The Increasing amount of heatwaves, floods, and hurricanes in the Western hemisphere have also threatened climate crises in developing nations as well.
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Climate Crisis Change Shifts Global Investment
The global investment and lending systems are on the verge of climate-centric development as the consequences of global warming on economies around the world have become impossible to overlook.
That change should be good news but it is the economically challenged Global South that could bear the heaviest burden of this shift in this climate crisis which has challenged the world.
Before 2021, people mostly thought that climate change was a bigger problem for countries in the Global South. Big banks and rich countries gave a lot of their money meant for fixing the Climate Crisis to help these vulnerable places get better at dealing with climate change.
However, the past two years have brought about a radical shift. The year 2023, specifically, has witnessed an unprecedented surge in dramatic Climate Crisis change effects across North America, Europe, the Middle East, and East Asia. Prolonged heatwaves, floods, raging wildfires, and devastating hurricanes have struck these wealthier regions, leaving them bewildered.
Shift in Climate Funding
Against this backdrop, it should surprise no one if richer nations redirect financing that was previously allocated for the Global South’s adaptation efforts, channelling it instead towards domestic recovery efforts.
The shift is already noticeable in mechanisms like multilateral climate funds, as highlighted recently by the struggles of the Green Climate Fund (GCF) in securing pledges from rich countries for its upcoming funding cycle. Remember, there are only limited dedicated sources of Climate Crisis financing to begin with.
Getting money from these sources is very hard, but they are super important and might be the only help for many places in danger. If these funds run out of money, then the Global South won’t have anywhere else to go for help.
Challenges Faced By Global Partners
The Loss and Damage (L&D) Fund, which started just last year, is also having a tough time in this changing situation. It doesn’t have enough promises of money yet, and it struggles to get the money it needs to deal with climate change. Plus, rich countries, especially the United States, don’t want to admit they should pay for the problems they caused in the past or help countries affected by disasters, and they often say dismissive things about contributing to the fund.
In COP28, there are plans to discuss making the L&D fund actually work. It will be interesting to see how the delegates handle the difficulty of making a fund that has very little money actually function.
Another important thing to consider in the changing financial landscape due to the Climate Crisis is how it affects the Global South, especially when it comes to the more lenient parts of worldwide debt agreements.
Climate Crisis Debt Challenges
For institutional lenders like the International Monetary Fund (IMF) and the World Bank, climate crises are becoming increasingly evident through an elevated probability of loans that borrowers are not able to repay due to hardships.
Such challenges stem from borrowers facing recurring climate-induced disasters or depreciation of their existing assets caused by the escalation of global inflation, which itself may be driven by the climate Crisis.
Lenders face a quandary. On the one hand, their core mandate is to provide financial assistance to countries in need. However, they must also exercise caution when extending loans to countries that may be unable to repay them.
Consequently, as a delicate balancing act, institutions are now moving away from the concessional nature of debt instruments, relinquishing their prior leniency.
Pakistan’s IMF Bailout
Pakistan serves as a notable example.
Last year’s floods plunged the country into poly-crises, pushing it dangerously close to a sovereign debt default. Ultimately, the economic collapse was averted through the approval of a $3bn loan program by the IMF.
One would expect that the IMF would provide this amount on favorable terms to help alleviate Pakistan’s economic woes. However, the reality is quite the opposite.
Reforms tied to the bailout package have resulted in a surge in annual inflation in Pakistan, reaching a historic high of 38 percent in May. Interest rates have also climbed, and the Pakistani rupee has reached unprecedented lows, with a 6.2 percent decline against the US dollar last month.
African countries that are vulnerable to climate change provide clear examples. The IMF itself says that 13 African countries are in a very tough spot when it comes to handling both climate-related challenges and their debt. Zambia, facing severe droughts, and Ghana, dealing with frequent floods, have already failed to pay their debts.
Rethinking Global Finance
The idea of forgiving these debts, which many heavily indebted countries in the Global South are asking for, is not something that lenders are eager to support. It seems that even with the climate crisis, the basic principles of capitalism remain unchanged.
During the New Global Financial Pact Summit in June, Kenyan President William Ruto expressed, “We want to repay our debts, but we need a new financial system.” He argued that the current financial system is unfair and punishes countries unfairly.
Certainly, the Global South will have to rely more on its own resources to invest in climate solutions. These countries need to break free from the constant cycle of debt and climate crisis emergencies. However, to achieve this, they require a financial system that doesn’t favor only the strongest but provides equal opportunities to all.
Mere sympathy from wealthy nations is no longer sufficient. What the Global South truly needs and rightfully deserves is a system that consistently shows empathy.