Do Disasters or Climate Change Lead Adapting Countries to Debt Crisis? (All India Disaster Mitigation Institute)
The countries that are the most vulnerable to climate change and natural disasters are also some of the poorest and most heavily indebted countries in the world. It is therefore problematic that more than half of all climate finance is given through loans, as this could lead to unsustainable debt levels for some countries or deter them from implementing the necessary climate measures, as they cannot take up more loans. It is also problematic that countries hit by disasters have to service debt rather than focus on reconstruction, as this can further exacerbate their debt situation, due to diminishing income and the need for new loans.
The International Monetary Fund (IMF) reports that 31 of 67 low-income countries are now either in, or in high risk of experiencing, a debt crisis. Many of these countries also face great challenges with a changing climate, and some are in debt distress because of natural disasters that have caused enormous damage both to the physical and financial environment.
Several examples of countries that are caught in a vicious cycle of hurricanes, rebuilding and debt servicing can be found among Caribbean island states. After hurricane Irma, Barbuda lost about 90 per cent of its structures and the price tag for the reconstruction was estimated at $150 million. With a standing debt of almost $16 million to the IMF, Barbuda faced a difficult situation in having to service debt instead of rebuilding houses for the 1600 new homeless on the island. Instead of stopping to collect the repayments due – providing a so-called moratorium, the IMF stated that they would rather lend more money to the island. This further increased the debt burdens and inhibited a quick recovery from the disaster for Barbuda.
In other countries, climate change is altering the natural environment and affecting the livelihoods and sources of income for people and states. Over time, this can make it difficult to fulfill debt payment obligations and it may increase the price of the debt as it becomes increasingly risky to invest or provide loans to these countries. Indeed, a new report commissioned by the UN finds that increased risk from vulnerability to climate change is increasing the cost of capital and is projected to cause an additional $168 billion of debt payments over the next ten years among the most climate change vulnerable countries. The same report finds that borrowing for climate finance becomes more expensive over time if action is not taken quickly because the increased risk of investments from climate vulnerability causes debt repayments to increase over time, due to the aforementioned risk linked to interest rate levels.
Furthermore, both adapting to these changes and implementing mitigation measures to cut emissions and prevent further climate change are extremely costly activities. The Paris Agreement states that developed countries should contribute to providing the funds needed for mitigation and adaptation. Yet, many of today’s financing models impose a great payment burden on developing and emerging economies who experience the threat of climate change as they need to finance mitigation and adaption through loans. This, in turn, could jeopardize reaching the climate goals, as a debt crisis will require a public spending cut, and climate projects may very well be the first on the list to go.
We can thus see that disasters or climate change may be causes for debt crises for a number of different countries, and this is something that needs to be taken into account when we work towards the Sustainable Development Goals and climate goals. It is of the utmost importance that a moratorium comes into place when countries are hit by disasters, and that debt sustainability is considered when providing other types of climate finance. The latter should be given as grants to those most vulnerable in order to avoid a double disaster; both environmental and financial.