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Context:

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.

Background:

The intersection of climate change and sovereign debt presents a growing challenge for developing countries. While climate-induced disasters are increasing in frequency and intensity, they are also exacerbating the financial fragility of economies least responsible for emissions. This phenomenon leads to a vicious cycle of climate vulnerability and unsustainable debt, with private lenders and wealthy nations often profiting from the crisis.

About the International Conference on Financing for Development (FfD4)

Debt-Climate Nexus:

The link between debt and climate is not incidental. Developing countries frequently suffer extreme climate events like floods, hurricanes, and droughts, causing widespread destruction of infrastructure, livelihoods, and ecosystems. To recover, these countries often take on emergency loans—increasing their external debt burden.

At the same time, they need financing to invest in adaptation and mitigation strategies to build resilience. However, limited fiscal space and high debt servicing costs constrain climate action. The UN has identified this as a structural problem: climate vulnerability and fiscal constraints reinforce each other, keeping developing countries trapped in a cycle of dependence.

Who Profits from the Debt?

While the countries of the Global South struggle to cope, private lenders, investment funds, and certain multilateral institutions profit from high interest rates and restructuring programs. According to Debt Justice, private creditors charge interest rates as high as 12.5%, compared to 1% from bilateral lenders.

Furthermore, climate finance commitments by developed countries—promised as grants or concessional aid under the Paris Agreement—often arrive as loans, adding to the debt burden. For example, over 70% of climate finance to developing countries comes in the form of repayable loans.

Case Studies:

1. Pakistan: After devastating floods in 2022, the country faced damages worth over $30 billion, yet debt servicing obligations forced it to spend more on repayments than on recovery and adaptation.
2. Zambia: The country defaulted on its sovereign debt in 2020 amid the pandemic and climate stress. Private lenders held out during restructuring negotiations, delaying relief.
3. Barbados: Prime Minister Mia Mottley has spearheaded the Bridgetown Initiative, demanding reform in global financial institutions to enable climate-resilient development without increasing debt dependency.

Global Financial Architecture:

There is a growing consensus that the global financial system is skewed in favor of wealthy nations and investors. Institutions like the International Monetary Fund (IMF) and the World Bank often promote austerity measures during debt restructuring, further weakening public infrastructure and climate resilience in debtor countries.

Key reforms suggested include:

• Debt-for-climate swaps: Redirecting debt repayments into local climate initiatives.
• Green concessional finance: Providing grants or low-interest loans for adaptation.
• Loss and Damage Fund: Operationalised at COP28, but needs scaled-up, predictable funding from historical emitters.

India’s Position

India, as a developing country with increasing global influence, advocates for climate equity and climate finance justice. At forums like the G20 and COP summits, India has called for restructuring global debt mechanisms and for developed countries to fulfill their $100 billion climate finance commitment.

Moreover, India’s International Solar Alliance and Coalition for Disaster Resilient Infrastructure promote South-South cooperation in climate adaptation without reliance on debt-heavy models.

The emerging debt-climate crisis is a manifestation of historical injustices, where the poorest and least responsible for emissions are burdened by climate catastrophes and financial penalties. The issue demands restructuring of the global financial system, ensuring that climate finance is just, adequate, and accessible, and that the Global South can pursue sustainable development without falling into a debt trap.

ALSO READ- https://www.iasgyan.in/daily-current-affairs/uns-development-conference-in-seville

Source: Downtoearth