Debt repayments squeeze climate resilience investment in lower-income countries
- Editorial Team SDG17
- 2 days ago
- 4 min read
Published on 7 August 2026 at 02:22 GMT
By Editorial Team SDG17
High debt repayments are narrowing the choices available to many lower-income countries just as climate shocks increase demand for public investment. Money transferred to creditors cannot simultaneously finance flood defences, heat-resilient health services, electricity systems or emergency planning. The pressure is most severe where tax bases are small, borrowing is expensive and governments must pay external debts in foreign currency.
The scale of the constraint extends beyond countries already in default. UN Trade and Development (UNCTAD) reported that developing countries paid US$921 billion in net interest on public debt in 2024, 10 per cent more than in 2023. Its separate assessment of external debt estimated that least developed countries spent about 22.3 per cent of government revenue servicing external public and publicly guaranteed debt in 2024. These are group-level figures, not a measure of what every government could redirect to climate programmes, but they show why debt service has become a central budget pressure.
Climate resilience competes inside those budgets with wages, schools, existing social programmes and basic infrastructure. Flood-control channels and sea walls require capital spending followed by maintenance. Public-health resilience involves surveillance, clinics, cooling, water and sanitation, medical supplies and staff. Clean-energy systems require grids, storage and affordable connections, while disaster preparedness depends on forecasting, early warning, evacuation planning and pre-arranged finance. When interest and principal payments rise faster than revenue, governments may postpone projects, reduce their scope or rely on further borrowing.
Debt and climate exposure can reinforce one another. A country that delays adaptation remains more exposed to floods, droughts, storms or heat. A severe event can destroy infrastructure, weaken tax receipts and generate emergency borrowing. Higher debt and perceived climate risk may then raise financing costs, further restricting preventive investment. These pressures can be especially acute in small states, although debt structures and climate hazards vary widely across lower-income economies.
The latest World Bank International Debt Report found that low- and middle-income countries paid US$741 billion more in principal and interest on external debt than they received in new external financing during 2022 to 2024. That net outflow includes diverse borrowers and does not by itself prove that a particular resilience project was cancelled. It does, however, describe an international financing environment in which many countries are transferring resources outward while trying to fund development and climate protection.
Public health shows how the categories overlap. Flooding can contaminate water, disrupt clinics and increase some infectious-disease risks. Heat can raise illness and mortality while reducing labour productivity. Reliable clean electricity can keep health facilities operating and, where it replaces fuel-based generation, reduce exposure to volatile imported fuel prices. Budget reductions in one area can therefore weaken several layers of resilience rather than produce a single, isolated gap.
Debt relief is one proposal for changing that arithmetic. Cancellation or reduction of eligible obligations can lower future payments, while maturity extensions and interest-rate reductions can smooth them. The practical effect depends on which obligations are covered, the size and timing of the reduction, and the debtor's wider fiscal and economic position.
Debt restructuring also raises allocation and design questions. Creditors span bilateral lenders, multilateral institutions, commercial banks and bondholders, and negotiations over comparable treatment can be protracted. The effect on subsequent market access and borrowing costs varies by country and by the design and credibility of the restructuring. Relief that is insufficient may leave debt unsustainable, while renewed distress remains possible if growth, revenue, debt management or exposure to shocks does not improve.
Climate-linked restructuring takes several forms. Debt-for-climate swaps replace existing sovereign debt with liabilities that include a commitment to agreed climate or nature programmes. A joint International Monetary Fund (IMF) and World Bank framework describes swaps as potentially useful in particular circumstances while emphasising the need to compare them with other forms of support. Swaps can involve legal, financial, monitoring and verification costs, and the fiscal savings may be modest relative to a country's total debt or climate investment needs.
Another instrument is the climate-resilient debt clause, which allows scheduled payments to be deferred following an eligible catastrophic event. The World Bank offers such clauses to eligible small states, allowing principal and interest payments on qualifying loans to be deferred for up to two years. The clauses create liquidity during an emergency but postpone payments rather than cancel them. Their value depends on eligibility, coverage and whether other creditors offer comparable provisions.
Proposals for future finance focus on lending terms and governance. UNCTAD and other development institutions have called for more grants and concessional loans, lower financing costs, stronger debt transparency and faster, more predictable restructuring. These proposals seek to reduce financing constraints on public investment in vulnerable countries. Lenders, however, still assess repayment capacity, currency risk, project quality and institutional safeguards, while concessional finance depends on limited donor and multilateral resources.
This debate connects directly to SDG 17 (partnerships for the goals), whose target 17.4 addresses long-term debt sustainability through coordinated policies. The link is not that one financing instrument can resolve climate vulnerability. It is that debt contracts, creditor coordination and development finance shape whether governments can make investments before disasters rather than borrow mainly after damage occurs.
The debate therefore concerns how losses, risks and financing costs are distributed among debtor governments, citizens, public and private creditors, and international institutions. Debt relief, climate-linked instruments and revised lending terms can alter that distribution, but each brings conditions, costs and limits.
For lower-income countries facing repeated shocks, prolonged debt distress can delay resilience investment and increase recovery costs.
Further information:
UN Trade and Development, A world of debt 2025, supports the figures on developing-country public-debt interest payments and their relationship to public spending.
UN Trade and Development, External debt sustainability and development 2025, supports the 2024 debt-service estimate for least developed countries and the wider discussion of resource constraints.
World Bank, International Debt Report 2025, supports the external financing and debt-service figures for low- and middle-income countries.
International Monetary Fund and World Bank, Debt for Development Swaps: An Approach Framework, supports the explanation of swap design, circumstances and transaction costs.
World Bank, Climate Resilient Debt Clause update, supports the explanation of principal and interest deferrals following eligible catastrophic events.
