Half of top ten countries most at risk from climate change already in or at high risk of entering debt distress

Five of the top ten countries most at risk from climate change-related disasters are either already in debt distress or at high risk of becoming so, according to analysis by IIED released as the World Bank and IMF hold their Spring Meetings this week.

Mozambique and Zimbabwe, listed as the two countries most affected by extreme weather events in 2019 in the latest global climate risk index, are both already unable to service their debts and so are considered to be in debt distress. Three others in the top ten – Malawi, Afghanistan and South Sudan – are at high risk of failing to fulfil their financial obligations.

In total, 38 low-income countries are currently either in debt distress or in danger of becoming so. Not only are many facing climate risks, including several small island states, some also rank highly for their biodiversity potential, hosting diverse species and habitats at risk of being lost.

Analysis by IIED has shown that linking debt relief to climate change and nature conservation outcomes could tackle what for many countries is a triple crisis.

Sejal Patel, an IIED researcher, said: “Given the economic chaos unleashed by soaring worldwide energy prices and uncertainty over food supplies as the conflict in Ukraine continues on the back of COVID-19, it’s likely that debt levels for many countries are going to keep rising, and quickly.

“We urgently need to respond to countries’ spiralling debts, and in the context of the global climate and nature emergencies, it makes sense to link debt relief to climate and nature outcomes. It could protect the lives and livelihoods of millions of people who are already suffering the effects of global warming but have done the least to cause it.”

While the World Bank and IMF promoted a debt service suspension initiative (DSSI) to free up countries’ financial resources to combat and recover from the COVID-19 pandemic, it only supported immediate relief on interest payments rather than the much-needed systematic initiatives to redesign debt financing to support post-COVID recovery.

Chad, Ethiopia and Zambia are the only countries going through a process of debt restructuring and relief under the G20’s Common Framework for debt treatment beyond the DSSI, suggesting limited potential for support being provided.

A Climate and Nature Debt Relief (CaNDR) initiative should involve all creditors with debt relief provided through the budget against clear ‘key performance indicators’ for climate and nature outcomes. These key performance indicators would be agreed between debtor and creditors including multilaterals, China and private investors.

Climate and nature programmes would need to vary by country but could include inclusive investments in renewable energy, climate-smart agriculture and labour-intensive soil and water programmes.

They would need to support inclusive growth to avoid further debt distress in the long term. These climate programmes also need strong national ownership and engagement with affected poor women and men.