Navigating Debt Challenges: G20’s Pursuit of Sustainable Solutions   

Climate Change Comissions
Aerial view of a green area limited by the urban perimeter on the East Side of Manaus, Amazonas, Brazil, June 9, 2021. Photo by IMF Photo/Raphael Alves 9 June 2021.

The global macroeconomic and geopolitical landscape amplifies debt challenges, restricting the capacity for essential climate-focused investments and risking underdevelopment alongside a delayed climate transition.

The Brazilian G20 presidency has placed a significant focus on restoring fiscal space, deemed essential for addressing both debt burdens and climate-related challenges effectively. The formation of Brazil’s G20 Task Force on Global Mobilization against Climate Change and its Task Force for establishing a Global Alliance Against Hunger and Poverty was highlighted, underscoring the critical link between debt management, climate action, and poverty reduction. 

Under the Chatham House Rule, key stakeholders convened on the sidelines of the 2024 IMF and World Bank Spring Meetings for a critical dialogue on the intertwined issues of debt, climate action, and development. The event was hosted by E3G, IIED, the Wilson Centre’s Brazil Institute, CONCITO, and CPI. 

Participants engaged in a comprehensive, focused discussion, providing a nuanced view of the challenges around debt, the urgency of action, and the need for a multi-layered approach. The dialogue was an excellent opportunity to map out potential pathways and strategies for future action.  

Key takeaways

The crucial role of diagnostic tools in providing tailored solutions to countries. The joint IMF-World Bank comprehensive review of the Low-Income Countries’ Debt Sustainability Framework initiated this year, presents an opportunity to sharpen the tools to integrate and manage climate risks, aligning them with sustainable development goals — an opportunity to revise the blurred lines between liquidity and solvency.  However, regardless of solvency or liquidity crisis, both characterisations connect to the broader challenge of LMICs sourcing ongoing quality financing at affordable rates and, subsequently, how to invest that finance in building resilience and growth. 

Reversing net outflows and development losses and increasing climate action. Supporting countries to realise their prosperity, development, and climate goals will imply more holistic thinking about solutions for simultaneously addressing the debt burden whilst increasing investment to activate sustainable development. This is particularly challenging given climate change is a threat multiplier, whilst debt – solvency or liquidity – remains an issue for investments to be realised.     

Bold solutions need to be explored: the Common Debt Framework is progressing too slowly, cannot address the complexities of the issue and is ill-suited to respond to all countries’ circumstances. For example, SIDS are highly exposed to climate risks, their debt could increase due to external shocks, and they might not be eligible for treatment under the Common Framework. Therefore, bold solutions outside of the current “too little, too late” approach are necessary. 

Country platforms, a priority for the G20 Brazilian Presidency, are a potential means of mobilising affordable finance if learnings are identified and expectations are managed. However, pre-conditions will need to be implemented for this to succeed: a better collaboration space, and a different approach to development and climate finance. Country platforms must be country-owned and incorporate learnings from past experiences, such as JETPs. This would manage the tension between leveraging multilateral actors ’finance and expertise while maintaining country ownership.     

Considering a multi-layered approach to new policy solutions & financial innovations, particularly for SIDS but not exclusively. Explore increasing use of sovereign risk guarantees, solutions focused on aggregating/pooling risks could be part of the mix; the LIC-DSA could also include an analysis of ‘protection gaps’ for countries to thoroughly understand where financing solutions can be introduced to plug gaps. The role of the insurance and re-insurance sector will be key regarding protection gaps.  

Public finance will be at the core of the solutions, both in funding (sources of money necessary to pay for projects) and financing (mechanisms through which the required funds are raised and structured). Domestic resources will be crucial for the transition; taxation is key, particularly following the polluter-pays principle. The ongoing collaboration between the IMF and WB could benefit countries in this area, but IMF conditionalities have often not yielded the intended results. Concessional finance will be essential to catalyse more private finance. Most immediately, this year will deliver IDA replenishment, opening the space for MDB capitalisation.  

While the G20 faces the challenge of navigating complex geopolitics, it is essential to remember that innovative ideas have previously led to great results. Adhering too closely to conventional thinking will continue to put countries in precarious positions and exacerbate internal instabilities, particularly as the effects of climate change worsen. Therefore, the path forward should involve accelerating the use of existing tools and boldly exploring and implementing new solutions to address these multifaceted challenges effectively. 

Call to action: Addressing the climate-debt nexus demands a multifaceted approach characterised by innovation, collaboration, institutional reform, and targeted financial instruments. By considering the key points from this rich discussion as recommendations, stakeholders can navigate towards a sustainable future, mitigating climate risks while fostering inclusive economic development. 

Source: E3G analysis, 2024.


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