PARIS—The leaders of wealthy nations want private investors to send a flood of capital to poorer countries to lift them out of poverty and bankroll the response to climate change. Instead, those investor funds are drying up.
Rising interest rates and financial stress have choked off finance to the world’s poorest countries, leaving them with debt burdens that are larger than they have been in nearly three decades. The market turmoil and the aftereffects of the global pandemic have pushed these countries deeper into poverty, reversing years of income gains and undermining their transition to cleaner energy, one of the rich world’s top development priorities.
The gap between advanced economies and poor ones on wind and solar deployment is now so large that the Netherlands, one of the rainiest countries in Europe, generates more solar electricity than all of sub-Saharan Africa, according to the International Energy Agency.
World leaders—from Saudi Crown Prince Mohammed bin Salman and Chinese Premier Li Qiang to German Chancellor Olaf Scholz and Treasury Secretary Janet Yellen—are gathering in Paris on Thursday and Friday to find ways to entice global investors to developing countries.
French President Emmanuel Macron, the host, has billed the meeting as a summit to agree on “a new global financing pact.” French officials say it should update the mission of the World Bank and the International Monetary Fund, created by the Bretton Woods agreement of 1944, to include fighting climate change and protecting biodiversity.
“We simply can’t address modern issues with institutions which were created for a very different world nearly 80 years ago,” said Mia Mottley, the prime minister of Barbados.
Among the financing ideas under discussion: creating a new global tax on shipping, helping investors hedge against currency risk and repurposing the IMF’s special currency, known as a special drawing right, that is allocated to wealthy nations for the benefit of poor ones, according to people involved in the talks.
Ajay Banga, who started as the World Bank’s president this month with the backing of President Biden, rolled out a series of measures for responding to climate disasters on Thursday. The World Bank will now allow countries to pause debt payments after hurricanes and other disasters and repurpose funds toward recovery.
The moves come on top of roughly $5 billion more in annual lending the World Bank will offer by lowering its equity-to-loan ratio to 19% from 20%.
Largely absent from the talks, though, is the possibility that the U.S. could directly offer more financing to the World Bank and IMF. Such moves often face stiff opposition in Congress, where Republicans skeptical of foreign aid control the House. The Biden administration has been unable to win congressional approval for putting $21 billion toward IMF programs.
“The risk of this summit is that you have a lot of developing country heads of state saying, ‘Show me the money. We’re tired of these weedsy discussions,’” said Scott Morris, a fellow at the Center for Global Development, a Washington think tank. “Their bigger point is: Why are we only talking about these things when we know there’s a well-known model of putting capital into these banks and making them bigger?”
Yellen said overhauling multilateral development banks could make them more effective without additional capital.
“We’re certainly not ruling out at some later stage a capital increase, but I think these banks need to function better,” she said.
Debt restructuring for poor countries will be high on the agenda. The Covid-19 pandemic pushed some of them deeper into poverty; then they were hit by surging inflation after the war in Ukraine and rising interest rates. Now, more than half of low-income countries and about a quarter of middle-income countries are in debt distress or at high risk of it, according to the IMF.
French officials are pushing to complete a restructuring deal for Zambia at the summit, under a process set up by the Group of 20 major economies. Those talks, however, have been complicated by the geopolitical struggle between the U.S. and China, which is by far the largest single creditor of the developing world. Zambia has been struggling to restructure its debts with China for years, and U.S. officials have repeatedly cited the African nation’s challenges as a warning against borrowing from Beijing.
A U.S. Treasury official said an agreement on restructuring Zambia’s debt could be imminent.
The rise in global interest rates set off by the Federal Reserve last year cut back financing for many developing economies. Fund managers who had ventured into emerging markets looking for higher yields are coming back to the U.S., investors say.
“This is the worst year in 20 to 25 years to fundraise for emerging markets,” said Cyrille Arnould, chief executive of Annycent Capital, a fund that invests in renewable-energy projects in the developing world. “A lot of the capital allocators think they can get yield without going too far.”
Investors and officials say the World Bank and other development finance organizations such as the European Investment Bank and the Green Climate Fund need to provide more powerful incentives to draw in private investors to fund the response to climate change. Global investment in clean energy has risen sharply over the past decade to more than $1.5 trillion last year, according to the IEA.
But all of that increase has occurred in advanced economies and China. Clean-energy investment in the rest of the world has held steady at around $250 billion a year.
To achieve the targets of the 2015 Paris accord—which calls for governments to strive to limit global warming to 1.5 degrees above preindustrial temperatures—investments in clean energy and efficiency in developing countries excluding China need to surge to around $1.4 trillion a year starting in 2026, the IEA says.
“The investment needs go well beyond the capacity of public financing alone,” said Fatih Birol, executive director of the IEA.
Financing of that scale will require development finance institutions to offer $80 billion to $100 billion worth of concessional financing a year, according to an analysis from the IEA and the International Finance Corporation, part of the World Bank. These institutions now provide $1 billion annually.