We need a fairer global financial system for climate-vulnerable countries

The international financial system (IFS) represents the institutions, rules, and instruments, including the International Monetary Fund (IMF), the World Bank, and other multilateral development banks (MDBs),  and the multilateral climate funds. The IMF and World Bank were established in the 20th century, when most of the current members of the system were under colonial rule. Today, the system is under sustained pressure to reform in order to better serve low-income and least developed countries (LICs and LDCs) that face compounding development, debt, and climate shocks.

Climate adaptation finance—the resources needed to help communities and economies prepare for floods, droughts, heatwaves, and sea-level rise—remains severely underfunded relative to need, and much of what flows to vulnerable countries arrives as loans rather than grants, deepening debt burden. Reform efforts led through the G20, IMF, and World Bank shareholders, the 2023 Summit for a New Global Financing Pact, the Fourth International Conference on Financing for Development (FfD4) in Sevilla, Spain, and successive UN climate conferences are converging on a shared diagnosis: the system must become faster, cheaper, and fairer for the countries least responsible for, and most exposed to, global shocks including climate change.

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Global climate finance analysis shows adaptation received only a single-digit share of overall climate finance in recent years, while private capital continues to chase mitigation projects with faster returns. LDCs typically borrow at far higher interest rates than wealthy nations for comparable risk, and a large share of the world’s population lives in countries where debt servicing now crowds out health, education, and climate spending.

Besides, fragmented, highly intermediated finance often passes through multiple international and national intermediaries, each adding transaction costs, delays, and conditions before funds reach local projects. Finally, limited voice in IFS governance—quota- and share-based voting at the IMF and World Bank—leaves climate-vulnerable LICs little room to have their say over the institutions that set the terms of their access to finance.

What dividends can the main strands of IFS reform, under discussion over the last decade, offer to LICs and LDCs? Firstly, G20-backed MDB reforms, such as revised capital adequacy frameworks, callable capital recognition, and hybrid capital instruments aim to expand lending headroom without new shareholder capital. For LDCs, a larger, more risk-tolerant MDB balance sheet translates into more affordable, longer-term financing for resilient infrastructure such as flood defence; climate-proofed roads, ports, and water systems; and shock-responsive contingent credit lines that disburse automatically after a disaster, thus reducing the need for emergency borrowing at commercial rates.

Secondly,  the IMF’s 2021 allocation of $650 billion in Special Drawing Rights was followed by a G20 pledge to voluntarily rechannel $100 billion to LICs, largely through the Poverty Reduction and Growth Trust and the new Resilience and Sustainability Trust (RST), a facility explicitly designed to support long-term structural reforms via affordable, long-maturity loans. As SDRs are reserve assets rather than new debt, rechannelling and routing mostly through MDBs decouple periodic allocations from IMF quotas, or ease the legal constraints on their use. This offers LDCs the liquidity for resilience investment without adding to sovereign debt stock. Critics note the RST’s eligibility rules—its 75 percent of quota access cap and its policy conditionality—still limit reach and speed for the most vulnerable states, underscoring that design details matter as much as headline volumes.

Thirdly, as debt service is squeezing out climate spending in many LDCs, reform proposals include state-contingent “climate-resilient debt clauses” that automatically pause repayments after a disaster, debt-for-climate and debt-for-nature swaps (as piloted by Belize and the Seychelles) that convert a portion of external debt into domestic conservation spending, and a more orderly multilateral debt restructuring process. Each mechanism directly frees up fiscal space that governments can redirect to early-warning systems, social protection and climate-proofed public services.

Fourthly, predictable replenishment of the Green Climate Fund, the Adaptation Fund and the Least Developed Countries Fund and the newly operationalised Loss and Damage Fund gives LDCs more reliable, grant-based resources for implementing the National Adaptation Plans (which the UNFCCC’s LDC Expert Group aims to have completed in all LDCs by 2030) and concrete projects such as heat-tolerant crop varieties, flood-resistant housing and coastal protection. Simplifying accreditation and direct-access procedures reduces the time and technical capacity needed for LDCs to draw on these funds directly, rather than through international intermediaries.

Fifthly, blended finance, guarantees and first-loss instruments provided by MDBs and bilateral agencies can lower the perceived risk of investing in LDCs, crowding in private capital for resilient agriculture, water, and energy systems that would otherwise be considered too risky. Coupled with local-currency lending, this reduces LDCs’ exposure to currency depreciation, a recurring driver of debt distress after climate shocks.

Finally, proposals under the Sevilla Commitment from FfD4 and the G20-linked Pact for Prosperity, People and the Planet call for fairer representation of LICs and LDCs in IMF and World Bank decision-making, alongside support for strengthening domestic tax systems and public financial management. Greater voice helps ensure that eligibility rules, conditionality and risk assessments better reflect the realities, while stronger domestic resource mobilisation reduces long-term dependence on external finance.

Taken together, these reforms could shift the experience of a climate-vulnerable country like Bangladesh in several ways: faster access to finance immediately after a disaster rather than lengthy emergency appeals; a higher share of finance delivered as grants or highly concessional loans; more resources reaching local governments and communities directly supporting locally led adaptation; greater fiscal space, freed up from debt service; and a stronger voice in shaping the rules, eligibility criteria and risk models that determine what finance is available, on what terms.

However, reform proposals face real constraints, as SDR trusts and MDB balance-sheet measures cannot substitute for the still-unmet pledge to triple adaptation finance and reach the broader $1.3 trillion climate finance goal agreed upon at COP29; conditionality attached to IMF and MDB instruments can constrain national policy space; and implementation has historically lagged behind commitments. Realising the benefits will depend on sustained political will, transparent monitoring, such as the tracking undertaken by Focus 2030 and civil society groups, and effective inclusion of LDCs and LICs in the reform process itself. The governments of LICs and LDCs, including Bangladesh and like-minded groups of countries, must push hard for reforms of the international financial system as an increasingly central lever for closing the development and adaptation finance gap.

Mizan R Khan is technical lead of the LDC Universities Consortium on Climate Change (LUCCC).

Views expressed in this article are the author's own. 

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