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Research: 93% of countries vulnerable to climate disasters are indebted

Climate Disasters

A research has revealed that 93 per cent of countries, including Ghana, at the forefront of climate disasters, are drowning in debt.

The newly published policy brief, “The vicious cycle: The links between debt crisis and climate crisis” by ActionAid International, a humanitarian organisation, recommended for most climate vulnerable countries to have their debts cancelled, along with a radical reform of the way global debt is managed, to stop further crisis.

With countries forced to pay back their debts to the World Bank, International Monetary Fund (IMF) and private banks before spending on anything else, the research raises worrying questions about how the countries were afforded to rebuild, adapt, and mitigate against frequent and intensifying climate disasters.

The research found that nine countries, most vulnerable to climate change, including Somalia, Malawi, and Mozambique, were already in debt distress.

It found that 40 climate vulnerable countries were at moderate or high risk of debt distress, while only four countries, being impacted by climate disasters, were at low risk of debt distress.

The ActionAid research comes on the back of the IMF and World Bank 2023 Spring Meetings, where economic policy options for Global South countries will be under the spotlight.

Ghana, for instance, defaulted on its $28.4 billion external debts in December with about 42 per cent of that being domestic debt, leading the country to restructure its domestic debt through a domestic debt swap.

In January Ghana applied for debt relief through the G20 Common Framework, widely criticized by some global economic watchers for very slow progress.

Ghana is waiting for an Executive Board approval for a three-year Extended Credit Facility (ECF) agreement for $3 billion with the IMF.

Mr John Nkaw, Country Director, ActionAid Ghana, said Ghana was having to spend more on servicing its debt than it spent on education and health.

“It is a vicious cycle because cutting public expenditure means the country doesn’t have as many resources to respond to climate disasters when they do hit. We can’t invest in adaptation or resilience, and we can’t appropriately prepare for or respond to climate-induced disasters,” he said.

Mr Nkaw said Ghana would need about 60 per cent of its debt cancelled if it was to return to a path of sustainability.

He noted that “If freed of debt, we would be able to strengthen small and medium size businesses, invest in renewable sources of energy, smallholder farmers and agroecology. But these choices aren’t an option.”

ActionAid International, in a statement said, “the vicious cycle continues with countries needing to repay these debts in foreign currencies, mostly US dollars.”

To get this quickly, it said, countries were often driven to invest in extractive industries like fossil fuels and invest in large scale industrial agriculture which was harmful for the environment and contributed towards climate change.

The statement said Malawi, a country ravaged by the recent Cyclone Freddy, which displaced more than half a million people and destroyed buildings, roads, and homes, was heavily affected by debt.

Ms Pamela Kuwali, Country Director, ActionAid Malawi, said: “Malawi faces a debt which is nearly two thirds of its gross domestic product which means instead of our government being able to channel vital finances to rebuild and recover after Cyclone Freddy, instead to we are being forced to pay back old loans.”

“Our hands are tied, and all the while climate disasters are becoming ever more intense and destructive. This can’t continue, and it will be women and girls who suffer the impact the most,” she added.

The research also found that 38 out of 63 most climate vulnerable countries were already spending so much on debt servicing, they were likely to be cutting spending on public services.

Mr David Archer, Head of Programmes and Influencing, ActionAid International, said: “These debts are locking countries into a negative spiral – forcing governments to resort to cutting public spending and investing in things which aren’t good for the climate to pay back their debts.”

He said, “It is crucial we spotlight how the World Bank, IMF and private banks based in wealthy countries are preventing climate progress as they continue to enforce strict conditions around debt repayments on climate vulnerable countries at any cost.”

Mr Archer added: “It’s time for the most climate vulnerable countries to have their debt cancelled so we break free of this harmful cycle.”

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