Reports

Tackling the Vicious Circle: The Interim Report of the Expert Review on Debt, Nature & Climate

Today many low and middle income countries are facing a 'triple crisis'. The impacts of climate change are becoming more severe. The loss of nature and biodiversity threatens dangerous tipping points. And recent global increases in interest rates have forced up the costs of sovereign debt.

These crises are feeding one another in a 'vicious circle'. At the same time as environmental shocks and stresses force countries to borrow more to finance disaster recovery and adaptation, higher debt burdens are reducing their fiscal space to pursue sustainable and inclusive economic growth. Inadequate investment in adaptation and nature conservation in turn lowers future growth prospects, so making further debt more risky and more expensive.

The Expert Review on Debt, Nature and Climate was set up by the governments of Colombia, Kenya, France and Germany to understand these dynamics better and to make recommendations on how debt could be made more sustainable, both fiscally and environmentally.

This Interim Report, Tackling the Vicious Circle, sets out the triple crisis and explains the vicious circle. But it also argues that a 'virtuous circle' of sustainable growth is possible, if countries invest in low-carbon, climate-resilient and nature-positive development. This requires both strong domestic policies and a supportive international financial architecture.

Tackling the Vicious Circle focuses in particular on the critical role of the Debt Sustainability Frameworks (DSFs) used to assess debt by the IMF and World Bank. It argues that these do not at present fully take into account either the risks to growth from climate impacts and nature loss, or the economic benefits of climate adaptation and nature conservation. It makes a number of recommendations for their reform.

The final report of the Expert Review, with wider recommendations on both current and future debt arrangements, will be published in April 2025.