Debt and climate — I

While geopolitical conflict has unfortunately taken centre-stage, it is in fact debt and climate that is among the most pressing challenges facing humanity. It is indeed not how future wars will be financed that should be the main focus, but how existing international law and multilateral institutions can be used, and augmented to evolve a global strategy to deal with the existential threat of climate change – and related ‘Pandemicene’ phenomenon – and dealing with an evolving global debt crisis, especially in developing countries.

In this regard, an April 2025 Project Syndicate (PS) published article ‘Climate action requires debt relief’ pointed out: ’In February, the IMF estimated that nearly half of the lowest-income countries were at risk of debt distress, at which point they may no longer be able to meet their debt obligations.

That number is expected to rise as conditions continue to deteriorate. Compounding the crisis, the world’s poorest countries – especially small island developing states – are highly vulnerable to climate change and biodiversity loss.

Extreme weather events like hurricanes, droughts, and floods can wipe out critical infrastructure and cripple agricultural production in an instant, while slower-onset changes like rising temperatures and shifting rainfall patterns require continuous and costly adaptation measures. The debt and climate crises are closely intertwined.’

Debt distress, and climate change crisis require counter-cyclical policies, while what is being prescribed under the International Monetary Fund (IMF) austerity-based programmes is squeezing aggregate demand through raising policy rate, and cutting expenditure, where what gets slashed is mostly the very expenditure needed to reach Sustainable Development Goals (SDGs) targets, climate related expenditures, and lack of revenues due to overall lack of economic growth, and lack of political will to go for meaningful broadening of tax base.

Moreover, lack of economic institutional quality and very sub-optimal functioning markets means that productivity is overall low, which together with both high transaction costs and policy rate feed into lower domestic production, exports, and overall lower economic growth rate. So, lack of finance and poor economic institutional variables continue to keep developing countries like Pakistan into low-growth equilibrium.

What is needed are counter-cyclical policies and non-neoliberal economic institutional reform, which can happen in an environment of appropriate level of economic independence at the country level, and a global multilateral framework that is much more sensitive to such needs as availability of greater climate finance, that is shifting the discussion from ‘billions of dollars’ to ‘trillions of dollars’ in view of the fact that around $4 trillion worth of climate-related expenditure is needed on a yearly basis to effectively change the fast-unfolding of global warming, and to enhance resilience.

At the country level, in addition to greater domestic resource mobilization, and high level of exports – which once again means greater economic growth – such economic independence requires lesser gross financing needs, lower debt distress, and larger availability of multilateral financing; particularly medium-term allocation of IMF’s special drawing rights to countries on the basis of needs, greater sovereign debt forgiveness, and approaching much-improved sovereign debt restructuring framework.

Here, it needs to be clarified that unlike an unfortunate perception – unfortunate given in any case it is essential to deal with climate change crisis as it is an existential threat – among certain policy circles that climate-related initiative negatively impacts economic growth, a recent joint study by Organization of Economic Co-operation and Development (OECD), and United Nations Development Programme (UNDP) in fact, pointed out that climate change related initiative help avoid economic growth, which is likely to be lost by climate change crisis, and also overall expected to enhance economic growth.

A March 2025 Guardian published article ‘Tackling climate crisis will increase economic growth, OECD research finds’ pointed out in this regard: ‘Taking strong action to tackle the climate crisis will increase countries’ economic growth, rather than damage their finances as critics of net zero policies have claimed, research from the world’s economic watchdog has found. …By 2050, the most advanced economies would enjoy an increase of 60% in GDP per capita growth, while by the same date lower income countries would experience a 124 percent rise from 2025 levels. In the shorter term, there would also be benefits for developing countries, with 175 million people lifted out of poverty by the end of the decade, if governments invest in cutting emissions now. By contrast, a third of global GDP could be lost this century, if the climate crisis were allowed to run unchecked.’

The upcoming ’4th International Conference on Financing for Development (FfD4) in Seville (Spain) provides an important opportunity in this regard, both because of its important agenda whereby ‘the conference will address new and emerging issues, and the urgent need to fully implement the Sustainable Development Goals, and support reform of the international financial architecture’, and especially given a lack of progress made under a number of similar platforms of discussion in recent history.

Emphasising the importance of this conference, a June 10 PS published article ‘A defining moment for global development finance?’ pointed out: ’Rising uncertainty over the future of global trade and multilateralism is threatening to derail the long-term development agenda. But amid volatile markets and geopolitical tensions, the Fourth International Conference on Financing for Development (FfD4), in Seville, Spain, at the end of June must not be overlooked.

FfD4 represents an opportunity to forge consensus on the policies and strategies required to finance inclusive and sustainable development, including climate action. The stakes have never been higher: access to affordable long-term financing that could improve the lives and futures of billions of people’

Moreover, the argument advanced by noted economist, Jayati Ghosh, in her June 12, PS published article ‘Can the Conference on Financing for Development Succeed?’ provides some important guidelines on issues that should come under discussion, which is based on FfD4’s own published report ‘International Commission of Experts on Financing for Development’: ’A key focus of the document is enabling greater domestic resource mobilization.

An outdated international tax system and inadequate checks on illicit financial flows are a severe constraint on low- and middle-income countries’ budgets. …More broadly, participants at the Seville summit must seek to address the lack of a global financial safety net. A first step could be to initiate regular allocations of the International Monetary Fund’s reserve asset, special drawing rights. …But this is only the beginning. …It is time to embrace an entirely new model of “global public investment,” with all countries contributing to the provision of shared public goods according to their means. This will require, for starters, fundamental reform of the IMF and the World Bank.

Both institutions need to adopt a more countercyclical approach to lending. Moreover, they must stop linking loans to oppressive conditionalities that favour the interests of global capital over the well-being of people and the planet. In general, multilateral banks must increase their lending significantly to meet social, developmental, and climate needs, which in turn requires robust, reliable funding.’

(To be continued)

(The writer holds PhD in Economics degree from the University of Barcelona, and previously worked at the International Monetary Fund. His contact on ‘X’ (formerly ‘Twitter’) is @omerjaved7)

Copyright Business Recorder, 2025