To achieve international climate and development goals, developing and emerging countries would need an additional three trillion US dollars annually. But the Global South is currently groaning under the weight of an unmanageable debt burden. It’s time for a debt cut.
The Global South is facing financial collapse. During the coronavirus pandemic, many developing and emerging countries borrowed on the capital markets to ease the plight of both people and businesses. Today, more than half are facing a debt emergency; another third has only very limited access to capital markets. The combined effects of the pandemic, high interest rates, the rise in the US dollar, and food and energy price shocks have weakened economies, making it even more expensive for developing countries to borrow on the financial markets and sending state coffers into a downward spiral.
At the same time, financial needs are currently high, especially in low-income countries. According to the G20 Independent Expert Group, developing and emerging countries (excluding China) would need to raise around three trillion US dollars a year to achieve international climate and development goals. However, as few of them have access to high government revenues or affordable loans, the outlook for investments in climate protection and sustainable development is poor.
A recent study by the Heinrich-Böll-Stiftung, the Boston University Global Development Policy Center, and the Centre for Sustainable Finance at SOAS University of London found that 47 countries with a total population of over one billion people would be at risk of insolvency if they increased investment in climate protection and development. A further 19 countries, while not faced with immediate insolvency issues, would not be able to finance the necessary investments without credit enhancement or liquidity assistance. This threatens to derail the global development and climate agenda – with catastrophic economic and social consequences.
Debt service payments are already threatening to break the backs of many countries. Our study shows that foreign debt has more than doubled since 2008, and repayment levels are now higher than ever. Many borrowing countries are cutting important basic services and forgoing investments to enable them to service their debts.
Almost half of the world’s population lives in a country that spends more on foreign debt service payments than on investments in health or education. Money is expensive, especially for low-income countries. At the UN Environment Assembly in February this year, Kenyan president William Ruto underlined that African countries pay at least five times more than high-income economies to borrow from financial markets.
In order to protect the climate for the benefit of us all, the quickest and most immediately effective measure would be a debt “haircut”. The countries of the Global South in particular, who have contributed relatively little to climate change but are particularly badly affected by it, now have to raise enormous sums of money.
The annual financial contributions made by industrialised countries to support developing countries in the fight against climate change have so far been insufficient, and the allocation of funds is complicated and lengthy. Moreover, a large part of the money is distributed as loans, further increasing debt. A debt cut, on the other hand, would quickly free up financial resources for investment – including for building a sustainable economy and ending poverty and hunger.
The Common Framework for Debt Treatment adopted by the G20 to negotiate the restructuring of sovereign debt has so far proven to be too slow and inefficient, partly because it does not provide sufficient incentives for private creditors to participate. Moreover, it only applies to low-income countries, not to highly indebted middle-income countries, and does not take into account their investment needs in the areas of development and climate change. The fact that both the World Bank and the International Monetary Fund now recognise the need for reform here is only to be welcomed; Germany should actively support this process.
However, Germany also has options for action at national level, for instance the introduction of a law preventing private creditors from pursuing claims against insolvent states in German courts. This would safeguard restructuring or debt relief measures agreed upon by a majority of creditors during international negotiations. Experience from the Argentinian and Greek sovereign debt crises shows that such lawsuits are not uncommon, even in Germany.
Such a law, which could be quickly implemented, would send an important political signal that the German government continues to support the call for an international sovereign insolvency procedure featured in the coalition agreement and is working to defend the interests of the countries affected. After all, the London Debt Agreement cancelled a large part of Germany’s foreign debt after the Second World War – and this without the added impetus of a climate and development crisis.
böll.column
Get involved! There’s no other way to be real – thus the message of Heinrich Böll, and, to this day, his encouragement is inspiring us. With this column the Presidents of the Foundation involve themselves in current social and political debates. This column will appear each month, authored, in turn, by Jan Philipp Albrecht and Imme Scholz.
This article first appeared here: www.boell.de
