After the Paris Agreement, the debt deluge

Think tank: IIED

Author(s): Sejal Patel; Erik Klok; Paul Steele; Isatou F Camara

October 18, 2022

This report from UK think tank IIED looks at why lending for climate drives debt distress.

Developing countries — especially least developed countries (LDCs) and Small Island Developing States (SIDS) — face huge challenges in financing their current climate and nature needs. The borrowing space of LDCs and SIDS is already significantly constrained by debt, and the 70% of climate finance provided as loans to developing countries is driving further debt distress. Now almost midway through the process of agreeing the new collective quantified goal (NCQG) for climate finance mobilisation post-2025, this analysis highlights why it is time to urgently reverse the balance between grants and loans. It highlights why grants must be at least 70% of climate finance for LDCs and SIDS through debt swaps for climate and nature action, climate-related budget support and new reallocated Special Drawing Rights from the International Monetary Fund for climate action.