A Triple Fiscal Crisis Periling Climate Action

Quick Read Many developing economies are facing unsustainable debt, with 41.5% of budget revenues spent on debt service. The debt crisis is compounded by climate change and environmental degradation. Climate-related disasters and deforestation are undermining economic development and contributing to the 'climate debt' and 'nature debt'.

- By Vera Songwe and Guido Schmidt-Traub

A recent report by the Independent Expert Group on Debt, Nature, and Climate reveals that many of the world's 144 developing economies are on an unsustainable fiscal trajectory. On average, these countries spend 41.5% of their budget revenues—or 8.4% of GDP—on debt service, severely limiting their scope for public investments in education, health care, infrastructure, and innovation, which are essential for economic growth. Without growth and greater fiscal flexibility, repaying sovereign debts becomes unfeasible. Consequently, developing countries urgently require a massive injection of affordable capital and, in some cases, outright debt relief from both international and domestic creditors.

The developing world's debt crisis is compounded by two related factors. The first is climate change: global temperatures have already risen by 1.2° Celsius and are projected to increase by an additional 0.2-0.3°C per decade. This "climate debt" is exacting an enormous toll, with damages in vulnerable countries—currently estimated at roughly 20% of GDP—stalling their economic development. Over the past few months alone, record floods have struck Spain, Nepal, and parts of West Africa, unprecedented wildfires have ravaged Canada, Brazil, and Bolivia, and hurricanes Helene and Milton have battered the Caribbean, Central America, and the southeastern United States. In Chad, torrential rains have led to widespread flooding, affecting 1.9 million people since late July.

Equally urgent, though less understood, is the nature crisis. Natural ecosystems act as a crucial buffer against climate change, absorbing half of the carbon dioxide produced by human activity. But deforestation and land-use changes are eroding the planet's natural defenses, with most of the world's forests—including the Amazon—now emitting more CO2 than they absorb, thus accelerating the climate crisis instead of mitigating it.