When Debt Worsens Climate Change, Invest News & Top Stories
(NYTIMES) – How does a country deal with climate disasters when it is drowning in debt? Not very well, it turns out. Especially not when a global pandemic hits its economy.
Take Belize, Fiji, and Mozambique. Extremely different countries, they are among dozens of nations at the crossroads of two growing global crises that are attracting the attention of global financial institutions: climate change and debt.
They owe huge amounts of money to various foreign lenders. They also face staggering climatic risks. And now, with the coronavirus pandemic hitting their economies, it is increasingly recognized that their debt obligations stand in the way of meeting the immediate needs of their people – not to mention the investments needed to protect them from climate disasters. .
The combination of debt, climate change and environmental degradation “poses a systemic risk to the global economy that can trigger a cycle that lowers income, increases spending, and exacerbates vulnerabilities to climate and nature. “, according to a new assessment by the World Bank, International Monetary Fund (IMF) and others. This comes after pressure from academics and lender advocates to address this issue.
The World Bank and the IMF are planning talks in the coming months with debtor countries, creditors, advocates and rating agencies to work out how to free up new money for what they call a green economic recovery.
The aim is to come up with concrete proposals ahead of the international climate talks in November and ultimately get the world’s richest countries on board, including China, which is the world’s largest single creditor country.
IMF Managing Director Kristalina Georgieva said green stimulus programs have the potential to spur ambitious climate action in developing countries, “especially at a time when they face budget constraints due to the impact of the pandemic on their economies “.
In the case of Belize, a middle-income country on the Caribbean coast of Central America, its external debt has grown steadily in recent years.
He was also feeling some of the more acute effects of climate change: rising sea levels, bleached corals, coastal erosion. The coronavirus pandemic has dried up tourism, a pillar of its economy. Then, after two hurricanes, Eta and Iota, hit neighboring Guatemala, flooding swept through farms and roads downstream from Belize.
Today, the debt Belize owes to its foreign creditors is equivalent to 85% of its entire national economy. The private rating agency Standard & Poor’s has downgraded the country’s creditworthiness, making it more difficult to obtain loans on the private market.
The IMF qualifies its level of indebtedness as “unsustainable”. Belize, said its Minister of State for Finance, Christopher Coye, needs immediate debt relief to deal with the effects of global warming that it has had little role to play.
Many Caribbean countries like Belize are not eligible for the low interest loans that poorer countries are entitled to.
On March 31, the United Nations declared that the collapse of the global economy puts nearly 600 billion U.S. dollars (S $ 797 billion) in debt service payments at risk over the next five years.
The World Bank and the IMF are important lenders, as are rich countries, as well as private banks and bondholders. The global financial system would face a huge problem if countries with shrinking economies default on their debt.
“We cannot walk head-on, with our eyes wide open, in a predictable and preventable debt crisis,” UN Secretary-General Antonio Guterres recently said, calling for broad-based debt relief. range of countries.
“Many developing countries face financing constraints that prevent them from investing in recovery and resilience.” The Biden administration, in an executive order on climate change, said it would use its voice in international financial institutions, like the World Bank, to align debt relief with the goals of the Paris agreement on the climate.
Debt and climate talks are expected to intensify in the run-up to the November climate negotiations, where money is expected to be one of the main sticking points. Rich countries fall far short of delivering the $ 100 billion per year pledged to help poorer countries cope with the effects of global warming.
On their own, low- and middle-income countries owed foreign lenders US $ 8.1 trillion in 2019, the most recent year for which data is available – and that was before the Covid-19 pandemic.
At the time, half of all the countries the World Bank classified as low income were either in what it called “debt distress or at high risk.” Many of them are also extremely vulnerable to climate change, including more frequent droughts, more severe hurricanes and rising sea levels that wash away the coasts.
A widely circulated proposal calls on the world’s 20 largest economies to require lenders to offer relief in return for a pledge to use some of the new fiscal space for a green and inclusive recovery.