Climate-vulnerable countries need better recovery support to avoid debt: Here are some measures that can help

Monday, November 6, 2023

As the frequency and intensity of storms, flash floods and other climate-induced hazards continue to increase, many climate-vulnerable countries find themselves at greater risk of being hit by crises while still not fully recovered from previous ones. In March of this year, Cyclone Freddy claimed nearly 200 lives and displaced more than 180,000 people in Mozambique – a country still reeling from the impact of Cyclones Kenneth and Idai four years earlier.

Having recently marked the International Day for Disaster Risk Reduction, it is essential to remember that hazards need not always result in disasters. For the last 10 years, the Zurich Flood Resilience Alliance, of which Mercy Corps is a member, has undertaken a series of analyses of major flood events and their impact on communities. We have been able to draw learning from these studies, including the types of interventions, policies and approaches in recovery efforts that help communities better cope with future climate risks, as outlined in our new report.

Much can and should change to ensure that recovery is resilient. A key element is ensuring access to finance in a way that does not lead to unjust and unsustainable indebtedness.

Recovery loans provide short-term funds, but lead to long-term debt

We are all familiar with the calls for funding for responding to emergencies, and sadly, we are also well aware that even these are woefully underfunded. Yet even this dwarfs the amount of aid money available for recovery after a disaster. There is rarely sufficient funding to build back, let alone ‘build back better’.

Instead, the majority of finance for recovery comes in the form of loans. Not only does this place a heavy burden on developing countries to repay the loans, but it is also thoroughly unjust. The most vulnerable countries and communities should not be forced to take out loans to protect themselves from a crisis they are not responsible for.

Meanwhile, developed countries recoup most of what is given while still counting it in their contributions towards collective goals on climate finance. The consequences of this approach can be severe – especially after multiple disasters, when government funding urgently needed for the latest recovery is instead being used to repay previous loans.

Decisions on climate finance provision can significantly impact recovery from climate disasters. Try our new interactive video to find out how.

The billions borrowed by Pakistan to recover from the major floods of 2010 and 2011 had, by 2021, contributed to annual debt servicing of $11.9 billion – accounting for 32% of government revenue and significantly limiting the government’s fiscal space to respond to the 2022 floods. Indeed, in 2022, the country took on more debt than it received in humanitarian support.

Tackle existing debt crises and prevent new ones

Every loan repayment a developing country makes after a disaster means less money to prepare for the next by investing in adaptation. It also significantly impacts budgets for vital public services such as education and healthcare.

To protect the hardest-hit communities from being severely impacted by the next climate shock or the one after that, developed countries and international finance institutions must recognise the rising debt burden resulting from recovery needs and do all they can to prevent it.

New and additional grant funding, tailored to facilitate long-term resilience in the recipient communities, is key. Where loans are still used, they must be designed flexibly to respond to future disasters and prevent debt levels from spiralling out of control.

Grace periods and pause clauses, for example, can ensure that debt servicing does not draw resources away from response and recovery efforts. The loss and damage fund, which should be established at the upcoming COP28, offers a new opportunity to ensure that more grant and highly concessional funding is available for countries post-disaster.

Furthermore, the reform of International Finance Institutions (IFIs) holds significant potential to increase funding levels and reach a new and improved consensus on responsible lending. The Bridgetown Initiative launched at COP27 has been at the forefront of the call for change, and some constructive discussions took place at the Paris Climate Summit in June. Still, there’s a long way to go for significant progress. Major changes to how IFIs provide recovery finance are required to meet the scale of the challenge facing climate-vulnerable countries. However, while the annual meetings of the World Bank and International Monetary Fund last week recognized the problems, there is a need to adopt measures that respond structurally to the issue.

The road to resilient recovery from climate-related disasters

Recovery from disaster is a highly complex issue that cuts across a wide range of technical, socio-economic, institutional, and environmental dimensions. Money alone is not the answer; much must be done at both the national and international level to ensure recovery is pre-planned and adequately resourced, as well as being sufficiently comprehensive and inclusive in its activities. However, the financial consequences of climate-related disasters are demonstrably too great for developing countries to bear alone, with the ever-increasing burden falling on those least able to shoulder it.

At COP28 and beyond, it is vital that developed countries and international finance institutions ensure that adequate funding for recovery can be swiftly delivered, and debt crises avoided.

This post was originally published by the World Economic Forum. You can read the original here.

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