Bridging Climate Finance and Debt Sustainability in Global Vulnerable Countries

After decade of aspiring to fulfill sustainability ambitions, we are still facing a polycrisis of complex and intertwined global economic, social and environmental challenges. Specifically, climate – related challenges (stemming from both acute and chronic risks) are responsible for a series of macroeconomic shocks which (by inducing economic disruptions and fiscal pressures) directly affect a country’s fiscal space and debt sustainability. Consequently, Global Vulnerable Countries (GVCs) will have to face higher borrowing needs and costs which can result in heightened refinancing risks and fiscal space reduction. Regrettably, this will result in fewer resources being available to fund adaptation and mitigation policies to reduce potential climate vulnerabilities. In fact, this also increases the probability of default of the GVCs and can feed into the climate Crisis – Sovereign Debt Doom Cycle. Therefore, this paper argued that Debt for – Climate – Swaps (DFCS) could unlock direct funding for climate – related spending to break the negative cycle. Fundamentally, DFCS can free up fiscal space beyond the direct savings generated by the debt swap by enhancing governments’ repayment capacity is well as lowering borrowing costs often linked to debt distress situation. However, policy action at both global and national levels is needed to foster a more favorable external environment as well as enhancing macroeconomic stability with reduced structural constraints to accelerate long term growth and development of those vulnerable countries. In other words, for these actions, global coordination and cooperation will be critical and useful.