Debt burden traps global south in a vicious cycle
Debt distress: this year’s floods in Pakistan displaced 33mn people and cost around $40bn in property damage. The country has external debt of around $130bn © Asim Hafeez/Bloomberg We’ll send you a myFT Daily Digest email rounding up the latest Climate change news every morning.
It was the $100bn question during COP26 last year: would rich countries fulfil their pledge to give that sum to poorer states of the global south, to address climate change. In 2009, they said they would do so by 2020. But the figure was not achieved — falling short at $83.3bn, and Oxfam calculates that most of this was provided as loans, rather than grants.
At COP27 in Egypt this month, discussion will once again be dominated by rifts over climate finance. African ministers have called the failure to provide the promised money “shameful”.
And, even if $100bn is delivered, leaders in the global south argue it is insufficient, particularly when most climate-vulnerable countries are already mired in debt and still grappling with the economic fallout from Covid-19.
“Developing countries have to balance between urgent climate needs and paying back debts,” says Jessica Omukuti, research fellow at the University of Oxford’s Inclusive Net Zero initiative. “If you can’t pay back your debts, your credit rating goes down, [and] you compromise your partnerships and your future capacity to get finance.”
More than half of the world’s poorest countries are either in debt distress or at high risk of it, according to the World Bank. Poorer countries bear the brunt of environmental degradation and are simultaneously unable to meet the cost of low-carbon and climate-resilient development.
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Research by the campaigning group Debt Justice found they spend five times more on debt payments than on dealing with climate change, resulting in a vicious circle of climate catastrophe, borrowing, and spiralling debt burdens.
The climate crisis is driving poor countries further into debt distress, says Mary Robinson, founder of the Mary Robinson Foundation-Climate Justice, and former president of Ireland. “As Mia Mottley [Barbados prime minister] said, in many places like the Caribbean, climate and other natural disasters account for 50 per cent of the long increase in public debt there. And that’s typical.”
Pakistan is a recent case in point. Fierce flooding in the summer ravaged the country, displacing 33mn people, killing more than 1,400, and costing around $40bn in property damage. The IMF approved a bailout loan of more than $1.1bn but, last month, Pakistan’s government announced it would need to borrow billions more. The country already has external debt of around $130bn.
Debt crises in poor countries are often triggered by extreme climate events. In 2019, Mozambique took on a $118mn loan from the IMF to deal with the aftermath of cyclone Kenneth and cyclone Idai. Decades earlier, Belize’s debt doubled from 47 per cent of GDP in 1999 to 96 per cent by 2003, following devastating storms in 2000 and 2001.
Increasing climate threats make lending to vulnerable countries more risky, so borrowing becomes more expensive
Nearly three-quarters of climate finance still comes in the form of loans, usually with high interest. A 2020 Oxfam report revealed that as much as 80 per cent of funds gathered for the $100bn pot came as loans and, of that, about half was in the form of non-concessional loans: those offered on ungenerous terms.
Increasing climate threats make lending to vulnerable countries more risky, so borrowing becomes more expensive. But, equally, as the intensity and frequency of extreme weather escalates, vulnerable countries desperately need cash for adaptation, yet only a quarter of climate finance in 2019 was spent on adaptation, according to the OECD.
Some in the global south argue that, because they bear little responsibility for the climate chaos wrecking their nations, debts should be cancelled and the global north should pay reparations for the damage it has caused.
Demands are also growing for a “loss and damage” fund to help low-income countries deal with climate-related devastation, though so far most developed nations have sidestepped the issue.
Members of V20, a bloc of 20 countries among the most vulnerable to climate change, are considering halting debt payments. Between them, they owe $500bn over the next four years. Leading the charge, Mohamad Nasheed, former president of the Maldives, said poor nations were locked in a Sisyphean trap: borrowing money to ward off storms, only to see climate change destroy the improvements.
There are potential solutions. Thinkers in the Caribbean, Germany and elsewhere have proposed debt-for-adaptation swaps: creditors would forgo debt repayments so that the funds could instead be spent locally on adaptation. This would boost domestic economies, eliminate the search for hard currency to repay loans, and spur climate resilience.
Similar debt swaps have worked in Seychelles, Poland and Argentina. The Bridgetown Initiative, unveiled by Mottley in September, puts forward a number of proposals to transform international financing, including natural disaster clauses in every debt contract, more concessional funding, and expanding the lending capacity of multilateral development banks (MDBs).
“We need all the possibilities,” says Robinson. Securing the promised $100bn is important because it has become a trust issue, she says, but there also needs to be “a real pathway to doubling climate adaptation finance” and “debt swaps for adaptation and nature”.
“Above all else, we need to work out how to open the coffers of the MDBs. There’s so much capital available. It’s the political will that’s the problem.”
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