COVID and climate change in low income developing countries

COVID and low income developing countries

Has the negative impact of COVID on low income developing countries (LIDCs) been exaggerated? While many LIDCs have expended less fiscal support to their economies than advanced or emerging market economies, the share of additional spending dedicated to health has been higher. In addition, through the use of containment measures they have succeeded in flattening the curve. But the risk of long-term “scarring” i.e. the permanent loss of productive capacity, is a particularly worrisome prospect.

Scarring has been the legacy of past pandemics: mortality; worse health and education outcomes that depress future earnings; the depletion of savings and assets that force firm closures—especially of small enterprises that lack access to credit—and cause irrecoverable production disruptions; and debt overhangs that depress lending to the private sector. For example, in the aftermath of the 2013 Ebola pandemic, Sierra Leone’s economy never recovered to its pre-crisis growth path.

COVID-19: Without Help, Low-Income Developing Countries Risk a Lost Decade
By: Daniel Gurara, Stefania Fabrizio, Johannes Wiegand – IMF

Climate risk and low income developing countries

Against this background of deteriorating public finances and potential long-term economic “scarring”, how will LDICs confront climate change risks?

In this paper by Beirne and al., the authors argue that vulnerability to climate risks has significant implications for sovereign borrowing costs. In particular, they show that climate-vulnerable developing countries incur a risk premium on their sovereign debt, reducing their fiscal capacity for investments in climate adaptation and resilience.

Feeling the heat: Climate risks and the cost of sovereign borrowing
Authors: John Beirne, Nuobu Renzhi, Ulrich Volz
From: Asian Development Bank Institute, SOAS

How to boost growth and mitigate climate change effects in low income developing countries

In this commentary, the authors suggest a “debt-for-climate swap” facility whereby debt relief is linked to investments that address climate change and inequality:

A policy tool of this type would not only put us on the path to recovery, but also could help to prevent future debt-sustainability problems that might emerge as more fossil-fuel holdings and non-resilient infrastructure become “stranded assets”. Moreover, the dramatic decline in the cost of renewable energy represents an opportunity for a big investment push in zero-carbon energy infrastructure, which itself would help to redress energy poverty and unsustainable growth.

Debt-for-climate swaps are crucial for economic recovery in the developing world
By: Shamshad Akhtar, Kevin P Gallagher, Stephany Griffith-Jones, Jörg Haas, Ulrich Volz – State Bank of Pakistan, Boston University, Columbia University, Heinrich Böll Foundation, SOAS