Poor countries' debt repayments are twice what they get in climate finance

A growing number of climate-vulnerable countries risk “defaulting on their development and climate goals” as debt repayments soar and dwarf the support they receive to address climate change, according to a pair of analyses published this week. The world’s poorest and most climate-vulnerable countries are collectively spending twice as much paying creditors to service their debts as they receive in climate finance. That’s the finding of an analysis by the think-tank International Institute for Environment and Development, or IIED, which examined the latest available data from the World Bank and the Organisation for Economic Co-operation and Development for 58 countries that the United Nations classifies as least developed or small island developing states. Despite being highly exposed to climate impacts, low-income and climate-vulnerable nations’ high debt repayments leave them with very little fiscal room to invest in building resilience and respond when droughts, floods, or major storms hit. And the increase in climate finance reaching them is not keeping pace with the growth in debt repayments as countries borrow more to respond to shocks at higher interest rates. IIED found that, collectively, the group of 58 countries received $28 billion in climate finance but spent $59 billion repaying debts in 2022. Almost half are at high risk of defaulting on their debt or are already in debt distress.Yet, debt repayments exceeded climate finance provisions for 23 nations. “Every dollar that these countries are spending on loan repayments is a dollar not being spent on hospitals or schools, or funding climate-resilient infrastructure,” said IIED senior researcher Sejal Patel, who led the analysis. Jamaica, which was pounded by Hurricane Beryl as it swept across its southern coast in July, paid $1.39 billion to service its debts in 2022 and received just $12 million in climate finance — 115 times less — that same year. Debt repayments also dwarfed the provision of climate finance in Angola, Senegal, Mozambique, and Zambia. Mozambique paid six times the amount of climate finance it received in debt repayments in 2022, despite struggling to recover from successive cyclones. IIED used a broad definition of climate finance, which includes development finance that the OECD recorded as significantly climate-related or as having climate components. Countries’ debt burdens are compounded by the fact that just over half the climate finance these countries received was provided as loans rather than grants. Albeit mostly on concessional terms with interests below market rates, loans contribute to countries’ debt burden, Patel told Devex. “We are in the worst crisis in 80 years,” said Patrick Njoroge, former governor of the Central Bank of Kenya and co-chair of the Debt Relief for a Green and Inclusive Recovery Project, of the situation among African countries. “External public debt service ratios have reached record levels, and a growing number of countries risk defaulting not only on debt, but also on their development and climate goals,” he said in response to a separate analysis of African countries’ debt published this week by the DRGR Project. It found that African countries’ debt levels have increased by 240% between 2008 and 2022 due to external shocks, including climate impacts. Half of African nations are now spending more on paying back interests than on their public health budget, the DRGR Project warned. “A comprehensive debt relief response that bolsters growth and safeguards the development and climate goals of these countries is urgently needed,” said Njoroge in a written statement to Devex. The analyses come ahead of a series of key international meetings this fall in which access to affordable financing for low-income countries to invest in sustainable development and climate action is top of the agenda. This includes the World Bank and International Monetary Fund annual meetings, the G20 Leaders' Summit in Brazil, and the 29th United Nations Climate Change Conference in Azerbaijan. At COP 29, countries are expected to agree on a new climate financial goal for low- and middle-income countries despite fraught negotiations. Patel said addressing debt issues and providing climate finance were “two sides of the same coin” to unlock the funds low-income nations need. This requires international bodies to better “coordinate how development and climate finance is being provided to support countries,” she said. Barbados Prime Minister Mia Mottley has made alleviating climate-vulnerable nations’ debt burden while increasing access to financing the linchpin of her efforts to reform the international financial system. The third iteration of the Barbados-backed Bridgetown Initiative, launched last month, warns of “an avalanche of unsustainable debt service over the next three years” caused by high interest rates and maturing debt. Despite growing support for debt-for-climate or nature swaps and clauses to pause debt repayment in the case of a climate disaster, the initiative calls on the G20 group of high-income nations to do more to ensure that debt relief is “sufficiently robust to ensure countries are able to finance their development and climate goals.” An expert review on debt, nature, and climate was mandated by Colombia, Kenya, France, and Germany to examine the relationship between debt, nature conservation, and climate action in low- and middle-income countries and provide recommendations by spring 2025. The group will launch an interim report looking at how environmental shocks are leading governments to borrow more to finance disaster response next week.