African nations are trapped in a vicious circle: They are among the most climate-vulnerable yet least able to afford the investments needed for resilience. Climate vulnerability has been shown to drive up the cost of sovereign debt, creating a climate risk premium that leaves governments with even less fiscal space to invest in adaptation and resilience. From 2021 to 2023, countries have paid more than twice as much in debt service as they have received in climate finance during the same period.
A new policy brief by Alexander Dryden and Ulrich Volz highlights how this cycle threatens fiscal stability, questions the adequacy of the International Monetary Fund’s (IMF) debt sustainability analysis (DSA) , and points to ways forward.
Key Findings:
- African countries are caught in a vicious circle: climate shocks worsen debt distress, while debt service crowds out the investments needed for resilience.
- Public external debt has more than tripled since 2008, with significant increases in the debt owed to private bondholders. The pain of this debt burden has been worsened by increases in global borrowing costs and a continued decline in African currencies versus the U.S. dollar.
- In 2023, African governments spent on average 13 percent of total expenditure on debt service, double the levels witnessed in 2012. More than half of African countries are now spending more on interest payments than on health care.
- In Sub-Saharan Africa, climate finance needs exceed US$1.4 trillion this decade, yet actual flows average just US$35 billion per year – with over 50 percent coming in the form of debt rather than grants.
- The IMF’s debt sustainability analysis (DSA) systematically understates risks by ignoring climate and SDG investment needs, leaving many African economies vulnerable. An enhanced DSA reveals that many more countries face unsustainable debt paths than official assessments suggest.
- The worsening external debt situation warrants a concerted effort to tackle the debt crisis facing a large number of African low- and lower-middle income countries. The Common Framework’s case-by-case approach is proving to be a prolonged, complex, and unpredictable process that puts debtor governments in a structurally weak position.
- The DRGR proposal calls for comprehensive, equitable debt relief across all creditor classes, coupled with fresh concessional finance and strict transparency standards. For liquidity-constrained but solvent countries, DRGR recommends credit enhancements, SDR reallocation, concessional finance, and innovative swaps to lower capital costs
- Recent political momentum on debt is unprecedented. The African Union’s Lomé Declaration, the United Nation’s Compromiso de Sevilla, South Africa’s G20 Presidency, the Jubilee Commission’s blueprint, and the African Leaders Debt Relief Initiative have all elevated debt to the top of the regional and international agendas. Yet, despite this growing awareness, concrete action and systemic reform remain elusive.
- The upcoming G20 summit provides an opportunity for more immediate steps: improving the Common Framework by expanding it to middle-income countries, introducing automatic debt standstills, linking debt relief more explicitly to climate risks and development needs, establishing a global debt registry, and supporting the emerging Borrowers’ Forum as a platform for collective debtor action.