengthen disaster risk reduction and management.

The IMF recognized that despite Kenya’s modest contribution to global greenhouse gas emissions, its economy is highly vulnerable to climate change shocks. In recognition of these challenges, the RSF contained nine conditions: introducing carbon taxes, providing green fiscal incentives in land and water management, regulating electricity markets to promote energy efficiency, developing a green finance taxonomy, issuing guidelines for financial institutions on reporting climate-related risks, using climate change scenarios in fiscal risk analysis, adopting climate-informed investment selection criteria, implementing climate budget tagging, and adoption of a framework to enable dissemination of a digital early warning system platform. While the ECF-EFF program contained no conditions that directly addressed climate-related challenges, several have indirect implications for a green and just transition.

Despite recognizing that increased public spending on climate adaptation and mitigation can improve Kenya’s debt profile, the IMF had nonetheless been calling for an extensive multi-year fiscal consolidation since the ECF-EFF program began in April 2021. The program initially called for a decline in the primary balance from a deficit of 4.0% of GDP to a 0.2% surplus by mid-2024 (IMF 2021f). In this context, the government revised domestic fuel and energy prices to ensure fiscal consolidation consistent with the program objectives. Fuel subsidies were eliminated in March 2023 and cost-based upward adjustments to electricity prices were effective April 2023 (IMF 2023f). By the most recent review, the IMF was calling for a 1.7% surplus by the 2024–2025 fiscal year, totaling a major 5.7 percentage point increase to the primary fiscal balance over the course of the program (IMF 2024f).

Notable in its absence was any explicit consideration of the trade-offs involved of such fiscal consolidation measures in achieving climate objectives. The ECF-EFF program also appeared to be at cross-purposes with the RSF program: while the IMF notes lack of funding for adaptation projects when describing climate finances, it does not recognize that the very fiscal austerity they endorse may undermine the ability of the government to fund such projects. To address these gaps, the IMF’s programs anticipated private climate financing would be scaled up. Kenya requires an estimated annual climate financing of about 6% of GDP to meet its updated Paris-aligned climate goals (Government of Kenya 2020). According to IMF analysis, only about one-third of Kenya’s financing gap is being filled annually and the IMF has recognized that current private sector commitments are falling far short of projected requirements and – to the extent that such funds are provided – they are mostly channeled towards renewable energy projects and none towards adaptation efforts (IMF 2023f).

To attempt to spur further investment, the IMF’s conditionality called for the introduction of new regulations on the electricity market, bulk supply, and ‘net metering’ (i.e., the ability of consumers to generate their own electricity). These measures were intended as signals to private investors to invest in certain sectors, such as electric vehicles and renewable energy, and pave the way for private sector generation companies to transmit electricity to their customers via bilateral power purchase agreements in deals that bypass the partly state-owned enterprise Kenya Power and Lighting Company (KPLC), which operates most of the electricity transmission and distribution system. Under the ECF-EFF, the IMF also set a condition requiring the transfer of KPLC’s power transmission lines to Kenya Electricity Transmission Company, that KPLC enter a commercial contract with Renewable Energy Corporation for future Rural Electrification Schemes maintenance costs, and for the establishment of a new governance structure that gives private shareholders better representation by end-December 2024.

2.3.2 Senegal’s 2023 Loan

Following on from an IMF lending program for $650mil that was approved in 2021, Senegal agreed on renewed financial support for three years in 2023. This was to be disbursed through a joint ECF-EFF program ($1.51bn) and a parallel RSF loan ($324mil) – a financing arrangement that mirrors Kenya’s experience described earlier. The stated aims of the ECF-EFF are to reduce debt vulnerability through fiscal consolidation (primarily via revenue mobilization and phasing out energy subsidies), to strengthen public sector governance, and to foster a more inclusive and private-sector-led growth trajectory (IMF 2023i). The aim of the RSF is to support efforts to tackle climate change mitigation objectives, accelerate climate change adaptation, and integrate climate change considerations into the budget process (IMF 2023i).

The RSF program contained ten conditions grouped into three pillars. The first pillar seeks to support climate change mitigation goals by adopting an implementation plan for greener public transport and phasing out untargeted subsidies in the electricity sector. The second pillar aims to accelerate adaptation to climate change by adopting a country development strategy consistent with its Nationally Determined Contributions, submitting urban planning laws that mitigate coastal erosion and urban flooding, disseminating climate risk data to relevant committees, and strengthening the institution in charge of implementing water management. The third pillar looks to integrate climate change considerations into the budget process by integrating climate considerations into public investment management, assessing disaster-related fiscal risks for the 2025 budget law, developing guidelines for climate budget tagging and issuing directives in the budget call circular to reflect climate investments, and ensuring all public investments and public-private partnership projects include an appraisal of their effect on climate adaptation and mitigation.

The selection of these reforms was coordinated with the World Bank, who joined the program negotiation mission and are providing ongoing technical assistance for reforms required under the RSF (IMF 2023h). Extensive coordination is also evident with regard to the policy measures mandated in the World Bank’s Development Policy Financing program commencing May 2022 that are consolidated in the ECF-EFF and RSF programs, such as reforms geared towards establishing the regulatory framework for private investment in the gas subsector and increasing transparency in government procurement processes in the electricity sector (World Bank 2022).

Like in the case of Kenya, several conditions related to the reduction of the fiscal deficit have the potential to impact the country’s climate change efforts. The IMF calls for a fiscal consolidation that would see a decline in the primary budget deficit from 4.4% of GDP at end-2022 to 0.7% by 2025. Fiscal consolidation is to be driven primarily by a phasing out of untargeted energy subsidies – via reductions to gasoline and diesel subsidies under the ECF-EFF and via increases to electricity tariffs under the RSF – from 4% of GDP in 2022 to 1% of GDP in 2024, and to eliminate them by 2025. To facilitate this process, the IMF set structural conditions under the ECF-EFF requiring the government to establish an independent committee with the mandate to determine and publish final consumption fuel prices based on a revised pricing formula; and to revise the current pricing formula for petroleum products to ensure that prices at the pump reflect developments international markets by December 2023. The IMF also included a condition under the RSF stipulating that the government adopt an electricity tariff adjustment plan that would see subsidies gradually eliminated. These reforms hold implications both in terms of the shift away from dependence on fossil fuels and the extent to which this shift is consistent with a just transition. The IMF argues that reductions to energy subsidies effectively raise the price of fossil fuels to the end-user, thereby encouraging less and more efficient use of energy and incentivizing a shift to cheaper renewable sources, like wind and solar (Lagarde and Gaspar Reference Lagarde and Gaspar2019).

In the context of austerity measures and energy price hikes, the IMF included some provisions for the protection of vulnerable groups. For example, the program mandated the re-certification of data in the Single National Registry and a scaling up of its coverage from 500,000 to 1,000,000 households to improve targeting of the most vulnerable individuals in the safety net system, while the government was also expected to settle outstanding cash transfers that had not been paid since 2021, which “would therefore help protect the most vulnerable in the context of energy subsidies phasing out” (IMF 2023i, 20). More specifically linked to a just green transition, IMF conditionality mandated that the new electricity tariff structure incorporates a social tariff specifically designed for vulnerable groups. It is as yet unclear to what extent this may alleviate the burden on vulnerable households, reflecting a more general trend throughout the program documentation of a lack of detailed diagnostics surrounding the impact of energy subsidies on poorer income deciles and substantive analysis indicating how social protection measures will compensate. In addition, it is questionable whether the IMF’s push for the rapid elimination of energy subsidies is politically feasible given Senegal is in a presidential election year and has already experienced social unrest – and is only likely to be exacerbated by, in the IMF’s words in describing the Senegalese context, “a cost-of-living crisis, widespread youth unemployment, and threat to security from developments in neighboring countries [that] are adding to this loaded political period” (IMF 2023i, 5).

3.2.1 Fiscal Consolidation and the Green Transition

The global green transition will demand large-scale investments from various sources. While the exact mix of public, private, and multilateral financing for this goal varies by country, there is wide-ranging acceptance that the role of states is central, both as funders and as regulators (Mazzucato et al. Reference Mazzucato, Songwe and Lebdioui2024; Rodrik Reference Rodrik2014). But this role comes under pressure over the course of IMF interventions due to the organization’s demands for extensive fiscal consolidation measures. To a degree, changes to spending in countries undergoing deep economic crises – the most common reason for resorting to the IMF in the first place – are inevitable. What matters most is the scale, scope, and pace of such measures: how much will be cut, in which areas, and how fast? It is in these regards that the IMF has a central role in shaping country decisions through the conditions attached to its loans, which specify a wide range of quantitative fiscal targets, as well as many structural reforms to help attain these targets.

Evidence on the IMF’s recent programs reveals that austerity measures form a key part of its policy advice to countries. Of the thirty-one countries with recent IMF programs, twenty-eight had available data on fiscal consolidation, and budget cuts were foreseen for twenty-four of these countries, averaging contractions to the tune of 4.2% of GDP.Footnote ⁵ Disaggregating these IMF borrowers by their income classification reveals that low-income countries (nine countries) will bear the brunt of austerity, with average IMF mandated contractions of 4.9% of GDP, while middle-income borrowers (fifteen countries) are required to contract by 3.7%. A main reason for these high levels of fiscal austerity is to repay debt: according to the IMF and World Bank’s latest assessment of debt sustainability, thirteen out of the nineteen contracting countries for which we have data are classified as being ‘in distress’ or ‘at high risk of distress.’ As a country in debt distress, Zambia provides a case in point. Following a major drought, the COVID-19 pandemic, a debt default, and spillovers from the Russian war in Ukraine, the country commenced an IMF program in 2022 that mandated extensive fiscal consolidation: 5.0% of GDP over three years (IMF 2024l). These cuts occurred in a context of urgent financing needs for climate adaptation, as the country is experiencing an increase in frequency and severity of droughts and floods (Ngoma et al. Reference Ngoma, Lupiya, Kabisa and Hartley2021).

Of course, austerity measures have been part of the IMF’s toolkit for decades (Kentikelenis and Stubbs Reference Kentikelenis and Stubbs2023), so their promotion in recent lending programs should not come as a surprise. But this time is different because such measures are in part defended through a climate rationale: a key plank of such fiscal consolidation is the decrease in fossil fuel energy subsidies to consumers and/or producers. Indeed, price increases or subsidy cuts in electricity, gas, or fuel were requested in twenty-two of thirty-one countries with recent IMF loans. For example, Suriname’s IMF program necessitated a fiscal consolidation of 5.5% of GDP over 2021–2025, of which 3.9% of the savings are from the reduction of energy subsidies (IMF 2024j). As a result, fuel subsidies were eliminated in March 2023; liquefied petroleum gas subsidies were reduced to 55% of the cost, resulting in a price increase of 425% in September 2023 (with further increases slated); and average electricity tariffs increased in the second, third, and fourth quarters of 2023 by 28%, 42%, and 21% respectively, with the aim of eliminating subsidies (cost-recovery) by end 2024.

Deep, far-ranging, and fast-paced austerity measures can undermine green transition objectives. First, and most conspicuously, reductions in public spending impact available financing for green investments: as governments seek cuts, future-oriented projects – like infrastructural upgrading or renewable energy – are often the first to be retrenched (Stubbs and Kentikelenis Reference Stubbs and Kentikelenis2023). In other words, short-term fiscal goals trump concerns over long-term sustainability. Second, austerity diminishes the ability of states to recruit, train, and retain qualified personnel (ActionAid 2021), which in turn reduces their regulatory and enforcement capacity (Reinsberg et al. Reference Reinsberg, Kentikelenis, Stubbs and King2019). This opens the door for entrenched interests to block or stall major green initiatives and for weak enforcement of climate-related regulations. Third, the social backlash from austerity – stemming from citizens’ exposure to reductions in the availability of social services or the introduction of new taxes – erodes the potential support base for green policies, insofar as these are perceived to require public financing or additional spending by households (Beiser-McGrath Reference Beiser-McGrath2022; Beiser-McGrath and Bernauer Reference Beiser-McGrath and Bernauer2019).

Regarding the latter, the IMF also points to how such reforms are implemented with simultaneous concern for their distributional implications. For this reason, the organization promotes compensatory measures – commonly in the form of so-called ‘social spending floors’ that stipulate a particular level below which social spending should not sink during the IMF’s intervention. Of the twenty-two countries that the IMF calls for decreases in energy subsidies, twenty-one contained nonbinding quarterly indicative targets on priority social expenditures, and thirteen contained explicit reference to compensatory measures for households in direct relation to higher energy prices. For example, the Democratic Republic of Congo’s loan called for a 7% increase in fuel prices in April 2024, which brought total increases since the program began to over 75%. The IMF loan agreement stipulated that the authorities should “ensure a timely phasing out of direct fuel subsidies, to reduce tax expenditure (implicit subsidies), and develop targeted social safety nets for vulnerable populations” (IMF 2024b, 13). Similarly, the IMF’s approach to a just transition in Chad’s loan was focused on ensuring the phase-out of subsidies is coupled “with appropriate transfers to households to mitigate the impact on vulnerable ones” (IMF 2023a, 20).

These examples typify the IMF’s approach to compensation for the removal of subsidies: targeted transfers to the most vulnerable groups, underpinned by social spending floors. But the way the IMF implements this strategy often presents several issues. First, the IMF neglects the sequencing of reforms. Compensatory mechanisms take time to build, and key populations that would benefit from compensation can struggle to access these resources (e.g., due to bureaucratic hurdles, complex eligibility criteria, or inadequate information). Yet, the IMF often expects cuts to subsidies from the outset of the program, before mechanisms have been put in place to protect vulnerable households. For instance, the IMF advised Gabon in July 2022 that “[fuel] subsides should end by end-December 2022,” despite Gabonese authorities’ indicating that “their option of protecting all households [via fuel subsidies] is based on the absence of well-targeted social safety nets” (IMF 2022e, 13). While the IMF also urged authorities to “finalize the database of the most vulnerable by end-December 2022, and subsequently develop well-targeted measures” (IMF 2022e, 13), even the most optimistic timeline would leave vulnerable households exposed for a six-month period while subsidies are being phased out but no targeted measures are in place. Only in Honduras were sequencing issues explicitly mentioned, where the IMF stated that “authorities should consider reversing the reductions to gasoline and diesel taxes introduced in 2022 – at an annual cost of 0.4% of GDP – once the social safety nets have been further strengthened” (IMF 2023d, our emphasis, 15).

Second, a widely advertised feature of IMF programs that purportedly helps protect social groups impacted by the economic fallout of the organization’s lending programs is the aforementioned social spending floors, whose functioning and application were codified in the Strategy on Social Spending (IMF 2019b). The promise of these measures is that they allow – or compel – countries to protect or increase public investment in health, education, and social protection. But recent evidence points to such floors being inconsistent, inadequate, and not implemented (Kentikelenis and Stubbs Reference Kentikelenis and Stubbs2024).

Third, there is a lack of transparency in terms of how the resources freed up from energy subsidy elimination are repurposed. Savings could be directed toward increases in social protection and investment for renewable energy, but this is difficult to verify due to the insufficient provision of data in IMF program reports detailing where such savings will be used. For example, in the Republic of Congo’s loan, the IMF called for “reprioritiz[ing] resources freed up by the elimination of fuel price subsidies (2.7 percent of non-oil GDP for 2023) to social spending targeted at vulnerable groups (0.4% of non-oil GDP, including measures targeting public transportation) and capital spending (1.5% of non-oil GDP), providing a positive impulse to inclusive growth while still achieving fiscal consolidation” (IMF 2024h, 11–12). Notably, the increase in capital spending includes agriculture, roads, electricity, health, education, transportation, as well as promoting tourism, industry, the digital economy, and special economic zones, but no indication is provided for how spending is distributed among these sectors (and with little guarantee that it was not redirected to supporting the country’s hydrocarbon industry).

3.2.2 Green Structural Adjustment in the Energy Sector

The discussion has thus far presented summary evidence of the IMF’s advice on fiscal policy and social protection for its recent borrowers. These are features of nearly all traditional IMF programs. However, beyond IMF targets on public expenditures, lending programs also include a range of structural reforms – that is, measures that target deep changes to a country’s policy environment and that include fine-grained interventions on policy areas considered by the IMF as important.Footnote ⁶ Such IMF reforms vary considerably in each country, and, per Table 2, we distinguish its borrowers between established fossil fuel producers (either major global producers, or producers for whom fossil fuel rents form a significant part of economic activity), emergent fossil fuel producers (countries with ongoing fossil fuel exploitation projects), and the remaining countries which are either nonproducers or where such production forms only a minor part of economic activity. If the IMF lives up to its own rhetoric on supporting the green transition, then its advice for the former two categories should be geared toward facilitating the decarbonization of these economies and against further extraction. Further, for fossil fuel producers and nonproducers alike, investments in renewable energy should be expected to form a major part of IMF policy advice.

Among the fifteen recent IMF borrowers that are either established or emergent fossil fuel producers, the IMF discusses macroeconomic effects of continued production through its analysis of ongoing reforms in eight of them. The rationale for covering extractive policies in the emergent or established fossil fuel producers frequently relates to fiscal or debt considerations. For example, in the case of Chad, the IMF explains that additional oil revenue will be central to “reduce domestic arrears and external debt” (IMF 2023a, 1). Per the IMF’s advice, “higher oil revenue should be used to build buffers and accelerate the payment of debt. … Debt is expected to decline faster than envisaged at the time of the [original request for the lending agreement], as higher oil prices would result in accelerated repayments to Glencore, while higher net oil revenue will allow for a quicker reduction of the stock of T-bills and payment of domestic arrears” (IMF 2023a, 15). This illustrates how debt problems can end up entrenching high-emission growth models, a phenomenon known as the debt-fossil fuel trap (Woolfenden Reference Woolfenden2023b). Similarly, in the case of Uganda, the IMF outlines how investments in the oil sector would improve the fiscal deficit (IMF 2024k). And in Gabon, the IMF explains that the government should “enhance facility maintenance and plan adequate investment for refurbishment and encourage exploration and discovery of new oil” to safeguard fiscal revenues and exports (IMF 2022e, 44). Even in Zambia, a country that is not a significant fossil fuel producer, the IMF promoted the construction of the Tazama pipeline, which is expected to reduce transportation costs, but will also lock in such fossil fuel investments over the medium run (IMF 2024l).

One possibility for the organization would have been to couple such recommendations with the promotion of investments in renewable energy, to gradually wean domestic energy production off fossil fuels. This was the case in only one of these eight countries: Ecuador. The country was advised to prioritize “unlocking private-led investment projects in renewable energy sources such as solar and wind, for which Ecuador has good potential” (IMF 2024d, 18).

The IMF fared little better in its attention to such issues for nonproducers of fossil fuels. Of the sixteen such recent borrowers, the organization treated renewable energy issues in three countries. This advice was geared toward supporting the role of the private sector in production and distribution processes, as the IMF’s analysis in two of these three countries referred to measures that would expand markets. Such measures have potential for spurring investment in renewable energy, but they can also foreclose more strategic and centralized approaches that accord states a more active role in steering such transformations. For instance, Jordan adopted an implementation roadmap for the electricity sector that would “facilita[te] a further shift to renewable energy sources and an increase in competition” (IMF 2024e, 53). In Georgia, the development of a renewable energy support scheme will see the government award 1,500 MW of power generation capacity to the private sector via competitive auctions (IMF 2022f). While market competition has the potential to lower prices and displace the dominance of fossil fuel usage, it can also lead to uncoordinated efforts and a short-term focus on profits rather than on investments that will ensure viability in the long run (Gabor and Braun Reference Gabor and Braun2025).

The role of private sector promotion in recent IMF programs raises broader questions about the possible biases that the organization’s policy advice has. The pro-market approaches that the organization promotes are well established, even though – in recent years – there has been cautious acknowledgment on the potential of state-led programs for green transformation. For example, recent IMF research has noted the potential for industrial policies to increase domestic renewable energy manufacturing capacities (Prasad et al. Reference Prasad, Loukoianova, Xiaochen Feng and Oman2022). Indeed, nearly 30% of all industrial policies that have been developed in 2023 have been justified by governments on climate grounds, thus prompting the IMF to point to the return of industrial policy (Ilyina, Pazarbasioglu, and Ruta Reference Ilyina, Pazarbasioglu and Ruta2024).

However, the evidence from the organization’s recent lending programs reveals that engagement with the potential for green industrial policies was nonexistent. The closest the IMF came to advocating such policies was in the Democratic Republic of Congo, where the organization acknowledged the potential for becoming a major player in the global green transition, given its abundant mineral wealth, and the importance for “expanding along the mining value chain” (IMF 2024b, 55). Even so, the practical steps promoted were primarily regulatory interventions: improvements in mining governance and transparency, and enforcement of social and environmental regulations. While such measures are important, they do not constitute major efforts to develop comprehensive green industrial policies that would ensure broad-based economic development.

Instead, the IMF set conditions that called for state-owned enterprise restructuring and deregulation that would expand the remit of private actors in the energy sector. In this regard Serbia stands out. The IMF targeted Elektroprivreda Serbije, the country’s coal-dominated electricity utility, mandating the adoption of a comprehensive restructuring plan that specified “reform priorities in the areas of organizational and financial restructuring, human resources, procurement, project development, reporting, risk management and the environment” (IMF 2024i, 13). Similarly, Georgia was expected to drive reforms to its major state-owned enterprises, including the Georgian State Electrosystem and the Gas Transportation Company (IMF 2022g).

3.3.1 Argentina’s 2022 Loan

Argentina is the twenty-third largest emitter in the world, contributing 0.8% of global greenhouse emissions in 2021 (World Resources Institute 2024a), and contains the second largest reserve of shale gas and the fourth largest reserve of shale oil worldwide (IEA 2024a). Its energy mix is dominated by fossil fuels, of which 55% is from natural gas and 33% from oil (IEA 2024a). Despite pledges to engage in renewable energy projects, the government is ramping up gas and oil extraction by heavily subsidizing natural gas exploration in the untapped deposits of Vaca Muerta in Northern Patagonia, with the goal of exporting 50% of its crude oil and 38% of gas (Fundación Ambiente y Recursos Naturales 2019). The government also subsidizes fossil fuels to the end-user. In 2021, energy tariffs reflected 37% of the full cost of electricity and 44% for gas, and were among the lowest in Latin America, while subsidies amounted to 2.3% of GDP (Parry, Black, and Vernon Reference Parry, Black and Vernon2021). Moreover, the country is a large agriculture emitter, linked to its dependence on large-scale livestock and agricultural industries, with meat and grain exports accounting for 55% of export revenues (World Bank 2021a).

Argentina entered a thirty-month $44bn IMF program in March 2022 to replenish foreign exchange reserves, control inflation, reduce the budget deficit, and improve long-term growth (IMF 2022b). The country was in the midst of a full-blown economic and social crisis since 2018, exacerbated by the COVID-19 pandemic and the war in Ukraine. An unsustainable public debt burden and current account deficit had drained the country of foreign exchange reserves, and a collapse of investor confidence meant there was little access to new loans. Inflation had reached over 50% year-on-year, fueled by the Central Bank printing money to support the budget deficit as well as global commodity price rises, placing a disproportionate burden on the poorest households. Most significantly, the new IMF loan meant Argentina could avoid defaulting on debt repayments of $19bn in 2022 owed to the IMF itself because of a previous lending program in 2018.

Argentina’s IMF program affects three key arenas in relation to the country’s climate change efforts: energy subsidy reforms, energy investment, and identification of climate risks. First, energy subsidy reforms were mandated in IMF conditions related to fiscal consolidation that would see a decline in the primary budget deficit from 3.0% of GDP in 2021 to 0.9% by 2024. To reach these targets, the program called for reducing the energy subsidy bill by 0.6% in 2022, with further reductions scheduled for subsequent years. These reforms can support climate objectives by raising the price of fossil fuels to the end-user, thereby encouraging more efficient usage of energy and incentivizing a shift to renewable sources like solar. However, the IMF discussed energy subsidies only in relation to immediate fiscal risks, thereby overlooking opportunities to foster a green transition in the long term – for example, by reorienting savings from fossil fuel subsidies toward green transformation. While the removal of energy subsidies can place a disproportionate burden on poorer households, these are being phased out in a progressive way: eliminated for the top 10% of urban residential users and for large commercial users, pegged so that prices reflect 40% of average wage growth for poor households, and pegged so that prices reflect 80% of average wage growth for other residential users. This indicates the IMF’s constructive role at designing effective approaches in phasing out energy subsidies.

Second, Argentina’s IMF program encouraged the development of a strategic tradeable sector in energy to replenish foreign exchange reserves and ensure long-term debt sustainability. To this end, the IMF endorsed the government promoting private investment in exploration, production, and transportation of energy from the shale oil and gas reserves of Vaca Muerta. The IMF described how “efforts are needed to improve the efficiency of the energy sector and tap Argentina’s vast energy potential to reduce reliance on more expensive energy imports and transition to a cleaner energy matrix” (IMF 2022b). In this context, the ‘cleaner energy matrix’ refers to natural gas, which is described as a transition fuel in Argentina’s Nationally Determined Contributions. Ultimately, it would allow the country to become an exporter of natural gas and reduce its reliance on expensive energy imports. But such incentives for fossil fuel expansion contradict the IMF’s advertised climate orientation that centers on aiding countries phasing out of fossil fuel usage. It represents a missed opportunity to consider large-scale government investment in renewable energy production and supply-side subsidies to encourage private investment in wind and solar. Furthermore, where consumer energy subsidies are being cut at the behest of fiscal expediency, it could be viewed as contentious to advocate incentives for wealthy private investors – including TotalEnergies, Wintershall Dea, and Pan American Energy (Fundación Ambiente y Recursos Naturales 2021) – through producer subsidies, tax breaks, and other guarantees. Even so, Vaca Muerta represents the potential to reduce domestic energy costs, including for poorer households, and can also offer a crucial source of foreign exchange that would enable the country to avoid painful IMF austerity programs in the future.

Third, the IMF considered physical risks linked to climate change, such as climate-induced commodity export shocks impacting production and exports, but provided only negligible coverage of such risks. The organization also failed to identify global spillover transition risks linked to the government’s economic dependence on Vaca Muerta energy reserves and on highly pollutive agroindustry. As an increasing number of countries commit to decarbonization, trade partners may impose carbon border taxes, impacting the earnings from such exports. There was also no recognition of national-level transition risks linked to asset stranding in the fossil fuel sector if the country chooses to move toward an energy matrix dominated by renewables.

3.3.2 Pakistan’s 2020 Loan

Pakistan contributed 0.9% of global greenhouse gas emissions in 2021, ranking as the twenty-first largest emitter (World Resources Institute 2024d). Roughly two-thirds of its energy needs are met by fossil fuels, including oil (25%), natural gas (24%), and coal (14%), and about 40% is imported (IEA 2024d), which depletes foreign exchange reserves and exposes the country to inflationary pressures due to international fossil fuel price shocks. Pakistan faces significant physical risks from climate change, foremost of which is the greater frequency and intensity of flooding, especially along the Indus River, where most of the population resides. Floods have cost the economy an estimated $1.7bn annually since 2010, and damages are projected to increase to $5.8bn per year by 2030 (World Bank and Asian Development Bank 2021b). Climate change is also increasing the incidence of severe droughts, disproportionately affecting the livelihoods of the 39% of the workforce engaged in agriculture, most of whom are subsistence farmers (World Bank and Asian Development Bank 2021b). Heat waves, too, are expected to increase in frequency and intensity, resulting in reduced crop yield and desertification, critical water shortages, floods from rapidly melting glaciers, and economically debilitating power cuts (Aftab Reference Aftab2022; Ellis-Petersen and Baloch Reference Ellis-Petersen and Baloch2022).

The IMF resumed a thirty-nine-month $6bn lending program with Pakistan in March 2020 – it was initially approved in July 2019 but interrupted due to the pandemic. The resurrected program sought to reduce the fiscal deficit, control inflation, replenish foreign reserves, and improve the financial viability of the energy sector (IMF 2021g, 2022j). It responded to urgent balance of payments issues that arose due to a surge in the value of imports linked to higher commodity prices, which depleted Pakistan’s foreign exchange reserves.

Pakistan’s IMF program impacts three important facets of the country’s climate change efforts: tax reforms, energy sector reforms, and identification of climate risks. First, tax reforms were predicated upon a series of IMF conditions to achieve a fiscal consolidation of 2% of GDP for the 2022 fiscal year. As a result of the removal of various goods from tax zero-rating, discounted rates, and other exemptions, a 12% increase in sales tax was implemented for imported electric vehicles and a 20% tax was introduced on solar panels, wind turbines, and other renewable energy technologies (Moulvi Reference Moulvi2022). By increasing the price of renewable energy, the IMF-mandated tax reforms disincentivize investor uptake, including from existing fossil fuel-based producers, self-generating agriculturalists, and industrial consumers. Major beneficiaries of the growth in solar and wind energy in Pakistan have been poorer subsistence farming communities that remain without grid access, so by placing higher costs onto these communities – which are also the most impacted by climate change – the tax reforms undermine achievement of a socially just low-carbon transition.

Second, Pakistan’s program contained conditions to reduce the fiscal deficit through energy subsidy and pricing reforms as part of a more comprehensive energy sector restructuring. The energy sector suffers from long-standing deficiencies related to circular debt – a complex form of public debt accruing due to unpaid government subsidies to distribution companies, who in turn cannot pay independent power producers, thereby affecting the entire power and gas chain. Two reforms co-occurred that raise costs to the end-user but reduce government expenditures: energy price reform, which seeks to bring electricity and gas prices in line with cost recovery along prescribed formulas and procedures; and energy subsidy reform, which seeks to target subsidies to a smaller group of consumers on a more progressive tariff structure. These energy sector reforms could support climate objectives by raising the price of fossil fuels to the end-user, thereby providing more incentive to invest in energy-efficient production capacity or shift to off-grid renewable sources like solar. However, more ambitious reforms to the energy sector were overlooked because the IMF’s recommendations were guided by short-term fiscal expediency, rather than considering climate concerns that will impact macroeconomic fundamentals in the long run. For instance, cheaper renewable energy could allow for a financially viable long-term solution to addressing the sector’s recurrent deficiencies. Furthermore, fuel and power price hikes disproportionately burden poorer households because energy constitutes a greater portion of their spending – and energy prices in Pakistan were already three times higher than other countries in the MENAP (Middle East, North Africa, Afghanistan, and Pakistan) region (Parry, Black, and Vernon Reference Parry, Black and Vernon2021). Recognizing this issue, the IMF called for vulnerable households to be compensated via expansion and better targeting of social support schemes like the Benazir Income Support Program. However, recent social tensions over food and energy prices suggest that this package of measures is neither politically palatable nor sufficiently compensatory as poorer households struggle to free up resources to adapt to new economic realities and the consequences of climate change (Ethirajan Reference Ethirajan2023; Mangi Reference Mangi2024).

Third, Pakistan’s IMF program contained negligible coverage of physical or transition risks. The IMF identified climate change as a risk to the program, but the analysis was too vague to be of substantive use. Higher frequency and severity of natural disasters is simply flagged as a potential cause of severe economic damage. Outside of the risk assessment, the IMF described the recent history of extensive damage that climate-related disasters have dealt to the Pakistan economy, and the country’s position as one of the world’s largest emitters on an absolute basis. These descriptions were self-contained and did not consider trade-offs and contradictions involved between the program and Pakistan’s extensive climate adaptation and mitigation needs. For instance, the IMF advised the country to accelerate efforts to meet greenhouse gas reduction commitments by reforming energy prices, subsidies, and taxes, but failed to recognize how fiscal constraints prescribed by the program impede efforts to invest in new infrastructure and incentives for climate adaptation. In addition, the IMF did not consider risks linked to the banking sector from changes in carbon-intensive asset values or include any climate-related stress tests in its debt sustainability analysis. As a result, the IMF failed to quantify the macroeconomic benefits of climate adaptation and mitigation measures.

4.3.1 Indonesia’s 2023 Article IV Consultation

Indonesia boasts the largest economy in Southeast Asia, underpinned by an export sector led by coal (18.5% of 2022 exports) and palm oil (9.0%) (OEC 2024). It is the sixth largest emitter in the world – contributing 3.1% of global greenhouse gas emissions in 2021 (World Resources Institute 2024c) – and is the world’s fourth largest coal producer, largest gas supplier in Southeast Asia, and meets 77% of domestic energy needs with fossil fuels (IEA 2024c). Its government supports the fossil fuel industry via a range of subsidies, at 15.4% of GDP in 2022 (Black et al. Reference Black, Liu, Parry and Vernon2023), while the fossil fuel sector provides a major share of the government’s revenues, accounting for 13.6% of total revenues over 2014–2016 (Braithwaite and Gerasimchuk Reference Braithwaite and Gerasimchuk2019). Indonesia is also one of the planet’s largest emitters of land-use related emissions, an outcome of deforestation and peatland fires undertaken to facilitate the expansion of oil palm plantations (World Bank and Asian Development Bank 2021a).

Given Indonesia’s significance in the fight against climate change, the IMF’s Article IV analyses offered in-depth coverage of green financing issues, which entailed mobilizing private investment to finance Indonesia’s adaptation and mitigation commitments. Further, the organization welcomed the Indonesian government’s introduction of a carbon tax of 30,000 Rupiah (about $2) per ton of carbon dioxide equivalent that will apply to coal-fired power plants and came into effect in 2022. The IMF demonstrated consideration of climate mitigation in identifying key limitations of the scheme. For instance, it recognized that since the government provides energy subsidies and sets the price for fossil fuels and electricity, the carbon tax will not provide an incentive for end-users to transition to renewable energy and/or achieve greater energy efficiency. Further, the IMF supported the 2021 tax reform law to raise additional revenue, which included broadening of excise taxes to plastics.

The IMF also endorsed cuts to energy subsidies to help balance the budget. The Indonesian government sets fuel and electricity prices for consumers below market rates and compensates producers for the difference. As global oil prices surged in 2022, spending on consumer subsidies and compensation for producers tripled (an increase of about 2 percentage points of GDP). The IMF recommended changes to the pricing formula that would align electricity and fossil fuel prices with the market price, viewing such reforms as both fiscally expedient and “essential to change incentives in the energy sector and help achieve climate objectives” (IMF 2023e, 12). The rationale is that it forces energy end-users to internalize the full cost of fossil fuels. While increases in energy prices disproportionately impact poorer households (Nasruddin Reference Nasruddin2022), the IMF explicitly recognized the need to expand social assistance benefits and coverage to facilitate energy subsidy reform.

In addition, IMF staff referred to earlier analyses on the macro-criticality of climate change and transition risks the country faces (IMF 2021e). As multilateral and private banks and investment managers commit to coal divestment, this major export of Indonesia may face lower demand, which would impact the viability of coal companies, the domestic energy mix, and – by extension – the broader economy. The organization also provided analyses using the global IMF-ENV model (Chateau, Jaumotte, and Schwerhoff Reference Chateau, Jaumotte and Schwerhoff2022) – which captures detailed sectoral, trade, and employment consequences of mitigation policies to address climate change – to illustrate the macroeconomic costs of meeting domestic climate change commitments based on several scenarios, using the evidence to bolster calls for the country to undertake carbon pricing and energy subsidy reform.

However, the Article IV report also contained recommendations that could hinder Indonesia’s green transition. On the fiscal policy side, the organization advocated for a budget deficit ceiling of 3% of GDP by 2023, despite the financing needed to achieve Indonesia’s Nationally Determined Contribution targets alone amounting to 2.8% of GDP annually (Government of Indonesia 2022). Given the IMF’s assessment of the Indonesian economy as having “ample policy space, strong financial buffers, and favorable initial conditions to respond to adverse shocks” (IMF 2023e, 20), there was policy space for greater ambition vis-à-vis climate. An unduly cautious fiscal approach could represent a threat to Indonesia transitioning away from fossil fuel dependence and achieving its climate commitments, as investment on climate adaptation and mitigation measures need to be scaled up. Relatedly, the organization did not adequately reflect on the role of carbon-intensive sectors like coal, oil and gas, and palm oil in driving higher-than-expected revenue performance. These sources of government revenue cannot be relied on in the long-term as Indonesia and its trade partners transition toward a low-carbon economy and may thus spell fiscal trouble in the medium- or long-term.

The IMF also called on the government to phase out nickel ore export restrictions and not extend them to other commodities. The government plans to diversify exports away from raw commodities by encouraging manufacturing, marketing, packing, and/or retailing to add value before reaching export. Thus far the government focused on nickel through tax holidays for investment in smelter capacity and the introduction of an export ban on raw nickel in 2020. The strategy proved economically successful: foreign direct investment from China and Hong Kong led to smelters increasing from three in 2014 to eleven in 2023, processed nickel exports surged from $4.5bn in 2019 to $19.6bn in 2022, and formal sector jobs were created in poorer regions such as Central Sulawesi and North Maluku (IMF 2023e). Following the experience with nickel, the government intends to extend the strategy to copper, bauxite, cobalt, and tin to promote manufacturing of batteries for electric vehicles. Moreover, the IMF failed to analyze the strategy’s environmental costs, describing the main costs as “foregone fiscal revenues, the unintended consequences of export restrictions at home (such as potential resource misallocation and rent seeking), and those that spillover across borders (such as price effects in the global commodity markets), which could potentially be met by retaliation from trade partners” (IMF 2023e, 27). Yet, new coal power plants are being constructed to power nickel industrial parks and other metal smelters, which could threaten the achievement of climate change goals (Simon Reference Simon2023).

The IMF’s analysis contained several additional blind spots. In the debt sustainability analysis, IMF staff did not assess the long-term risks from climate change adaptation needs to public debt and gross financing needs (IMF 2023e), thus failing to quantify and convey the benefits of adaptation policy measures vis-à-vis the country’s debt profile. In addition, the IMF did not consider global spillover risks linked to trade partners committing to decarbonization through the imposition of carbon border taxes or related measures, thereby impacting the potential earning from fossil fuel exports and environmentally unsound extractive sectors like palm oil. China, for instance, is the main importer of Indonesian coal and has already introduced a national carbon pricing mechanism (Nogrady Reference Nogrady2021), which could decrease the country’s demand for coal from Indonesia. Finally, more ambitious reforms to the energy sector were overlooked, despite their significant macroeconomic implications. For instance, the possibility of more affordable renewable energy sources could offer a financially sustainable, enduring remedy for the power sector’s ongoing overcapacity issue from coal-fired power plants, which is costing the government $1.2bn annually in operating and maintenance expenses (Prasetiyo et al. Reference Prasetiyo, Suarez, Parapat and Amali2023).

4.3.2 South Africa’s 2021 Article IV Consultation

South Africa is the largest economy in Africa and the world’s seventeenth largest emitter, with 1.1% of global emissions in 2021 (World Resources Institute 2024e). Over half of merchandise exports are from the carbon-intensive mining sector, including coal, platinum, gold, and iron ore (World Bank 2021b). Its economy is also one of the most coal-dependent in the world. The coal mining sector employs over 90,000 workers concentrated in regions with high unemployment levels and millions more are connected to the coal value chain, such as transport, electricity generation, and petro-chemical production (Rumble and Sidiropoulos Reference Rumble and Sidiropoulos2022). Moreover, about 94% of South Africa’s energy needs are met by fossil fuels, primarily from coal (71%) and oil (20%), and the country produces 84% of its electricity from coal (IEA 2024e). Furthermore, subsidies were handed out over the past decade to support the production and consumption of petroleum and coal. In 2019 alone, the government spent $4.3bn on fossil fuel subsidies (Climate Transparency 2021).

There were some climate-sensitive developments in South Africa’s Article IV report coverage of climate change and the green transition. IMF staff highlighted that the room for active government support of climate adaptation and decarbonization transition had been constrained because many state-owned enterprises are highly exposed to carbon-intensive activities (e.g., coal-fired power plants, rail, and port infrastructure), which makes them vulnerable to a drop in demand from the decarbonization transition, with potential significant fiscal implications. On the other hand, IMF staff outlined how South Africa’s jobless pandemic recovery – there were 1.9 million less people employed at the end of 2021 compared with the quarter before the pandemic (Rumble and Sidiropoulos Reference Rumble and Sidiropoulos2022) – will mean that the migration of low-skilled workers out of the coal value chain will be even more challenging, and that deficiencies in the country’s education system further complicate the necessary workforce transition. To address these issues, the IMF advised South Africa to improve the quality of education, apprenticeships, and vocational training schemes to support displaced workers, and to design policies that could bridge the spatial divide between workers’ living areas and places where new jobs are created.

In addition, the IMF was constructively critical of South Africa’s policies on climate grounds. In its assessment of the country’s Economic Recovery and Reconstruction Plan (Government of South Africa 2020), the IMF identified important inconsistencies with the aim of a low-carbon economic rebound – for example, a published list of preferred bidders under the Risk Mitigation Independent Power Procurement Program showing that most of the two gigawatts of energy procured use carbon-intensive gas technology. The IMF also acknowledged that the banking and financial system faced significant physical risks related to natural disasters and transition risks related to coal-based energy generation, and their analysis included stress tests for how future climate-related policy developments might affect financial stability.

Despite these climate-sensitive steps, other areas of the IMF’s policy advice could potentially hamper green transition objectives. Most notably, the IMF endorsed expenditure cuts to reduce the fiscal deficit from −3.9% of GDP in 2021 to −1.8% by 2023. Further, the IMF also did not evaluate the extent to which the fiscal consolidation may impede the ability of the government to scale up public investment to fulfil the climate adaptation and mitigation programs described in its Nationally Determined Contribution (Government of South Africa 2021).

In relation to South Africa’s energy sector, the IMF argued that reforms to reduce rigidities in the economy are key to accelerate decarbonization of the power sector and transition away from coal. Eskom, the near-monopoly national power utility, faces persistent criticism for its outdated and poorly maintained coal power plants, which have led to economically debilitating rolling-blackouts – known locally as ‘loadshedding’ – since 2008 that continue to the present as it struggles to keep pace with growing demand (Cohen and Burkhardt Reference Cohen and Burkhardt2022). The IMF criticized Eskom, which relies heavily on government transfers and coal extraction, because the company had actively resisted new entrants into the sector by delaying the expansion of independent power producer programs that would allow for the growth of renewables. Nonetheless, the IMF fell short of recommending additional incentives for investors to enter the renewable energy market or for new forms of large-scale government investment in renewables (i.e., distinct from Eskom). The IMF also identified a need to expedite the authorization process to accelerate significant investments by several mining companies to generate their own electricity, and to reduce regulatory hurdles and tackle a backlog of mining licensing applications to attract investment in the mining sector. The promotion of mining sector investment is clearly counter to a green transition and, as a carbon-intensive activity, there is imminent risk that such investments will become stranded assets. Additionally, if mining company electricity generation is based on fossil fuels, then such advice may further entrench fossil fuel dependence.

More generally, the IMF provided insufficient recognition of spillover risk to public finances and the balance of payments due to the ongoing low-carbon transition. South Africa is expected to lose $84bn by 2035 from falling prices and demand because of other countries’ transitions to a low-carbon economy (Huxham, Anwar, and Nelson Reference Huxham, Anwar and Nelson2019). Investments by Eskom and other carbon-intensive sectors of the economy will also become exposed to asset stranding, with significant flow-on effects for the broader economy (Burton et al. Reference Burton, Caetano and Hughes2016). This represents a major omission – especially so given that the IMF explicitly recognizes that South Africa’s subpar economic performance over the last decade is the result of economic policies failing to adapt to the end of the commodity price boom of the 2000s. The impending drop in demand, and thus prices, for carbon-intensive commodities as South Africa’s trade partners commit to decarbonization thus represents a level of urgency that warrants embedding in all projections and assessments of fiscal risk.

4.3.3 Colombia’s 2023 Article IV Consultation

Colombia is the fifth largest economy in Latin America and the Caribbean, the world’s thirty-first largest greenhouse gas emitter (World Resources Institute 2024b), and remains highly dependent on commodity exports. The country’s crude oil and coal exports composed 55% of merchandise exports in 2022, while agricultural products like coffee, cut flowers, bananas, and palm oil represented 15% (IMF 2023c). About 73% of Colombia’s energy needs are met by fossil fuels, primarily from oil (41%) and gas (23%) (IEA 2024b). But the Petro-led administration made ambitious plans for an energy transition. This included prioritizing the expansion of renewable energy production and diversification of exports to reduce the country’s dependence on fossil fuels, as well as approving a progressive tax reform law that included an annual wealth tax, higher duties on oil and coal exports, a windfall tax for oil and gas companies, and an increase and broadening of the scope of the carbon tax (Deloitte 2022).

The Article IV report appropriately emphasized the need for export diversification. As key export markets shift toward renewable sources or consider carbon border taxes, the IMF reflected on the underlying reality that over-reliance on fossil fuel exports is unlikely to provide a reliable source of export earnings and fiscal revenue in the future. This advice was bolstered by economic simulations showing oil production declines of about 90% by 2033 would result in GDP dropping by 1.3%, a current account deficit ratio of 6% of GDP, and a fall in fiscal revenue by 2% of GDP. Moreover, the IMF recognized that dependence on fossil fuels is likely to increase in the coming years because of the tax reform, as more than half of the reform’s total yield comes from taxes on the oil and coal sector.

Another area where the IMF offered value was through its FSAP (IMF 2022c), included as an annex to the Article IV report. A transition risk stress-testing exercise assessed the effects of a higher carbon tax on the banking sector at both a granular and aggregate level, based on increases of $10, $15, $20, and $70 per ton of carbon; and a physical risk stress test was performed at the municipal level to investigate banks’ vulnerability to riverine floods. Based on these findings, the IMF suggested the government “adopt a risk-based approach in supervision for climate-related risks and continuously improve information disclosures (both by nonfinancial corporates and by financial institutions) and data availability” (IMF 2023b, 48).

A sticking point for the IMF was the government resources dedicated to fuel subsidies, estimated at about 2.6% of GDP in 2022 (World Bank 2023a). Gasoline and diesel price smoothing occurs in Colombia through a fuel price stabilization fund, effectively acting as an untargeted fuel subsidy. Domestic fuel prices were below international prices following price freezes during the first half of 2022, resulting in the fund accruing a deficit. The IMF endorsed the government’s plan for cutbacks of fuel subsidies, which will allow domestic gasoline prices to be higher than international prices while focusing subsidies on diesel products that are typically consumed by poorer households (Government of Colombia 2023). This presents a step toward reducing the consumption of fossil fuels while also guarding against distributionally regressive consequences.

However, the IMF also advocated policies that could impede green transition objectives. The organization pushed for a fiscal consolidation that would see the government balance shift from a −1.1% of GDP deficit in 2022 to a 0.6% surplus in 2023, an adjustment larger than required to remain within limits prescribed by the country’s fiscal rules (which the IMF helped design). At a time when expenditure on climate adaptation and mitigation needs to be scaled up, fiscal consolidation beyond what the country’s fiscal rules necessitate could nullify new revenue sources for Colombia to invest in transitioning away from fossil fuels. For instance, the World Bank (2023a) estimates that the Colombian government will need to spend an additional 0.4% of GDP per year between 2023 and 2030 to fund its transition, based on the optimistic assumption that the private sector is able to provide another 1.1% of GDP. Yet the IMF fails to explicitly examine the implications of its fiscal targets for climate initiatives.

In relation to export diversification, the IMF called for “a market-oriented strategy to sustain the strong dynamism of non-traditional exports of recent years. Import substitution and protectionist measures should be avoided” (IMF 2023b, 16). Such advice is at odds with arguments by IMF staff who recognize the central importance of industrial policies to increase domestic renewable energy manufacturing capacities (Prasad et al. Reference Prasad, Loukoianova, Xiaochen Feng and Oman2022). It also neglects Colombia’s underwhelming experience with the role of private companies in the energy transition, which encounter strong opposition from local communities (Reuters 2023). Instead, industrial policies developed by the government in consultation with the relevant stakeholders can offer a more sustainable and equitable path forward. For example, the Ministry of Environment and Sustainable Development in Colombia is working on a comunidades energéticas locales project to enhance community participation in energy projects and to share in its revenues.

There were additional missed opportunities in the Article IV report. First, any energy market interventions – precisely because of their direct impact on the income distribution and their potential for political destabilization – should be accompanied by distributional impact assessments. The IMF has employed such a tool in the recent past – for example, it quantified how different economic policies would impact each income decile in the case of Ecuador (IMF 2022d). Yet such an analysis was altogether absent from the recommendations to Colombia. Second, the IMF recommended a tight monetary stance beyond 2023, including further hikes to interest rates. While this advice may be appropriate, the IMF failed to conduct analyses of how it will affect investment in renewable energy. Higher interest rates can slow the renewable energy transition and shield oil and gas producers from competition by low-carbon producers because newly applied renewable energy technologies have relatively large front-loaded costs compared to already-installed fossil fuel technologies (Ferguson and Storm Reference Ferguson and Storm2023). Finally, the IMF failed to analyze needs related to managing the job transition, as opportunities linked to new export sectors may not geographically correspond with oil and mining areas.