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Making Sense of Competing Narratives on Debt and Climate Change

By Tim Hirschel-Burns

If you are a casual observer trying to keep up with the news on sovereign debt right now, you have every right to be confused by last month’s stories.

According to Bloomberg, whose recent headline announced “Africa’s Eurobond Comeback Ends Debt-Distress Saga,” the debt crisis is over. But according to a recent interview with Barbados Prime Minister Mia Mottley, who has spearheaded the influential Bridgetown Initiative to help developing countries address climate change, it is time for a level of ambition similar to perhaps the most significant debt relief initiative in history, the Heavily Indebted Poor Countries (HIPC) Initiative.

Meanwhile, the World Bank’s Deputy Chief Economist took a mixed tack in The Guardian, calling debt a “silent crisis” but pushing back against Mottley-like calls for a “grand scheme” to address debt. He also managed to throw another narrative into the mix: that the delays in debt relief efforts are in large part down to China.

A major reason for the seemingly conflicting narratives on debt is that actors are holding the current debt situation against different benchmarks. If your benchmark is whether countries are literally on the verge of defaulting on their debts, it is true that emerging markets and developing economies (EMDEs) are on a slightly upward trajectory. But if your benchmark is that EMDEs need to invest in an economic transformation on a virtually unprecedented scale and speed if the world is to have any hope of meeting its climate goals, debt should get the sirens whirring and the alarm bells flashing.

Take Kenya as an example. Kenya was one of the African countries able to return to international capital markets this month, and the new bond it issued will help pay off a $2 billion payment on an existing bond due in June. So, if your benchmark is avoiding immediate default, crisis averted.

But where does this leave Kenya’s prospects of investing in solar panels, drought-resistant seeds, and infrastructure that can withstand higher temperatures? Kenya already spends over half its revenues on debt service, and it will have to pay an eye-popping 10.375 percent interest rate on its new bond, far higher than its projected growth rate for the coming years. As a result, this bond will eat further into the share of revenue that can be spent on climate investments, as well as likely provoking more severe debt challenges in the future.

Kenya is not alone in facing a mix of debt and high capital costs that impede climate action. A recent report from the Boston University Global Development Policy Center found that, of 108 EMDEs studied, 62 are in or at risk of debt distress. Another 33 countries face capital constraints, either due to sovereign bond ratings below “investment grade” or by facing borrowing costs above projected growth rates. Only 13 of the 108 EMDEs studied have relative capital market access.

While China was not included in the study, the scale of its climate investments stands in stark contrast to the vast majority of developing countries. China accounts for two-thirds of all the clean energy investments in EMDEs. In 2022 alone, China installed new solar photovoltaics (PV) capacity that is ten times that of Africa’s existing solar capacity. One important reason for the divergence in clean energy investments between China and other EMDEs is that China faces far lower capital costs. For example, China’s 10-year government bonds come with a yield of just 2.406 percent, while the African countries that issued bonds this month all did so at upwards of 8 percent.

When the Global Sovereign Debt Roundtable meets to discuss the intersection of climate change and debt at the beginning of March, the benchmark they use should be to ensure that countries have the fiscal space they need to make rapid, large-scale climate investments. Technical fixes will be on the agenda, including debt pause clauses and debt-for-climate swaps. However, these instruments are not enough to resolve the problem. While debt pause clauses can help countries get back on their feet after disasters, they only push debt payments out into the future. Debt-for-climate swaps are difficult to conduct and their time-consuming, piecemeal nature mean they are unlikely to meet the scale of the problem.

With EMDEs other than China needing to spend around $2.4 trillion per year by 2030 to meet climate and development goals, there is no route to sufficient action that does not include debt relief. All creditors must play a role in this debt relief. The World Bank Deputy Chief Economist’s recent statement that “China is the big player” on debt relief is not accurate in terms of debt loads: of the 62 countries in or at risk of debt distress, 49 countries owe more to multilateral development banks (MDBs), bondholders, or Paris Club lenders than China. Still, China is an influential player in global debt negotiations, and countries that predominantly owe China have disproportionately high sustainable investment needs, so China’s participation is crucial.

Furthermore, debt relief needs to come as a broader suite of climate action-enabling reforms to the international financial architecture. With capital markets largely inaccessible or too expensive, EMDEs need access to significantly more finance, especially grant-based and concessional finance, including from MDBs and China’s concessional lending windows. Special Drawing Rights, new international taxes and scaled up progressive taxation can add further finance. Changing debt sustainability frameworks to better account for green growth multipliers and the scale of required development and climate investments can ensure that debt aligns with climate action going forward—the International Monetary Fund (IMF) and World Bank’s ongoing review of their Debt Sustainability Framework for low-income countries provides a welcome opportunity to start.

If the only bar that needs to be cleared is ensuring countries do not default in the coming months, these steps might look excessive. But come 2030, with climate and development goals out of reach because far too many EMDEs faced a fatal mix of debt distress and high capital costs, it will be entirely obvious that this was the wrong bar to focus on. Clearing a more important bar—$2.4 trillion per year in climate spending in EMDEs by 2030—demands a different level of ambition, and it demands significant debt relief.

Tim Hirschel-Burns is the Policy Liaison for the Global Economic Governance Initiative at the Boston University Global Development Policy Center. Follow him on X: @TimH_B.

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