How debt is undermining countries’ fight against climate change

The climate emergency is colliding head-on with a debt crisis. While the climate crisis demands immediate attention, many climate-vulnerable and low- and middle-income countries stand at a fiscal crossroads as government debt is at a record high. This presents a paradox of climate action and debt, as stated by Christopher Coye, Belize’s former minister of state in the Ministry of Finance: “We are fiscally constrained at this point” when it comes to taking any climate action. How can climate action be a priority when debts have soared into the sky? Low- and middle-income countries are sinking deeper than ever into a debt-driven development crisis. In 2023, external debt owed to foreign creditors quadrupled to a record $11.4 trillion, which is nearly equal to 99% of export earnings. Take Pakistan, one of the hardest hit by climate disasters. While the country had barely recovered from the devastating floods of 2022, mid-2025 monsoon spells and flash floods left multiple parts of the country completely submerged once again. Yet the debt-crippled government continues to devote scarce resources to meet International Monetary Fund loan terms. This contradiction between urgent climate action and debt illustrates the financial trap facing much of the global south. According to a report by the International Institute of Environment and Development, the most climate vulnerable countries spend “billions to repay debt,” and more than they receive in funding to fight climate change. In 2023, least developed countries paid $37 billion to service their debt, while receiving only $32 billion in climate financing. A perfect storm of debt servicing and high interest rates In lower-income countries, the issue of high debt-servicing costs, e.g., the money governments must pay regularly to cover the interest and principal repayments on their outstanding debt, is being compounded by high interest rates. In 2023, high-income nations paid 26% more interest rates compared to 2021. They also borrow at interest rates 2% to 4% higher than the United States and 6% to 12% higher than Germany. When governments seek to prioritize debt, to avoid more constraints from international creditors, it is often the people who suffer the most. Lower-income countries are unable to fund their schools, health, and basic infrastructure, let alone spend on climate action. These high rates increase the country’s risk of economic downturn and the risks associated with increasingly intense climate events. <iframe title="Interest rate comparisons between Germany, United States, and developing countries" aria-label="Pie Chart" id="datawrapper-chart-OMIYv" src="https://datawrapper.dwcdn.net/OMIYv/2/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="418" data-external="1"></iframe><span style="font-family: Arial, sans-serif; font-style: italic; font-size: 0.75em; line-height: .25!important;"> Source: <a href="https://unctad.org/news/debt-crisis-developing-countries-external-debt-hits-record-114-trillion" target="_blank" rel="noopener noreferrer">UNCTAD “Debt Crisis”</a>, compiled and visualised by the author. Developing countries face much higher borrowing costs than advanced economies. The chart shows the relative interest burden (normalized points) based on UNCTAD 2023 data. </span><script type="text/javascript">window.addEventListener("message",function(a){if(void 0!==a.data["datawrapper-height"]){var e=document.querySelectorAll("iframe");for(var t in a.data["datawrapper-height"])for(var r,i=0;r=e[i];i++)if(r.contentWindow===a.source){var d=a.data["datawrapper-height"][t]+"px";r.style.height=d}}});</script> Countries in the global south, such as Pakistan, are still meeting IMF loan terms while allocating part of the 2024–2025 budget to climate welfare. The federal budget for the Ministry of Climate Change was increased from 4 billion Pakistani rupees to Rs 15.87 billion, a nearly fourfold increase from the previous allocation. But despite this budget allocation, challenges lie in implementing a coordinated plan to combat climate change, due in part to weak coordination and low technical capacity. Access to international finance would, in part, help solve that problem — rather than paying off crippling debt. An intensifying climate situation To add to the situation, the 2025 climate events have brought no relief. In Pakistan, the fiscal damages have been excessive, with 60% of Punjab’s rice crops gone, 35% of the cotton supply, and much more disrupting the supply chain, causing the local inflation to soar. Inflation is expected to rise from 3.5% to 4.5% in September as the country braces for further damage. Prices rising due to the climate crisis are not an arbitrary event; rather, they are the structural drivers of “climate inflation,” that is, inflation stimulated by climate shocks. When climate disasters wipe out transport routes and crops, it disrupts the market by limiting the supply chain, and the prices surge because the goods cannot reach the market. Prices have risen over 40% for a 100-kilogram bag of wheat in major cities of Pakistan. Importantly, the increase is not due to high demand but rather to disrupted supply chains, infrastructure damage, and losses confronted by the country as a result of climate events. The Business Recorder further reports issues of "high interest rates" currently at 11%. High interest rates, while intended to stabilize the macroeconomic situation, increase the borrowing amount that these low-income countries cannot sustain. This promotes slow recovery of the local infrastructure and deepens the crisis of the government’s debt. Similar tensions are visible across South Asia, from Bangladesh struggling with cyclone recovery costs to Sri Lanka balancing debt restructuring with climate pledges — further real-life examples of contradiction in climate action, debt, and the practical constraints for change. Managing debt effectively Low- and middle-income countries, especially the global south, must strengthen their institutional capacities for managing debt effectively. Many countries face institutional gaps in conducting debt sustainability analysis or understanding the terms of the International Monetary Fund. Most low- and middle-income countries also lack the infrastructural capability to manage debt soundly. The burden of debt servicing alone, due to high interest rates, consumes a significant portion of public revenue, leaving limited room to invest in a resilient infrastructure. In countries such as Pakistan, climate governance remains fragmented, with multiple agencies, such as the Ministry of Climate and the Public Finance management system, handling climate and financing planning, without following any uniform strategy, which serves as a barrier to long-term climate planning. Inadequate policies, organizational structures, and the lack of integration between the financial governing bodies limit economies’ ability to manage debt effectively. This is the dual challenge faced by many countries, underscoring the systemic crisis of achieving a green future. The efforts to break this cycle must start today and require a two-pronged approach. International creditors, such as the IMF and World Bank, are already focusing on climate resilience through programs such as the Extended Fund Facility and Climate Support Facility, respectively. But they must shift their framework from rigid financial orthodoxy. Then South Asian governments themselves should work on their institutional capacity, governance, and debt management to prioritise climate action. Without reforms, the situation will only worsen, and these countries risk running in circles. Pakistan’s experience serves as a warning; climate and debt must be addressed together. The path forward should be marked by systematic resilience, ensuring that financial stability and climate action must reinforce each other, rather than undermine.