How does a country deal with climate disasters when it is drowning in debt? Not very well, it turns out. Especially not when a global pandemic affects your economy.
Take Belize, Fiji, and Mozambique. They are very different countries, among dozens of nations at the intersection of two deepening global crises that are attracting the attention of international financial institutions: climate change and debt.
You owe astonishing amounts of money to various foreign lenders. They are also exposed to amazing climate risks. And now that the coronavirus pandemic is affecting their economies, there is growing recognition that their debt obligations stand in the way of the immediate needs of their people – not to mention the investments needed to protect them from climate catastrophes.
The combination of debt, climate change and environmental degradation “poses a systemic risk to the global economy that can trigger a cycle that depresses revenues, increases spending and exacerbates vulnerability to climate and nature,” according to a new assessment by World Bank International Monetary Fund and others seen by The Times. It comes after months of pressure from academics and lender advocates to address this issue.
The bank and the IMF, whose top officials are meeting this week, are planning talks with debtor countries, creditors, lawyers and rating agencies over the next few months to find out how new money can be made available for what is known as a green economic recovery. The aim is to come up with concrete proposals before the international climate negotiations in November and ultimately get the richest countries in the world, including China, the world’s largest single creditor, to participate.
IMF executive director Kristalina Georgieva said in an email that green recovery programs have the potential to fuel ambitious climate action in developing countries, “especially at a time when the impact of the pandemic on their economies is facing fiscal constraints are faced. ”
One of the countries at the crossroads between climate and debt crises is Belize, a middle-income country on the Caribbean coast of Central America. Foreign debt had risen steadily over the past few years. Some of the most acute effects of climate change were also felt: sea level rise, bleached coral, coastal erosion. The pandemic dried up tourism, a mainstay of its economy. Then, after two hurricanes, Eta and Iota, hit neighboring Guatemala, flooding swept away farms and roads downstream in Belize.
Today, the debt that Belize owes its overseas creditors is 85 percent of its total economy. The private rating agency Standard & Poor’s has downgraded its credit rating, making it harder to get credit in the private market. The International Monetary Fund calls its debt “unsustainable”.
Belize said Christopher Coye, the country’s minister of state for finance, needs immediate debt relief to deal with the impact of global warming, which it has barely played.
“How do we pursue climate protection measures?” he said. “We are tax restricted at this point.”
“We should be compensated for suffering the excesses of others and supported in mitigating and adapting to the effects of climate change – certainly in the form of debt relief and concession financing,” Coye said.
Many Caribbean countries, such as Belize, are not eligible for the low interest loans that poorer countries qualify for.
The United Nations said Thursday that the global economic collapse jeopardized nearly $ 600 billion in debt service payments over the next five years. Both the World Bank and the International Monetary Fund are important lenders, but also rich countries, as well as private banks and bondholders. The global financial system would face a major problem if countries with shrinking economies defaulted
“We cannot get into a predictable and avoidable debt crisis with open eyes,” United Nations Secretary-General António Guterres said last week when he called for debt relief for a wide range of countries. “Many developing countries face funding shortages that mean they cannot invest in recovery and resilience.”
In a climate change implementing regulation, the Biden government said it would use its voice in international financial institutions such as the World Bank to align debt relief with the goals of the Paris Agreement, although it has not yet set out exactly what that means.
Debate and climate debates are likely to intensify ahead of the November climate negotiations, where money is likely to be one of the main issues. The rich nations are nowhere near able to deliver the $ 100 billion a year promised to help poorer countries cope with the effects of global warming. Low- and middle-income countries alone owed $ 8.1 trillion to foreign lenders in 2019, the most recent year for which the data is available – and that was before the pandemic.
At that time, half of all countries classified as low income by the World Bank were either in a so-called “debt crisis” or at high risk. Many of them are also acutely vulnerable to climate change, including more frequent droughts, stronger hurricanes, and rising sea levels washing away the coasts.
(The fund said Monday that 28 of the world’s poorest countries would not have to make debt payments by October in order for their governments to use the money on instant-handling chemistry relief.)
There have been a myriad of suggestions recently from economists, lawyers, and others to address the problem. The details vary. But all, in one way or another, are calling for rich countries and private creditors to offer debt relief so that countries can use those funds to move away from fossil fuels, adapt to the effects of climate change, or receive a financial reward for natural assets that they already protect, such as forests and wetlands. A widespread proposal calls for the 20-strong group (the world’s 20 largest economies) to require lenders to offer relief “in return for an obligation to use part of the newly won tax space for environmentally friendly and inclusive recreation” .
Across the world, from Belize, the low-lying Pacific island nation of Fiji has seen a series of storms in recent years that have resulted in destruction and the need to borrow money for reconstruction. The pandemic brought about an economic downturn. In December, tropical cyclone Yasa destroyed homes and crops. Fiji’s debts rose, including to China, and the country, whose existence is threatened by rising sea levels, cut back planned climate projects, according to research by the World Resources Institute.
The authors proposed a so-called climate-health debt swap, in which bilateral creditors, namely China, would cancel part of the debt in exchange for climate and health investments. (China has not publicly said anything about the idea of debt swaps.)
And then there is Mozambique. The sixth poorest country in the world.
It was already submerged in enormous debt, including secret loans that the government did not reveal when successive cyclones hit in 2019. They killed 1,000 people and left more than $ 870 million in physical damage. Mozambique raised more loans to deal with it. Then came the pandemic. The IMF says the country is in debt.
Six countries on the continent are in a debt crisis, and many more countries have had their credit ratings downgraded by private rating agencies. In March, finance ministers from across Africa said that many of their countries had already spent a significant portion of their budgets on extreme weather events such as droughts and floods, and that some countries were spending a tenth of their budgets on adaptation efforts. “Our tax buffers are really exhausted now,” they wrote.
In developing countries, the share of government revenue used to pay foreign debts almost tripled to 17.4 percent between 2011 and 2020. This was the result of an analysis by Eurodad, an advocacy group for debt relief.
Research suggests that climate risks have already made it more expensive for developing countries to borrow. The problem is likely to get worse. A recently published paper found that climate change will increase borrowing costs for many more countries as early as 2030 unless efforts are made to significantly reduce greenhouse gas emissions.