Compass Money: Can’t Afford to Fight It, Can’t Afford Not To – The Climate Debt Dilemma

Countries with high amounts of foreign debt and high vulnerability to the effects of climate change, like Belize, are in dire straits unless institutions act. (Flickr)

The International Monetary Fund (IMF) announced on April 5 that it would not require the world’s 28 poorest countries to make debt payments until October 15. Many of those countries are extremely vulnerable to climate change. As a result of the COVID-19 pandemic, the global debt has risen by $24 trillion. The global debt rate reached an all-time high of $281 trillion in February, and that number continues to grow.  

When a country has a lot of foreign debt, that country is exceedingly vulnerable to costly natural disasters. To make matters worse, many of the countries in the world with the most debt are disproportionately exposed to the dangers of climate change. Countries in the Global South and island states are particularly at-risk for natural disasters, which have risen due to climate change. The IMF has tried to combat this imbalance by creating low-income loan programs with low-interest rates and forgiving payment plans. However, these programs fail to adequately aid middle-income countries with large amounts of debt. 

Belize, for example, is not eligible for the IMF’s low-income program because it is categorized as a middle-income state. However, the country’s foreign debt has been rising for the last several years. Tourism made up a large component of the country’s economy, but coastal erosion, hurricanes, and other ecological disasters have significantly decreased the national revenue. This exemplifies a vicious cycle where countries cannot repay debts, leading to lower creditworthiness, rendering them unable to protect themselves against the next natural disaster. 

Fiji faces a similar crisis. While it isn’t responsible for large amounts of carbon emissions, the island country is very vulnerable to natural disasters. The pandemic caused an economic downturn. Fiji’s debt soared following a December tropical cyclone, which destroyed homes and crops. This led the country to set its climate projects aside while in its fiscally precarious state. Some economists have proposed a “climate-health-debt swap.” Its principle is that foreign debtors, like China who holds the majority of Fiji’s debt, would forgive the debt in exchange for Fiji improving their healthcare and climate systems. However, the Chinese government has not issued an official statement regarding the proposal. 

The issues in Belize and Fiji are exacerbations of existing trends. In 2018, the United Nations found that climate change was driving up debt for developing countries. Ulrich Voltz, the lead author of the report, said “Helping people address climate risk is a good investment.” Unfortunately, there is not a widely adopted global system to financially incentivize climate investment. Because there is no system in place, institutions like the IMF and the UN have to evaluate each issue individually, leading to inefficiencies. 

Climate change will raise the cost of borrowing money. This will lead to lower and lower credit scores for countries most vulnerable to climate change. The IMF report warns that this could exacerbate global wealth inequality. It will also negatively impact these countries’ abilities to recover from the COVID-19 global financial crisis. Unless institutions enact policies to address the cost of climate change, the world’s most vulnerable countries may go without the aid they so desperately need.