Climate Debt Trap, A ‘Vicious Circle’ for Vulnerable Nations

by Vins
Published: Updated:

Many of the developing nations most vulnerable to climate change are “operating on increasingly tight budgets and at risk of defaulting on loans,” Natalia Alayza, Valerie Laxton, and Carolyn Neunuebel reported for the World Resources Institute in September 2023. They describe the pattern—which has been worsened by the pandemic and a global recession—as a “climate debt trap” for the affected countries.

Global standards for climate resilience require immense national budgets. Developing countries borrow from international credit lines and, as debt piles up, governments are unable to pay for essential needs, including climate protections. This, Alayza, Laxton, and Neunuebel reported, is increasingly true for the nations most affected by flooding, drought, and other consequences of climate change. Their report quoted the Minister of State for Finance in Belize, Christopher Coye, “How do we pursue climate action? We are fiscally constrained at this point.” Similarly, the finance minister of Barbados, Ryan Staughn, called for a debt crisis solution that “allows countries to be able to continue to respond to the climate crisis without getting ourselves into trouble.”

Debt distress in developing nations is a growing problem. As the World Resources Institute article reported, from 2011-2022, the number of developing countries where debt liabilities exceeded 60 percent of the nation’s GDP nearly tripled (from 22 nations to 59). Among the fifty most climate-vulnerable nations around the world, 23 countries (53 percent) are either in debt distress or at risk of it. In 2022, for instance, Ghana invested $6.3 billion to reduce its debt—but, because of its currency’s low value compared to the US dollar, the amount of Ghana’s debt obligations actually increased.

A 2018 study, produced by the United Nations Environment Programme in collaboration with the Imperial College Business School and SOAS University of London, determined that “climate vulnerability has already raised the average cost of debt in a sample of developing countries by 117 basis points” (or, in absolute terms, added interest payments of USD 40 billion across the past decade). One of this report’s key messages was the need for investments that “enhance the resilience of climate vulnerable countries” in order to help them deal not only “with the consequences of climate risks, but also bring down their cost of borrowing.”

These concerns have received limited corporate news coverage. For instance, a New York Times article detailed how defaults threaten a “lost decade” for poor countries. But this report focused primarily on defaults to the US and China, with no less focus on how poorer countries will combat deficits, especially as climate change escalates.

Source: Natalia Alayza, Valerie Laxton and Carolyn Neunuebel, “Developing Countries Won’t Beat the Climate Crisis Without Tackling Rising Debt,” World Resources Institute, September 22, 2023.

Editor’s Note: For prior coverage of this topic by Project Censored, see Debt Crisis Looms for World’s Poorest Nations, story #18 from State of the Free Press 2024.

Student Researcher: Tyler Sarro (Saint Michael’s College)

Faculty Evaluator: Rob Williams (Saint Michael’s College)