In this time of climate emergency and urgent calls to investment for climate adaptation and mitigation, a question that must not be overlooked is that of debt. Indeed, Jubilee Scotland is worried to see the current debt levels in low-income countries increasing. Many low- and middle-income countries are struggling with slow economic growth and high external debt levels, which stand in the way of needed climate investment despite these countries struggling the most with the effects of climate change.
At the end of 2020, the combined external debt stocks of low- and middle-income countries were as high as $8.7 trillion, according to data from the World Bank. The average external debt payments of governments were 14.3% of governments revenue in 2021: in 2010, they only made up 6.8%. Yet, for most countries, this rise in external debt is not matched by a growth of gross national income and exports. Out of 69 low- and middle-income countries being assessed by the IMF for debt default risk, nine were already in default on some external debt, 30 were at high risk of debt distress, 23 at moderate risk and only seven at low risk.
These high levels of debt have a severe impact on development, as it prevents countries from spending the necessary resources especially within the areas of health, education and climate adaptation. Every day, $107 million leaves 68 countries in the global south to pay lenders, instead of being invested in social protection, economic recovery and climate adaptation. Lower income countries are spending five times more on debt payments than on adapting to climate change, which is a huge problem!
Prior to the COVID pandemic, many developing countries were already in a vulnerable fiscal position with elevated external debt, but COVID brought this debt to record highs. In 2020, the external debt stock of low- and middle-income countries rose on average by 5.6 percent, and sometimes even reached as high as a 20% increase. This is happening at the same time as the climate crisis becomes more and more pressing.
The Debt Service Suspension Initiative, which closed at the end of 2021 was supposed to bring relief to some countries. Yet, deferred official debt payments under the DSSI are expected to be repaid in full between 2022 and 2024. The 46 countries that requested participation will be required to pay back not only the $5.3 billion of postponed payments, but also the $71.54 billion of pre-existing commitments, plus any other debt contracted after 2018. In 2020, only 44% of DSSI-eligible countries had a debt-to-GNI ratio at or below 60% and in seven percent of these, it exceeded 100%. In 2020, 21% of them had a debt-to-export ratio over 250%.
The Common Framework for Debt Treatment is replacing DSSI, but also failing to support the countries in need: Chad, Ethiopia and Zambia all applied for a debt restructuring in 2021, but none have obtained anything to this day. When a country applies for a debt restructuring under the Common Framework, a Debt Sustainability Analysis is undertaken by the IMF to assess how much debt needs to be cancelled in order to make it sustainable. However, the IMF has no clear definition of “sustainable debt”, which is a problem. Moreover, the Common Framework doesn’t provide any additional mechanisms for making sure private creditors cancel debt on the same terms as bilateral lenders. This can lead to a situation where willing creditors end up bailing out creditors unwilling to take part in the restructuring, or a situation where the debtor becomes unable to finalise a restructuring deal with anyone. The G20 has stated that private creditors should provide debt relief on at least the same terms as bilateral creditors, however the implementation of this is difficult.
Considering all of this, we are calling on the UK government to take action. Indeed, private lenders in the UK account for 30% of the debt owed by 73 countries eligible for debt relief under the G20 initiative during the Covid-19 pandemic: this is higher than both Chinese and US private lenders combined. Therefore, the UK has a key role to play in improving debt relief mechanisms and incentivising private lenders to engage in debt relief. We’re in a unique position to make a difference, since around half of international private debt contracts (with public information) are governed by English law and 90% of bonds of countries eligible for the Common Framework are governed by English law. Both the IMF and the World Bank have called on the UK to pass legislation to make collaboration with private creditors on debt restructuring easier. Jubilee Scotland join them in this call: the UK Government must use its unique position to act on debt, to make sure that countries are able to invest in climate adaptation rather than repaying unsustainable debt.