A triple fiscal crisis is jeopardizing climate action

A 2024 report by the Independent Expert Group on Debt, Nature and Climate revealed that many of the world’s 144 developing economies are on an unsustainable fiscal trajectory. On average, these countries spend 41.5 percent of their budget revenues — or 8.4 percent of gross domestic product — on debt service, severely limiting their scope for public investments in education, healthcare, infrastructure and innovation, which are essential for economic growth.
Without growth and greater fiscal flexibility, repaying sovereign debts becomes unfeasible. Consequently, developing countries urgently require a massive injection of affordable capital and, in some cases, outright debt relief from both international and domestic creditors.
The developing world’s debt crisis is compounded by two related factors. The first is climate change: global temperatures have already risen by 1.2 degrees Celsius and are projected to increase by an additional 0.2 C to 0.3 C per decade. This “climate debt” is exacting an enormous toll, with damages in vulnerable countries — currently estimated at roughly 20 percent of GDP — stalling their economic development.
Over the past few months alone, record floods have struck Spain, Nepal and parts of West Africa, unprecedented wildfires have ravaged Canada, Brazil and Bolivia and hurricanes Helene and Milton have battered the Caribbean, Central America and the southeastern United States. In Chad, torrential rains have led to widespread flooding, affecting 1.9 million people since late July.
Equally urgent, though less understood, is the nature crisis. Natural ecosystems act as a crucial buffer against climate change, absorbing half of the carbon dioxide produced by human activity. But deforestation and land-use changes are eroding the planet’s natural defenses, with most of the world’s forests — including the Amazon — now emitting more carbon dioxide than they absorb, thus accelerating the climate crisis instead of mitigating it.
Natural ecosystems also generate half of the rainfall needed for agriculture and human survival, with the rest supplied by ocean-formed clouds. But deforestation in the Amazon and Queensland is already threatening agriculture in regions like the Cerrado and eastern Australia. The situation in Africa is just as grim: Nigeria, which has the world’s highest deforestation rate, has lost more than half of its remaining forests in the past five years to logging, subsistence farming and firewood collection.
This “nature debt” continues to grow at an alarming rate, with $7 trillion pouring annually into industries that drive deforestation, overfishing and other destructive practices. By contrast, in 2022, nature-based projects received only $200 billion.
Together, these forces have created a triple debt crisis that threatens the economic and political stability of the world’s poorest countries. Ernest Hemingway’s famous adage about how one goes bankrupt — “gradually, then suddenly” — holds true for developing economies: unless they reduce their debt burdens, they cannot invest in climate resilience and environmental restoration. And without curbing nature loss and reducing greenhouse gas emissions, the world risks crossing critical tipping points that will exacerbate the climate debt crisis, with severe macroeconomic consequences.

Given the stakes, the international community must unite under the G20’s Common Framework to facilitate a global investment agreement that promotes sustainable growth by providing developing countries with affordable long-term funding and, where needed, swift debt restructuring.

Developing countries urgently require a massive injection of affordable capital and, in some cases, outright debt relief. 

Vera Songwe and Guido Schmidt-Traub

Achieving this goal requires decisive leadership. The G20 must demonstrate its commitment to fiscal responsibility by adopting robust emission-reduction targets that stimulate global growth without triggering another inflationary surge. While most G20 countries have embraced decarbonization and green growth as pathways to economic development, they must also share technology and expertise with low-income economies. Debt-distressed countries, overwhelmed by high borrowing costs, cannot reach carbon neutrality without innovative financial mechanisms, grant-based funding and technical support.
Regrettably, this year’s annual meetings of the International Monetary Fund and the World Bank, together with October’s UN Biodiversity Conference in Colombia, revealed that global leaders and financial institutions are still not prepared to invest in climate solutions at the necessary scale. This is surprising, given that investments in climate and environmental resilience yield high economic returns. Credit rating agencies have already downgraded several small island states and other climate-vulnerable countries, thereby driving up borrowing costs and potentially trapping them in a vicious cycle of financial and environmental instability. These countries do not just need temporary relief to stay afloat; they need resources to help them achieve sustainable growth.
In addition to the fiscal constraints imposed by the current debt crisis, two key barriers to global climate action stand out. First, macroeconomic frameworks — including the IMF’s Debt Sustainability Analysis — still do not recognize investments in climate resilience as productive. While the IMF has started to address this issue, the process remains slow and overly complex.
To advance sustainable development, the IMF and the World Bank must adopt the independent expert group’s recommendations and incorporate the effects of immediate climate shocks and longer-term environmental risks into their baseline macroeconomic and fiscal projections. They should also account for the cost savings and enhanced economic stability implied by anticipatory disaster financing, resilience-strengthening investments and insurance solutions.
The second, more politically charged barrier to effective climate action is the lack of international support for developing country governments seeking to invest in climate resilience. This fuels cynicism toward rich countries, whose repeated promises to provide climate financing remain largely unfulfilled. Consequently, developing countries find themselves in a double bind: without immediate relief, they cannot escape the climate debt trap; and without necessary financing, they struggle to devise credible investment strategies, thereby reducing their chances of receiving the concessional funding they urgently need.
Although the G20’s ongoing climate funding review is a promising first step, much more is needed. Mobilizing the $1 trillion in external financing proposed by the Independent High-Level Expert Group on Climate Finance requires a systemic overhaul that includes increasing multilateral development banks’ lending, providing an additional $100 billion to the International Development Association and fostering greater cooperation between governments, the private sector and philanthropic organizations.
The coming year offers wealthy countries a rare chance to prove that their climate financing commitments are more than just talk. The 2025 G20 summit in South Africa, the Catholic Church’s Jubilee Year and the UN’s COP30 climate change conference in Brazil could advance a sovereign debt deal and significantly increase investments in climate resilience.
Meanwhile, the IMF, the World Bank and other multilateral institutions must work together with forward-thinking governments, the private sector and other allies to show that investing in resilience can dramatically improve economic outcomes. Only then can the world overcome the triple debt crisis and pave the way for a sustainable future.

• Vera Songwe, founder and chair of the Liquidity and Sustainability Facility, is senior adviser at the Bank for International Settlements’ Financial Stability Institute and co-chair of the Group of Experts to the G20 Taskforce for a Global Mobilization Against Climate Change.
• Guido Schmidt-Traub, former executive director of the UN Sustainable Development Solutions Network, is partner at Systemiq. ©Project Syndicate