Poorer nations call for urgent debt reforms over climate crisis

Rescued flood victims sit in a boat, following rains and floods during the monsoon season in village Arazi, in Pakistan, on Sept 11, 2022. PHOTO: REUTERS

Dozens of nations most threatened by climate change are calling for urgent debt restructuring and other reforms, saying debt servicing payments are crippling their ability to respond to climate change just as the impacts are getting worse.

The Vulnerable Twenty (V20) group representing 58 members have at least US$435 billion (S$620 billion) of debt servicing payments due in four years, at a time when new investments are severely needed, finance ministers from the group said in a communique on Sunday.

“The effects of climate change are far reaching in terms of capital cost, inflation, debt ratings and other economic and financial terms,” the communique said.

It was released in Washington on the same day the World Bank and the International Monetary Fund concluded their annual meetings.

The issues of climate finance and debt will be central at next month’s COP27 United Nations climate conference in Egypt. Poorer nations need finance to pay for clean energy investments that will also cut greenhouse gas emissions. They also need cash for projects to adapt to climate impacts, such as sea walls, better drainage, cooling centres and better insulated buildings.

Critically, they need financing to recover from severe weather-related events, such as Pakistan’s record floods. The heavily indebted nation urgently needs US$16 billion to recover from the disaster, its Finance Minister said last week.

Wealthy nations, which are most responsible for the carbon dioxide emissions driving climate change, are under increasing pressure to compensate poor countries.

The problem is that debt repayments currently far outweigh climate financing. For instance, small developing island states, which are heavily exposed to the effects of climate change, spend at least 18 times more on debt servicing than they receive in climate finance, a report by the European Network on Debt and Development said earlier this month.

The V20 group said the combination of high debt servicing costs and climate change represents a systemic risk to climate-vulnerable economies. This can trigger a vicious cycle that depresses revenues and exchange rates, while increasing inflation and the cost of capital, including for investments to respond to climate shocks themselves.

“Climate change has already eliminated one-fifth of our wealth – in other words, V20 economies would be 20 per cent wealthier today had we not been suffering the daily toll of climate loss and damage. In aggregate dollar terms, this is half a trillion in losses,” said Mr Mohamed Nasheed, former president of the Maldives.

V20 nations also include Bangladesh, Cambodia, Nepal, the Philippines and Vietnam, as well as nations in Africa, the Caribbean and the Pacific.

In an interview with The New York Times, Mr Nasheed said poor nations faced a Sisyphean task: They borrow money to ward off rising seas and storms – only to see disasters made worse by climate change destroy the improvements they make.

If debts owed by countries were shaved by 30 per cent and that money was invested in projects such as improving water systems or preserving mangrove forests that protect shorelines from hurricanes, “it would have a huge impact”, Mr Nasheed said.

According to the World Bank, 58 per cent of the world’s poorest countries are at risk or are in “debt distress”.

Earlier this month, the International Monetary Fund (IMF) said its Resilience and Sustainability Trust is now operational. This is a financing instrument to help countries deal with climate change, pandemics and other longer-term issues, IMF managing director Kristalina Georgieva said.

Dr Georgieva said the long-term fund was ready to start lending to low-income and most middle-income countries, after receiving initial pledges of US$37 billion.

She said members could start applying for the funds, which will offer 20-year maturities and a 10½-year grace period. It allows richer IMF members to channel their special drawing rights, or emergency reserves, to help vulnerable countries tackle key issues.

Join ST's Telegram channel and get the latest breaking news delivered to you.