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Rising debt may force poor countries to scale back their actions against climate change

Countries most vulnerable to climate change face a sharp rise in debt service payments in the next two years, which will cause them to stop investing in climate resilience and economic developments, Reuters reported, citing a report.

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The Vulnerable Group of Twenty (V20) includes 55 economies that are vulnerable to climate change. Countries in this group expect debt service payments to rise to $69 billion by 2024. If the prediction turns out to be true, the increase will be the highest in the current decade, according to calculations by V20 and Boston University’s Center for Global Development Policy.

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The report added that debt service payments currently stand at $61.5 billion, and may increase that in 2023.

Ongoing global issues such as inflation, the Covid pandemic and the Russia-Ukraine war may force these countries to cut their expenditures on economic development and on policies to save themselves from the impact of climate change.

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As the world continues to suffer from the after-effects of the Covid pandemic, several debt relief plans have been launched for the world’s poorest countries. These schemes were put in place to help these economies after the pandemic that ravaged global financial markets.

However, such schemes failed to provide relief to these countries from major issues such as global inflation and the Ukraine-Russia crisis. Moreover, many schemes such as the Debt Service Suspension Initiative (DSSI) have expired.

“Without debt relief and other complementary measures such as grants, G20 countries will delay their ability to reap the benefits of climate investments, such as improved resilience and enhanced energy generation through renewables,” the report added.

Change in the structure of creditors

The report pointed to a change in the creditor structure of many countries exposed to climate change. The external public debt of $686.3 billion owed by the V20 nation saw more private creditors come in. Now, they hold more than a third of the debt while the World Bank and other multilateral institutions hold a fifth of each, according to a Reuters reporter.

China also has a large share in the amount of debt. The V20 owes about 7% of the total to the Dragon. Moreover, 13% of the debt share is left to be paid to the wealthy countries crediting the Paris Club by the V20 countries.

As rising temperatures, melting glaciers and changing season patterns continue to remind the world of climate change, these climate-vulnerable nations don’t even need such reminders. The land area of ​​one of the V20 members, Tuvalu (an island nation) is constantly decreasing due to sea level rise. With the impact of the current global problems on its economy, it will not be able to invest more in saving itself from sinking.

To deal with the situation, the authors urged the International Monetary Fund to step in and raise the level of debt sustainability analysis. They asked the International Monetary Fund to take into account the climate risks faced by vulnerable countries.

“Given that climate impacts increase the cost of raising capital for countries at risk, the close link between climate change and debt sustainability needs to be identified and should inform the debate about countries in need of debt relief,” the report concluded.

The V20 economies consist of Barbados, Cambodia, Costa Rica, Ethiopia, Honduras, Lebanon, Morocco, Nepal, the Philippines, Rwanda, Senegal, Sudan, Tanzania, Tunisia, Tuvalu, and Vietnam.

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