Winds of up to 240 kilometres per hour flattened entire neighbourhoods and toppled power and communication lines, causing damage equivalent to a third of the country’s annual economic output, according to early government estimates.

Many Grenadians cast their minds back 20 years when a similarly powerful storm – Hurricane Ivan – brought the island state to its knees, triggering a vicious circle of financial distress that eventually led to a debt default.

But, unlike in 2004, officials this time could deploy a tool that has been widely discussed in climate circles to provide financial help in the wake of fierce storms: hurricane clauses built into its agreements with international creditors.

Grenada last week became the first country in the world to use such a provision in a government bond which will allow it to postpone debt repayments to private investors, including US investment firms Franklin Templeton and T. Rowe Price.

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The move will save the Caribbean island nation a total of around $30 million in payments due this November and in May next year. While the money owed will be added to future bills, in the meantime the cash injection will help fund immediate recovery efforts and keep essential services like healthcare and education running, a senior official in Grenada’s Ministry of Finance told Climate Home.

The government is now “in talks” about triggering similar clauses with other creditors.

Fighting the debt trap

Grenada’s use of debt suspension clauses will be seen as a litmus test for their effectiveness in shoring up disaster-hit economies, as major international financial institutions like the World Bank promise to offer them more widely to climate-vulnerable countries.

Mike Sylvester, permanent secretary at Grenada’s Ministry of Finance, told Climate Home the debt repayment pause can have a “significant” impact in the short term, giving “some breathing space to the government to be able to properly and adequately respond to the crisis”.

Without this option and other relief measures, the government may have struggled to meet basic needs without making painful cuts to services, he added.

Simon Stiell, the head of the UN Climate Change body (UNFCCC), told Climate Home that “mechanisms such as this will be increasingly important as the scale, frequency and impacts of climate disasters continue to worsen”. Last month Stiell saw first hand the scale the devastation Hurricane Beryl inflicted on his home island of Carriacou – part of Grenada – where 98% of homes and buildings had been destroyed or severely damaged.

Like Grenada, many developing nations are finding it hard to deal with the combined effect of rising debt and worsening climate impacts.

Nearly half of low-income countries currently experiencing or at high risk of debt distress are also highly vulnerable to the effects of climate change, according to a March 2023 report by the UN Trade and Development agency (UNCTAD).

A separate analysis by charity Debt Justice found that debt payments for the most climate-vulnerable countries have reached their highest level in at least 30 years.

Emily Wilkinson, a senior research fellow at think-tank ODI, said that when a natural disaster hits a highly debt-distressed country, the impact on the economy is likely to prompt a default unless there are safeguards in place or the debt can be renegotiated quickly.

Disaster clauses in spotlight

Debt suspension clauses have risen to the top of the agenda since they were featured among the key recommendations put forward by Barbados Prime Minister Mia Mottley in her Bridgetown Agenda, a vision for reforming the global financial architecture and making it fit for a world grappling with rising climate pressures.

The World Bank expanded the scope of its climate-resilient debt clauses last year. Pauses on repayments of all new and existing loans, and related interest payments, are now being offered to 45 states it classes as “small” including island nations.

Other international development lenders, like the African Development Bank, the Inter American Development Bank and the UK Export Finance, have introduced similar options.

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For Marina Zucker-Marques, an economist and senior researcher with the Boston University Global Development Policy Center, temporary debt suspensions are an important tool that gives disaster-hit countries “some breathing space, allowing them to prioritise social spending, which is critical in the immediate aftermath of a natural disaster”.

But while these clauses have become more popular, they are still “a tiny fraction of debt contracts,” she added.

The lesson of 2004

Grenada is among a handful of countries that have pioneered the inclusion of hurricane clauses in their loan agreements dating back nearly a decade.

After the devastating experience of Hurricane Ivan in 2004 and a subsequent default, the island nation insisted on including such provisions in 2015 when it restructured debt with its main creditors, international private bondholders and the Exim Bank of the Republic of China (Taiwan).

One of the main challenges during the extended negotiations was to settle on specific parameters that would allow Grenada to trigger the clause in the event of a severe storm. These could be the wind-speed or the size of the economic losses caused by the disaster.

In the end, Grenada and its creditors agreed that a payout from the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a regional disaster insurance fund Grenada is part of, for losses over $15 million would be the trigger.

After the passage of Hurricane Beryl, CCRIF has made a record $44 million insurance payout to Grenada as a result of the extensive damages to the islands. This enabled the government to activate its debt suspension clauses.

The aftermath of the devastating passage of Hurricane Beryl on the island of Petite Martinique, Grenada in July 2024. REUTERS/Arthur Daniel

Sylvester from Grenada’s Ministry of Finance said the country is now much better prepared to deal with the financial aftershocks of a hurricane, having learned the lesson of the events in 2004 – but more needs to be done.

“The money that we’ve received so far is still a drop in the bucket, given our significant needs,” he added. “We need to continue to build our resilience with the right financial tools, because we don’t want to pile up our debt just to reconstruct damaged infrastructure.”

Grants and debt relief

To that end, the government has set up a disaster relief fund, while looking to repurpose some of its loans and obtain new financial help from multilateral banks.

Boston University’s Zucker-Marques said support from rich countries, which are major contributors to climate change through their historically high greenhouse gas emissions, is fundamental to prevent financial crisis in developing countries on the frontline of extreme weather.

“Climate vulnerable countries need access to more grants and affordable long-term finance to invest in resilient infrastructure and economies,” she said. “Otherwise, the vicious cycle of natural disasters and financial instability will only worsen in the years to come.”

ODI’s Wilkinson said pausing countries’ debt is helpful, but she called for further action from creditors. “In the case of a qualifying disaster, they should offer some form of debt relief on repayments rather than just delaying them – which only kicks the can down the road,” she added.

The article was updated on 23/8 to add a comment from UNFCCC chief Simon Stiell received after publication.

(Reporting by Matteo Civillini; editing by Megan Rowling)

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With spring in full bloom, the world’s finance ministers, development and financial leaders, and philanthropists met for the World Bank and International Monetary Fund (IMF) Spring Meetings in Washington, DC last week.  

In their midst, Brazil, the current president of the G20, insisted on a balanced focus between ending poverty and food insecurity and combating climate change. President Lula makes no secret of his desire for a new international financial architecture, designed for different challenges, in a different century with new emerging powers at the table. 

2023 was the year leaders agreed the current architecture was no longer fit for purpose. 2024 needs to be the year the IMF, multilateral development banks (MDBs), and their shareholders rapidly implement reforms and begin the process for increasing capital. 

In Washington, the presidents of the MDBs held their first-ever “summit” – a direct response to insistence by G20 leaders and expert groups that the system must work more effectively together as one, in addition to individual bank reforms. 

Since G20 leaders last September called for a better, bolder and bigger MDB system, and the World Bank responded with its own roadmap of reform, changes are underway, especially in areas where the MDB managements have authority. Where progress is less clear is on issues requiring their shareholders to take the lead.  

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Last week, coalitions of countries met with private finance, think tanks, philanthropy and civil society to discuss the key problems of debt, reversals on global development goals and lagging climate action. The policy proposals on what to do are manifold, and there is a deep well of goodwill to help with the current system’s obvious failures. But all eyes must be on governments.  

In one gathering of finance ministers, IMF Managing Director Kristalina Georgieva boiled down the climate change to-do list to the two things only they can do: price carbon effectively and remove harmful subsidies in the fuel, food and fisheries sectors. So how do we move from rhetoric to action? 

Geopolitical pressure and debt distress 

We cannot ignore the worsening context. Wars in Ukraine and Israel-Gaza, and their costs, threaten progress. Famine and conflict are taking their toll in many other countries too. Climate impacts are severe and intensifying, with crippling extreme heat stretching across India and closing school systems from the Philippines to Sudan.  

Many countries are suffering from debt distress and many more are channeling all available funds to service their debt at the expense of basic services, a serious impediment to investing in their much-needed climate resilience. Even more countries are suffering a crisis of liquidity.  

Whether it’s debt, debt service, or liquidity, it’s a crisis. Yet, at the Spring Meetings, the crisis response still lacked urgency. 

Protesters gather outside the IMF and World Bank’s 2024 Spring Meeting in Washington D.C., on April 19, 2024. (Photo: Andrew Thomas/Sipa USA)

Debt rescheduling was called out by the World Bank chief economist as inadequate. The details of how MDBs can use reflows of Special Drawing Rights as hybrid capital continues to be debated by the very same countries that urge climate action, and who themselves face fiscal pressure on their development and climate budgets.  

While shareholders, creditors and the institutional leadership played pass the parcel, the finance ministers of Small Island Developing States (SIDS) – whose cumulative debt is around $40bn, and who have no tools to dig out of their growing indebtedness and climate crisis – were despairing. As the urgency of a lack of inclusion coupled with climate stress grows, is it time not to tweak the system but to break it in places? 

For example, we could write off the debt of SIDS, while we begin new resource mobilization schemes from targeted forms of taxation to moral payments. If SIDS could face their short-term and existential challenges on a sounder footing, the international system could then expedite work on the problems of the next groups of vulnerable countries to mobilise investment in their resilience at scale.

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To underline the bind countries find themselves in, during the time that MDB reform has become mainstream and Mia Mottley of Barbados and other leaders from emerging market and developing economies have called for a system reset under the banner of the Bridgetown Initiative, net flows of finance away from emerging and developing economies have grown. 

If we were grading reform mid-terms, we would be looking at Bs for management making in-roads on better and bolder, but an F for shareholders stuck on the bigger. How do they get straight As by the end of the year? 

IMF and World Bank at a crossroads 

First, we need radical collaboration among MDBs and between MDBs and development finance institutions, national development banks and private finance on the processes needed to get loans and guarantees disbursed faster. Some MDBs have moved to cooperate on procurement, and there are many suggestions on how to make country platforms work. But radical collaboration involves much deeper streamlining, due diligence, term sheets, analysis, talent, and pooled capital.  

Second, pressure must now be focused on the MDBs’ major shareholders: the G7, other OECD countries and the G20. While they work out how to mobilize more funds and endorse a US proposal for a framework for capital increases, there is room to de-fragment the many pockets of resources stuck in trust funds and facilities with too many strings attached to scale their impact. 

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Thirdly, we must preserve the collaboration within the MDBs that, despite growing tension, means that the US, China, Europe and other large emerging economies are working together and can zero in on solutions to debt, growth of carbon markets, the evolution of the trade system, harmful subsidy removal, and shifting the development and climate finance systems to a world where all development is supporting adaptation and resilience.  

Shareholders could start by strengthening the quality of governance and ensuring that the ambition leaders show when they meet at the G20 is echoed in the way MDB board members articulate interests. This would support management to act more boldly and thwart push-back against the reform agenda among senior officials. 

In their 80th anniversary year, the IMF, the World Bank, and their owners and borrowers, are at a crossroads. The analysis of the last two years has confirmed they are necessary institutions. Yet, if they are to retain their relevance – and not face competition from new institutions and capital pools as frustration at the system’s inertia grows – reform must go deeper and faster to rise to the challenges of tomorrow, starting today. 

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Many countries in the Global South are burdened with huge public debts. These rising debts are a drain on public resources that are urgently needed for sustainable development programmes, and further pressure Southern governments to prioritise debt service over climate actions. 

Global South countries allocate more funds for debt service – 65% in lower- income countries and 14% in lower-middle-income countries – than their combined budgetary spending for education, health and social protection.  

Included among the public debts of Global South countries are those from projects tainted with fraud and whose negative impacts on people, economies and the planet far outweigh the benefits, if any. Furthermore, many debts arose from projects that did not involve democratic consultations nor the free, prior and informed consent of affected communities including indigenous peoples. Prime examples of these debts are those arising from or related to fossil fuel projects. These debts should be seen and treated as illegitimate.   

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For several decades, international financial institutions and public finance institutions have lent hundreds of billions of dollars to Southern governments to support fossil-fuel energy projects. Many of the loans extended by the World Bank, Asian Development Bank (ADB), and other public finance institutions such as the Japan Bank for International Cooperation (JBIC), remain part of the current outstanding public debts. 

There is already a clear consensus among governments and many public financial institutions that fossil fuel energy – from its extraction, production and consumption – is the main driver of climate change.  

This is evidenced by outcomes from the Conference of Parties (COPs) summits of the UN Framework Convention on Climate Change, calling for the phase-out or transition away from fossil fuels, as well as outcomes from G7 and G20 summits committing to the phase-out of fossil fuel subsidies. Individual governments including China and Korea, have announced decisions to stop their financing of overseas coal projects. Further evidence is in the decisions made by public financial institutions to stop or phase out financing of coal and fossil fuels.   

These decisions, commitments and policy shifts should be taken as acknowledgement of their co-responsibility in the promotion of fossil fuels and the harms fossil fuel projects have caused to people, communities, the environment and climate systems. 

Owning up to their co-responsibility for fossil fuel projects and their impacts, and consistent with their avowed commitments to combat climate change, governments and public financial institutions, including international financial institutions, should cancel all outstanding public debts that arose from fossil fuel projects. These outstanding debts may be transformed into grants for renewable energy systems.  

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The same can be said for private banks, financial and investment institutions and corporations that have lent money to governments for fossil fuel projects. Many have also recognised fossil fuels as the main drivers of climate change and have shifted their policies towards reducing or phasing down their lending and investments in coal and fossil fuels.   

From April 17 to 19, the IMF and the World Bank (IMF-WB) will hold their Spring Meetings in Washington D.C. These meetings take place amidst an ever-worsening debt crisis, most harshly felt by 3.3 billion people living under governments that spend more on interest payments than education or health.  

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A new report released on the eve of the meetings found that developing countries will pay a record $400 billion to service external debt this year. It said climate spending could bankrupt developing countries due to huge debt costs and called for debt forgiveness for those most at risk. The report from the Debt Relief for Green and Inclusive Recovery Project (DRGR) warned 47 developing nations would reach external debt insolvency thresholds in the next five years if they invested the necessary amounts to meet the 2030 Agenda and Paris Agreement goals.

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It is deplorable that the IMF-WB continues to push loans as the solution to multiple crises facing developing countries, including loans for climate action. At the height of the COVID-19 pandemic, when financial resources were most urgently needed, they supported and promoted the debt relief schemes of the G20 and Paris Club for the mere postponement of debt payments. These have all but proven flawed and futile. The suspended payments fall due in 2025 – by which time debt accumulation will have sped up even more. Private and commercial lenders, who now hold over 60% of sovereign debt, remain free to refuse participation in debt reduction. 

Total public debt, domestic and external, reached $92 trillion in 2022, increasing five-fold since 2000. Southern governments account for almost one-third of the total debt and are accumulating debt much faster than their richer counterparts. The number of countries with public debt levels exceeding 60% of GDP continues to rise, from 22 in 2011 to 59 in 2022. The long-term public external debts alone of low- and middle-income countries, excluding China, amount to a staggering $3.3 trillion. 

The consequences of World Bank projects, coupled with IMF neoliberal, policies have been devastating for vulnerable communities in the Global South. Large-scale infrastructure projects financed by the World Bank have led to displacement of communities, loss of livelihoods and destruction of ecosystems, and in the process, deepened inequality and impoverishment. Its fossil fuel subsidies and project loans impacted communities already struggling to survive economic hardships and environmental degradation. It also continues to subsidise the fossil fuel industry through direct and indirect financing, estimated at $885 million in 2022 and at least $194 million in 2023.  

The World Bank and the IMF, now in their eighth decade of committing to fight poverty, have yet to account for loans that are clearly illegitimate and must be canceled outright, nor for harsh loan conditionalities that have deepened inequality and impoverishment.

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But he and other G20 leaders could have done more to recognise how economic reliance on fossil fuels has made debt crises worse.

National debt burdens have reached catastrophic levels in over 50 countries. Sri Lanka, Ghana, Zambia and Pakistan are already restructuring their debt or negotiating bailouts to save their economies.

The current debt crisis did not emerge because governments mismanaged public finances.

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Most developing countries have been forced into borrowing by external shocks: the Covid-19 pandemic, soaring energy and food prices, and climate-related disasters such as floods, droughts and cyclones.

That debt has been made more costly by rising interest rates and a strengthening US dollar.

Consequently, dozens of countries are sacrificing spending on health, education, or infrastructure in order to repay their creditors. Investments in tackling climate change are also at risk.

As a result, both creditors and debtors are exploring how debt repayments could be paused after climate disasters, or re-directed towards advancing climate goals.

However, few of the initiatives have tackled the way that the debt crisis incentivises oil and gas production, jeopardising the fossil fuel phase-out necessary to limit global warming.

Vicious cycle

Many of the countries facing debt distress have significant oil and gas reserves, whether low-income countries such as Chad, Mozambique and Papua New Guinea, or middle-income economies such as Angola, Egypt and Tunisia.

The relationship between abundant fossil fuel reserves and rising debt is no coincidence.

Oil and gas exporters can increase borrowing when energy prices are high. High prices increase the value of their reserves and thus boost their credit ratings, enabling these countries to borrow cheaply in international debt markets.

However, oil and gas exporters may also increase borrowing when energy prices are low. Many fund their public services using oil and gas revenues and do not want to impose cuts on their citizens when those revenues decline – so they borrow to close the gap.

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New research from ODI, a global affairs think tank, reveals that oil and gas producers are likely to increase borrowing whether energy prices are rising or falling.

Consequently, many are seeing their debt stock balloon. Over the last decade, oil-rich countries such as Angola, Congo-Brazzaville, Gabon, Mozambique and Venezuela have all seen gross debt as a percentage of GDP grow over 50 percentage points.

Soaring debt increases a country’s reliance on fossil fuel exports to repay its creditors. It is politically difficult and considered fiscally irresponsible to cut oil production when oil revenues are needed to service debts.

Indeed, the debt crisis also incentivises an expansion of oil and gas production to increase export revenues, meaning countries can borrow even more against their larger oil and gas exports. Thus, a vicious cycle of indebtedness and fossil fuel production emerges: higher debt spurs increased fossil fuel production that enables more and more borrowing.

Not just more debt, but worse debt

Not only are fossil fuel producers borrowing more relative to GDP, but ODI’s analysis finds that they are turning to more expensive sources of debt – especially private creditors.

Over the last decade, Bolivia increased its borrowing from private creditors 85-fold, while Chad saw a 75-fold increase. Papua New Guinea, Ecuador and Mozambique saw their debt to private creditors increase 10-fold. All of these countries sit on significant oil and gas reserves.

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Larger debt burdens coupled with higher interest rates mean that more and more of a country’s foreign exchange earnings must go towards repaying its creditors.

As a result, much of the revenues from oil and gas exports simply go towards debt servicing. Countries therefore become dependent oil and gas production, as any decline in export revenues has to be offset elsewhere in public budgets.

The global debt crisis therefore incentivises more fossil fuel production.

How can the vicious cycle be broken?

Many developing countries now need debt relief. But while debt relief will provide a temporary respite, it will not change the underlying financial incentives that spur fossil fuel extraction.

Additional reforms are needed so that it is cheaper for oil and gas producers to borrow for green purposes than grey ones.

International public finance can have huge influence over energy markets in smaller and poorer countries.

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The G20 and multilateral development banks therefore need to end their funding for fossil fuels.

While many governments have promised to align their international public finance with a 2°C world, the G20 still provided $55 billion for fossil fuels between 2019 and 2021, compared to just $29 billion for renewable energy. Allocating public money in this way embeds the chronic cycle of fossil fuel extraction and debt servicing.

International private finance is also critical in many developing countries, given their relatively shallow capital markets. These resources flow from financial centres like Frankfurt, London, Paris, Singapore and Tokyo.

Role of central banks

The central banks governing these financial centres can push their commercial banks and institutional investors towards greener international lending through regulatory reforms, especially “capital adequacy requirements”.

What are capital adequacy requirements? Central banks require banks and investors to hold enough reserves to manage any unexpected losses.

The minimum value of those reserves is determined based on central banks’ assessment of how risky an asset is, and often favours grey assets over green.

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Central banks can therefore add a “green-supporting factor” or “dirty-penalising factor” to level the playing field, helping to make borrowing for climate-smart investments like solar cheaper than borrowing for dirty options like gas.

Such financial reforms are critical but on their own not sufficient to break the cycle of oil and gas dependency and indebtedness. The most essential step to deter further fossil fuel production is to reduce demand.

Rather than pointing the finger of blame at lower-income countries with large oil and gas reserves, wealthy importers like the European Union, USA, Japan, Canada and South Korea must take steps to slash consumption at home.

The debt crisis poses an immediate risk to the wellbeing of hundreds of millions of people, while climate changes poses an even more profound threat in the longer term. If debt levels exacerbate fossil fuel lock-in as our research predicts, it will destroy any hopes of limiting global warming to 2°C.

Under its G20 Presidency, India has successfully moved debt vulnerabilities up the diplomatic agenda. But any debt relief must be designed to help countries break the vicious cycle of fossil export dependency and indebtedness. Only by increasing access to affordable, predictable green finance will the G20 help deliver long-term prosperity for all.

Sarah Colenbrander is the director of the climate and sustainability programme at ODI, a global affairs think tank.

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The bank’s new chief Ajay Banga unveiled the measure at a global leaders’ summit in Paris as part of a raft of tools to help nations dealing with a crisis.

He said this will allow countries to “focus on what matters to their leaders when a crisis hits and stop worrying about the bill that’s going to come”.

Many countries at the forefront of the climate crisis already have some of the highest levels of debt distress, meaning they are unable to meet financial obligations.

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Today’s announcement marks an important victory for Barbados prime minister Mia Mottley and her Bridgetown agenda, as her campaign to reform global finance for the climate era is known.

Step forward

Speaking at the gathering she helped convene with French President Emmanuel Macron, Mottley hailed recent progress. “Nine months ago, no one was speaking about natural disaster clauses,” she said. “Now, we have people wanting to recognise the wisdom of it because countries do need to pause debt payments if they’re going to house and feed people who are victims of a climate crisis”.

In a press release, the World Bank said it would initially trial the clause with its most vulnerable borrowers, hoping to expand it to all clients in the future. It also announced other measures including options for countries to redirect a portion of their funds for emergency response and the provision of new types of insurance. 

About three-quarters of developing countries’ debt is to the private sector. About a quarter is to multilateral development banks like the World Bank and less than a fifth is owed to governments, mainly China and the big developed nations.

Dileimy Orozco, senior policy advisor at E3G, told Climate Home News that debt suspension “is not the holy grail, but it is a step forward as it will give countries some breathing space in case of disaster”.

Separately, the United Kingdom, the United States and France have announced plans to offer similar debt relief measures to certain borrowers.

The UK’s export credit agency is in discussion with twelve countries in Africa and the Caribbean to allow them to defer debt repayments if they are hit by climate catastrophe, the government said today.

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The US plans to begin incorporating disaster-related debt clauses in the bilateral lending done through its export credit agency by the end of the year. The measure will be applied “on a transaction-by-transaction basis, looking at where they are most needed”, Patricia Pollard, a US Treasury official, told a panel discussion in Paris.

France is also working towards integrating debt suspension clauses in the concessional loans disbursed by its development agency, the country’s development minister Chrysoula Zacharopoulou announced on Thursday.

Debt traps

Most countries facing a high risk of climate disasters are already “drowning in debt”, according to an analysis by the campaigning group ActionAid. Debt distress is affecting, for example, Mozambique and Malawi, where the passage of Cyclone Freddy killed thousands of people and caused $1.5 billion in damages earlier this year.

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Without relief measures, natural disasters can easily push vulnerable countries into a costly debt spiral, the report said, as they have to keep paying back their existing loans while taking on even more debt by borrowing the money needed to respond to the crisis.

Debt piles can rise quickly. Covering the costs of catastrophe is expensive for countries that have to pay more to borrow money because of the perceived risk of lending to them. The average cost of borrowing for a group of 58 climate-vulnerable nations is 11%, according to a study by the Boston University Global Development Center. This is much higher than borrowing costs for developed countries.

Breathing space

Pakistan has been particularly vocal about the risks of a climate “debt trap”. The South Asian country was pushed to the brink of default last year. While flooding affected nearly a third of its territory last year, it owed billions of dollars in debt repayments.

Its former climate minister Malik Amin told Climate Home the World Bank initiative “could help Pakistan in creating badly needed fiscal space when it’s needed the most to deal with the ever-increasing climate impacts it is facing such as super floods, glacial bursts and unliveable heat waves”” 

After today’s announcement, the World Bank will now need to put the scheme into practice. This means establishing which countries could qualify and setting criteria for when a debt suspension would be triggered.

Barbados’ template

Mia Mottley’s Barbados could come again to the fore as a model of how to implement a natural disaster clause. The island nation was among the first to insert payment suspension measures when it restructured its existing debt in 2019. In the case of a catastrophe, the clause will allow Barbados to free up an estimated $700 million, or almost 15% of its economy, in debt repayment for emergency response, rebuilding and recovery.

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E3G’s Orozco says the clause will also send an important signal to credit agencies, which affect borrowing costs with their assessments. “It will tell the market that debt can be caused by these external shocks, not bad economic management,” she added.

Some vulnerable countries and campaigners would like to see the World Bank – and other major lenders – go further and offer debt cancellations in case of disasters.

While these clauses can work well for climate disasters that happen suddenly, like the storms Barbados suffers from, Mottley said they may not be as suitable for disasters like droughts which happen at a slower pace. “We need to perfect it”, she said.

The article was updated after publication to include debt suspension measures announced by the United States and France.

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In recent months, the plea of vulnerable nations for financial support has risen to the top of the international agenda.

Revenues from the commodity trade and tourism collapsed in 2020, leaving many nations struggling to meet their basic needs, let alone invest in sustainable development.

Cash-strapped governments in Africa, Latin America and the Caribbean do not have the luxury of borrowing cheaply to finance a green recovery from the coronavirus pandemic.

More than half of developing countries are estimated to be in debt distress, with interest payments accounting for at least a quarter of governments’ tax revenues in 2020 and raising to 40% in some countries, according to Jubilee USA Network.

And the costs of dealing with intensifying climate impacts such as drought, flooding and tropical storms have not gone away.

In some African countries, up to 10% of GDP has been diverted to adapting to climate change, African finance ministers said in a statement this week. “Our fiscal buffers are now truly depleted,” they wrote.

“The most consequential climate decision made in the next few months to five years will be made by the IMF, the G7, the G20 and the US Treasury as part of global pandemic response policies,” Eric LeCompte, executive director of Jubilee USA Network, told Climate Home News.

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A debt repayment suspension initiative by the G20 has brought some relief, but excludes middle-income countries, such as small island states, that have been hit hard by the pandemic and climate impacts.

In Belize, which suffered intense flooding following the passage of hurricanes Eta and Iota last year, crops were washed away and homes and road infrastructure destroyed. Its debt-to-GDP ratio reached 130%, yet international support has been limited.

“We find ourselves underwater and at risk of sinking even deeper,” Christopher Coye, a minister of state in Belize’s finance ministry, told Climate Home News in an email, describing the response from international financial institutions as “lethargic” and “constrained”.

Unless the global community acts “fast, proportionally and comprehensively,” the health crisis could turn into a debt crisis, Mia Mottley, prime minister of Barbados, told a conference of African ministers on Monday.

“We simply do not have the money, the fiscal space nor the policy space needed to build the green, resilient and inclusive development of which we speak,” she said.

With around three quarters of climate finance delivered as loans, support to address the climate crisis adds to the debt burden of recipient countries.

Short-term debt relief may provide “a momentary boost in climate action but at the same time we are spiralling countries in a debt trap,” Zaheer Fakir, chief policy advisor in South Africa’s environment ministry, told Climate Home News.

Mottley, of Barbados, has previously made the case for climate and debt vulnerabilities to replace GDP as central criteria for accessing concessional finance.

“If we have to set but one goal over the course of the next two years… then the most important goal is to be able to settle the issue of vulnerability criteria because that is the only thing that is going to unlock access to oxygen, namely finance,” she said.

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Debt relief is one of four priorities at a UK-hosted virtual summit on climate and development on 31 March. The event is expected to identify practical ways to support climate-friendly investment in poorer countries, in preparation for UN climate negotiations in Glasgow this November.

Anne-Marie Trevelyan, a UK energy minister and Cop26 champion on adaptation and resilience, recognised there was an “enduring sense of anxiety” over debt challenges and access to climate finance among developing nations.

Defining vulnerability criteria for accessing concessional finance “will be part of the discussions” at next Wednesday’s event, she said. “These are some of the issues we need to think differently and much more holistically about in order to help our climate vulnerable friends and partners.”

The outcomes of the event, Trevelyan said, will be carried forward by prime minister Boris Johnson and chancellor Rishi Sunak to the G7, G20 and the Commonwealth heads of government meeting ahead of Cop26.

Rachel Kyte, dean of the Fletcher School and former sustainable energy representative for the UN secretary general, told Climate Home News debt relief was “a pre-requisite” for success in Glasgow.

“We need to think big and invest at scale,” she said. “I don’t see how Cop26 works politically without a commensurate effort to invest in infrastructure, agriculture and resilience.”

A boy stands in the destruction left in the wake of hurricane Iota which hit Central America barely two weeks after hurricane Eta (Photo: D. Membreño/ European Union/Flickr)

The election of Joe Biden to the White House puts more options on the table. In one of his first executive orders, Biden mandated treasury secretary Janet Yellen to develop a strategy to align climate finance policy, including debt relief initiatives, with the goals of the Paris climate agreement.

With US backing, the International Monetary Fund (IMF) is discussing issuing the equivalent of $650 billion in liquidity, known as special drawing rights (SDRs) into the global economy. As the US holds the largest voting power at the IMF, no decision can be made without its approval.

Great news: IMF Executive Directors conveyed broad support for considering an SDR allocation of ~$650 billion!

Key step to ensure all members, particularly those hardest hit in the crisis, have higher reserve buffers and more capacity to help their people and support recovery.

— Kristalina Georgieva (@KGeorgieva) March 23, 2021

The IMF has issued emergency SDRs only four times before, most recently in 2009.

This allocation of IMF reserve assets would provide a short-term response to the liquidity crisis and free up funds to pay for vaccines and food imports for example, or pay off debt.

The proposal pales in comparison to campaigners’ demands. More than 200 civil society groups have called for SDR allocation of up to $3 trillion dollars to meet countries’ needs in a “decisive and sustainable way”. The IMF conservatively estimated emerging economies’ need $2.5 trillion to bounce back from the pandemic.

By default, SDRs are allocated to countries proportionally to the size of their economy, which means richer nations would receive most of the support. Developing countries would automatically receive an estimated $220 billion they could use without conditionality.

Last week, G7 finance ministers agreed to work with the IMF to explore how wealthy countries could voluntarily redistribute their share to emerging markets and low-income nations.

IMF head Kristalina Georgieva said she would present a formal proposal by June. The issue will take centre stage at the IMF spring meeting next month.

IMF managing director Kristalina Georgieva (Photo: IMF Photo/Cory Hancock/Flickr)

Climate and debt vulnerability should be key criteria for reallocating support. That was among the top recommendations by experts consulted during workshops last month ahead of the UK ministerial summit.

This would allow climate vulnerable middle-income countries, such as small island states which have limited access to concessional finance, to benefit.

African finance ministers described the issuance of IMF reserve assets as “imperative” to “help the continent access the trillions of dollars needed for a green recovery”.

Jean-Paul Adam, a former minister in the Seychelles and director of climate change at the United Nations Economic Commission for Africa (ECA), told Climate Home News this injection of liquidity could support investment in energy, food security and nature-based solutions.

ECA proposes creating a liquidity and sustainability facility that would use IMF’s SDRs to subsidise private sector investments and shave off higher borrowing cost faced by African countries.

This could unlock some of the 39,000MW of renewable energy projects in planning across the continent, Adam said.

The Karoo solar farm in South Africa (Photo: 6000.co.za/Flickr)

Another option is to attach green criteria to money channeled through existing IMF initiatives such as the Poverty Growth Reduction Trust.

Avinash Persaud, professor at Gresham College in London, has suggested distributing SDRs though an IMF-administered global disaster mechanism. Countries suffering loss and damages caused by climate change or a natural disasters greater than 5% of their GDP would receive fast and unconditional funds.

Barbadian prime minister Mottley has proposed allocating half the money to governments to pay off debts and half to regional development banks. This would allow development banks to identify where sustainable development needs lay, without requiring country-by-country vulnerability assessments.

The Caribbean Development Bank has an “intimate perspective” on what a green recovery in the region looks like, said Tumasie Blair, of Antigua and Barbuda, lead negotiator on climate finance for the Alliance of Small Island States.

Debt-for-climate swaps can help developing countries make a green recovery

For Belizean minister Coye, none of these proposals get to the heart of the matter. “Our poor and vulnerable countries, plain and simple need debt cancellation and debt forgiveness,” he said.

Injecting liquidity may ease the immediate crisis, agreed Jason Braganza, executive director of the African Forum and Network on Debt and Development (Afrodad), “but it does not go far enough to deal with the systematic and systemic structural issues of the global debt architecture”.

Part of the challenge is the political shame and embarrassment countries may face when renegotiating their debt, Braganza said. In some instances, debt relief can lead to a downgrade from credit rating agencies — increasing the cost of borrowing.

Finance and development experts are calling for a more comprehensive approach.

A global debt relief blueprint “for a green and inclusive recovery” has been backed by Mottley and UK former prime minister Gordon Brown.

It calls for debt relief to go beyond repayment suspension and include both public and private creditors, low and middle-income countries with support conditional on recipient nations committing to align their policies with the Paris Agreement and global development goals.

It includes proposals for green recovery bonds and for nations with sufficient fiscal space to invest their debt service payments into local climate and nature protection projects, known as debt swaps.

For Braganza, of Afrodad, this must be the moment to address the power imbalance between rich and poor nations. The voice of African governments has to be included “as an equal player and a decision-maker rather than a decision-taker,” he said.

The post Rare IMF relief offers a hope of green recovery to debt-laden nations appeared first on Climate Home News.

In a report published on Tuesday, the anti-poverty charity found that nearly 80% of climate finance to developing countries took the form of loans, rather than grants. Poor nations were expected to pay richer countries back, often for investment in projects with weak climate credentials.

“The excessive use of loans and the provision of non-concessional finance in the name of climate assistance is an overlooked scandal,” the report said.

In 2009, rich countries committed to mobilise $100 billion per year by 2020 to help vulnerable nations cut their emissions and cope with climate impacts.

Oxfam analysed the latest climate finance figures from 2017-2018, when developed countries reported delivering $59.5 billion in climate finance, about 33% more than in 2015-2016.

In total, rich countries gave just $12.5bn in the form of grants, $22bn in loans with better-than-market rates and around $24bn in loans with standard market rates. Interest charges and payments to creditors were not deducted from donor countries’ climate finance figures.

China hits out at US climate record, in pointed message ahead of election

Report co-author Tracy Carty identified Japan and France as having the biggest grant-to-loan imbalance in their climate finance, with just 3% of their overall contributions attached to grants.

Both were among donor countries giving out the highest percentage of market-rate loans, respectively 24% and 16% of their contributions. Market-rate loans made up 55% of Spain’s climate finance and 22% of Germany’s.

In contrast, other donor’s contributions were almost 100% grant-based, including Australia, the EU, the Netherlands, Sweden and Switzerland.

Carty said the coronavirus pandemic meant that more developing countries were unable to take on more debt for climate projects and so, now more than ever, climate finance should take the form of grants over loans.

“Against a backdrop of rising and unsustainable debt in many low income countries, there’s a clear risk that finance that should be helping countries respond to climate change could be harming them in other ways,” said Carty.

Officials from Angola and Belize last week told Climate Home News that their falling revenues and ballooning debt meant they would find it hard to invest in medium and long-term climate adaptation projects.

Last week, over 550 global civil society organisations called on G20 finance ministers to cancel countries’ debts in the wake of the Covid-19 pandemic. Instead, they suspended debt repayments for six months.

Balooning debt cripples poor countries’ hopes of a green recovery

Oxfam have called on all donor countries to agree to record the ‘grant equivalent’ of their climate finance and the terms of any loans in their annual reporting as countries are due to meet for UN climate talks in Glasgow, in November 2021.

The analysis pointed out to another reporting issue with some rich nations’ figures including in their climate finance the full cost of projects which were only partly related to addressing climate change.

For example, the full cost of building a school could be counted as climate finance if part of the funding was to make the school more flood-proof.

In other instances the money was used to support fossil fuel expansion if the project was deemed to cut emissions. Japan claimed it provided $700m in climate finance to Bangladesh but the money was in fact a loan to build the Matabari coal power plant. Tokyo justified the project claiming the plant was cleaner and more efficient than other power plants.

Bangladesh considers scrapping 90% of its coal pipeline

Oxfam warned not enough funds reached the poorest countries and small island developing states to help them cope with intensifying climate impacts, according to countries’ submissions to the OECD and UN Climate Change.

Germany, France, Japan, Canada and Norway gave less than 20% of their climate finance to least developed countries (LDCs) . At the other end of the scale, Denmark directed 41% of its finance to LDCs.

Several nations gave less than 1% of their finance to small island developing states, including Germany, Japan and the UK, while Australia directed half of its funding to them.

Oxfam called on countries to report the percentage of their finance which goes to LDCs and SIDS and cast doubt over whether countries are accurately estimating the amount of private climate finance they claim to have ‘mobilised’.

Some countries did include an estimate of ‘mobilised’ private finance in their figures while Japan claimed to have leveraged $4.5bn in 2017-2018.

At UN climate talks in Poland in 2018, nations agreed guidelines on how to count ‘mobilised’ private finance towards climate finance figures. These principles will be implemented at the Cop26 talks in Glasgow next year, when Oxfam said they should be “strictly applied”.

The post Oxfam: Rich countries are not delivering on $100bn climate finance promise appeared first on Climate Home News.