Record debt costs mean climate spending could push nations to brink of insolvency

By Libby George

LONDON (Reuters) – Emerging countries will pay a record $400 billion to service external debt this year, and nearly four dozen cannot spend the money they need for climate adaptation and sustainable development without risking default in the next five years, according to a report led by Boston University released on the eve of the IMF/World Bank spring meetings.

The report from the Debt Relief for Green and Inclusive Recovery Project (DRGR) found that 47 developing countries would hit external debt insolvency thresholds, as defined by the International Monetary Fund (IMF), in the next five years if they invested the necessary amounts to hit 2030 Agenda and Paris Agreement goals.

“They would be in such high debt distress that they would be knocking on the door of (default), given the current debt environment, if they were going to try to mobilize that kind of financing,” said Kevin Gallagher, director of Boston University’s Global Development Policy Center.

A further 19 developing countries lack the liquidity to meet the spending targets without help, though they would not approach default thresholds.

The report called for an overhaul of the global financial architecture, alongside debt forgiveness for the most at-risk countries and an increase in affordable finance and credit enhancements.

“We need to mobilize more capital and bend down the cost of capital for countries if we’re going to have any prayer to meet this,” Gallagher told Reuters.

The DRGR Project is collaboration between the Boston University Global Development Policy Center, Heinrich-Böll-Stiftung, the Centre for Sustainable Finance, SOAS and the University of London.

The report also presses the International Monetary Fund to rejig the way it calculates debt sustainability — arcane-sounding assessments that are crucial to determining how much debt relief defaulted countries get.

If the IMF determines a country can handle an amount of debt that is too high, it can saddle the nation with unaffordable payments — possibly pushing them back into default.

Private creditors, however, have at times criticised the Fund’s analyses for being too pessimistic, making them closely watched and politically charged.

The DRGR says the IMF, which is conducting a years-long review of the analyses, must incorporate climate spending needs — as well buffers to weather shocks, from climate to economic crises to pandemics.

“If the international community does not act in a swift and uniform manner to provide comprehensive debt relief where needed alongside new liquidity, grants and concessional development finance, the costs of inaction will be exorbitant,” the report warned.

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