As the fourth International Conference on Financing for Development (FfD4) kicks off in Seville, Spain, we look at how a massive debt burden on developing countries is holding them back. As an unfit global financial architecture makes accessing finance more difficult for countries in the developing world, governments are left with the option of either servicing the debt or serving the people. ead the first, second and third parts.
Since 2015, gross capital formation (or fixed assets of the economy such as schools, hospitals and plants) in low-income countries has stalled at just 22 per cent of GDP — well below the 33 per cent average for middle-income countries, highlighted The Jubilee Report, a Vatican-backed report by 30 prominent economists commissioned by Pope Francis. To emerge from their poverty and to catch up even with middle-income countries, they should be investing a larger, not a smaller, percentage of GDP.
The implications of rising sovereign debt repayments and the resulting burdens on a country’s financial health are worrisome. Comparing external sovereign debt service costs as a share of GDP with governments’ health and education expenditures as shares of GDP reveals startling results. The past decade has witnessed an increase of over 47 per cent in the number of countries where external sovereign debt service is crowding out education and health spending.
In 2013, nine countries saw their external sovereign debt service as a share of GDP exceed their education expenditure as a share of GDP, while 35 countries saw their external sovereign debt service as a share of GDP exceed their health expenditure as a share of GDP.
By 2023, these numbers had risen to 17 and 48 respectively. Moreover, in 2023, 11 countries saw their external sovereign debt service as a share of GDP exceed government education expenditure as a share of GDP by over 1 percentage point. For Indonesia, the difference was 2.1 per cent, for Maldives it was 5.1 per cent, for Angola it was 5.9 per cent while for Mongolia, it was 8.2 per cent.
Similarly, 21 countries saw their external sovereign debt service as a share of GDP exceed government health expenditure as a share of GDP by over 1 percentage point. In 13 of these countries, the difference was over 2 percentage points. The difference was 1.6 per cent for Indonesia, 3 per cent for Cameroon, 4.7 per cent for Congo, 4.9 per cent for Jordan and 6.4 per cent for Angola. This highlights the growing precarity of developmental spending in the Global South — driven, at least in part, by the unfolding sovereign debt crisis.
A 2023 report by international non-profit ActionAid states such high debt service costs are locking countries into a negative spiral, forcing governments to not only cut public spending on vital public services but also investing in things that are not good for the climate to pay back their debts. Countries like Ghana are even cutting funds to vital public services like health and education to keep up with debt repayments.
For several of the most vulnerable countries, the costs of addressing climate change, as reported by them, amount to costs of damages for isolated climate-induced / climate-worsened weather events. For instance, past hurricanes are a primary reason that Dominica and other Caribbean countries are heavily indebted. When Dominica was hit by Hurricane Erika in 2015, the damages amounted to up to90 per cent of their total GDP.
More recently, several small island countries, at greatest risk of sea level rise caused by climate change, have rallied together to call for debt relief in the face of mounting physical and economic impacts of climate change. Haiti, among the most vulnerable and severely indebted, faced damages of at least $432.38 million in 2023 alone from “climatological” natural disasters alone. These vulnerabilities reinforce each other, demanding that debt and climate finance be addressed together.
To understand the overlap of debt and climate vulnerability, we examined the countries most at risk from climate impacts and most burdened by debt. Over half of the low- and middle-income countries (LMIC) with high climate vulnerability are either already in debt distress or at high risk of it. These 36 low- and middle-income climate-vulnerable countries are either already in debt distress or at high risk of it. Their experiences offer a sharp lens into how debt burdens shrink fiscal space, deepen climate vulnerability, and how international climate finance still falls short of addressing this imbalance.
Developing countries need scaled-up finance to enable climate action. Those most vulnerable — to both climate and economic shocks — need non-debt climate finance. The countries in this analysis have together received $78 billion over 11 years (2012-2022) as development finance with a climate component. This is a generous estimate, given the varying degrees of actual climate aspects at the project level, and the fact that figures are only available for the commitments made by donor countries—actual disbursements might vary.
It has been noted in the past that climate finance has a much lower disbursement ratio than overall development finance; sometimes, even as much as only half the amount being disbursed. On an annual basis, they have together received $7.17 billion per annum. The total costed needs for implementing these countries’ national climate plans per year, on the other hand, amounts to $79 billion — the gap is significant.
All the while, damages from climate related disasters continue to pile up. When we add the lens of sovereign debt to this situation, the picture becomes murkier. These countries are either already at high risk of debt distress or in debt distress. The World Bank and the International Monetary Fund (IMF) explain debt distress as a situation where a country is “unable to fulfil its financial obligations and debt restructuring is required.”
In the event of a sovereign debt default, countries further lose market access and face even higher borrowing costs. These 36 countries spent a total of $13.24 billion on external sovereign debt service payments in 2022 alone. This is 1.8 times more than what they have received as climate-related development finance in a year — they have spent nearly double the amount of what has flowed in for climate action servicing external ppg debt alone.
Of the 36 countries highlighted in this analysis, one-third have the highest vulnerability to climate change with the least preparedness. Examining the climate finance needs, flows and public debt service, it is revealed that climate-vulnerable countries are under-supported on finance, yet overburdened with debt servicing, often spending more on debt than on education or health. While the situation varies given the unique circumstances of each country, it is reflective of the broader debt-development-climate nexus.
The following snapshot drives home this point. In most countries, debt service outweighs either climate finance received or basic social spending as a share of gdp. For instance, debt service is higher than climate-related development finance flowing in Chad, Guinea-Bissau, Haiti and Sierra Leone. In Chad, Guinea-Bissau and Haiti, debt service also exceeds social spending.
Of the 36 countries in this sample, reliable data on losses from climate related disasters was available for 25. For these 25 countries, nearly 70 per cent have paid more in public debt service in 2022 than the average annual losses from climate disasters.
In four of these countries, Zambia, Ghana, Cameroon and Tajikstan, the public debt service exceeds the losses from climate by over 50 times. It comes as no surprise that two of these, Ghana and Zambia, are also countries that have attempted to have their external debts restructured under the G20 Common Framework — to limited avail.
While climate-related losses may be episodic and debt service is a recurring fiscal obligation, this contrast reveals the structural imbalance in how public finances are allocated. It underscores that even without a disaster occurring, a significant portion of a vulnerable country’s fiscal space is already pre-committed to creditors — often far exceeding what they typically lose from disasters. This leaves little to no room to respond when an actual climate crisis strikes.
The comparison is not to equate the two, but to expose how rigid and unfair financial commitments can crowd out the capacity to prepare for or recover from the far less predictable — but potentially catastrophic — shocks of climate change.
Chad, one of the world’s most climate-vulnerable countries, faces a stark imbalance between its climate needs and financial realities. With over $2.1 billion needed annually to implement its climate plans, it has received just $177 millionper year in committed climate-related development finance over the past decade — barely 8 per cent of its actual requirements. Meanwhile, the country suffers annual average climate-related damages of around $29 million, further compounding its vulnerability.
Yet, Chad spends far more on debt repayment than on addressing climateor development needs. In 2022, the government paid $393 million in external public debt service — more than double the amount it receives on average per year in climate related development finance, and more than seven times what it spent on health as a share of GDP.
Debt servicing also consumed a staggering 19.15 per cent of total government revenue; the country is classified at high risk of debt distress. This also underscores the urgent need for creating non-debt climate finance and fairer financial rules for frontline nations.
More concessionality
Several countries delineate the requirement of international assistance for climate finance in their nationally determined contributions (NDC), ranging from 75 per cent to 90 per cent of overall needs. The Organisation of Economic Cooperation and Development (OECD) collates data on flows of Climate Related Development Finance (CRDF), of which Official Development Assistance (ODA) towards developing countries is a large part. These flows comprise the bulk of tracked international assistance for climate finance flowing to developing countries around the world.
Though it is important to note that crdf is closely related but distinct from the flows that comprise climate finance, tracked as part of the erstwhile $100 billion goal. The growing share of non-concessional, less development-focused climate related development finance suggests a shift away from equitable, need-based support.
The data shows around 2015, the share of non-concessional flows overtook concessional, and the trend continues till 2022. The gap may be reducing, but for countries with small economies, the need for majority concessional finance, particularly for climate, is imperative.
OECD’s latest report tracking overall climate finance flows also highlighted that of the $115.9 billion provided / mobilised by developed countries in 2022, some 69 per cent were in the form of loans. For countries grappling with climate shocks, low readiness, and high debt, this triple bind leaves little space for investment in adaptation or recovery.
These are not isolated or theoretical mismatches — they are systemic and structural failures of the global financial system. The analysis underscores the need for a justice informed lens on climate and debt to ensure that those facing the brunt of climate breakdown are not punished twice.