Tuesday

16th Apr 2024

Debt crisis undermines climate action in the Global South, report finds

  • Drought is a growing problem, but many countries lack the means to cushion the impact of global warming (Photo: Caritas Africa/Zambia)
Listen to article

Even as investment in, and the deployment of, clean energy, electric vehicles and electric heating in wealthy nations are beating the International Energy Agency's expectations by a large margin, a large proportion of the world is at risk of falling behind due to an escalating debt burden.

The UN estimates that developing and emerging economies (a group of 100 countries excluding China) need annual investments worth €900bn "now or never".

Read and decide

Join EUobserver today

Get the EU news that really matters

Instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

But precisely at this moment, a debt crisis is emerging in the Global South. According to recent World Bank estimates, 61 developing countries — representing 40 percent of the world economy — face debt distress.

In a report published on Tuesday (2 May), a group of researchers have collected evidence showing that without significant debt relief, many developing countries will not be able to invest in a green future, risking another "lost decade" for those countries.

According to the Debt Relief for Green and Inclusive Recovery Project (DRGR), — a collaboration between multiple universities, including the Boston University Global Development Policy Center — external debt levels and service payments have more than doubled since the 2008 global financial crisis.

Between 2008 and 2021, developing and emerging economies' sovereign debt increased by 178 percent, from €1.3 trillion to €3.5 trillion. In Pakistan and Egypt, 50 percent of the annual revenue goes to foreign creditors. After debt servicing, Nigeria was left with only 4 percent of its budget last year, according to the World Bank.

Many countries suffering debt distress are also most acutely confronted with the destructive effects of climate change. Following the worst flood in its history, Pakistan now faces reconstruction costs estimated at €30bn — costs exceeding the country's annual budget.

Looking at the big picture, the DRGR researchers find that the 61 countries at high risk of debt distress will need at least €735bn of their arrears restructured—jargon for written off— to achieve "sustainable levels" of debt.

It is a response to efforts already underway that have not reached meaningful results. Crucially, the Group of 20 wealthy countries initiated debt relief reform following the Covid-19 pandemic — the so-called "common framework."

This was supposed to offer clarity to all creditors and debtors and speed up the debt relief process. But it has become clear the effort has failed due to a limited buy-in from creditors and because middle-income countries were excluded.

The DRGR proposal suggests rapid reform could be made around three pillars.

Three pillars

First, public and multilateral creditors like the World Bank, the African Development Bank and the International Monetary Fund (IMF) should agree to reduce debt by up to €212bn — a sum these institutions have so far not been willing to accept.

Secondly, private and commercial creditors — a group that includes US asset giants Blackrock and Vanguard and many other institutional investors like pension funds and insurers —should restructure up to €257bn.

Additionally, up to €55bn is needed to fund newly issued 'green and inclusive recovery' bonds that private and commercial creditors can swap against old debt at a significantly lower interest rate. Finally, for those countries not in immediate debt distress but lacking the money to invest in the green transition, international financial institutions should help lower the cost of capital.

Debt relief alone "is not a panacea," the authors write but should be part of a package of measures that increases access to cheap finance, for example, by funnelling €500bn in unused IMF reserves towards developing countries. However, this would require 85 percent of the voting power of the IMF board of governors.

Climate frontline

Although politically not yet within reach, the proposal has already been endorsed by the Group of Vulnerable 20 finance ministers, representing 58 finance ministries, indicating significant support across the Global South.

Implementation would especially help the countries on the climate frontline, as the authors find a correlation between debt distress and vulnerability to environmental destruction.

Climate risks increase the cost of capital paid by climate-vulnerable developing countries, which in turn deepens both the debt problems and hampers the ability to adapt and prevent environmental destruction.

Cash-strapped Pakistan suffered a flood last year and is now dealing with a devastating drought. Argentine farmers face losses of €18bn following the worst drought in 60 years. By 2050 drought losses could account for 4 percent of Argentina's GDP, the World Bank recently reported.

If debt problems are not addressed, these countries could sink ever deeper into a downward spiral of financial and environmental distress. The authors explain debt relief can free up the space necessary to achieve sustainable development and climate goals.

The next significant global financial negotiation meeting will occur at the New Global Financial Pact Summit in Paris on 22-23 June.

Analysis

EU in whirlwind of Africa diplomacy. Did it work?

EU Commission president Ursula von der Leyen and Senegalese president Macky Sall unveiled a €150bn plan investment plan for Africa, but in some quarters, Europe's charm offensive is not going well.

Kenya hosts first-ever Africa Climate Summit

Kenyan president William Ruto launched the inaugural Africa Climate Summit in Nairobi and showcased the continent's potential as a clean energy powerhouse. Africa contains 60 percent of the world's solar potential, massive geothermal capacity and CO2-absorbing tropical forests.

Global North-South inequality — can the EU do anything?

Inequalities between the Global North and the South are growing, exacerbated by food insecurity, climate change, Covid-19 and the war in Ukraine. What has been the EU's response — and what are the prospects?

Column

What do we actually mean by EU 'competitiveness'?

Enrico Letta and Mario Draghi are coming up with reports on the EU's single market and competitiveness — but although 'competitiveness' has become a buzzword, there's no consensus on a definition for what it actually means.

Latest News

  1. EU leaders mull ways to arrest bloc's economic decline
  2. Police ordered to end far-right 'Nat-Con' Brussels conference
  3. How Hungary's teachers are taking on Viktor Orban
  4. What do we actually mean by EU 'competitiveness'?
  5. New EU envoy Markus Pieper quits before taking up post
  6. EU puts Sudan war and famine-risk back in spotlight
  7. EU to blacklist Israeli settlers, after new sanctions on Hamas
  8. Private fears of fairtrade activist for EU election campaign

Stakeholders' Highlights

  1. Nordic Council of MinistersJoin the Nordic Food Systems Takeover at COP28
  2. Nordic Council of MinistersHow women and men are affected differently by climate policy
  3. Nordic Council of MinistersArtist Jessie Kleemann at Nordic pavilion during UN climate summit COP28
  4. Nordic Council of MinistersCOP28: Gathering Nordic and global experts to put food and health on the agenda
  5. Friedrich Naumann FoundationPoems of Liberty – Call for Submission “Human Rights in Inhume War”: 250€ honorary fee for selected poems
  6. World BankWorld Bank report: How to create a future where the rewards of technology benefit all levels of society?

Stakeholders' Highlights

  1. Georgia Ministry of Foreign AffairsThis autumn Europalia arts festival is all about GEORGIA!
  2. UNOPSFostering health system resilience in fragile and conflict-affected countries
  3. European Citizen's InitiativeThe European Commission launches the ‘ImagineEU’ competition for secondary school students in the EU.
  4. Nordic Council of MinistersThe Nordic Region is stepping up its efforts to reduce food waste
  5. UNOPSUNOPS begins works under EU-funded project to repair schools in Ukraine
  6. Georgia Ministry of Foreign AffairsGeorgia effectively prevents sanctions evasion against Russia – confirm EU, UK, USA

Join EUobserver

EU news that matters

Join us