Climate-Vulnerable Countries and Debt Payments

Debt payments by the 50 countries most vulnerable to the climate crisis have doubled since the start of the coronavirus pandemic, reaching their highest level in more than three decades, according to a new report from the Debt Justice charity. These countries now allocate 15.5% of government revenues to external creditors, a significant increase from less than 8% before the pandemic and 4% at their lowest recent point in 2010.

Using data from the World Bank and the International Monetary Fund, the report highlights the urgent need for comprehensive debt relief to enable poor countries to invest in measures to address the climate crisis. Heidi Chow, executive director of Debt Justice, stated, “Record levels of debt are crushing the ability of the most vulnerable countries to tackle the climate emergency. We need a rapid and effective debt relief scheme to cancel debts down to a sustainable level. The UK can play its part by legislating to ensure private lenders take part in international debt relief agreements.”

For the 50 countries examined in the report, 38% of their external interest payments go to private lenders, 35% to multilateral institutions, 14% to China, and 13% to other governments. The debt burdens of poor countries fell significantly following two rounds of comprehensive debt relief in the late 1990s and mid-2000s but began rising again in the 2010s and soared from 2020 onwards.

Debt Justice identified several factors contributing to the new debt crisis. The debt suspension scheme agreed upon by creditors at the pandemic’s outset has ended, and the suspended debts are now due. Borrowers face rising global interest rates and a strong US dollar, which increases the relative size of external debt payments typically owed in dollars.

A 10-day conference focusing on countries’ ability to finance climate action, including through climate finance and addressing unsustainable debt levels, begins in Bonn on Monday. Debt Justice pointed to Zambia, experiencing severe drought, as a case highlighting the need for urgent action.

After three and a half years of negotiations, Zambia recently finalized a debt restructuring deal with some of its private lenders. The deal includes provisions for significant increases in debt payments if the economy performs better than expected but lacks clauses to reduce payments in case of shocks like droughts. Under this agreement, Zambia must pay bondholders $450 million this year.

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