Climate Finance Requires Debt Reform
When delegations from around the world gathered in Bonn, Germany, last month for the sixty-second session of the United Nations subsidiary bodies on climate change (SB62), the specter of sovereign debt loomed large. In African countries, in particular, debt is no longer a problem unfolding alongside rising climate shocks and increasing developmental deficits; it has become the main obstacle to implementing effective responses to crises. Debt reform and climate finance are two sides of the same coin.
According to the Carnegie Endowment for International Peace, the external debt of African countries reached $655 billion, with debt service payments having tripled since 2010, driven by rising interest rates and currency depreciation. This year, the continent’s total debt service bill will amount to $79 billion. In 2023, spending on debt servicing in 34 African countries exceeded their total spending on health or education, let alone disaster relief or green infrastructure.
Comprehensive debt cancellation is a prerequisite for making any progress toward sustainable development. But that is just the beginning. The global financial structure, shaped by colonial power dynamics, is practically designed to entrench inequality. When extending loans to developing economies, institutions like the International Monetary Fund and the World Bank often impose conditions that restrict the fiscal space available to these countries and entrench austerity in local policies. Consequently, short-term relief comes with long-term shackles.
Many believe that mobilizing private investment is the way to bridge the climate finance gap. “De-risking” climate finance and attracting private capital using tools like green bonds and blended finance are among the key priorities of the G20. Similarly, the resolution regarding the new collective quantifiable goal on climate finance, adopted at last year’s twenty-ninth Conference of the Parties in Baku, emphasizes the importance of private sector engagement.
South Africa, which assumed the G20 presidency in December 2024, has reiterated this approach. For instance, at the G20 Finance Ministers’ meeting in February, South African President Cyril Ramaphosa called on the private sector, in collaboration with international financial institutions and development banks, to implement “innovative financing and insurance mechanisms” aimed at increasing funding for disaster preparedness and rebuilding efforts.
However, the private sector has long struggled to effectively engage in climate negotiations or identify viable projects that serve climate, development, and business goals simultaneously. Since infrastructure projects needed to enhance climate resilience typically take 20 to 30 years to mature, countries require access to long-term financing that they can rely on. Yet credit markets operate on time frames of three to five years, meaning borrowers often find themselves scrambling for more capital in uncertain and costly environments.
According to the ONE Campaign, the average interest rate on bonds for African countries in 2021 was 5.78%, compared to about 1.14% on loans from the World Bank. These countries will pay $56 billion in additional interest over the life of loans contracted between 2017 and 2021, compared to what they would have paid had they borrowed at World Bank rates. The much-promoted “blended finance” model does not resolve this issue, as it often combines public and private funds in ways that expose countries to credit market risks.
The real problem lies in the systemic bias of private financing against southern countries, partly due to inherent flaws in sovereign risk assessments. If the private sector is to help close the climate finance gap without trapping developing countries in cycles of repayment and dependency, we must first address the information asymmetries that allow credit rating agencies and investment institutions to define “risk” in ways that penalize developing economies. Ramaphosa—who has expressed support for reforming global credit rating systems—should help lead this process.
At the same time, we must recognize the limitations of private capital, especially when it comes to funding adaptation and loss and damage. There is no alternative to significantly expanding grants and public financing.
The responsibility for addressing biases in the global financial system lies with the entire international community—particularly advanced economies that are now cutting their climate aid budgets. However, African countries must take greater responsibility for leading this change.
Often, Africa has failed to adopt a unified approach to global issues and maximize its collective negotiating power. Consider the Baku-to-Belem roadmap—a joint initiative between the presidencies of the twenty-ninth and thirtieth Conferences of the Parties aimed at delivering at least $1.3 trillion in climate finance annually by 2035. Despite the initiation of regional consultations on the roadmap in February, with input from stakeholders encouraged, Africa has not presented a coherent position or set of recommendations.
Meanwhile, many African countries are seeking to strike bilateral debt deals in isolation, while others become mired in opaque and prolonged restructuring processes like the G20’s Common Framework for Debt Transactions. For example, Zambia’s debt restructuring process has lasted over three years.
It is now imperative for African countries to build consensus around a common agenda linking the thirtieth Conference of the Parties and the G20. Priorities should include comprehensive debt cancellation for countries vulnerable to climate impacts; reforming credit rating systems and capital cost structures that unjustly penalize African economies; and increasing the use of non-debt tools like grants for climate action. It is crucial to also table a global tax system capable of utilizing revenues to fund resilience in developing economies.
These efforts should be based on existing initiatives and proposals, such as the proposed United Nations Framework Convention on Sovereign Debt, which would offer a credible, cooperative, and rights-based approach to debt reform. The African Climate Summit, scheduled to take place in Addis Ababa this September, will serve as a critical moment to consolidate progress and speak with a united voice ahead of the thirtieth Conference of the Parties.
Alongside South Africa, the African Union—now a permanent member of the G20—should take a leading role in this process and steer global discussions toward creating a financial system that reflects today’s multipolar realities rather than the colonial dynamics of the past. This is a matter of justice, not charity. With developing economies on the front lines of the climate crisis, there could be no more pressing moment than now.
