Least developed countries unable to borrow over 80 per cent of money needed to adapt to climate change

Press release, 3 November 2021
• Economies in danger of debt distress • Need for debt restructuring or grant based climate budget support

The economies of at least 22 of the Least Developed Countries (LDCs) would be tipped into debt distress by measures they need to take to adapt to climate change, according to new analysis from IIED, released as delegates at the Glasgow climate talks focus on finance. They would be able to pay for less than 20 per cent of the adaptation measures needed by increasing their sovereign debt.

Climate finance will be top of the agenda at the COP26 talks today (Wednesday, 3 November). In addition to more and better quality climate finance, IIED wants to see the financing gap closed using debt restructuring linked to climate and nature outcomes, or through climate budget support, not loans.

The calculation is based on plans submitted to the UN by the LDCs, known as Nationally Determined Contributions (NDCs). Every country is expected to submit an NDC, and update it periodically, laying out what steps it will take to cut its carbon emissions as well as measures needed to adapt to runaway climate change.

Current adaptation plans submitted by 22 of the LDCs would cost an estimated $211.7bn. The countries could fund just 19.8 per cent of that ($41.8bn) through sovereign debt before tipping into debt distress. Countries’ adaptation costs are likely to be much more than this as climate impacts are compounded each year. NDCs by the remaining 24 LDCs do not include costings for adaptation.

Despite pledging more than ten years ago to provide $100bn per year by 2020, richer countries have failed to offer enough climate finance and very little of what has been offered is being ring-fenced for measures to adapt to climate change rather than mitigate its effects. Over 70 per cent is being offered in the form of loans, increasing debt levels for countries already feeling the strain.

Sejal Patel, an environmental economist at IIED, said: “As our analysis shows, expecting the poorest and most vulnerable countries to deal with the climate change they have done so little to cause by drowning further and further in debt, is nonsensical, immoral and unfair.

“Allowing low-income countries to swap debt or receive grant-based budget support in exchange for meeting key targets on climate and nature could simultaneously address both climate change and economic inequality which together threaten the lives of millions of the most vulnerable people.”

The 46 LDCs are facing a triple crisis of high debt levels, climate change and nature loss. Many are using up to 20 per cent of their government spending to pay off loans.

Large scale swaps or budget support move climate policies to the Ministry of Finance and the heart of economic decision-making away from loans which LDCs cannot afford or environmental grants which are typically off budget with high transaction costs.

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Notes to editors

IIED analysed the NDCs of 22 of the LDCs. They are: Somalia, Ethiopia, Madagascar, Haiti, Afghanistan, Mauritania, DRC, Uganda, Rwanda, Chad, Malawi, Senegal, Cambodia, Togo, Niger, Central African Republic, Guinea, Sudan, Gambia, Solomon Islands, Comoros and Liberia.

This analysis compares the costs of adaptation as presented in NDCs with the ‘borrowing space’ available to countries. The analysis defines the borrowing space as the difference between the sustainable debt to GDP threshold for the country and the debt to GDP ratio in 2020. The country specific sustainable debt to GDP thresholds are presented in the IMF-World Bank debt sustainability framework. The full analysis will be made available by IIED in a forthcoming publication.