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Posted 16th May 2023

How Debt Impacts Climate Disasters

Most of the countries that are vulnerable to climate disasters are also struggling with debt, which is making it harder for them to respond effectively to climate-related emergencies.

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How Debt Impacts Climate Disasters

Most of the countries that are vulnerable to climate disasters are also struggling with debt, which is making it harder for them to respond effectively to climate-related emergencies. This was revealed in a new report by international charity ActionAid, which said that 93% of countries in the Global South that are most affected by global warming are under significant debt distress. 

Of the 63 most climate-vulnerable countries, only four are at low risk of debt distress, while nine are already reeling under debt distress, including Somalia, Malawi, and Mozambique. The report highlights the urgent need for developed countries and international financial institutions to provide financial support and debt relief to climate-vulnerable countries to enable them to build resilience and adapt to the worsening impacts of climate change.

What Is The Environmental Cost of Debt?

The report, which was released during the World Bank and International Monetary Fund (IMF) Spring Meetings, disclosed that 38 of the 63 most climate-vulnerable countries are cutting back on essential public services to service their debt. 

The situation is further exacerbated by the fact that these countries are forced to repay their debts in foreign currencies, mainly US dollars, which compels them to invest in extractive industries like fossil fuels and large-scale industrial agriculture, exacerbating environmental degradation and worsening climate change impacts.

According to the report, the debt crisis and climate crisis are inextricably linked, creating a vicious cycle that traps vulnerable countries in a downward spiral. David Archer, ActionAid International’s head of programmes and influencing, warned that urgent debt cancellation for climate-vulnerable countries and a radical transformation of global debt management is needed to address this pressing crisis. 

The report also called for immediate action from international financial institutions to make finances available to poor countries facing increasing pressure due to the climate crisis.

What Is An Example of the Climate Impact of Debt?

The report cited Malawi, which recently suffered the brunt of cyclone Freddy, displacing over half a million people and causing widespread destruction, as an example of a nation weighed down by debt. The country’s government is being forced to allocate limited resources to repay old loans, leaving it ill-equipped to rebuild and recover from cyclone Freddy. 

The situation is similar in Ghana, which defaulted on its $28.4bn external debt in December. The country is forced to spend more on debt servicing than on education and health, perpetuating a destructive cycle where the country lacks the necessary resources to invest in climate adaptation, resilience, and disaster preparedness.

John Nkaw, country director at ActionAid Ghana, stated that the country needs about 60% of its debt canceled if it is to return to a path of sustainability. He added that if they are free of debt, Ghana would be able to strengthen small and medium-sized businesses, invest in renewable sources of energy, smallholder farmers, and agroecology. However, these choices are not an option at present. 

The report also revealed that 42 other African countries are at high risk of debt distress due to the impacts of climate change and other factors. These countries face a vicious cycle where they are forced to spend more on debt servicing, leaving fewer resources to invest in climate adaptation, resilience, and disaster preparedness.

Categories: Finance, News


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