Developing countries in Asia with the lowest indicators of socioeconomic growth spend double the amount on repaying national debt as they receive in climate finance, according to a report by a London-based research institution.
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Bangladesh, Cambodia, Laos, Myanmar, Timor-Leste, Nepal, and Afghanistan collectively paid almost US$12 billion repaying debt in 2022 compared with almost US$7 billion they received in climate finance for that year, analysis by the International Institute for Environment and Development (IIED) found.
However, Timor-Leste, Nepal and Afganhistan are the only least developed countries (LDCs) whose debt spending does not outpace the funding they receive for adaptation and mitigation-related projects.
Out of the US$7 billion the LDCs received to help mitigate climate impacts, 80 per cent was provided as loans rather than grants, which add to the debt burden, noted the report released on Wednesday.
“Debt sustainability and climate finance might seem to be two different things, but they are linked,” IIED’s senior researcher Sejal Patel told Eco-Business.
“Every time a cash-strapped country is hit by a climate disaster, they are forced further into debt. That lessens the fiscal space governments have to invest in long term climate resilience.”
Bangladesh, which ranks among the world’s top 10 disaster risk-prone countries, has been dealing with an ongoing economic crisis that has worsened due to political unrest that led to the resignation of its long-serving prime minister in August. Myanmar, also considered one of the most climate-vulnerable countries, was rocked by a military coup in 2021 that has isolated the country and its economy, with sanctions imposed by Western countries in 2023.
Among the seven LDCs in the region, Laos is at high-risk of defaulting on debt repayments, severely hampering its ability to invest in climate resilience.
Laos’ tourist-dependent economy has been in dire straits since the pandemic, with its debt last year nearly doubling to US$950 million, prompting the Southeast Asian nation to seek additional deferrals to avoid defaulting.
Among 58 least-developd countries, 26 of them (highlighted above) were found to have debt repayments in 2022 that cost more than they received in climate finance in the same year. Source: IIED with data drawn from the World Bank and OECD
Outside of Asia, 51 other LDCs spent close to US$48 billion repaying debts in 2022 compared with almost US$22 billion they received in climate finance.
The research comes ahead of international summits like the World Bank’s and International Monetary Fund’s annual meetings that take place this month along with the G20 leaders meeting, and the nature and climate COPs, where finance will be the key topic.
In a pre-COP29 meeting in Baku, Azerbaijan on 10 October, rich countries failed to agree on a specific amount for the new global climate finance goal aimed at channeling additional funds toward urgently needed climate action in developing countries.
A new and larger target, also known as the new collective quantified goal on climate finance (NCQG), is expected to displace the current US$100 billion pledge made by wealthy countries, which is due to expire in 2025.
Call to overhaul the international financial system
From the total of US$28 billion that the world’s poorest countries received from Australia, Japan and European nations in climate finance, US$14.8 billion was provided as loans. About 80 per cent of the loans was issued on “concessional” terms, which were somewhat below market rates.
Despite this, the international financial system for developing and climate-vulnerable countries is still “flawed”, as it piles up interest and pushes governments further into the red and forces them to cut vital spending, said Patel.
“The international financial system is a relic of the 20th century. It needs to be overhauled to benefit all nations and underwrite our collective climate goals in line with the United Nations,” she said.
“Rethinking debt and providing climate finance are two sides of the same coin. Both are needed to help the most vulnerable countries respond to climate change.”
Lower-income countries should be given easier access to capital through grants and concessional finance along the lines of the Bridgetown Initiative proposed by Caribbean island state Barbados, she added.
The initiative calls for urgent action to reform the international financial architecture. It demands for UN member states to fast-track the transfer of US$100 billion in so-called “special drawing rights”, a monetary reserve currency, to programmes that support climate resilience and subsidise lending to low-income countries.
G20 donor countries should likewise redesign their debt structure for poor countries by speeding up debt relief talks and allowing middle-income countries to access it.
Patel said: “Leaders from the world’s richest countries have spent a lot of time talking about financial reform and the sovereign debt crisis but have little to show for it. It is crucial to reform bureaucratic hurdles preventing funds from reaching those on the frontline of the climate and nature crisis.”
