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22nd Feb 2024

Wealthy countries slammed for failing to address debt crisis

  • World Bank president Ajay Banga (left) speaking at the Paris summit with prime minister of Ethiopia Abiy Ahmed (Photo: New Global Financing PactN)
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The World Bank and other multilateral development banks are set to find $200bn [€183bn] in extra financing for developing countries by taking on more risk, which is expected to require increased funding from wealthy countries, world leaders announced in Paris on Friday (23 June).

Over 40 heads of state and government had gathered in Paris to agree on a new pact to increase climate financing for the developing world.

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The final summit draft text called for the doubling of available public finance by leveraging private finance, which French president Emmanuel Macron said could mean an additional $100bn of capital for developing countries

The World Bank also announced including so-called environmental clauses in new debt, allowing countries faced with an environmental catastrophe to pause debt repayments for two years. "I am very proud to announce a new debt pause option, and it was made possible by you, the stakeholders of the bank,," World Bank president Ajay Banga told the audience in Paris.

Many leaders in attendance, however warned deeper transformation of the World Bank and the International Monetary Fund was needed. "Global problems like the climate crisis show us that we simply can't address modern issues with institutions, which were created for a very different world nearly 80 years ago," said Barbados prime minister Mia Amor Mottley ahead of the summit.

And civil society organisations were also critical of the results.

"The sad fact is that this summit has not delivered anything new and has not led to a global pact," said Iolanda Fresnillo, policy and advocacy manager at the European Network on Debt and Development (Eurodad), who attended the summit. "It was full of 'announcements' that amounted to a push for the further financialisation of development and climate action, and that do next to nothing for the current debt crisis."

Low-income countries have to raise €2.5 trillion in the next five years just to pay off creditors. Some 30 percent of the annual revenue of Zambia goes to creditors, for instance. Nigeria also paid 96 percent of its total 2022 income to foreign creditors.

The chronic lack of money amplifies the destructive effects of climate change as little is spent to protect against flash floods, droughts or other consequences, forcing them to borrow even more when a crisis hits.

At the summit, following over two years of negotiations, Zambia reached a landmark deal on Thursday to restructure $6.3bn [€5.8bn] in debt, most of it owed to China.

But according to World Bank figures 60 percent of the developing world — representing 40 percent of global GDP — is at risk of defaulting on loans. The world currently lacks a system to deal with debt relief, and no significant new announcements have been made to solve global debt problems.

"Unless the discussions on international financial architecture reform include the need for a new multilateral debt resolution framework we cannot take them seriously," said Fresnillo.

Leaders will next meet in Nairobi in September to discuss debt and financial reform. "Global North leaders need to act," said Laurence Tubiana, CEO of the European Climate Foundation, adding that ideas now need to be turned into " an action plan with concrete steps."

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