About the Author
Dev Useree is a Technical Expert in international finance, debt markets and public financial management. With a career spanning 30 years, Dev brings an extensive blend of strategic and operational expertise in delivering consultancy and capacity building solutions in over 50 countries across different continents, including Africa, Asia and the Caribbean. Having held senior positions in government and in international development organizations, Dev has a wealth of knowledge and experience in implementing a diverse portfolio of projects in public financial management, macroeconomic management, debt and cash management, risk management and leveraging IT systems. Email: Devuseree@consultant.com
Since early 2020, when COVID-19 wreaked havoc on economic and social life practically everywhere, key fault lines that undermined developing countries’ ability to achieve sustainable development have remained a serious cause of concern. The severe strain on their public finances caused by falling revenue and higher than expected health and social spending has been further compounded by debt levels that worsened following the advent of the pandemic. Amidst such acute difficulties, those countries will inevitably find it harder to fully meet the climate action commitment they have signed up to under the Paris Agreement.
With the forthcoming annual World Bank/IMF meetings and the global COP26 summit nearly upon us, discussions on options for tackling the debt and climate crisis under post-pandemic recovery must take centre-stage. Decisive action from the international community cannot be delayed anymore.
Worsening Debt burden
Though the IMF expects the global economy to grow by 6% in 2021 and 4.4% in 2022, the uncertainty faced, especially by developing countries has certainly not gone away. In welcoming the additional US$650 billion SDR allocation to beef up new financing for countries in need, targeted action is still required to ease up the debt burden of concerned countries.
Emerging market and developing economies debt as a percentage of GDP, 1970-2020
Source: IMF, Caught by the cresting Debt wave, M. Ayhan Kose, Franziska Ohnsorge, Peter Nagle, and Naotaka Sugawara, Finance & Development, 2020
Indeed, debt levels which were already high before the pandemic rose further at a time when pressure to spend on health and social services became unavoidable. As more resources are directed towards servicing existing debt, there is growing concern that the most vulnerable and poorest in societies will feel the impact of a serious squeeze in resources to meet their basic needs.
Countries such as Zambia, Chad and Ethiopia have formally requested support for debt relief under the G20 Common framework. But these instances do not reflect the whole picture. A larger group of countries whose debt levels may have already become close to unmanageable would require support well beyond the suspension of debt service made available. Small island developing states which are often left out of international solutions are facing financial difficulties and require urgent support on the debt front.
Climate and nature loss worsening
Not a day goes by without some part of the world being reminded of the catastrophic impact of climate and nature deterioration. The fact that close to 4 billion people are living in those countries that are acutely vulnerable to climate change is one grim statistics that cannot be dismissed anymore. The economic costs of climate change are immense and may well undermine debt sustainability in many countries. Faced with limited fiscal space and tight domestic resources made worse by the pandemic, many countries and especially environmentally vulnerable developing economies face pressures to adequately invest in essential climate change adaptation and mitigation efforts. For many economies, high debt levels impede their capacity to invest in those much-needed adaptation and resilience measures. For others, attempts to embrace high adaptation costs could well worsen their unsustainable debt burden
Urgent actions needed
In the face of the myriad and daunting challenges posed by climate change, the international community must now move from rhetoric to action and deal forcefully with the debt and climate crisis. As developing countries attempt to plan for a post-pandemic recovery, they should be given a genuine opportunity to deal with their debt burden and in tandem tackle the challenge of climate and nature that threaten to derail their economies.
- New global debt relief for climate and nature initiative. More specifically, it is high time for the international community to put forward a new debt relief initiative for post-COVID-19 recovery that prioritises and promotes targeted investment to support action on climate and nature. To ensure that the environmental agenda is not left out as developing countries try to get their economies back on track, the new debt reduction package linked with targeted and scaled up investment to support action on climate and nature is needed. Such a package could draw lessons from previous initiatives, such as the Heavily Indebted Poor Countries (HIPC) Initiative, which was launched in 1996 by the IMF and World Bank to ensure that poor countries were able to manage their debt burden.
- Debt reduction savings to support sustainable climate and nature investment. In the same way that HIPC was linked to poverty reduction, the new global initiative should focus on inclusive climate and biodiversity outcomes through commitments to key performance indicators (KPIs). That way, countries will aim at using the debt relief proceeds towards financing climate, nature and biodiversity priorities. Savings from debt reduction could also be linked to investments in marine and terrestrial conservation, sustainable natural resource management and increased climate resilience. In practice, priority investment should be decided on a case-by-case basis and owned locally. Crucially, the new initiative should aim to safeguard longer-term investment with high returns and positive environmental benefits such as sustainable energy, climate-smart agriculture, labour-intensive soil and water programmes, and prevention of climate change damage.
- Mainstream climate and green investment in national fiscal and PFM agenda. The call for debt relief and climate financing should not take place in a vacuum. Nationally, the policy agenda should focus on adequate fiscal policy and sound public financial management that support green investment and mainstream climate, nature, and biodiversity. Under that framework, the global initiative should promote responsible borrowing, support inclusive growth and allow for the right fiscal choices that can help reduce wasteful public spending such as subsidies for fossil fuel energy, help generate increased public revenues through climate taxation and increased natural resource taxation.
The forthcoming international gatherings should not be another missed opportunity for genuine action on the debt and climate front.
Some of the points quoted in this blog are based on Dev’s issue paper, Redesigning debt
Lessons from HIPC for COVID, climate and nature