Hemispheric banks offer climate financing options for the Caribbean 

By Kenton X. Chance

RIYADH, Saudi Arabia (CMC) — Two developmental banks are positioning themselves as financing alternatives for the Caribbean, as the region responds to the rising cost of climate change adaptation and mitigation.

The Washington-based International Monetary Fund (IMF) said in June this year that the Caribbean is the most exposed region to climate-related natural disasters, with estimated adaptation investment needs of more than US$100 billion, equal to about one-third of its annual economic output.

Chief financial officer of the Inter-American Development Bank (IDB), Gustavo De Rosa, told the Caribbean Media Corporation (CMC) that the Caribbean faces similar challenges to other regions of the Americas, even as it has its unique challenges.

“And that’s why we created a programme for the Caribbean that’s called One Caribbean that has four strategic priorities and two cross-cutting themes that really address what we think are critical development challenges in the Caribbean,” he said.

Speaking to CMC on the sidelines of the Saudi Fund for Development’s (SFD) 50th-anniversary gala, last month, De Rosa said the four strategic priorities include citizen security, private sector integration, and digital transformation.

“The other is, of course, climate change, resilience and adaptation,” he told CMC, adding that this is an area for which the IDB sees “significant work ahead.

“It’s not just about creating resilient infrastructure, although that’s a very significant part, but it’s making sure that the countries also have the instruments to manage the risks that they’re exposed to.”

IDB is a multilateral development bank created in 1959 and has 48 member countries, several of which are Caribbean countries.

De Rosa said the Caribbean region is very exposed to climate risk, hence the IDB is trying to deploy new financial instruments.

“The bank has typically done loans and guarantees as one of the core products, then developed technical assistance and knowledge products. Now we’re integrating also insurance as one of our additional products,” he noted.

Catastrophic risk insurance has become an important tool for Caribbean nations in light of the impact of more frequent and intense natural hazards as a result of climate change.

These hazards include droughts, floods, and cyclones, such as Hurricane Beryl, which impacted Grenada, Barbados, Dominica, Haiti, and Jamaica, among other Caribbean countries in July.

At the same time, Caribbean countries have been pushing for a multidimensional vulnerability index rather than gross national income (GNI) to inform their ability to access developmental financing from international institutions, such as the IMF and the World Bank.

In making this case, Caribbean countries have argued that despite their GNI, a climate event can result in loss and damage amounting to a significant chunk of their gross domestic product (GDP).

De Rosa said IDB is among the first development banks to include climate-resilient debt clauses.

“So, these are, basically, contractual agreements that allow member countries to go through a natural disaster to basically defer principal payments to accommodate for crisis response,” he explained.

“So, if there’s a very tight budget, we want to make sure that all the budget, or most of that budget, can be deployed to address a climate crisis.”

The IDB efforts come at a time when the Venezuela-based Latin American and Caribbean Development Bank (CAF) is also expanding into the Caribbean.

CAF’s manager for resource mobilisation and global alliance, Ignacio Corlazzoli Hughes, told CMC that the bank is expanding its mandate to become “the blue and green development bank of the region,” adding, “We’re also expanding our geographic scope”.

He said that in this vein, CAF is “actively working on climate change.

“In that sense, we have a mandate that we need to increase up to 30 per cent … our approvals in climate change operations,” Corlazzoli Hughes said.

“We have to transform our modality, the way we think, the way we approve, operation, the way we work, precisely to have a bigger and better and stronger impact on climate change operation in the Caribbean.”

He said CAF is involved in the new Bank for Development in Jamaica as well as the Bridgetown Initiative, a call, led by Barbados Prime Minister Mia Mottley, for urgent and decisive action to reform the international financial architecture.

Late last month, Mottley announced the launch of  a third iteration of the Bridgetown Initiative, identifying three key principles, as the Caribbean Community (CARICOM) country continues to call for urgent and decisive action to reform the international financial architecture (IFA).

She told the 79th session of the United Nations General Assembly (UNGA) in New York that restricted access to capital, its disproportionately high cost, it’s inadequate scale and the overwhelming burden of debt, are now combining to force governments in the world’s poorest countries and frankly, across many vulnerable middle income countries, to devote more resources to debt service than to health, education, and infrastructure combined.

Corlazzoli Hughes said CAF is actively working in Trinidad, thanks to other partners such as the European Commission, as well on connectivity, “but we’re always thinking about the impact and the sustainable impact these have on the citizens.

“What we want to do is to improve their lives, and in this way, try to be much closer to the Caribbean citizens.”

Unlike other banks, there are no differences between CAF’s borrowing and non-borrowing members.

“So, 95 per cent of capital is from the region. We have Portugal and Spain with five per cent but we are a bank that can allow borrowing to every member country. That’s very important,” Corlazzoli Hughes told CMC.

The focus on becoming the “blue and green” bank of the region includes helping to preserve the region’s coral reefs — about 10 per cent of the global population.

“We’re going to be working more on those solutions, nature-based solution, working with the ocean, the blue economy,” he said, adding that CAF committed a few years ago to increase its financing for the blue economy.

“At the same time, we’re working on climate change issues. We want to become the voice of the region, the financial voice of the region, especially of the Caribbean region, on climate change discussions.”

Corlazzoli Hughes said CAF wants to project itself “to become a bridge between Latin America and the Caribbean.

“These two regions, while in the same geography, have been working back to back, unfortunately, over the last few years, and we want to position CAF as that bridge where we can reproduce lessons learned from one region to the other and to try to work on a more integrated way.”

The two hemispheric financial institutions highlighted their financing options even as Caribbean countries lobby the developed world to live up to their climate response pledges.

“Climate change is really affecting everyone, and so the global community has the responsibility to really provide additional support, financial support,” De Rosa said, adding that the IDB has been working with a lot of its partners, including the SFD and other multilateral development banks, in support of the Caribbean agenda.

“For example, we work with the Caribbean Development Bank. We provide financing to them, we provide support. We’re discussing now, exchanging exposure so that that reduces and makes our capital more efficient. So there’s different ways in which I think the international community can support the Caribbean,” De Rosa said.

He said that in pushing the multidimensional vulnerability index, small island development states “need to be more present on the global fora.

“I think that this is critical. I think we need to speak with one voice, and we’re doing that,” he said, adding that the IDB is chairing the group of all multilateral development banks.

“And we’re basically trying to do exactly what you’re saying, which is come up with objectives, but also make sure that there’s accountability, and we keep track of how those objectives are implemented.”

At the same time, Corlazzoli Hughes praised what Caribbean countries have been doing on the macro scale over the last 10 years in trying to hold the developed world to account.

“As we all know, Caribbean economies are highly indebted,” he said, noting that before the coronavirus pandemic, the average debt-to-GDP rate was 75 per cent.

“It went up way up during the pandemic, for many reasons, because of public investment, because of lack of tourism revenues,” he said. It has since fallen to about 77 per cent.

The CAF official said the economic performance in Jamaica and Guyana, as outliers, have contributed to the regional debt-to-GDP ratio falling significantly.

“Those are two countries. But I think we have to recognise that what the Caribbean has been doing is better management of the debt, and of course, when increasing their revenues and strengthening some institutions, some fiscal institutions, that’s one.”

He said that he was speaking about debt because it gives a country “a very limited fiscal space to what you can do, what you cannot do when you have impacts of climate change”.

The CAF official said the Caribbean has two of the 10 countries in the world most severely impacted by climate change — Haiti and The Bahamas.

“… every time you’re hit by a hurricane, a huge percentage of your GDP is back in question. So there’s only so much countries can do. Why? Because IMF institutions and others limit the spending that you can do, your public spending,” he told CMC.

“So, we’re working together. And, for example, we have been listening to the Bridgetown agenda and we’re trying to work on new financial instruments for the region.”