The global debt crisis in many developing countries and its interconnectedness with the climate crisis | Heinrich Böll Stiftung (2024)

The war in Ukraine, the climate crisis, the Covid-19 pandemic and the recent rise in interest rates due to inflation have massively exacerbated the debt burden in the Global South. Many countries are spending more money on servicing their debt than on providing healthcare or education for their populations. Climate-vulnerable countries are particularly affected by debt. They urgently need debt relief and new, low-interest loans in order to overcome the multitude of crises. Otherwise, many countries face the threat of stagnating development, political instability, intensified crises and growing emigration. Achieving the Sustainable Development Goals and implementing the Paris Climate Agreement would be out of reach.

Global Debt: Figures, Causes, Actors

Current developments, data and figures

In developing countries, debt has increased particularly in recent years - from 35 percent of GDP in 2010 to 60 percent of GDP in 2021, on average in each case.

• The foreign debt and debt service payments of developing and emerging countries have more than doubled since the global financial crisis in 2008. 1
• According to the IMF, 70 countries are acutely threatened by debt2 - Africa being hit the hardest.
• 42 percent of the world's population and 90 percent of the extremely poor live in the countries with the highest debt burden.3
• The following countries are already affected by a default in 2023: Zambia, Belarus, Lebanon, Suriname, Ghana and Sri Lanka. Numerous other countries are on the verge of default.

Looking at both domestic and foreign debt, the level of debt in the Global South is at the highest level since records began. For low-income countries (LICs), debt servicing accounts for 39 per cent of government spending in 2023; including middle-income countries, it is 29 per cent. In Sub-Saharan Africa, debt servicing exceeds expenditure on health, education and social security by a factor of two. This is incompatible with the Sustainable Development Goals. 4

Causes: COVID, price surges and interest rate turnaround

Numerous developing countries were particularly affected by the COVID-19 pandemic: Tourism revenues, remittances from migrants and export earnings plummeted, while spending on healthcare and economic stabilisation increased massively. The rise in energy and food prices as a result of the Russian attack on Ukraine exacerbated the balance of payments crisis for many. The turnaround in interest rates at the leading central banks triggered by global inflation then significantly increased refinancing costs and debt servicing.

Developing countries are structurally disadvantaged on the financial markets, as they borrow on much less favourable terms than countries in the Global North. On average, African countries paid eight times more for their debt than Germany in 2022-2023.5 The difference to the interest rates of developed countries (spread) is increasing as interest rates rise. They also have to contend with currency fluctuations and capital flight by foreign investors in times of crisis.

Vicious circle of debt and climate vulnerability

Many countries in the Global South are particularly affected by the consequences of climate change. This is due to the high proportion of climate-dependent agriculture in GDP, inadequate infrastructure and particularly severe extreme events (hurricanes, floods, droughts).

Anticipated economic climate damage is increasingly being priced in by the financial markets as a risk premium, making it even more expensive for the affected countries to take out loans. As a result, urgently needed investments in adaptation and resilience are not made, which exacerbates the vulnerability of the national economy: a vicious circle.6

Changed creditor landscape makes debt relief more difficult

Compared to previous debt crises, the creditor landscape has become more diverse. The role of bilateral state creditors, with the exception of China, has declined, making the Paris Club of Western creditor states less relevant. Private creditors now account for an increasing share: in 2021, they accounted for 62 per cent of the foreign debt of developing countries.7 Furthermore, bilateral creditors that are not represented in the Paris Club, such as China and Saudi Arabia, are playing a greater role. All of this makes debt restructuring more difficult, as all players have to agree on comparable treatment.

Debt governance and reform proposals

The "Common Framework for Debt Treatments" of the G20 countries has been in place since November 2020. It was intended to simplify negotiations on debt restructuring. Unfortunately, it has proven to be highly inefficient and slow and has been criticised as inadequate and in need of reform. The weaknesses of the Common Framework include

• It only addresses low-income countries (LICs), although middle-income countries are also highly indebted and need debt relief.
• It offers no incentives for private creditors to participate in the restructuring negotiations and to cancel debts.
• The investment required to achieve climate and development goals is not taken into account. As a result, debt relief is not extensive enough. This is a particular problem for climate-vulnerable countries.

So far, only Chad and Zambia have utilised the Common Framework and have not received any substantial debt relief. Ghana and Ethiopia are still in the process.

Reform proposals

The international debt architecture is no longer fit for purpose in view of the interlinked crises and must be reformed. New financial resources alone will not solve the problem. Proposals currently under discussion include

• Creation of an independent body at the UN for a multilateral and fair debt restructuring process with all creditors and debtors (international sovereign insolvency proceedings).
• A comprehensive programme of debt relief for sustainable development (see box).
• Adoption of national laws that restrict the ability of private creditors to sue and enforce claims against debtor states.
• Debt moratorium: Automatic deferral of payments when countries are on the verge of a debt crisis.
• Inclusion of climate resilient debt clauses in loan agreements.
• Abolition of the IMF risk premium and reform of the IMF debt sustainability analysis, taking into account climate vulnerability and investment needs.

"Debt Relief for a Green and Inclusive Recovery" develops proposals for a comprehensive debt relief initiative for climate protection and sustainable development. They were developed by a group of high-level experts from all continents and taken up by the V20 group (68 particularly climate-vulnerable countries with 1.7 billion inhabitants). www.drgr.org

• 1Debt Relief for a Green and Inclusive Recovery (2023): Guaranteeing Sustainable Development.
• 2IMF (2023): List of LIC DSAs
• 3 UNCTAD (2023): A World of Debt.
• 4Development Finance International (2023). The Worst Ever Global Debt Crisis. New Data from Debt Service Watch.
• 5Development Finance International (2023)
• 6K. Gallagher et al. (2023): Reforming Bretton Woods institutions to achieve climate change and development goals. One Earth.
• 7UNCTAD (2023): A World of Debt.