Developing countries face ‘vicious circle’ of climate change and debt
- More severe climate shocks are forcing countries to borrow to finance disaster recovery, leading to a ‘vicious circle’ of indebtedness.
- As their debts rise and become more expensive, countries are unable to invest in climate resilience, nature conservation and low-carbon transitions, increasing their vulnerability.
- The Debt Sustainability Frameworks (DSFs) used by the World Bank and International Monetary Fund fail to properly consider the nexus of debt, climate and nature and must be reformed.
A NEW report commissioned by the governments of Colombia, Kenya, France and Germany lays bare the devastating effect of debt burdens for many vulnerable low-income countries. The Expert Review on Debt, Nature and Climate reveals the extent to which unsustainable debt burdens, loss of in nature, and escalating climate change are compounding one another in a hugely destructive ‘triple crisis’.
Countries most exposed to climate change and nature loss –are increasingly having to borrow to fund disaster response and recovery and climate adaptation. - But environmental shocks and stresses then constrain economic growth and public revenues, reducing their ability to service debt, and raising the interest rates they face. This then further damages a country’s ability to invest in climate- and nature-positive development. This vicious circle means there is no addressing the climate crisis without addressing the debt crisis.
A ‘virtuous circle’ of environmentally sustainable and inclusive growth is possible, the report argues, but only if strong domestic policy is matched by international financial support.
The report shows how the Covid pandemic, fuel and food price inflation, a strengthening US dollar and soaring interest rates have left many countries at high risk of ‘debt distress’ - being unable to pay their debts – at the same time as extreme weather events have become more frequent and severe.
The report shows how the ‘Debt Sustainability Frameworks’ used by the World Bank and IMF to assess the affordability of sovereign debt fail properly to consider the links between debt, climate and nature loss. It makes a series of recommendations for their reform.
The Expert Review was established to catalyze a response to the triple crisis. This interim report provides a diagnosis of the scale of the issues in the hope of establishing greater international collaboration towards solutions. The final report, to be published in Spring 2025, will provide a series of recommendations on how debt can be made more sustainable, both fiscally and environmentally.
Vera Songwe, former UN Under-Secretary General and Expert Review Co-Chair said:
“Many low and middle-income countries are facing a ‘triple crisis’ not of their own making, with high global interest rates compounding increasingly severe climate impacts and nature loss. Unless the international community collectively takes measures to address this, countries are not going to be able to pursue the climate-resilient, low-carbon and nature-positive growth which they need – and of which they are capable.”
Moritz Kraemer, former Global Chief Ratings Officer of S&P Global and Expert Review Co-Chair said:
“The increasing economic impact of climate change and nature loss make it critical for the IMF and the World Bank to revise the way they assess the sustainability of countries’ debt. We hope that our report will help them do this.”
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Notes to eds.
For any interview or background requests, please contact Mai-Linh Florentin
Email: florentin@findevlab.org
What is the ‘vicious circle’?
How the climate and nature crises can affect the debt crisis:
How the debt crisis affects the climate and nature crises:
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Source: authors
About the Expert Review on Debt, Nature, and Climate
The Review was established by the governments of Colombia, Kenya, France and Germany to assess the relationships between sovereign debt and climate and nature impacts and policy.
It is being conducted by an Independent Expert Group (IEG) co-chaired by Vera Songwe, former UN Under-Secretary General, and Moritz Kraemer, Chief Economist at LBBW bank and former Global Chief Ratings Officer of S&P Global (previously known as Standard and Poor’s). Coming from both developed and developing countries, members of the IEG have expertise and experience drawn from borrower and creditor country governments, international financial institutions, the private sector, academia and civil society.
The Review is being supported by a Secretariat drawn from four independent research institutes: the UN Economic Commission for Latin America (based in Santiago, Chile), ODI (based in London, UK), the Finance for Development Lab of the Paris School of Economics (based in Paris, France) and the Africa Centre for Economic Transformation (based in Accra Ghana).