How are climate and debt interconnected?
There are several clear connections between indebtedness and climate vulnerability in countries in the global south. For a more complete analysis, please check the Eurodad report “A tale of two emergencies – the interplay of sovereign debt and climate crises in the global south”.
Here’s a summary
The impacts of the climate emergency in the global south exacerbates the debt problems in climate vulnerable countries. This is because most countries have little or no option other than borrowing to deal with recovery and reconstruction costs after a climate extreme event or environmental hazard (see glossary).
- The International Monetary Fund (IMF) analysed 11 cases of major “natural disasters’’ in developing countries between 1992 and 2016, with a percentage of damage to their Gross Domestic Product (GDP) greater than 20 per cent. The results show that public debt increased from an average of 68 per cent of GDP in the year of the climate extreme event to 75 percent of GDP three years afterwards.
- In 2018, the Jubilee Debt Campaign UK published a report that exposed how debt sustainability indicators worsen after a climate-related disaster: in over 80 per cent of 21st century cases, government debt was higher two years after the disaster. In a context where the public debt of developing countries “has increased from an average of 40.2 to 62.3 percent of GDP between 2010 and 2020”, this is particularly worrying. The majority of this increase took place last year.
- More recently, a report published by Erlassjahr.de and Bread for the World, indicates that climate-induced loss and damage is an important driver of debt, and proposes a “Climate Disaster and Debt Risk Index” that assesses the combined vulnerabilities to climate and debt.
When an over-indebted country is affected by an extreme climate event, existing debt makes it more difficult for that country to respond to the emergency needs. The impacts also extend into the future, as pre-existing debt, together with the costs of reconstruction worsen the chances of economic recovery. The coexistence of high debt and climate extreme events also makes it more difficult for the country to repay the debts it already owes.
Comparing a map of the countries most severely affected by climate change with a map of the most heavily indebted countries does reveal an incomplete but discernible congruence between the threat of climate change and impending or existing over-indebtedness
Jürgen Kaiser, Jubilee Germany
Over the last decade, climate finance (see more details in questions 3-5) has mostly been provided through debt-creating instruments. Continued use of loans to fulfil climate finance obligations sharply reduces a country’s ability to achieve fiscal stability and debt sustainability, and helps to fuel the debt crisis in the global south. This in turn impacts on a country’s ability to provide adequate public services during the ongoing health crisis and in the wake of a climate extreme event; public services that are greatly needed particularly by marginalised groups including women, children, indigenous peoples and the transgender community.
Furthermore, climate vulnerabilities increase the costs of borrowing from private creditors for countries in the global south. This recent report shows how climate risks increased the cost of debt for the countries in the Vulnerable Twenty (V20) group, adding US$ 40 billion of additional interest payments over the past 10 years – US$ 62 billion if we include the private sector. Over the next decade, this number is set to increase to US$ 168 billion. The higher the existing debt, the more reluctant creditors will be to lend to a country already struggling with payments and climate vulnerabilities, and if they do, the interest rates will be higher.
There is also a debt-induced climate impact. High public external debt levels translate into more revenues spent on servicing that debt. This makes it more difficult to invest limited domestic resources in climate adaptation and mitigation, or to respond to the challenge of loss and damage after a climate extreme event. Furthermore, when a country is struggling to repay its unsustainable debts, it might look for options that include exploiting its natural
resources, including fossil fuel, mining or forests, in order to increase exports and therefore revenues, that it will then use to repay its debts. This, in turn, contributes further to climate change by facilitating, for instance, desertification.
This trend is especially worrying in the aftermath of the Covid-19 crisis, when an increasing number of countries in the global south are facing a surge in their public debts. With more debt and no relief in sight, developing countries will be forced to implement austerity measures on an unprecedented scale. In fact, a large number of countries in the developing world are already allocating more resources to debt service than to either public health care or education. According to IMF projections (analysed by Eurodad), primary expenditures will contract below pre-crisis levels in at least 60 countries by 2025. The widespread decline in expenditures runs counter to the investments required to meet the commitments under the 2030 Agenda, the Beijing Declaration and the Paris Climate Agreement.
In conclusion, the countries that struggle the most with debt tend to be more vulnerable to the impact of climate change: on the other hand, climate change exacerbates debt vulnerabilities. This is extremely problematic as it creates a vicious circle.