In February, United Nations (UN) Secretary-General António Guterres said "It is time for a new Bretton Woods moment."
President of France Emmanuel Macron on Thursday convened a summit with over 300 people in attendance including about 39 heads of state, 25 of them African.
The summit called to discuss a "New Global Financing Pact" seeks to reform and transform existing financial systems created by the Bretton Woods initiative/agreement, arguing that it is now redundant, not inclusive and unreflective of the realities of today's world.
What is the Bretton Woods Agreement
The Bretton Woods Agreement was reached at the United Nations Monetary and Financial Conference 1944 summit held in New Hampshire, USA on a site by the same name.
At that time, the world economy was very shaky, and the allied nations sought to meet to discuss and find a solution for the prevailing issues that plagued currency exchange.
Nations were also seeking policies and regulations that would maximise the potential benefits and profits that could be derived from the global trading system. The outcome of the conference was the Bretton Woods Agreement and the Bretton Woods System.
The agreement was reached by 730 delegates, who were the representatives of the 44 allied nations that attended the summit. The delegates, within the agreement, used the gold standard to create a fixed currency exchange rate.
The Bretton Woods System is a set of unified rules and policies that provided the framework necessary to create fixed international currency exchange rates. Essentially, the agreement called for the newly created IMF to determine the fixed rate of exchange for currencies around the world.
It is famous for what has today become famous financial institutions in the world - the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) popularly called the World Bank.
The system was depended on and was used heavily until the beginning of 1973 when it fell apart as major countries began to float their currencies. At this period, it was feared that countries will fall back to where they used to be before the agreement. However, economists noted that it made it easier for countries to adjust to external shocks at the time.
The institutions created by this agreement (IMF and World Bank) also had the responsibility of helping poor countries around the world through loans and grants.
In February, United Nations (UN) Secretary-General António Guterres said "It is time for a new Bretton Woods moment," because he believes the global financial architecture needs a radical transformation. He spoke while briefing the UN General Assembly on priorities for 2023
He reechoed this on Thursday when he spoke at the Paris Summit's opening ceremony when he said the current global financial architecture is outdated, dysfunctional and unjust, hence the need for a New Global Financial Pact to take action to meet the urgent needs of developing countries.
What then is the alternative on the table?
Led by the Prime Minister of Barbados, Mia Mottley, developing countries are proposing an alternative called the Bridgetown Initiative which seeks to be more inclusive and, according to Ms Mottley, reflective of today's realities.
The initiative, as seen on the website of the Barbadian Ministry of Foreign Affairs, groups its demand into three:
The first step is to immediately provide liquidity to stop the debt crisis in its tracks, by asking the IMF Board to return access to its unconditional rapid credit and financing facilities to previous crisis levels and to temporarily suspend its interest surcharges imposed on heavily indebted borrowing countries - for two to three years.
This is expected to re-channel at least $100 billion of unused Special Drawing Rights (SDRs) to those who need it and operationalise the Resilience and Sustainability Trust.
SDR is an international reserve asset created by the IMF in 1969 to supplement the official reserves of its member countries. It is not a currency; it is a potential claim on the freely usable currencies of IMF members. As such, SDRs can provide a country with liquidity.
Also, the G20 should agree to an ambitious Debt Service Suspension Initiative that includes all Multilateral Development Bank (MDB) loans to the poorest countries, and COVID-related loans to the middle-income.
Major issuers of debt to the markets should help normalise natural disasters and pandemic clauses in all debt instruments to absorb shocks better.
In the second part, the initiative proposes the expansion of multilateral lending to governments by $1 trillion
"Liquidity is not enough; these crises have systemic roots. Only investment will change their course," it says.
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MDB shareholders should implement the recommendations of the independent G-20 Capital Adequacy Frameworks Review of 2022 and the World Bank and other MDBs must use remaining headroom, increased risk appetite, new guarantees and the holding of SDRs to expand lending to governments by $1 trillion. New concessional lending should prioritise attaining the SDGs everywhere and building climate resilience in climate-vulnerable countries.
The third step involves activating private sector savings for climate mitigation and fund reconstruction after a climate disaster through new multilateral mechanisms
"Most climate-vulnerable countries do not have the fiscal space to adopt new debt. We must move beyond country-by-country responses that have become bogged down by issues of who should do more," it said while proposing that "we need a global mechanism for raising reconstruction grants for any country just imperilled by a climate disaster."
Additionally, it proposes a new issuance of 500 billion SDRs ($650 billion) or other low-interest, long-term instruments to back a multilateral agency that accelerates private investment in the low-carbon transition, wherever it is most effective.
