The growing costs of the climate crisis are forcing developing nations to make painful choices, compelling them to pay off debts rather than spend money on crucial services like health and education.
Only 28 per cent of climate finance was provided as grants in 2022 to developing countries recovering from floods or shifting to clean energy, and the rest was channeled as loans, leaving them swamped by overwhelming and pressing external debt.
“For many developing countries, climate finance is now increasingly tied to debt,” Sherry Rehman, a senator and former climate change minister of Pakistan, told Context.
Nations like hers spend more on interest payments than on health, education and infrastructure, which are critical expenditures for protecting people from climate disruptions to food, water and housing.
“Trying to fund resilience while falling further into debt is what I call recovery traps,” Rehman said.
Under the new climate finance deal struck at COP29, rich countries pledged to provide US$300 billion annually to developing nations by 2035, a figure dwarfed by the developing nations’ public debt repayments worth US$443.5 billion in 2022 alone.
The deal included a broader goal of raising US$1.3 trillion annually by 2035 from public and private sources, matching what economists say is needed and developing nations sought from wealthy governments.
However, what the COP29 deal failed to specify is how much of the US$300 billion will come in the form of loans or as grants or how the debt distress of climate-vulnerable countries will be addressed.
“What has obviously dampened enthusiasm is the opacity”, said Rehman, who called for a breakdown of the sources and types of finance, including the share of grants versus loans.
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We need to reimagine climate finance, so it doesn’t force countries to mortgage their future.
Sherry Rehman, senator, Pakistan
Severe debt challenges
Overall debt repayments faced by developing countries have accumulated to such a level that climate finance receipts pale in comparison.
In 2022, 58 developing countries spent twice the amount, US$59 billion, to pay back their debts compared with what they received in climate finance.
Public debt in developing countries has been racing higher for years, growing two times faster than in developed countries since 2010. Standing at US$29 trillion in 2023, that debt has left more than half of low-income countries stuck with severe debt challenges.
Along with incurring debt to meet economic needs, growing climate extremes like cyclones, floods and droughts have forced these countries to borrow even more.
Communities on the climate frontline, in particular, have been grappling with repayment of loans, from Indian farmers sunk in debt after drought destroyed their crops to coastal residents in Bangladesh servicing loans to rebuild cyclone-ravaged homes.
Added to that pressure, a growing share of debt stems from funding for climate actions like reducing emissions or investing in resilient infrastructure like flood protection structures and early warning systems.
Such loans add to the already excessive debt burden of developing countries, which is “totally unacceptable” for countries that had little role in creating the climate crisis, said Syeda Rizwana Hasan, environment adviser of Bangladesh, one of the most climate-vulnerable countries.
Bangladesh has a per capita debt of US$80 arising from its climate-related loans, which make up a sizable share of its overall per capita external debt of US$604, said M Zakir Hossain Khan, chief executive of the Dhaka-based think tank Change Initiative.
Steep social costs
Wary of debt risks that can have steep social costs, countries may just opt not to pursue climate actions, Khan added.
When rich countries offer finance for energy transitions, there should be a careful mapping of how much grant funding is needed and which actions should be financed by investment or loans, said Sandeep Pai, research director at the Swaniti Initiative, a policy think tank.
Some climate actions can generate clear financial returns. For example, research by the International Finance Corporation in 2020 pointed to US$30 trillion of climate investment opportunity in emerging markets by 2030.
But investment to protect communities on the frontline may not present a clear business case, and it doesn’t make sense for those communities to take on more commercial debt for most climate projects, Pai said.
Signs of progress
Calls to address climate and debt issues have focused on institutions that channel climate finance mostly in the form of loans.
These include multilateral development banks that jointly provided US$74.7 billion of climate finance to developing countries in 2023 - only 6.7 per cent of which was in the form of grants, according to the World Resources Institute, a global nonprofit research group.
Activists are urging these institutions to offer more non-debt finance and take concrete steps towards providing debt relief, with some recent signs of progress.
“The world is slowly waking up to the ‘climate-debt nexus’ and testing solutions to reduce the debt burden, but the change is happening far too slowly”, said Sejal Patel, senior researcher at the International Institute for Environment and Development (IIED).
The Asian Development Bank (ADB), which calls itself “Asia and the Pacific’s Climate Bank”, has set up a fund to provide grants and soft loans to those most in need, such as small island developing states and least developed countries.
“Many adaptation projects are of a public goods nature and target the most vulnerable, and you need grant resources for them,” said Arghya Sinha Roy, the ADB’s senior climate change specialist.
This year, the ADB allocated US$430 million in additional support to the most vulnerable countries while making loans to small island states more concessional.
Debt-for-climate swaps
Beyond expanding the share of grants and making loans easier to obtain, global institutions are testing instruments such as debt-for-climate swaps, whereby a nation can write off part of its debt in return for taking measurable climate actions.
Barbados, for example, just completed a successful debt swap in which the Caribbean island state replaced a portion of its debt with financing from international institutions to invest in climate-resilient water and sewage projects.
Another helpful step could be offering climate-linked debt relief to debt-distressed nations such as pausing debt repayments when such countries are hit by disasters, Rehman suggested.
“We need to reimagine climate finance, so it doesn’t force countries to mortgage their future,” she said.
This story was published with permission from Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers humanitarian news, climate change, resilience, women’s rights, trafficking and property rights. Visit https://www.context.news/.
