Climate debt trap risks pushing emerging markets to the brink

Rising global borrowing costs are denting the finances of some of the most climate- vulnerable countries right when they most need money to fight the devastating impacts of global warming. It’s a convergence of events that risks pushing developing nations into a “debt trap,” according to Prime Minister Shehbaz Sharif of Pakistan, who addressed world leaders at the COP27 climate talks in Egypt last week. Countries that borrowed heavily when interest rates were low are now struggling to fund projects that would make them more resilient to extreme weather, leaving them vulnerable to even higher borrowing costs in the future Pakistan, which was pushed to the brink of default by flooding on nearly a third of its territory this summer, is a case in point. The country received a $ 1 billion loan from the International Monetary Fund to help tide it over, but the flood damage is estimated at around $ 32 billion and the country has $ 3 billion of debt to service through June 2023, according to Bloomberg Economics.

Leaders of nations most vulnerable to climate change have long argued that the countries that contribute the bulk of emissions should foot the bill for mitigation and adaptation, but rich nations have consistently fallen short on their promise to provide $ 100 billion in annual climate finance to the developing world. While loans from individual countries and development finance organizations have helped plug some of the gap, emerging markets have also had to rely heavily on bond markets.