Press Release Climate Change Economic Crisis and Recovery Global Debt Crisis IMF World

Most Low- and Middle-Income Countries Are Unable to Adequately Respond to Climate Crisis Due to Debt Burdens, New Report Finds

October 12, 2023

Contact: Kelsey Moore, 862-324-1213Mail_Outline

“More Ambitious Response” Is Needed from International Financial Institutions, International Community, Report Warns

Washington, DC — A new report from the Center for Economic and Policy Research shows how mounting external debt is hampering low- and middle-income countries’ ability to respond to the climate crisis, even as climate-related disasters increasingly affect these same countries. The report warns that this is leading to a “vicious cycle” of more debt and ongoing vulnerability to climate change that prevents these nations from progressing toward the United Nations Sustainable Development Goals (SDGs).

The report, “The Growing Debt Burdens of Global South Countries: Standing in the Way of Climate and Development Goals,” by Ivana Vasic-Lalovic, Lara Merling, and Aileen Wu, examines what many economists and experts see as a looming external “debt crisis,” and how these countries’ inability to reduce their debt burdens is limiting their capacity to respond to other crises, including the climate crisis.

“Most of the world is going through what many have termed a ‘polycrisis,’ facing down high levels of external debt, combined with interlocking crises of food insecurity, fluctuating energy prices, impacts of war, and of course, the climate crisis,” report coauthor Ivana Vasic Lalovic said. “Countries are limited in what they can do to respond to the climate crisis, though, when they are forced to divert so much of their resources toward servicing their debts.”

“The response so far from the international financial community has been inadequate to help countries break this vicious cycle,” the report states. “A more ambitious response — combining an updating of debt resolution frameworks, debt relief, more grant-based finance, and a new allocation of Special Drawing Rights (SDRs) — is urgently needed.”

The report notes that low- and middle-income countries’ external debt stock has doubled since 2010, and currently stands at over $3 trillion, of which almost 60 percent is held by private creditors. Additionally, there are almost 80 countries that international financial institutions consider to be in, or at risk of, debt distress. “But debt from private creditors comes with high interest rates, short maturities, and is difficult to restructure,” the report notes.

Most – three-quarters – of these countries are also “highly climate vulnerable,” the report states. “These countries face the least responsibility for the climate crisis but are facing the greatest burdens in terms of the impacts of climate disasters.”

Interest payments on external public debt are limiting countries’ ability to spend on pressing needs, including climate response and climate change mitigation. Interest payments have “gone up sharply since 2010” relative to low- and middle-income countries’ export revenue. “This year, total debt service is estimated to exceed non-climate-related SDG investment needs for over 100 countries around the globe,” the report finds. “The inability to finance non-climate SDGs has direct human costs and also has an adverse impact on climate resilience, as stronger health, food, and other social systems are needed to withstand the effects of climate disasters.”

For countries to exit this vicious cycle, the authors recommend that debt resolution frameworks be updated, and that there be “rapid and fair debt treatment across all creditor classes” – which may require legislation to compel private investors to follow the same terms for debt restructuring as public sector creditors.

The authors also call for debt relief “from all creditors” and more grant-based financing for lower-income countries’ climate response from rich countries, which are, after all, mostly responsible for the climate crisis. They also urge a major new Special Drawing Rights allocation from the International Monetary Fund “as a quick way to give climate-vulnerable and debt-constrained countries more fiscal breathing room.”

“The international finance community needs to accept that the current dynamic, which prioritizes debt service – no matter how burdensome – over human needs and the urgency of climate crisis preparedness and response is unsustainable,” coauthor Lara Merling said. “They need to step forward with solutions. Millions of lives may depend on it.”


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