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The Need for Debt-for-Climate Swaps

With developing countries facing a debt crisis that will only get worse as the COVID-19 pandemic continues, it is already inevitable that massive debt relief will be necessary. The only question is whether it will be designed to address the even larger climate crisis that is approaching.

ISLAMABAD – A global debt crisis is looming. Even before COVID-19 swept the world, the International Monetary Fund had issued a warning about developing countries’ public debt burdens, noting that half of all lower-income countries were “at high risk of or already in debt distress.” As the economic crisis worsens, these countries are experiencing steep output contractions at the same time that COVID-19 relief and recovery efforts are demanding a massive increase in expenditures.

According to the United Nations Conference on Trade and Development, developing countries’ repayments on their public external debts will cost $2.6-3.4 trillion just in 2020 and 2021 alone.Hence, market analysts now suggest that almost 40% of emerging- and frontier-market sovereign external debt could be at risk of default in the next year.

Worse, measures to confront this debt crisis will collide head-on with the global efforts to combat climate change, inequality, and other escalating global crises. We therefore need creative thinking about how to advance multiple objectives at the same time. We must both achieve a strong recovery from the pandemic-induced crisis and mobilize trillions of dollars for the transition to a more financially stable, socially inclusive, low-carbon economy.

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