Sunday, September 17, 2017

Climate change, debt relief, debt swaps and climate finance

By Luis Alberto Fierro, Climate Finance Adviser (*)

In recent weeks we have witnessed the increasing impact of climate change, with Hurricanes Irma and Katia in the Atlantic, the heavy flooding in Southern Asia, Mali, Ecuador and other places, the extended wildfires in the United States and Canada, droughts, etc.

Climate-related natural disasters have increased four-fold since 1970:

In particular, the warming tropical waters have increased the intensity of tropical cyclones (hurricanes, typhoons), and thus their destructive power.

At the same time, we have seen that the economic cost of these climate events has increased, given the increase in population, the increase in cities near coastal areas, and the increase in the number of severe climate events.  In some highly vulnerable islands in the Caribbean, the losses can exceed the GDP. Just Hurricane Irma is estimated to have cost $13 billion in losses and damage, with the cost exceeding the annual GDP of several islands.

We are witnessing the following concurrent trends:

a) increasing number of climate-related natural disasters

b) increasing cost of these natural disasters;

c) several developing countries having a public external debt that exceeds their GDP, or are otherwise on an unsustainable debt path.

d) increasing number of "climate refugees", that have to flee their native countries due to climate change related problems (drought, flooding, agricultural losses, desertification, excess heat).

e) developed countries committed in Decision 1/CP.21 that accompanied the Paris Agreement to jointly mobilize at least $100 billion per year annually for climate finance, including mitigation and adaptation activities.

These trends are interconnected.

The 10 top climate vulnerable countries in the world are:

Source: GermanWatch,

According to Erlassjahr (based on IMF data and their own analysis) the countries facing the most severe difficulties regarding their public external debt are the following:
"Most threatened by a renewed debt crisis are countries that already have shown high indicators before and could not improve their situations. In the five regional groups this relates to the following countries:
CIS / CEE: Albania, Kyrgyz Republic, Armenia, Kazakhstan, Montenegro, Georgia, Croatia, Ukraine, Cyprus, Bosnia and Herzegovina, Serbia
Sub-Saharan Africa: Cape Verde, Mozambique, Ghana, Mauritania, The Gambia, Sudan, Mauritius, Zimbabwe
Latin America / Caribbean: Brazil, Colombia, Barbados, El Salvador, Antigua and Barbuda, Uruguay, Dominica, Saint Vincent and the Grenadines, Nicaragua, Venezuela
Asia / Pacific: Bhutan, Samoa, Sri Lanka, Mongolia, Tonga, Pakistan, Lao
North Africa / Middle East: Tunisia, Jordan, Yemen, Lebanon.
The most affected country groups are small island developing states, post-completion point HIPCs, transformation states and extractive economies"


Among those countries most affected by unsustainable levels of debt are the small island developing states (SIDS) of the Caribbean, as well as several highly vulnerable Central American nations (Nicaragua, Guatemala and El Salvador).

HIPC refers to the Highly-Indebted Poor Countries debt relief initiative, which was complemented by the Multilateral Debt Relief Initiative (MDRI).  Between the two, they provided debt relief of approximately $75 billion (in end-2014 net present value terms) to 36 low-income highly-indebted countries. (

HIPC Post-Completion-Point Countries (36)
The Gambia
Burkina Faso
São Tomé & Príncipe
Central African Republic
Sierra Leone
Republic of Congo
Democratic Republic of Congo
Côte d’Ivoire
Pre-Decision-Point Countries (3)

However, it should be noted that several non-Paris Club creditors (notably, China and the other BRICS) did NOT participate in this debt relief initiative, and, to the contrary, took advantage of the fiscal space opened by the HIPC to provide new loans to these countries, to the extent that several of them are now again facing debt service difficulties. Among these Nicaragua in Latin America, and Ghana, Mauritania, Mozambique, Sudan, and The Gambia in Africa.

Currently, there is a petition to provide a moratorium on debt payments for Antigua and Barbuda, given that the island of Barbuda was completely devastated, and losses mount to $220 million (about 15,7 % of GDP of the entire nation, but probably exceeds the GDP of Barbuda itself). 

Given the situation, I would like to propose the following:

1. Debt Relief, including multilateral and bilateral public debt, for highly-indebted, highly-vulnerable countries (irrespective of their GDP per capita level). Additional grant resources to finance primarily adaptation actions, to enhance climate resilience of infrastructure, and also to strengthen the existing regional and sub-regional catastrophe risk insurance facilities such as CCRIF:

This could be organized under existing international institutions (such as the World Bank or UNDP).

2.  Debt swaps, also open to multilateral and bilateral creditors, for those countries which still have market access and sustainable debt levels.  In this case, proceeds from debt swaps would be invested in results-based mitigation and adaptation actions, with stringent monitoring and evaluation systems, to ensure that the public investments (in lieu of external debt service payments) are effectively channeled.  This could be organized under existing climate finance facilities, such as the Global Environment Facility (GEF) or the Climate Investment Funds (CIF).

3.  Additional climate finance:  currently, multilateral development bank's climate finance for developing countries is estimated at $27 billion per year, and an additional 17 billion is provided through bilateral public finance from developed countries to developing countries.  The OECD and CPI estimated a total of $62 billion in climate finance in 2014, which included private funds mobilized by public institutions.  

In order to reach $100 billion goal by 2020, the OECD projects that public funding should increase to $67 billion (from an average of $41 billion in 2013-2014), with the difference coming from private funds mobilized by public entities.

An interesting recent proposal (given the uncertainty surrounding the Trump Administration's position vis-à-vis the Paris Agreement) has been launched by CAP  and WRI that would enable the creation of "America's Climate Fund" that would receive contributions from State and local governments, foundations, other private sources and even individuals (through crowd-funding).

Part of the funding provided by the Green Climate Fund, Adaptation Fund, LDCF, GEF, CIF and other climate funds could be directed at developing national climate finance strategies, identifying portfolios of projects, and assisting in the design of projects, to be partially funded through national investment derived from debt relief or debt swaps.

This would enable:

a) decreasing the debt burden of developing countries (especially low-income and highly-vulnerable countries).

b) channeling additional domestic and international resources towards mitigation and adaptation activities, with which hopefully the temperature increase would remain under 2 degrees C, and the impact of climate change wouldn't be as severe.

c) enabling additional climate finance resources to be channeled from developed countries to developing countries, and dedicated to establishing robust M&E systems to measure the results of the resources invested.

This initiative would require support from the larger sources of climate finance, and in particular a champion (such as France's Macron).

(*) Climate Finance and Development Finance Adviser.  These are my personal opinions, and they do not necessarily reflect the positions of any entity with which I am now or have been affiliated.

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