Climate Change, Digitalization, and Inclusion

Even as countries battle crises on multiple fronts, it is crucial not to overlook the longer-term challenge of improving their resilience to shocks and achieving sustainable and inclusive growth. If these long-term challenges are not addressed in a timely manner, there can be significant economic consequences, with the potential for future balance of payments problems.

Tackling climate change

Climate change imposes large economic and social costs, in part by contributing to a higher frequency and intensity of natural disasters, affecting macroeconomic and financial stability. For the IMF to live up to its mandate, it needs to assist its members in managing these challenges by rapidly scaling up and more systematically covering climate-related issues through its lending as well as its analytical, surveillance, and capacity development work.

The Executive Board approved a strategy to help members address climate-change-related policy challenges in July 2021. As part of the IMF’s surveillance, mitigation and adaptation policies and strategies for managing the transition to a low-carbon economy—especially for countries heavily dependent on fossil fuel production—are now regularly covered during Article IV consultations. In the past year, climate issues featured in about 30 country assessments, including those for Barbados, Canada, China, Fiji, Germany, Malawi, Mexico, the United Kingdom, and the United States.

In an effort to integrate in-depth climate-related risk assessments into the Fund’s work, the IMF’s Financial Sector Assessment Program (FSAP) now incorporates climate risk analysis, including stress testing where relevant. Climate risk analysis has been completed in regard to Colombia, Norway, the Philippines, South Africa, and the United Kingdom. Assessment of supervisory frameworks will also start evaluating climate risks.

Work is also underway to scale up climate-related capacity development. For example, to help governments improve the effectiveness of public investment in low-carbon and climate-resilient infrastructure, a new climate module has been added to the current Public Investment Management Assessment (PIMA) framework. The “Climate-PIMA” has been tested in more than 15 countries. A new IMF climate diagnostic tool, the Climate Macroeconomic Assessment Program, has been developed and piloted in two countries. The tool is intended to assess the macro-fiscal risks of climate shocks and stresses, the preparedness of climate-vulnerable countries, and the implications of mitigation and adaptation policies. A “green public financial management” framework was released in August 2021 and showcased in several regional trainings, helping governments integrate climate into public financial management practices.

To improve data and disclosure to more effectively price and manage climate risks, in 2021 the IMF launched the Climate Change Indicators Dashboard, which has since been further updated. The dashboard builds on collaboration with other international organizations and includes a range of distinctive indicators that demonstrate the impact of economic activity on climate change, making it a one-stop shop for relevant climate-change-related macroeconomic data. These indicators have been grouped into five categories: Economic Activity, Cross-Border, Financial and Risk, Government Policy, and Climate Change Data.

IMF staff members also cohost the Secretariat of the Coalition of Finance Ministers for Climate Action, as well as the Financial Stability Board’s working group on climate risks, data, and vulnerabilities. The institution collaborates with international organizations such as the Bank for International Settlements; Network for Greening the Financial System, where IMF staff members cochair the “bridging the data gaps” workstream; Organisation for Economic Co-operation and Development; United Nations; and World Bank.

Digitalization

Digital forms of money are diverse and evolving rapidly. The opportunities are immense, but the challenges to policymakers are also stark, complex, and widespread. The most far-reaching implications are to the stability of the international monetary system. Digital money must be designed and regulated so that member countries reap the potential benefits, including greater financial inclusion and more efficient payments across borders. Achieving these goals requires managing risks related to capital flow volatility and loss of control over monetary policy. International cooperation will be key to mitigating cross-border spillovers.

The IMF has a mandate to help ensure that widespread adoption of new forms of digital money fosters domestic economic and financial stability, as well as the stability of the international monetary system, and is engaging regularly with authorities to evaluate country-specific policies, identify policy options and trade-offs, and provide capacity development.

To do so, the IMF is deepening its expertise and collaborating closely with the Bank for International Settlements, Financial Stability Board, World Bank, and other international working groups and standard-setting bodies.

As part of the IMF’s surveillance, the broad domestic effects of digital money adoption are also being covered in an increasing number of countries. For example, the recent Article IV consultation on The Bahamas included an analysis of the introduction of the “Sand Dollar” (the digital version of the Bahamian dollar). Analysis of risks related to digital financial services will also be included in FSAP reports, as was done recently for Korea, Singapore, and Switzerland. Assessment tools are being upgraded to incorporate new sources of risks, as well as guidance and recommendations issued by international standard-setting bodies.

Digitalization and mobile money are also rapidly transforming fiscal operations and policies through GovTech, an area of increasing IMF support to members. During the pandemic, governments accelerated digital delivery of key government services. Revenue administrations are increasingly using e-tax filing and e-payment systems and digital technologies to improve compliance management, helping to reduce tax evasion and boost revenue mobilization. Digital technologies are also improving the efficiency and effectiveness of public financial management systems and processes, including budget preparation and execution, cash and debt management, e-procurement, financial reporting and audits, and administration of social programs. In many countries, digitalization is also enabling improvements in governance and fiscal transparency, allowing citizens and other stakeholders to have easy access to information on government revenues and spending and reducing opportunities for corruption.

Inclusive growth and gender

Inequalities within and across countries widened during the pandemic. Spillovers from the war in Ukraine, including the threat of fragmentation, are likely to amplify these inequalities, potentially rolling back years of progress.

The pandemic has also deepened long-standing gender gaps, which has macro-critical implications. IMF research has consistently underscored the benefits of addressing extreme inequality, including greater productivity and financial stability.

The IMF finalized a strategy in July 2022 to better integrate work on gender in its analysis and advice. The Fund continues to deliver hands-on capacity development, particularly on gender budgeting, and has started a new collaboration with the Gates Foundation to strengthen analysis and advice on gender policies and institutions. As part of the Platform for Collaboration on Tax—a joint initiative with the Organisation for Economic Co-operation and Development, United Nations, and World Bank—the IMF is also considering the role of taxation in achieving gender equality.

In addition to the analytical work underway on income and wealth inequality, the IMF continues to implement its strategy for engagement on social spending. The IMF's COVID-19 Crisis Capacity Development Initiative is helping low-income countries and emerging market and developing economies address inequalities, including by improving tax policies and leveraging digitalization to create safety nets and accelerate cash transfers.

A study is also underway on epidemics, gender, and human capital, drawing lessons from previous health crises. The analysis will quantify the impact of health crises on school completion rates in low-income countries, particularly for girls.