Climate finance exacerbates debt distress in developing countries

As the burden of climate change continues to grow, many developing countries are facing severe pressure to choose: repay debts or invest in basic public services such as health care and education? In 2022, only 28% of climate finance was provided in the form of grants, and most of the rest was loans, which made these countries' debt burden increasingly heavy, especially in the process of responding to climate disasters and promoting clean energy transformation.

First, Sherry Rehman, former Minister of Climate Change of Pakistan, pointed out that many developing countries are now facing the dual dilemma of climate finance and debt pressure. She said that many countries often spend more on debt repayment than on education, health care and infrastructure, which are crucial to responding to the climate crisis and protecting people from natural disasters. Rehman described this situation as a "recovery trap", that is, while working to restore and enhance climate resilience, they are constantly trapped in debt.

Second, according to the climate finance agreement reached at the 29th Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC), wealthy countries pledged to provide $300 billion in funds to developing countries each year by 2035. While this commitment may seem generous, it is a pittance compared to the $443.5 billion in public debt that developing countries will need to repay by 2022. More worryingly, the agreement does not specify how much of the $300 billion will be provided in the form of loans and how much in the form of grants. In addition, it does not clearly state how to effectively address the debt crisis of climate-vulnerable countries.

Furthermore, data from the World Resources Institute (WRI), a global nonprofit research organization, shows that the multilateral development banks, the main body of climate finance, are also an important source of debt pressure in developing countries. In 2023, these banks provided $74.7 billion in climate finance to developing countries, but only 6.7% of it was grants. Activists have expressed strong concern and called on these institutions to provide more non-debt financing and take measures to reduce debt burdens. Recently, the Asian Development Bank (ADB) has made some progress in this regard.

Finally, as the "Asia-Pacific Climate Bank", the Asian Development Bank has established a fund to provide grants and soft loans to countries that need help most, especially small island developing States and least developed countries. In 2023, the ADB allocated an additional $430 million to these vulnerable countries and provided more favorable loan terms to small island states. Despite this, many observers still believe that in addition to increasing grants and optimizing loan terms, the global climate finance system should further explore how to reduce the debt burden of developing countries. One possible solution is the "debt-for-climate" mechanism, that is, debt relief in exchange for national actions in climate adaptation and mitigation. In recent years, some countries have tried this model. For example, Barbados successfully completed a debt swap agreement to replace part of its debt with international financing institutions for investment in climate-resilient infrastructure such as water and sewage treatment projects. This case is considered an important step in exploring new models of climate finance.

In general, the mechanism of climate finance urgently needs reform. It cannot rely solely on loans to solve the climate crisis, but should pay more attention to the provision of grants and debt relief measures. In order to avoid the future "recovery trap", the world should take more flexible and fair measures in the field of climate finance to enable developing countries to maintain sustainable economic and social development while responding to climate change.