How to Enhance the Appeal of the IMF’s Climate Transition Facility

The IMF’s Resilience and Sustainability Facility (RSF) is now two years old. Since its inception, 20 countries have accessed the RSF, with Costa Rica and Jamaica recently becoming the first to complete their programs. The RSF has substantial funding available, with $47.2 billion pledged by donor countries as of June 2024, of which only $9.5 billion has been committed so far (taking 1 special drawing right to be worth $1.33). Yet demand for new RSF programs appears to be declining despite the significant climate finance needs in many lower- and middle-income countries.

To enhance the RSF’s appeal, we propose three recalibrations to program design: first, for countries with repeat RSF programs, a concurrent IMF upper credit tranche (UCT) program should not be required for at least one additional RSF arrangement; secondly, access limits should be raised for strong performers; and thirdly in the case of small developing states (SDS) which are particularly vulnerable to climate shocks, the IMF should pilot waving the UCT program requirement and increase SDS access limits, as current arrangements provide minimal funding due these country’s small size. To ensure that other countries are treated equally, we suggest the RSF pilot these changes for SDS first. Should this be successful, the Fund could explore offering similar exceptions for non-SDS with similar low access levels, relatively good economic management, and high vulnerability to climate change. We make these suggestions ahead of the IMFs’ comprehensive review of the RSF, tentatively planned for FY26.

Despite initial high demand, the number of new RSF programs is now declining (Figure 1). Earlier this year, the IMF anticipated 30-35 additional requests for RSF in the near term. However, since then, only two new programs—Madagascar and Tanzania—have been announced. Last week staff agreement for a new program in Papua New Guinea was announced, however this will likely take several months to be approved by the Board.

Figure 1. Timeline of RSF programs to date in six-month groupings

Note: Superscript letters denote the group countries are in and the associated tiered interest rate they pay on RSF loans. Group A includes Poverty Reduction and Growth Trust (PRGT)-eligible countries, Group B include presumed “Blend” countries and small states with GNI per capita below 10 times the IDA threshold, and Group C includes all other eligible members.

There are three likely reasons for this slowdown in demand for new programs. First, the high level of conditionality attached to accessing the RSF is likely suppressing demand. To access the RSF, the IMF requires a country to have a concurrent UCT program. This requirement is based on three reasons: first, to provide adequate policy safeguards that mitigate the credit risks associated with RSF financing; second, to prevent “facility shopping,” where the RSF’s longer and cheaper financing could be misused to finance current balance-of-payments problems; and third, to support a stable macroeconomic environment in the borrowing country, which is essential for pursuing long-term reforms and leveraging the RSF’s catalytic role. However, the IMF does not have a sufficient pipeline of UCT programs to enable additional RSF programs. As previously noted here and here for the IMF to reach its targets of 30-35 new RSF programs, several new UCT programs would need to be initiated. Currently, there are 31 countries with a UCT program without an RSF program (including Papua New Guinea). While some of these countries could potentially sign onto the RSF, we estimate that potentially up to half are unlikely to do so for several reasons, including: the UCT program is nearing completion; the country’s debt situation is precarious and the IMF may seek to avoid further exposure through additional RSF lending; and climate change may not be a priority for some countries given their circumstances, such as Sri Lanka and Ukraine. Additionally, due to the RSF’s design, countries are unlikely to enter a UCT program solely to access the RSF, particularly as a UCT program can carry a negative stigma often signaling poor economic performance.

Second, the relatively low financial access limits to the RSF are likely suppressing demand in some countries, particularly SDS. Countries can access 150 percent of their IMF quota from the RSF. Originally this access limit was set largely based on the anticipated size of the RSF Trust and the need to manage its resources. However, if demand is slowing down and four fifths of the existing funding is not committed, raising the access limits could be plausible. In June 2024, the IMF released an interim review of the RSF that highlights that only “a minority of authorities saw access limits as a factor that makes the instrument less attractive.” However, both authorities and mission chiefs advocated for higher minimum access for SDS. At the establishment of the RSF, many of the IMF’s executive directors also would have preferred higher access limits for small quota countries.

Third, the IMF’s efforts to improve the quality of RSF programs may partially explain the trend. Many earlier RSF programs lacked ambitious reform agendas (for examples see here, here, and here). In November 2023, the IMF sensibly issued new guidance, which requires more ambitious reform measures in RSF programs and that reform ambition should be better linked to the amount of financing a country can access. Subsequently, the interim review emphasized that more time is needed to explore, agree to, and implement programs with more ambitious reform measures. The recent slowdown might be a supply function of the IMF taking more time to develop ambitious programs and/or it may be a demand issue that this signaling of more ambitious programs has made the RSF relatively less attractive to countries, particularly when the high level of conditionality and low access limits are factored in. Adding the three most recently announced programs with documents available—Côte d’Ivoire, Madagascar, and Tanzania—to our previous analysis, we find these newest programs are relatively more ambitious than earlier programs (in Figure 2, compare the fourth set of programs with the first and second). Yet these newest programs are less ambitious than those announced around the time of the guidance note, which saw an notable improvement in program ambition (in Figure 2, compare the third set of RSF programs with the fourth).^[1] Overall the ambiguity surrounding agreements to reforms appears to be an issue, with the Interim Review highlighting that “about half of authorities agreed that perceptions on the lack of evenhandedness around access levels and in assessing reform quality made the RSF less attractive or more challenging to implement. A large majority of mission chiefs agreed.” To address the inconsistency around reform depth and access, the IMF should continue to implement ambitious programs and continue to increase the transparency and clarity on how reform quality is assessed and how this relates to access levels.

Figure 2. Depth of reform measures (RMs), by batch of programs (as grouped by authors).

Sources: SCs = structural conditions. RMs = reform measures. Fiscal SC, PRGT Gupta (2021) based on 131 programs implemented during 2008 and 2019; various RSF documents.

In light of these challenges, three changes to enhance the RSF’s appeal could be considered.

Proposal one: remove the requirement for a concurrent UCT program in the second phase of an RSF arrangement, provided a stable macroeconomic environment has been achieved.

Repeat borrowers of the RSF present a challenge for the IMF, which is tasked with short-term macroeconomic issues, while climate change is longer-term challenge. The Interim Review acknowledges this tension, noting that many countries may request two consecutive RSF programs. At the same time, it points out that the IMF does not plan for “consecutive back-to-back UCT-quality programs ex-ante”. The Review also notes that many RSF programs could benefit from longer implementation periods, which can be difficult to achieve within the timeframe of a single UCT program. While the Review proposes allowing RSF programs to continue a short while after UCT programs conclude to provide more time for better quality reforms to take place, it maintains that a new UCT program should be required for longer-term RSF reforms.

We propose that the successful completion of one UCT program should be sufficient to demonstrate macroeconomic stability, thus reducing or removing the need for additional safeguards and mitigating credit risks when offering a second RSF program. Furthermore, requiring at least one UCT program should serve as an effective deterrent against facility shopping, particularly since a second UCT could be required if the first one does not achieve its objectives. The IMF is well placed to make this assessment via its routine debt sustainability assessments which provide guidance on whether a country without a UCT program has capacity to repay the Fund. This proposal is not unique but joins a chorus of others calling for amendments to the requirement that countries must have a concurrent UCT program to access the RSF. However, we caveat that there should be a limit on how many repeat RSF programs a country can undertake without a UCT program. An evaluation process should be implemented beyond the second or possibly third RSF program to assess whether another UCT program is needed, and to determine the value of further RSF engagement. This evaluation could be integrated into the RSF reviews and Article IV consultations.

Proposal two: raise the access limit of high performers, if funding is available.

As mentioned above, the RSF access limit is 150 percent of a country’s IMF quota. Half of countries that have used the RSF have already accessed the full amount, preventing future RSF programs. Following the guidance note, the IMF has made an effort to align the amount of financing with the ambition of the reform program. This may allow space for more countries to have repeat programs going forward. However, for countries that have already accessed the full amount, there is no avenue to pursue another program, even if there is a strong future reform agenda. To ensure that the Fund maintains a principal of evenhandedness for countries, there would need to be transparent guidelines on lending limits to facilitate this change.

Proposal three: exempt SDS from the requirement to have a concurrent UCT program if they do not have any macroeconomic instability and raise their access limits.

The Interim Review acknowledges that SDS “tend to be reluctant to request UCT-quality programs” and as raised above, the small access limits are likely a key factor limiting demand these countries.

SDS present a low safeguards and credit risk to the IMF. Collectively SDS represent only 0.39 percent of the IMF’s quota, posing low risk to IMF’s safeguards and credit risk even if a concurrent UCT program is not in place during an RSF arrangement. Additionally, the Interim Review highlights that macro-critical reforms are not SDS’s most immediate priority, reducing the likelihood of “facility shopping” for balance of payments support. This further diminishes the need for a concurrent UCT program in SDS, as risks to IMF safeguards and credit are already quite low in these countries.

SDS have demand for RSF programs. Given that SDS do not have immediate needs for macro-critical reforms, the Interim Review questioned how relevant the RSF is to SDS. Yet the initial policy paper to establish the RSF indicated strong demand from SDS, with 15 out of 38 expressing interest. Moreover, there is demonstrated demand by SDS for the RSF: Barbados, Cabo Verde, and Seychelles have arrangements.^[2] These countries have demonstrated disproportionate interest in climate finance reforms, underscoring the relevance of the RSF to their long-term climate needs (Figure 3). Moreover, only one SDS, Comoros, has undertaken a UCT program without an RSF program. This may be because “Comoros’ capacity to repay the Fund is adequate, but subject to significant risks” indicating that the IMF may not have wished to overexpose itself. Such debt issues are less pronounced in many other SDS.

Figure 3. SDS and non-SDS countries’ percentage of reform measures that relate to the authors four themes for the 20 RSF countries with documents available

Sources: various RSF documents.

Many SDS need the RSF’s finance. The Interim Review states that SDS face capacity constraints for reforms and absorptive capacity issues for finance that could limit the usefulness of the RSF. We agree that multiple large reform programs are not an effective way to engage in SDS given their capacity constraints—hence we propose not having a concurrent UCT program. Additionally, the IMF should continue to strengthen its engagement with other development partners to ensure that the necessary technical assistance is provided for each reform measure (this point applies for all arrangements, not just those in SDS). Regarding absorptive capacity, these challenges are more pronounced in lower-income SDS. To address this, the IMF can collaborate with governments and key donors to develop strategies that ensure RSF funding is effectively utilized (again this should also occur in non-SDS countries with similar issues). For wealthier SDS, many have limited access to international finance, making the RSF particularly valuable to them, especially when financing is provided on favorable terms. Overall there are huge financing needs in small states, with the IMF estimating that SDS need to increase health and education spending by 3 percent of GDP and physical infrastructure spending by 3.7 percent of GDP to meet development and climate objectives.

Conclusion

The RSF, now two years old, represents a significant innovation by the IMF. However, like any new initiative, there is room for improvement to ensure that RSF meets its objectives. With demand for the RSF slowing down and the IMF aiming to improve the ambition of these programs, the Fund should consider ways to scale up RSF programs by adjusting its risk management framework, particularly the requirement for a concurrent UCT program requirement and access limits for some countries.

The authors are grateful to Benedict Clements, Mark Plant, and Megan Garner for their helpful comments on earlier drafts.