G20 must massively scale up debt offer to help low-income countries tackle climate crisis, nature and COVID-19

G20 finance ministers meeting in Venice this weekend should create a new initiative to massively scale up debt swaps and offer new bonds for climate change programmes in lower income countries recovering from COVID-19, according to new research published today by IIED.

'Redesigning debt: lessons from HIPC for COVID, climate and nature' shows that if championed by the G20 and heads of the International Monetary Fund (IMF), World Bank, and UN, a ‘debt for climate and nature’ global initiative could help low-income countries get their economies back on track after the pandemic, while also contributing to the goal of limiting global warming to 1.5ºC, just as the Heavily Indebted Poor Countries Initiative (HIPC) stimulated poverty reduction with the backing of the UK and the G7 over two decades ago.

The G20 countries also need to increase their climate finance commitments and endorse a set of principles to ensure local communities take the lead in adapting to climate change. The G7 fell short on these issues, and the G20 has the chance to make it up.

IIED director Andrew Norton said: “The G20 needs to seize this opportunity to rapidly develop a new debt reduction initiative so we don’t end up with a lost decade in the fight for both poverty reduction and climate action. HIPC provides lessons to quickly set up this  global initiative. 

“Allowing low-income countries to swap debt or access new bonds for climate and nature programmes would address the multiple crises of climate, economy and healthcare which threaten the lives and livelihoods of millions of the most vulnerable people.”

A new global initiative should include clear ‘key performance indicators’ linking debt relief and bonds with climate and nature, in the same way that HIPC was connected to poverty reduction. These key performance indicators would be agreed between debtor and creditor in the same way that poverty reduction strategies were signed off under HIPC.

Last year, the G20 established the Debt Service Suspension Initiative (DSSI), offering 73 countries a temporary suspension of debt-service payments owed to their official bilateral creditors to free up funds to spend on their response to COVID-19. Research by IIED shows that a global ‘debt for climate and nature’ initiative could be a way to link the G20’s debt reduction package with targeted investment to support action on climate and nature.

A new global initiative would need strong buy-in from both debtors as well as new creditors who have lent money since HIPC, including multilaterals, China and the private sector. Multilaterals such as the IMF and World Bank might be reluctant to forgive debt as they would find it hard to borrow money in the future so this debt relief could be financed by re-allocation of the US$650 billion special drawing rights that the IMF is about to release.

Climate and nature programmes would need to vary by country but could include inclusive investments in renewable energy, climate-smart agriculture and labour-intensive soil and water programmes. They would need to support inclusive growth and avoid further debt distress in the long-term in a way that the HIPC has not.

These climate programmes also need strong national ownership and engagement with affected poor women and men unlike HIPC where the poverty programmes were largely driven by donors and often stopped once the debt relief ran out.