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Nearly 80 low- and middle-income countries are considered by international institutions as being in or at risk of debt distress. Three-fourths of these countries have also been flagged by environmental experts as particularly vulnerable to the effects of climate change. The combined burden of the climate crisis and increasing debt, perpetuated by an unfair international financial architecture, is a recipe for economic and social devastation: as climate disasters strike, these countries are being forced into choosing between servicing debt and saving lives. This report documents how servicing debt is a direct obstacle to these countries’ ability to respond to climate disasters and to finance basic services and long-term development needs. As a result, countries are trapped in a vicious cycle which keeps them indebted, perpetuates vulnerability to the effects of climate change, and prevents progress on the Sustainable Development Goals (SDGs). The response so far from the international financial community has been inadequate to help countries break this vicious cycle. A more ambitious response — combining an updating of debt resolution frameworks, debt relief, more grant-based finance, and a new allocation of Special Drawing Rights (SDRs) — is urgently needed.
- Doubling debt: The stock of external public debt in low- and middle-income countries stands at over $3 trillion — a doubling since 2010 — and private creditors hold nearly 60 percent of it. A sustained period of low interest rates in advanced economies in the aftermath of the global financial crisis led to increased capital inflows to developing countries as private investors chased higher returns. However, in recent years there have been economic setbacks to these countries due to the effects of the pandemic, the war in Ukraine, and the rapid rise in interest rates as central banks in advanced economies have pivoted to fighting inflation. As a result, nearly 80 countries are considered by international financial institutions as in or at risk of debt distress. But debt from private creditors comes with high interest rates, short maturities, and is difficult to restructure.
- Climate costs: Three-fourths of the countries facing debt difficulties are also designated by environmental experts as highly climate vulnerable. These countries face the least responsibility for the climate crisis but are facing the greatest burdens in terms of the impacts of climate disasters. The costs of climate disasters can be very high, even for countries generally considered to be more resilient. For instance, Argentina is projected to lose about 3 percent of its income this year from losses of agricultural exports due to a severe drought. The cumulative loss over the past two decades in a group of climate-vulnerable countries is estimated to have added up to about 20 percent of their annual income.
- Life and debt: Interest payments on external public debt have gone up sharply since 2010 in low- and middle-income countries relative to their export revenue. In 2021, interest payments in some climate-vulnerable countries, such as Guinea-Bissau, Lesotho, and Sudan, amounted to between 15 and 25 percent of export revenue. A number of countries in or at risk of debt distress — such as Egypt, El Salvador, The Gambia, Ghana, Kenya, Senegal, and Sri Lanka — paid between 6 and 9 percent of their export revenue in interest payments alone. On average, in 16 low-income countries, interest payments amount to about 4 percent of export revenue and over 10 percent of export revenue if principal repayments are included. This year, total debt service is estimated to exceed non-climate-related SDG investment needs for over 100 countries around the globe. The inability to finance non-climate SDGs has direct human costs and also has an adverse impact on climate resilience, as stronger health, food, and other social systems are needed to withstand the effects of climate disasters. In fossil fuel-dependent economies, higher debt service costs force them to delay the energy transition.
- Inadequate initiatives: The international response to the climate crisis and the growing risk of debt crisis has been inadequate. The G20’s Common Framework for debt restructuring and relief excludes middle-income countries, has seen poor take-up from eligible countries, and does not cover private and multilateral debt, which comprises 70 percent of the debt stock of eligible countries. The IMF’s new climate-focused long-term lending program, the Resilience and Sustainability Trust, is also limited in scope, adds to countries’ debt burdens, and potentially imposes harmful austerity measures.
- What will work: To keep countries from being forced into austerity, debt resolution frameworks need urgent updating and a venue for rapid and fair debt treatment across all creditor classes. In addition, legislative action can compel private investors to access the same restructuring terms as public sector creditors. Debt relief from all creditors and more grant-based finance from the wealthy countries — which caused the climate crisis in the first place — can provide the funds for climate and development needs in low- and middle-income countries. Most importantly, a new SDR allocation would serve as a quick way to give climate-vulnerable and debt-constrained countries more fiscal breathing room. The August 2021 SDR allocation was effectively used by developing countries to provide urgent fiscal relief and address other vulnerabilities, and a new allocation — which is being championed by civil society and political actors around the world — would be just as effective.
Read the full report here. | Special Drawing Rights Factsheet | IMF Surcharges Factsheet