 "Climate funds")
A report has found that debt crises in many low and middle-income countries are impeding their efforts to combat climate change and transition to green economies.
The report, titled 'Beyond climate finance' and published by the Centre for Science and Environment (CSE), sheds light on the detrimental impact of historical inequalities and high debt burdens on these nations' ability to allocate resources for development and climate-related initiatives.
Key findings of the report
A significant finding of the report is that developing countries, particularly those with limited resources, are disproportionately affected by climate disasters.
The report gives examples of hurricane Maria, which struck Dominica in 2017, caused damages equivalent to a staggering 226 per cent of its gross domestic product (GDP). Furthermore, floods in Pakistan in 2022 and cyclone Pam in Vanuatu in 2015 resulted in damages amounting to nine per cent and 64 per cent of their respective GDPs.
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These countries also often face a shortage of funds for social and environmental projects, leading them to rely heavily on foreign debt to support essential activities. The report highlighted that debt payments for low-income countries have reached their highest levels since 1998, with an average external debt service payment of 16.3 per cent of government revenue in 2023.
This excessive debt burden surpasses the annual cost of achieving the countries' nationally determined contributions (NDCs), hindering their climate ambitions.
Sunita Narain, the director general of CSE, underscores that the financial support provided to these countries is predominantly in the form of loans or investments rather than grants, creating a repayment burden that they cannot afford. Only about five per cent of the climate finance disbursed between 2011 and 2020 was given as grants, while the rest was in the form of loans or equity. Consequently, the countries most in need of financial assistance do not receive adequate climate finance.
The report also revealed that 75 per cent of climate finance during the same period was concentrated in North America, western Europe, east Asia, and the Pacific, primarily led by China. In contrast, regions housing the majority of low and middle-income countries received less than 25 per cent of climate finance flows, worsening the financial disparities.
The report also emphasised how external shocks like the Covid-19 pandemic have further strained the spending capabilities of developing countries. Gas-dependent nations such as Pakistan and Sri Lanka faced energy crises due to the Russian war on Ukraine, rendering them unable to afford necessary liquefied natural gas (LNG) supplies. This situation hindered their transition from coal to gas, which is crucial to reducing emissions.
Furthermore, accessing funds for climate investments is more expensive for developing nations as they are perceived as having higher risks and face more socio-economic challenges. The limited resources and high-interest rates on loans contribute to making the deployment of green technologies up to seven times more expensive in these nations compared to Europe and the United States.
How can this be solved?
The CSE report proposes several solutions to address these challenges. It advocates for increased financial support for developing countries in the form of non-repayable funds. This would make the process more accessible.
Additionally, the report also calls for fairer lending rules that consider the unique circumstances of middle-income countries. Inclusive decision-making processes regarding the distribution of funds is also necessary, as well as moving away from the influence exerted by a handful of powerful countries.
Finally, it highlights the need to tackle existing debt problems first and prevent the creation of further debt burdens, so that this is no longer an hindrance for economies.
