By Bodo Ellmers

International financial architecture (IFA) reform has been a hot topic lately. Numerous expert groups have made policy recommendations, and the developing countries among the UN member states in particular are calling for faster and more fundamental reforms. In the run-up to the Summit of the Future, scheduled for September this year, civil society organisations have been campaigning for a wide range of changes. The latest Spotlight on Global Multilateralism highlighted campaigns for more inclusive global tax governance, a fundamental overhaul of the debt architecture, or making the actions of international financial institutions’ (IFIs) compatible with human rights. On 29th of January 2024, the UN has published the zero draft of the Pact for the Future. What does it offer to reform the international financial architecture?

The zero draft Pact for the Future subsumes IFA reform under the heading “Transforming Global Governance”. The separate sub-chapter contains nine paragraphs on relevant issues. Additional issues of concern, for example related to climate finance, are addressed elsewhere in the text. 

The zero draft takes up on the idea that the IFA in its current form is anachronistic. Many of the institutions date back to the 1940s, and have not been adequately adapted to needs since then. It therefore defines reforms of the IFA as a fundamental pillar of the planned overhaul of international institutions as a whole, which the Summit of the Future wants to promote (paragraph 136). It also reflects the widely acknowledged failure of the system during the COVID-19 crisis, when the IFA institutions failed to provide sufficient finance at affordable terms to developing countries in particular, meaning that they were unable to finance health programs, social protection or economic stimulus to the same extent as their counterparts elsewhere (137).

The zero draft refers to the long-standing question of what role the UN should play vis-à-vis other bodies of global economic governance, such as the G20, the IMF or the World Bank. However, the proposed language here is vague. The division of tasks between these bodies is a politically contentious issue, as they follow different voting procedures. The UN uses the principle of equality of states (one state, one vote), while the World Bank and the International Monetary Fund (IMF) use a quota system that gives more votes to economically stronger countries. In 2023, the lack of agreement in this area had delayed the adoption of the SDG Summit´s Political Declaration by several weeks. 

The zero draft takes up governance reform of the IFIs, mainly of IMF and World Bank, without making this explicit (138). It calls for greater voice and participation, essentially using agreed language from the 2023 SDG Summit (there paragraph 38t-VIII). When it “recommit[s] to open and transparent, gender-balanced and merit-based leadership selection” it refers to the so-called ‘gentlemen´s agreement’, i.e. that the US and Europe agreed that the President of the World Bank is nominated by the US and the Managing Director of the IMF by European member states. The language is unlikely to be sufficient to end this practice, as the US and the Europeans would argue that they already make a selection based on merit. Adding language such as “irrespective of nationality/citizenship” would make it stronger, effectively opening up leadership positions to other countries.

The zero draft goes on to address ongoing reform processes of the World Bank´s and other MDBs´ operations (140). The language is weak (uses non-binding terms such as recognise/encourage/support) and simply refers to ongoing processes and standing items on the MDB reform agendas, such as the reviews of the capital adequacy frameworks, reform of lending instruments or governance reform. This is probably due to the pushback at the SDG Summit, when some of the World Bank´s more powerful members insisted that World Bank reform be decided by the World Bank´s own Board of Executive Directors and Development Committee (para 38t-IX). So the only news in the zero draft Pact is that it “call[s] upon the banks to develop and publish impact reporting on the Sustainable Development Goals, and to build internal incentives tied to maximizing impact on the Goals”, but that is a fairly mild reform proposal.

The section on debt and debt architecture reform (141) contains one of the few operational points, as it “encourage[s] the undertaking of a comprehensive review of the sovereign debt architecture, with a view to making concrete recommendations for reform to the fourth International Conference on Financing for Development in 2025”.  The idea of updating the (UNCTAD) Principles on Responsible Lending and Borrowing as part of this review could be useful. The 2015 Addis Ababa Action Agenda (AAAA) had already committed to working towards a “global consensus on guidelines for debtor and creditor responsibilities …”, but this remains one of the many unfulfilled commitments of the AAAA. However, it is worrying that the scope of the review mentioned here does not explicitly include the ´debt restructuring framework´. The G20 and Paris Club’s ‘Common Framework on Debt Resolutions beyond the DSSI’ is currently the only game in town, but it is too slow, ineffective and criticised by many. The scope of the review should include the debt restructuring architecture. Debt issues promise to be a major topic at the FfD4 conference. 

The zero draft also refers to the Global Financial Safety Net (GFSN)(142). This is mostly the IMF and its instruments, so it is interesting that the paragraph does not mention the “IMF” at all. The language on Special Drawing Rights is notable: “We encourage the development of proposals for standing instruments to accelerate the issuance and the re-allocation of Special Drawing Rights in response to global crises.” There are many proposals to automate the allocations of SDRs, to distribute new SDR allocations according to need, to use new or reallocated SDRs for climate finance or other sectoral finance instruments, etc. The language here is non-binding and does not refer specifically to any proposal, perhaps it should. The sentence “We call for access to liquidity finance based on need and vulnerability” is also interesting. Currently, access to IMF loans is primarily quota-based and requires board approval. There has been a lot of recent criticism of the IMF´s surcharges (if countries borrow above their quota, they have to pay a hefty penalty interest rate), and there have been calls to abolish the surcharges. This is not mentioned here.   

The two broad areas financial regulation and taxation are squeezed into a single short paragraph (143). The sentence on tax simply “looks forward” to the new UN process on a framework convention, which is about to start with a first meeting in February following the adoption of UN General Assembly Resolution 78/230 at the end of 2023. As the Resolution was not adopted by universal consensus, a reference to it in the Pact for the Future could imply more endorsement ex post. In the complex area of financial regulation, the draft Pact for the Future only selected sustainability reporting and sustainability ratings, which already exist. There is plenty of scope to expand the list of issues covered. However, in the absence of acute financial crises, there is currently little political appetite and traction for financial regulation. 

The last points is relevant for the reform of the UN system, the real focus of the Summit of the Future. A key concern in global economic governance is that key decisions are being taken outside UN forums and bodies, notably by the Group of 20 (G20), which was set up as as an ad hoc body to deal with the global financial crisis of 2008, but has since become a permanent body covering an ever increasing number of policy issues at the annual G20 Heads of States summits and a large number of ministerial meetings. UN Secretary-General (SG) António Guterres has called for the G20 to be better integrated into the UN system. 

The zero draft proposes a “biennial summit at the level of Heads of State and Government between the members of the Group of 20 and the members of the Economic and Social Council …” (144) as key format suggested to achieve this goal. The idea came out of the SG´s report “Our Common Agenda” several years ago, and summits had been tentatively scheduled, but never realised. The wording “We welcome the Secretary-General’s decision …“ would adopt this format. However, by referring to it as a “SG decision”, it will not have the character of a formal UN summit, but rather an informal meeting convened by the Secretary-General. There have also been discussions about having the G20 meet with the UN General Assembly, instead of ECOSOC, in order to make it more inclusive.     

All in all, the IFA part of the zero draft of the Pact for the Future is rather weak. The review of the debt architecture and SDG impact reporting for MDBs are the only concrete deliverables or innovations (and perhaps the “standing instruments” for SDRs, but some instruments already exist, such as the IMF’s Resilience and Sustainability Facility). The remaining paragraphs simply reaffirm or refer to ongoing processes, and may or may not generate new and additional political pressure to take them forward. Some existing proposals that remain unimplemented are taken up again, notably the “biennial summit”. 

Most stakeholders had higher expectations of a Pact for the Future. Especially since the Summit of the Future has been heralded as the big thing in global governance reform in general, and in UN reform in particular. However, it is still unclear how the Summit of the Future and its Pact will be linked to the FfD4 conference, whose preparatory process is now starting. The only concrete link in the zero draft is the review of the debt architecture. There is a risk, however, that weak language in the Pact could also mean a weak outcome for FfD4, as parties could revert to ´agreed language´ if consensus on more ambitious steps can’t be reached during the FfD4 negotiations. This is why it is so important to fill the glaring gaps in the Pact for of the Future and to make it more binding in general. The negotiation process now underway provides ample opportunity to do so.