Which countries are the most affected by climate change and debt distress?

Developing countries, and particularly small island developing states (SIDS) and least developed countries (LDCs), are particularly vulnerable to the impacts of climate change. In absolute monetary terms, the losses of richer countries due to climate events tend to be higher, but economic losses relative to GDP, and especially, loss of life, biodiversity, culture, heritage and livelihoods, human and animal displacement, personal hardship and existential threats, have been much more widespread in low- and middle-income countries, as the Global Climate Risk Index by Germanwatch shows. A group of systemically climate vulnerable countries termed the V20 was also created in 2015. Today it has 48 members from the global south that cooperate to strengthen economic and financial responses to climate change.

If we look at debt vulnerabilities, we find a fundamental problem with the concept of debt sustainability and debt distress. For the IMF and the World Bank, and therefore for most creditors, global institutions and analysts, debt remains sustainable as long as it can be repaid, and debt distress is only a case of having difficulties paying the creditors, ignoring whether before reaching that state, the increase in debt levels has caused cuts in social and development policies. Debt vulnerabilities should be considered far beyond a country’s capacity to repay debts. Instead, debt sustainability assessments (DSA) should integrate development priorities and independent human rights impact assessments to assess countries’ ability to cover the needs of their populations. Gender inequalities and climate vulnerabilities, for instance, should be considered when assessing those impacts.

Erlassjahr.de, the German jubilee debt cancellation campaign, publishes an annual Global Sovereign Debt Monitor, which analyses the debt vulnerabilities of almost 150 countries worldwide, using different indicators. Their latest report showed that, by the end of 2020, 132 out of 148 countries surveyed in the Global South were critically indebted.

Countries that lie between the tropics of Cancer and Capricorn are more vulnerable to rising sea levels, to warmer seas, to more ferocious storms, and to more flooding and drought. Tackling natural disasters, and protecting the environment are the single most significant causes for increases in our debt.

Mia Mottley, Prime Minister of Barbados

The problems of dividing the world by wealth per capita

The World Bank classifies countries depending on their level of income per capita. This classification has been generally adopted worldwide, and it divides the world into low-income (LICs), middle-income (MICs) – which are also divided between lower middle income countries and upper middle income countries – and high-income countries (HICs). Falling in one group or another will mark whether a country can access concessional finance (lending with better conditions than the ones offered by the financial markets) or debt relief initiatives.

A definition as a middle-income country, and therefore not being eligible for concessional finance, is a key factor to understand debt vulnerabilities. For instance, SIDS that are eligible for non-concessional finance only are the very countries where debt problems have been prominent. If concessional finance (including climate finance) is not available, the only option for green and climate investment is more debt, and more expensive debt. As Ambassador Webson of Antigua and Barbuda, Chair of AOSIS stated, eligibility criteria for concessional finance and debt relief based on GDP/capita is an “outdated and illogical criterion”, especially “when our debt-to-GDP ratios are beyond maxed out and when even in the best of times, a hurricane can easily wipe out an entire year’s GDP in one fell swoop”.

In response to this problem, the Association of Small Island States (AOSIS) calls for a multi-dimensional vulnerability index, and several authors supported by Erlassjahr. de and Brot für die Welt recently launched a proposal for a Climate Disaster and Debt Risk Index. It uses 16 indicators to assess a country’s multidimensional risk. This approach to debt sustainability and climate vulnerabilities would serve countries such as Belize. Belize does not qualify for low-interest loans or for debt relief due to its status as an upper-middle income country, but in the last year it has faced multiple emergencies: debt default, tropical hurricanes impact, decrease in tourism, CRAs downgrading and the Covid-19 pandemic. As a consequence, now Belize’s foreign debt amounts to 85 per cent of its entire national economy, preventing the government from pursuing climate action.