As the IMF and World Bank spring meetings start this week in Washington, DC, there are growing calls to restructure the debt of developing countries. This, advocates and officials alike say, would help countries in the global south meet their climate goals.
“Overall flows to low- and middle-income countries have declined, something incongruous with the evident and urgent needs to meet development and climate needs,” Jay Shambaugh, the under-secretary for international affairs at the US Treasury, said at the Peterson Institute for International Economics on 11 April.
His remarks echo what some climate advocates have been saying for years: institutions need to reform debt in global south countries. Debt in low and middle-income countries has skyrocketed over the past few decades, reaching US$3tn, while 93% of the 63 countries most vulnerable to climate change are in or at risk of debt distress.
Experts say this sovereign debt crisis has made it difficult for the global south to prepare for a just transition to a greener economy. A report from the Debt Relief for Green and Inclusive Recovery project found that 47 emerging and developing countries would face insolvency in the next five years if they ramp up with climate and development goals.
“An increase in debt burden can put fiscal pressure [on global south countries] that can in turn lead to downgrades which make it difficult for these countries to access finance,” said Suranjali Tandon, an assistant professor at the National Institute of Public Finance and Policy in New Delhi.
Some note the countries most severely impacted by climate change are not the ones primarily responsible for the climate crisis. In addition, climate vulnerable countries are being pushed further into debt because of factors outside of their control, said Teresa Anderson, global lead on climate justice at ActionAid.
“It is a fundamental injustice that the world’s poorest countries are carrying the burden of a climate crisis that they have not caused,” she said.
Many of these countries are in what experts call a vicious cycle of debt. In order to pay off these debts that are often priced in foreign currencies such as the US dollar, countries need to continue harmful climate activities such as drilling for oil or mining.
“It leads these climate vulnerable countries in debt to expand their fossil fuels, and their harmful industrial agriculture, export commodities so that they can export them to pay off their debt,” said Anderson.
Debt restructuring needed
Reforming, if not cancelling, the debt of developing countries may be an important part of the solution to opening financing flows for these indebted countries which are also exposed to climate risks, Tandon said.
For Anderson, debt cancellation is also a climate solution, as it would allow countries in the global south to not only free their finances, but also give them more room to make policy decisions for their communities and the climate.
“Because right now, debt pressures are forcing climate vulnerable countries to make incredibly self-destructive decisions,” she said.
Ivana Vasic-Lalovic, a research associate at the Center for Economic and Policy Research, agrees that the debt of poorer countries should be cancelled, as “there is no systemic solution. They don’t have an option for relief because there’s no comprehensive debt resolution mechanism.”
While there are some initiatives to help countries get funding to address their climate investment needs, many of them are debt-based which perpetuates the cycle, she said.
“Institutions need to come together to create a comprehensive debt resolution mechanism,” she said.
Rishikesh Ram Bhandary, an assistant director at Boston University’s Global Development Policy Center, said the current debt restructuring mechanism under the G20 common framework largely excludes middle-income countries. The debt relief scheme was established in 2020 as a way to speed up the process of providing debt relief to low-income countries but has come under scrutiny for its lengthy process.
“We need comprehensive debt restructuring,” Bhandary said. Not only do countries face mounting debt, but the costs of borrowing have risen due to increased interest rates.
“Given where the cost of borrowing is, that is making debt services more unaffordable, and it’s also reducing the appetite to actually take on new investments, simply because the rates are so expensive,” he said.
The longer the situation continues, Bhandary said, the more unlikely it will be that these countries will be able to meet their climate commitment goals.
While programs like the loss and damage fund are meant to help finance some of the impacts of climate change on these vulnerable countries, it has been met with a lot of controversy. Many countries in the global south are opposed to the World Bank hosting the fund, while funding has been slow and many details have yet to be worked out.
Still, many experts recognise that it is better than nothing. Institutions like the IMF and World Bank have a role to play in financing the transition to a green economy, said Bhandary.
“We have to make sure that the spring [and] annual meetings are really able to add momentum to that climate finance conversation so that we can really have confidence that not only will there be a goal, but that there will also be the supporting infrastructure to really make that goal a reality”.
This page was last updated April 15, 2024