As policymakers convene for the International Monetary Fund (IMF)/World Bank Group 2024 Annual Meetings, a new report by the Expert Review on Debt, Nature and Climate documents the extent to which unsustainable debt burdens, loss of nature and escalating climate change are compounding one another in a hugely destructive ‘triple crisis.’
Commissioned by the governments of Colombia, Kenya, France and Germany, the report finds that the Debt Sustainability Analyses (DSAs) used by the IMF and World Bank to assess the affordability of sovereign debt fail to properly consider the links between debt, climate and nature loss.
Main findings:
- The COVID-19 pandemic, fuel and food price inflation, a strengthening US dollar and soaring interest rates have left many countries at high risk of debt distress, while extreme weather events have become more frequent and severe.
- Countries face a ‘vicious circle’ of indebtedness, wherein those most exposed to climate change and nature loss are increasingly having to borrow to fund disaster response and recovery and climate adaptation. But environmental shocks and stresses then constrain economic growth and public revenue, reducing their ability to service debt and raising the interest rates they face. This then further damages a country’s ability to invest in climate- and nature-positive development.
- A ‘virtuous circle’ of environmentally sustainable and inclusive growth is possible, but only if strong domestic policy is matched by international financial support.
Policy recommendations for DSAs:
- Incorporate the projected impacts of climate change, including both rapid onset shocks and slow onset stresses, in their underlying baseline macroeconomic and fiscal projections.
- Integrate the risks associated with nature loss in their underlying baseline macroeconomic and fiscal projections.
- Make more extensive use of different climate and nature scenarios, including ones with early and ambitious investments in resilience, nature protection and avoided emissions.
The bottom line: There is no addressing the climate crisis without addressing the debt crisis.
About the Expert Review: The Expert Review was established by the governments of Colombia, Kenya, France and Germany to assess the relationships between sovereign debt and climate and nature impacts and policy. It is conducted by an Independent Expert Group (IEG) co-chaired by Vera Songwe, former UN Under-Secretary General, and Moritz Kraemer, Chief Economist at LBBW bank and former Global Chief Ratings Officer of S&P Global (previously known as Standard and Poor’s). Coming from both developed and developing countries, members of the Expert Review’s Independent Expert Group have expertise and experience drawn from borrower and creditor country governments, international financial institutions, the private sector, academia and civil society.
Quotable:
- Vera Songwe, former UN Under-Secretary General; Expert Review Co-Chair: “Many low- and middle-income countries are facing a ‘triple crisis’ not of their own making, with high global interest rates compounding increasingly severe climate impacts and nature loss. Unless the international community collectively takes measures to address this, countries are not going to be able to pursue the climate-resilient, low-carbon and nature-positive growth which they need – and of which they are capable.”
- Moritz Kraemer, former Global Chief Ratings Officer, S&P Global; Expert Review Co-Chair: “The increasing economic impact of climate change and nature loss make it critical for the IMF and the World Bank to revise the way they assess the sustainability of countries’ debt. We hope that our report will help them do this.”
Resources:
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