World’s least developed countries spend twice as much servicing debts as they receive in climate finance

The world’s poorest and most climate-vulnerable countries are spending more than twice as much to service their debts as they receive to fight the climate crisis, according to new analysis by IIED.

It also shows the situation is getting worse, with debt payments growing at a faster rate than climate support.

The research comes ahead of a series of high-level international summits – including the World Bank/International Monetary Fund annual meetings, G20 leaders meeting, and the nature and climate COPs – where finance will be key.

IIED is calling on world leaders at these summits to overhaul the international financial system to make it fairer for countries that have done the least to cause climate change but are bearing the brunt of its effects.

The analysis uses the latest available data for 58 countries which are either part of the Least Developed Countries (LDC) Group or the Small Island Developing States (SIDS) group. These countries are home to around 1.2 billion people.   

Key findings from IIED’s analysis show:

• The 58 countries spent US$59 billion repaying debts in 2022 compared with $28 billion they received in climate finance
• While the amount of climate finance is up on 2021 data, it’s not keeping pace with the growth in debt payments. In 2021, the 58 countries paid $33 billion on debt servicing and received $20 billion in climate finance
• Of the $28 billion provided in climate finance in 2022, just over half ($14.8 billion) was provided as loans rather than grants
• For 26 countries, debt repayments in 2022 cost more than they received in total bilateral foreign aid (of which climate finance is a subset), and
• Almost half (25) countries in the analysis are at high risk of defaulting or are already in debt distress, severely hampering their ability to invest in climate resilience.

Climate change is an existential problem for many heavily indebted LDCs and SIDS because they are so highly exposed to climate impacts yet have very little fiscal room to adapt. When a drought, flood or major storm hits, they are forced into a vicious cycle of borrowing more money to support their people and rebuild their infrastructure, further compounding their debts.

Even though $11 billion of the $14.8 billion provided as loans was given on 'concessional' terms – meaning somewhat below market rates – this flawed system piles up interest and pushes governments further into the red and forces them to cut vital spending.

IIED senior researcher Sejal Patel said: “Leaders from the world’s richest countries have spent lots of time talking about financial reform and the sovereign debt crisis but have little to show for it. These are the same countries that have done so much to cause the climate crisis.

“Many of the world’s poorest countries are being battered by the effects of climate change, often going deeper and deeper into debt. The finance from richer countries is simply not keeping pace.

“Every dollar that these countries are spending on loan repayments is a dollar not being spent on hospitals or schools, or funding climate-resilient infrastructure.

“The international financial system is a relic of the 20th century. It needs to be overhauled to benefit all nations and underwrite our collective climate goals, in line with the new UN Pact for the Future.

“Rethinking debt and providing climate finance are two sides of the same coin. Both are needed to help the most vulnerable countries respond to climate change.”

IIED believes lower-income countries should be given easier access to money through grants and concessional finance along the lines of the Bridgetown Initiative proposed by the government of Barbados.

It is crucial to reform bureaucratic hurdles preventing funds from reaching those on the frontline of the climate and nature crisis.

There also needs to be more comprehensive debt relief to support developing nations free up budget space for climate change adaptation. Investors and government lenders should make greater use of debt-for-climate-and-nature swaps, parametric insurance, pause clauses or even cancellation, where appropriate.

• Download IIED's data showing climate finance received by LDCs and SIDS versus their debt payments.