Debt Pauses To Support Vulnerable Countries Fight Climate Catastrophes

COP28: The Finance Day event at the gathering of world leaders in addressing climate change, unlocked significant progress on international financial architecture reform to support low-income and vulnerable countries fight climate change.

Major international financial institutions and countries made new commitments to offer climate-resilient debt clauses (CRDCs) in their lending. These clauses allow debt service to be paused to provide breathing space when countries are hit by climate catastrophes.

The UK, France, World Bank, Inter-American Development Bank (IDB), European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD) and African Development Bank (AfDB) made new commitments to expand CRDCs in their lending. In total 73 countries called on donors to expand the use of these clauses by 2025.

Throughout COP28 Finance day, other announcements included:

  • The UK announced the first ever climate resilient debt clause to Senegal, the first in Africa.
  • The IDB announced it had already offered $1.2 billion of loans covered through CRDCs.
  • The World Bank announced it will start offering CRDCs in existing loans, which will pause debt as well as interest for two years in the event of a natural disaster, the World Bank has committed to covering all transaction costs.
  • AfDB, EBRD and the French Development Agency also announced plans to integrate these clauses in sovereign loan agreements. 
  • Japan announced a commitment to support the innovative facility developed by the AfDB and IDB to leverage Special Drawing Rights (SDRs) for climate and development.
  • France announced its commitment to support this facility through a guarantee and Spain and the UK indicated their willingness to further explore this solution.
  • The African Development Bank (AfDB) and the Inter-American Development Bank (IDB) have developed a hybrid capital-based mechanism to channel unused SDRs through MDBs. Using this model, wealthy countries lend their SDRs to MDBs, who can use them to issue bonds, multiplying the available capital.

This world leaders say this is a significant progress to reform the global climate finance architecture by making climate finance available, accessible, and affordable.

These innovative financial instruments it said can help provide countries with fiscal space to invest in climate resilience and recovery. These instruments are critical in the context of rising debts as well as needs to address loss and damage.

The Declaration is endorsed by India, France, Barbados, Kenya, Ghana, Germany, UK, USA, Senegal, and Colombia. It lays out defining principles for a climate finance architecture that delivers for all.

“I’ve said all along that if we fail to include the developing world in our solutions to climate change we will all fail. The announcement of new SDR pledges for Africa, and the broad adoption of climate-resilient debt clauses is essential. It will help those most vulnerable to the shocks and disasters caused by climate change.” COP28 President Dr. Sultan Al Jaber said.

The event also showcased views from credit rating agencies such as Fitch Ratings, who indicated their intention to consider revisions to credit rating criteria for loans to ensure use of CRDCs does not impose a burden for borrower countries.

Concessional finance will be crucial as developing countries seek to transform their economies and build resilience against climate change. At present, governments of developing countries typically pay much higher interest rates than governments of wealthy countries.

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