The case for ‘greening’ sovereign debt relief

Every year, international climate negotiators gather to discuss how to galvanise capital flows into low-income countries to fund green development and climate resilience.

But amid higher global interest rates in the past few years, those capital flows have been shrinking, and have in many cases turned negative. In 2023 — according to the latest World Bank data — low- and lower-middle-income countries paid out more to their lenders than they received in new credit (even including concessional loans from international financial institutions).

This has left many of these nations struggling to fund basic services, let alone green investment. Below, we highlight a new plan to address this sticky situation.

Also today: are economies of scale the answer to Africa’s biggest killer?

Sovereign debt

The search for green opportunity in a debt crisis

In his final new year’s address before his death this month, Pope Francis urged rich nations, “in recognition of their ecological debt”, to write down the loans of poorer nations “that are in no condition to repay the amount they owe”.

He was far from alone in voicing alarm at the debt struggles of lower-income countries, where surging interest bills are squeezing budgets for essential services and infrastructure.

At last week’s IMF and World Bank spring meetings in Washington, figures from IMF head Kristalina Georgieva to US Treasury secretary Scott Bessent spoke of the need for talks on restructuring of sovereign debts that have in some cases become unsustainable.

While it may not amount to the sweeping debt “jubilee” that the late pope envisaged, momentum seems to be growing behind a smarter approach to sovereign debt relief. And this presents an opportunity for a wider rethink on finance for lower-income economies, with a greater emphasis on climate and nature resilience.

That’s the argument of a new report from an international expert group, commissioned by the governments of France, Kenya, Colombia and Germany to explore how developing nations’ sovereign debt “can become more sustainable, both fiscally and environmentally”.

“We really cannot have the debt conversation without including climate and nature,” Vera Songwe, a former World Bank economist who co-chaired the group, told me.

The concept of “ecological debt”, as espoused by Pope Francis, has been central to discussions at recent UN climate and nature conferences. Climate-vulnerable low-income countries have argued that rich nations — which, on a per capita basis, have contributed a disproportionate share of global carbon emissions and environmental damage — are morally obliged to help them adapt to climate change, and help finance their low-carbon development.

Songwe and her co-authors suggest that conditional debt relief could be a powerful way of providing this support. They make the case for “greening debt restructuring”, with creditors taking haircuts in exchange for commitments from debtor nations to specific climate or nature investments.

The same principle could be applied to the refinancing of debt owed by countries that are not yet technically in distress, but face problematically high debt service payments. In the past few years, a handful of nations including Ecuador and Gabon have undertaken debt-for-nature swaps, in which they committed funds to conservation projects as part of a refinancing deal.

Scaled-up efforts on this front would be in the interest of creditor nations, the authors argue, given that climate and nature investment in low-income countries will be essential if the world is to avert ecological disaster. And at a time when rich-world governments have been slashing overseas aid spending, they “might find it politically easier” to support low-income countries in this way rather than through new grants and loans, the report suggests.

There are some grounds for caution about the ideas proposed in the paper. For one thing, adding a complex new dimension to sovereign debt restructuring risks further extending a process that is often painfully protracted as it is. And the authors’ suggestion of compulsory haircuts for all creditors, as part of the proposed restructuring deals, could damage the long-term appetite of private-sector borrowers for lending to low-income countries.

But buyers of high-yield government bonds are well aware of the risks that they are taking, Songwe argued. She added that the IMF and World Bank could help to create a framework for these processes by overhauling their approach to calculating debt sustainability, to account properly for environmental risks and the economic benefits of investing in resilience.

“We need to look at this as a one complete conversation,” Songwe said.

Philanthropy

Newborn health fund raises $450mn amid global aid cuts

Each year, more than a million babies in Africa die in their first month of life, making neonatal mortality the continent’s biggest killer. A richly funded new philanthropic initiative is aiming to change that.

Launched yesterday, the Beginnings Fund has raised $450mn from a wide group of foundations to support mother and infant care in Africa, with a focus on training and system improvements, in partnership with national governments.

The launch comes at a grim time for state-funded overseas aid, after Donald Trump gutted the US Agency for International Development and several European nations slashed their aid budgets. While it has been in the works since well before Trump’s return, the Beginnings Fund is a reminder of the firepower on hand from philanthropic foundations to soften that blow.

The new initiative has a broad crowd of funders, ranging from the foundation of United Arab Emirates leader Mohammed bin Zayed to the Gates Foundation and the Children’s Investment Fund Foundation. So far, philanthropic approaches to this problem have been fragmented and often sub-scale, with too much duplication of efforts, said Tsitsi Masiyiwa, chair of Delta Philanthropies, another of the backers.

“Newborn mortality is causing more deaths than HIV or tuberculosis or malaria, and yet it hasn’t had this kind of joined-up initiative that these other areas in global health have had to date,” said Robyn Calder, president of ELMA Philanthropies, another backer. The new fund could benefit from economies of scale, she added, in the procurement of medicines and equipment.

“It’s not just about money, but also learnings and experience, and modelling what does and doesn’t work,” added Masiyiwa. “And if we pull all that together, then we are more likely to reduce these glaring numbers.”

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