Climate spending may push nations to debt crisis

Emerging countries are facing a record external debt service of $400 billion this year as they allocate the necessary funds for climate change adaptation and sustainable development, according to a report by Boston University’s Debt Relief for Green and Inclusive Recovery Project (DRGR) cited by Reuters on Monday.

The report cautioned that 47 of these countries risk defaulting within the next five years if they invest in climate adaptation and sustainable development to meet the 2030 Agenda and Paris Agreement goals.

In addition, 19 other developing countries lack the necessary liquidity to meet these spending targets without assistance, although they are not at immediate risk of default. The report called for a global financial overhaul, debt forgiveness for the most vulnerable countries, and an increase in affordable finance and credit enhancements.

The DRGR is advocating for the IMF to modify its debt sustainability assessments, which are crucial in deciding the quantum of debt relief for countries in default.

DRGR’s report further warned that if the IMF overestimates a country’s debt capacity, it could burden the nation with unmanageable repayments, potentially leading to another default. The DRGR suggests that the IMF’s review process should consider climate spending needs and the capacity to withstand various shocks, from climate crises to pandemics.

The report concludes with a stark warning: without swift and uniform action from the international community to provide comprehensive debt relief and new liquidity, the costs of inaction will be severe.