Addressing Debt Distress in Developing Countries – A Blueprint for Debt-for-Climate-Resilience Swaps

Abstract

Low-income countries face the dual challenge of mounting debt pressures and heightened vulnerability to climate change. Climate-related disasters force these nations to borrow at higher costs for recovery, worsening their debt situations and limiting their ability to invest in climate resilience. This “climate debt trap” exacerbates interconnected risks like food insecurity, displacement, and regional conflicts, which spill over internationally. The G7 could leverage its influence on international financial institutions—including the IMF, World Bank, and Paris Club—to facilitate and streamline dialogue among key stakeholders. By complementing G20 efforts on debt treatments, the G7 can support low-income countries in building economies resilient to climate change. Debt-for-climate-resilience swaps offer a promising solution by alleviating liquidity pressures while fostering investments in climate adaptation. International financial institutions should develop clear eligibility criteria, identify adaptation-related projects for investment and standardize climate performance targets and penalties. Additionally, a framework to secure financial guarantees would be essential for ensuring the effectiveness of such swaps.