Activist countries

How debt cancellation could help poor countries prepare for climate change

As the planet heats up, worsening crises are pushing poor countries toward humanitarian catastrophe. Global warming disproportionately threatens the developing world with rising sea levels, more intense storms and scorching heat waves. At the same time, crippling debt is making it harder for many of these countries to prepare for and recover from these disasters.

A prime example is Eritrea, whose gross public debt is expected to exceed 160% of its GDP this year, leading the African Development Bank Group to label the country a “debt distress”. This debt could sap funds for much-needed measures to adapt to above-global average temperature increases, extreme drought and famine conditions like those currently wreaking havoc in the Horn of Africa.

Without urgent action, experts warn of a “catastrophic loop” of mounting debt and deteriorating environmental conditions. A new report from the Climate and Community Project – a coalition of scholars and policy experts working to advance climate justice – urges the United States and European countries to provide immediate relief through a “ climate reparations”, including large-scale debt cancellation. and restructuring. Even though the least developed countries have contributed only about 8% of the planet’s greenhouse gas emissions since 1850, they are ready to bear the brunt of the devastating effects of climate change.

According to the report, authored by Olufemi Táíwò, professor of philosophy at Georgetown University, and Patrick Bigger, research director of the Climate and Community Project, the current debt crisis in developing countries has its roots in colonialism and the ‘slavery. These practices have diverted labor and resources from countries in the South – countries in Latin America, Asia, Africa and Oceania – and given the North a head start in economic development. who left the rest of the world behind. As a result, countries in the South have had no choice but to borrow money to meet their basic needs. This money – which can be provided in the form of loans or interest-bearing bonds – comes from governments like the United States, multilateral lenders like the World Bank or the International Monetary Fund, or private lenders, like a person or a wealthy business.

Borrowing money allows poor countries to access the funds needed to avert an immediate disaster, such as famine, or to import enough oil to keep homes warm. But in the long run, these arrangements can saddle borrowers with a debt burden that ties them to their creditors.

On the Liberian coast, rising sea levels have forced residents out of Monrovia’s largest slum.
Zoom Dosso/AFP via Getty Images

The report’s top priority is for wealthy governments and multilateral organizations to cancel the public debt of poor countries – a proposal that Táíwò and Bigger say is relatively simple and politically possible. According to their analysis, 19 of the 20 most climate-vulnerable countries in the world owe most of their debt to public or multilateral lenders who can easily choose to cancel their debts. This could quickly free up fiscal space for the developing world to invest in climate adaptation and development without fossil fuels, especially since the ability of many countries to make such investments has been strained during the COVID-19 pandemic. In 2020, the long-term public and private debt of low- and middle-income countries ballooned by 12% to a record $860 billion, and some climate-vulnerable countries like Jamaica and Cabo Verde saw their debt ratios term/GDP balloon up to 96 percent.

There have been efforts by the G20 – an intergovernmental forum of 19 wealthy countries and the European Union – to suspend some of this debt, but the report by the Climate and Community Project calls them “catastrophically insufficient”, arguing that they did not go far enough and sometimes included austerity stipulations – for example, requiring countries to cut public sector wages.

A better policy, according to Táíwò and Bigger, should include the immediate cancellation of all debts held by the state without any conditions, giving debtor countries the agency to choose how they could allocate their newly available resources.

As a good example, the report cites the Heavily Indebted Poor Countries Initiative, an effort that began in 1996. The International Monetary Fund and a group of wealthy creditor countries eventually canceled more than $70 billion in debt for 37 countries in the developing world. , reducing their required debt repayments by 1.5 percent of GDP between 2001 and 2015. Independent analysis for the World Bank found that cancellations enabled 28 of the participating countries – including Burkina Faso, Niger and Ghana – to increase the “poverty-reduction of expenditure” from 6.4% of GDP in 1999 to 8.1% in 2004.

According to Bigger, this is a sign that debt cancellation is working. “Every dollar spent on debt servicing is a dollar that is not spent on other public policy priorities,” he said.

However, canceling public debt would not solve the whole problem, since private lenders hold a large and growing share of the developing world’s claims. In 2020, debt owed to private creditors was $2.2 trillion, compared to only $792 billion owed to multilateral development banks like the World Bank. Since private lenders are often reluctant to participate in debt cancellation programs, many private debts would have to be acquired by sovereign and multilateral lenders for cancellation.

A man draws water from a storage container, with two people beside him
A man fetches water in the arid Afghan village of Bala Murghab.
Hoshang Hashimi/AFP via Getty Images

Bigger also noted that debt cancellation is less visible politically today than it was in the late 1990s, when a number of high profile activist campaigns centered on the crisis of the debt that was smoldering in the countries of the South.

Some of today’s largest debt relief programs are run by large environmental nonprofits and involve conservation clauses. The Nature Conservancy’s Blue Bonds for Conservation program, for example, helped negotiate a sovereign debt restructuring for Belize in 2020, which reduced the country’s total debt burden by $250 million and enabled it to pay off its remaining debt at a lower interest rate – as long as the savings would be used to protect 30% of its ocean territory. A similar but larger effort was negotiated in 2016 for Seychelles.

Lee Buchheit, a lawyer who has represented several countries in sovereign debt restructurings, including Belize, said the model allows countries to contribute to the “global conservation project” despite their financial difficulties. While these programs aim to ensure savings are used wisely, some say so-called “debt-for-nature” swaps can prevent a country from making its own choices about what it needs.

“If an organization is really serious about the idea that environmental decline is linked to global inequality…it may not want to throw all of its efforts into the restructuring basket and instead look to reparations,” said said Jennifer Silver, associate professor of geography at the University of Guelph in Ontario, Canada.

In addition to debt cancellation, Táíwò and Bigger call for a rapid increase in global North climate finance. Currently, rich countries have pledged to provide the developing world with $100 billion each year for climate projects, but in reality they only give about $80 billion. The report from the Climate and Community Project claims that figure should be closer to $1 trillion per year. It also calls for fines extracted from the fossil fuel industry in courtrooms around the world to be deposited into a trust fund that can be used by vulnerable communities in the Global South.

According to Bigger, these actions should be seen not only as an opportunity for wealthy countries to right past wrongs, but also to ensure that the developing world can pursue low-carbon, climate-resilient development, preparing for a climate crisis, it had little role to play. while talking. “We need to think about the ramifications of how we decarbonise and what we owe the rest of the world,” he said.