• Fri. Apr 23rd, 2021

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How Debt and Climate Change Pose ‘Systemic Risk’ to World Economy

The discussions around debt and climate are likely to intensify in the run up to the climate talks in November, where money is expected to be one of the main sticking points. Rich nations are nowhere close to delivering the promised $100 billion a year to help poorer countries deal with the effects of global warming. Low- and middle-income countries alone owed $8.1 trillion to foreign lenders in 2019, the most recent year for which the data is available — and that was before the pandemic.

At the time, half of all countries that the World Bank classified as low-income were either in what it called “debt distress or at a high risk of it.” Many of those are also acutely vulnerable to climate change, including more frequent droughts, stronger hurricanes and rising sea levels that wash away coastlines.

(The fund said on Monday that it would not require 28 of the world’s poorest countries to make debt payments through October, so their governments can use the money on emergency pandemic-related relief.)

Lately, there’s been a flurry of proposals from economists, advocates and others to address the problem. The details vary. But they all call, in one way or another, for rich countries and private creditors to offer debt relief, so countries can use those funds to transition away from fossil fuels, adapt to the effects of climate change, or obtain financial reward for the natural assets they already protect, like forests and wetlands. One widely circulated proposal calls on the Group of 20 (the world’s 20 biggest economies) to require lenders to offer relief “in exchange for a commitment to use some of the newfound fiscal space for a green and inclusive recovery.”

On the other side of the world from Belize, the low-lying Pacific island nation of Fiji has experienced a succession of storms in recent years that brought destruction and the need to borrow money to rebuild. The pandemic brought an economic downturn. In December, tropical cyclone Yasa destroyed homes and crops. Fiji’s debts soared, including to China, and the country, whose very existence is threatened by sea level rise, pared back planned climate projects, according to research by the World Resources Institute.

The authors proposed what they called a climate-health-debt swap, where bilateral creditors, namely China, would forgive some of the debt in exchange for climate and health care investments. (China has said nothing publicly about the idea of debt swaps.)

And then there’s Mozambique. The sixth-poorest country in the world.

It was already sinking under huge debts, including secret loans that the government had not disclosed, when, in 2019, came back-to-back cyclones. They killed 1,000 people and left physical damages costing more than $870 million. Mozambique took on more loans to cope. Then came the pandemic. The I.M.F. says the country is in debt distress.