Urgent Action Required: why rich countries must address debt to combat the climate emergency
Following the G7 summit and the Bonn climate talks, groups around the world are calling for debt justice as a vital step for addressing the climate crisis.
Here’s why this is important, and what rich countries can do about it.
Addressing the debt crisis is vital for climate action
Debt payments for the most climate vulnerable countries are at their highest level in at least 30 years. To keep up with debt payments to external creditors, many countries have been forced to cut public spending on essential services like health, education, and climate action. In fact, global south countries are spending five times more on debt payments than they are on addressing the impacts of the climate crisis.
Even when extreme climate events take place, like hurricanes and droughts, countries must keep meeting debt payments. Take Dominica for example. In 2017, the Caribbean Island was hit by Hurricane Maria causing $2bn worth of damage. Yet, just days after Hurricane Maria struck, the government had to find several million dollars for a debt repayment that fell due. What’s more, due to the lack of climate finance from rich countries, the Dominican government took on new loans to finance reconstruction. This led to a sharp increase in the country’s debt levels, rising from 69% of GDP in 2015 to almost 100% by 2019.
And it’s not just draining resources where the debt crisis is hindering climate action. Many Global South countries are turning to their natural resources, including fossil fuels, to generate the resources they need to meet external debt payments – often encouraged and enforced by the IMF and World Bank.
Proposals to address the debt crisis
Encouragingly, there has been growing recognition of the links between the debt and climate crises, and several proposals have emerged that aim to address this interconnection. However, many proposals fail to deliver for global south countries and risk distracting attention from the deep changes required.
For example, debt-for-climate and nature swaps have gained a lot of traction in recent years with key actors like the IADB and the US promoting them. But, while they promise to reduce debt levels and free up resources at a national level for climate or nature goals, recent experiences show that swaps deliver neither to a meaningful degree. Furthermore, they present multiple risks, such as being slow processes and lacking democratic participation.
We also have debt pause clauses – added to loans to allow a country to temporarily suspend debt payments in the event of a climate extreme event. These have also been gaining bandwidth with some lenders exploring their use, such as UK Export Finance and the World Bank. While these clauses could be useful for future crises (if they are implemented properly), they do nothing to address the mounting debt crisis global south countries are facing right now. And suspended payments still have to be paid in the future, with interest.
Instead of false solutions, groups across the world are demanding urgent debt cancellation to free up resources for people’s needs, including the climate crisis. While the G20 has established a structure that should be helping achieve this, it is deeply inadequate and has failed to offer relief to countries that have applied.
G20 failure to ensure meaningful debt relief
In 2020, the G20 established the Common Framework – a mechanism to assist countries seeking debt relief from bilateral and private external creditors. Four years later and only four countries have applied – Chad, Ethiopia, Zambia and Ghana – none of which have achieved any meaningful debt relief.
A significant reason for this is the lack of a robust mechanism to compel private creditors to participate. Under the rules of the Common Framework, a country can only secure a debt restructuring if it gets a deal from both bilateral and private creditors that is comparable. But despite calls from the World Bank, IMF and G20 for private creditors to participate, there is nothing compelling them to do so. As a result, they can stall, delay and seek maximum profit in debt negotiations.
Meanwhile, countries are trapped in a debt crisis with people and communities experiencing the harms. In Ghana for example, the price for essentials such as water, electricity and health care have increased significantly. While in Zambia, activists are reporting how the debt crisis means there are inadequate resources to respond to the climate emergency, including the impacts of the current drought or the devastating floods last year.
The vital role of the UK
The UK has a vital role to play in addressing this. Over 90% of lower-income country external debt payments to private creditors are governed under English law. The UK has a critical opportunity and responsibility to act.
It can do this by introducing a new debt justice law which would ensure private creditors take part in debt relief. This could be done by replicating a UK 2010 law, which required private lenders to participate in a previous debt relief initiative, on the same terms as other lenders.
The other key jurisdiction for governing external loan contracts with private creditors is New York, and similar efforts are underway there too.
Debt cancellation is urgent – global south countries need to free up resources to respond to multiple crises, including the climate crisis. The UK has an important role to play in making this happen.
2024 is also a critical year for climate finance, as a new post-2025 climate finance goal will be agreed at COP29. Debt cancellation must go alongside, but not replace, rich countries providing adequate, grant based climate finance as a form of reparation for their role in creating the climate crisis. Without this, global south countries will continue to be forced further into debt for a crisis they did not create.
Find out more about debt demands for climate action in our new joint briefing here, and about the new debt justice law here. Take action to support the new debt justice law.