Nepal has increasingly relied on concessional loans from the World Bank for disaster management, signaling a growing trend of dependency on external borrowing for climate disaster recovery. This escalating reliance on loans highlights the urgent need for sustainable financial solutions, as the burden of debt continues to mount, potentially undermining the country’s ability to invest in long-term climate resilience and development. If immediate steps are not taken to address this trend, Nepal’s financial vulnerability in managing climate-related challenges could further intensify.
At the World Climate Conference (COP-29) in Baku, Azerbaijan, least developed and developing countries are demanding an increase in climate finance to $1.3 trillion per year. However, the first week of the conference saw a lack of priority from wealthy countries regarding the increase in funding, especially during the negotiation meetings on the new financial goal for climate action from 2025 to 2030 (New Collective Quantified Goal – NCQG). Despite calls for an increase in climate finance, it is expected that loans will constitute a larger portion than grants.
Historically, wealthy countries have imposed financial burdens on countries like Nepal under the guise of projects such as the Green Flexible and Inclusive Development (GRID). The G-77 and China, the alliance of island nations, and other developing countries have repeatedly raised their voices, insisting that climate finance should be fully mobilized as grants. Unfortunately, the G-7 nations have not shown any support for this position. The focus of the negotiation on the NCQG draft, rather than addressing the core issues, further underscores the unwillingness of wealthy countries to increase climate finance.
Multilateral lenders like the World Bank and the International Monetary Fund have also placed significant debt burdens on countries like Nepal in the name of climate resilience. This reliance on loans has become a growing concern. A recent study, the Climate Debt Risk Index 2024, highlights that Least Developed Countries (LDCs), despite contributing less than 3.3% of global emissions, are now sinking deeper into debt due to climate finance practices. The report describes this situation as a “climate debt trap” created by the wealthiest nations. Debt-driven climate finance has put many countries at risk of unsustainable debt levels, affecting critical sectors such as healthcare, infrastructure, and overall development goals. The LDCs are among the most vulnerable to climate change, and the mounting climate debt is hindering their ability to effectively use sustainable climate strategies and develop long-term resilience.
The Climate Debt Risk Index (CDRI) measures the exposure of countries to climate-related debt and forecasts whether these debts will stabilize or rise in the coming decade. If climate finance is not fully converted into grants, countries in South Asia, East Africa, and Southeast Asia are projected to face high risks of climate debt. Sri Lanka and Bangladesh in South Asia are already experiencing high risks. By 2030, Sri Lanka’s climate debt risk is estimated to rise to 74.17 points, while Bangladesh, with a $14.31 billion loan agreement, is also facing a very high risk due to climate debt reliance. In East Africa, countries like Mozambique and Madagascar are at similar risk, with Madagascar’s climate debt expected to reach 81.41% by 2030.
In Southeast Asia, Myanmar is projected to have the highest climate debt risk, with an estimated increase to 78.87% by 2030. Cambodia and Laos are also heavily reliant on climate-related loans and face growing debt risks. West Africa and the Caribbean, including Senegal and Haiti, are classified as vulnerable regions where climate debt will push them to high-risk levels by 2030.
The trend of debt-based climate finance in LDCs is particularly alarming. Nepal, for example, has taken loans for restructuring and rehabilitation after climate-related disasters. If this continues, and if political leadership does not take the issue seriously, Nepal may face even more significant debt after 2026, when it may lose the benefits currently available to developing countries.
In Bangladesh, grants account for only 8% of climate finance, while 34% is loan-based. Despite receiving $14.31 billion in climate finance, loans outweigh grants. Sri Lanka’s debt-to-grant ratio is similarly troubling, with a ratio of 12:13, making it highly vulnerable. Afghanistan, on the other hand, has relied exclusively on grants, receiving only $0.42 billion without loans. The reliance on loans for climate-related disaster management is reducing investments in climate adaptation and mitigation activities, while the climate debt burden of various projects continues to grow. This financial strain hampers overall development and stifles economic growth in poorer and developing countries.
The Need for Adaptation and Mitigation Funds
A major issue highlighted in the report is the imbalance in the allocation of funds for climate adaptation and mitigation in LDCs. Pakistan, for example, received $1.84 billion in climate finance, of which $1.45 billion was allocated to mitigation efforts, leaving only 0.29% for adaptation. Cambodia, in contrast, has adopted a more balanced approach between adaptation and mitigation. The report stresses the importance of investing in climate adaptation, as failure to do so will lead to economic and social damage. A balanced model of financial mobilization is crucial for strengthening adaptation efforts while also reducing greenhouse gas emissions through mitigation.
The Need for Sustainable Climate Finance
Nepal has taken concessional loans from the World Bank for disaster management. This trend of borrowing for climate disaster recovery is increasing. The World Bank and the International Monetary Fund have been imposing heavy debt burdens on countries like Nepal under the banner of climate resilience.
The Climate Debt Risk Index calls for a shift toward grant-based climate finance to mitigate the ongoing climate debt crisis. It suggests that loans should be converted into climate resilience funds and offered as grants. Innovative financial mechanisms, such as climate resilience and carbon taxes, should be created to reduce the national debt burden for climate projects. The creation of a Climate Resilience Fund could not only reduce the debt burden but also provide a new revenue stream, offering a sustainable solution to the current global climate finance system.
The Need for Global Policy Reform
The Paris Agreement, as discussed at COP-29, emphasizes both grants and loans for climate-related activities. However, the push to separate loans from grants for LDCs when determining future climate finance goals has yet to gain traction.
Despite the insistence from the G-77 group of countries, G-8 nations seem to favor a circular approach to decision-making. The Climate Debt Risk Index 2024 calls for policy reforms in the mobilization of climate finance and advocates for a “climate loan-swap” to replace loans with grants for climate adaptation and mitigation. This shift could reduce the financial burden on LDCs.
Additionally, the report stresses the importance of transparency in the allocation of climate finance. The LDC group must unite and push for a change in the current climate finance model, securing support from the China-led G-77 alliance.
Source: Kantipur – Krishna Poudel
