Washington, DC — A new report from the Center for Economic and Policy Research (CEPR) shows how external debt challenges affecting almost 80 countries continue to hamper global efforts to address the climate crisis. Due to factors such as interest rate hikes and escalating debt servicing costs, nations are compelled to prioritize debt service over crucial investments in climate resilience and disaster preparation. This perpetuates a cycle of vulnerability, leaving countries ill-equipped to withstand climate-related disasters.
“The burden of debt servicing and limited options for relief prevent many developing countries from being able to prioritize urgent climate and development needs,” report coauthor Ivana Vasic-Lalovic said. “This vicious cycle delays resilience investments, heightens vulnerability to climate impacts, and perpetuates indebtedness, leaving countries ill-prepared for future disasters.”
The report, “The Rising Cost of Debt: An Obstacle to Achieving Climate and Development Goals,” by Lara Merling, Ivana Vasic-Lalovic, and Lorena Valle Cuéllar of CEPR, and Angelica Huerta Ojeda of the Intergovernmental group of Twenty-Four on International Monetary Affairs and Development (G-24), reflects on solutions to break this cycle, including a comprehensive sovereign debt restructuring mechanism, new sustainable sources of financing, and a major new allocation of Special Drawing Rights (SDRs). It provides updated data on external debt and debt servicing in the developing world featured in CEPR’s October 2023 report, “The Growing Debt Burdens of Global South Countries: Standing in the Way of Climate and Development Goals.”
The report notes: “Since 2010, the external debt stock for 118 low- and middle-income countries (LMICs), excluding China, more than doubled in nominal terms, from $1.5 trillion in 2010 to $3.1 trillion in 2022,” and “increased from approximately 11 percent of GDP in 2010 to approximately 15 percent of GDP in 2022.” Currently, “external public debt service … represents, on average, 10 percent of export revenue for low-income countries, and it exceeds 6 and 7 percent of export revenue in middle-income and [G-24] member countries.”
As this external public debt is in US dollars and is owed to foreign creditors, it is challenging to restructure or to manage domestically. Consequently, scarce foreign currency resources are often directed toward debt repayment instead of climate resilience or other development priorities. As a result, external public debt service is likely to exceed spending toward non-climate-related Sustainable Development Goals in 92 low- and middle- income countries.
The report notes that most finance provided by wealthy countries responsible for the climate crisis has come in the form of additional loans. As a result, “over the last decade, the share of the external debt of developing countries as a percentage of governments’ borrowing increased from 17 percent to 25 percent,” making them “more vulnerable to external shocks and currency fluctuations.”
In this uncertain global context, countries can be expected to increase their reliance on multilateral creditors. The report also notes that the IMF penalizes its most indebted middle-income borrowers with additional, unnecessary fees, known as surcharges, that worsen the cycle.
“The IMF’s surcharge policy significantly increases debt service for heavily indebted countries and diverts scarce resources away from climate change response and urgent human needs,” Vasic-Lalovic said. “Over the next five years, 22 countries will spend some $10 billion on surcharges alone, in addition to their regular interest payments to the Fund.”
The report notes that initiatives intended to address the climate crisis, such as debt-for-nature swaps and the IMF’s Resilience and Sustainability Trust (RST) fall short. The RST converts rich countries’ SDRs into 20-year loans with conditions attached, and focuses on attracting private finance through reforms rather than direct climate investments. The authors note that the “RST would provide $73 billion in financing if all eligible countries, excluding China, would seek a program,” whereas those countries would get $209 billion worth of condition-free funds from a new SDR allocation, which they would not need to pay back.
Rather than perpetuating the “debt trap” that the World Bank warns 28 nations are already in, the report recommends pathways for relief, including a sovereign debt resolution mechanism; the end of IMF surcharges; and a major new allocation of SDRs, similar to or greater than the $650 billion worth amount issued in 2021.
“Coordinated action is urgently needed to ensure no country is forced to choose between repaying creditors and investing in health care, education, social protection, and climate resilience,” the report states.
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