Caribbean countries are caught in a vicious cycle of debt and climate disaster. That’s why

When Hurricane Beryl hit Carriacou, part of the Caribbean state of Grenada, in July, it nearly leveled the entire island, damaging every building in the village of 8,000 people.

Grenada has had to rebuild, but it’s a daunting prospect.

In 2022 the country spent US$51.9 million just to pay his loans, and he is currently in a debt crisis – a financial condition that means he is close to defaulting on his loans or that they need to be restructured. The cost of rebuilding would likely force Grenada to borrow more, pushing it further into the hole.

Beryl became the first Category 5 hurricane to form in the Caribbean, a shock even to a region accustomed to strong storms. It was fueled by unusually warm ocean water and increased in strength from category 1 to 4 in just 24 hours, which may be more likely due to climate change.

But for Caribbean island countries, the trail of destruction left by tropical storms extends to public debt – and their ability to borrow money to rebuild and rebuild.

This places these vulnerabilities in an ever-deepening cycle of costly debt that never fully covers the enormous costs of worsening climate disasters while mortgaging countries’ futures.

But new offers on the negotiating table at the COP29 climate summit in Baku, Azerbaijan – to use insurance to protect countries from debt crises and protect their fragile economies during natural disasters – could help them break out of this cycle.

What is a debt storm?

When Hurricane Maria hit the small Caribbean island country of Dominica in 2017, it… caused Damage totaled US$1.3 billion, more than double the size of the country’s entire economy. About 17,000 of the island’s 72,000 residents eventually left the island.

“This is for one country, one event per year,” said Sacha Jattansingh, a climate diplomacy expert at Climate Analytics, a science and policy think tank that has advised Caribbean governments on climate finance.

“We see the scale of just one climate event and how it can reverse years of economic and social progress a country has made.”

The next storm was the debt that Dominica had to take on to begin rebuilding. The debt burden continued to rise, and by 2022 the country was spending US$30.2 million per year just to service these external loans. That’s almost as much as the $32.4 million it received in climate finance – also mostly in loans – so it could prepare for the next disaster.

In fact, some of the world’s poorest countries are sending billions in debt payments to G20 countries, with payments reaching US$25.3 billion in 2023, according to analysis by the International Institute for Environment and Development (IIED), a think tank focused on climate finance for vulnerable countries.

How do countries fall into the trap?

Climate research shows hurricanes will get worse more intense due to anthropogenic global warming. This means more damage to the Caribbean islands and more costs.

“The timing of these disasters is getting shorter,” Jattansingh said. “You have a cycle of recovery, reconstruction, long-term recovery and so on, all for one more event to happen.”

This is leading countries to turn again to external lenders – but at a higher interest rate, as storms that destroy homes and infrastructure also damage a country’s creditworthiness.

Ritu Bhardwaj, principal investigator at IIED, calls it a “vicious circle.”

“Because (these countries) are already in a debt stream, no matter what kind of loan they take out, their loan comes at a higher interest rate. And no matter how much they want to get out of this hole, they will still never be able to do it. rise up—unless you give them a helping hand, pull them out, and bring them to a level playing field.”

More than 40 percent of small island developing states (SIDS), a group of island countries around the world facing similar climate and development challenges, are approaching or already in debt crisis, diverting precious money from services such as health and education to prevent bankruptcy. .

Is there a way out?

As climate disasters multiply, SIDS countries want reform of the global financial system that would take them out of this debt cycle.

In 2020 G20 launched a new framework for countries experiencing debt problems to restructure their loans with their creditors. Zambia, located in southern Africa, was the first country to enter into negotiations under the process and it took almost four years to reach an agreement with all of its creditors.

But this is not something many small island states can do due to their size.

“If you go to a SIDS country, the entire finance ministry consists of three to four people,” Bhardwaj said. “The ability (to negotiate) itself is quite limited.”

IIED has proposed a collective bargaining process for debt relief and restructuring, in which countries can negotiate as a group on financial issues, which can be very complex.

“We don’t want to move from country to country because that also comes at a cost to the country,” Bhardwaj said.

Bhardwaj says it is important to “layer” different forms of financial assistance on top of each other to form multiple walls of protection for highly vulnerable island countries.

One proposal: expand insurance for countries affected by natural disasters.

The Caribbean Catastrophe Risk Insurance Fund is a “risk pool” created in 2007 to help countries in the region insure against natural disasters. Countries buy insurance against natural disasters such as hurricanes, and the insurance pays out if a storm of a certain intensity occurs, according to the insurance policy.

By pooling the risks of several countries, CCRIF can offer insurance policies that are much cheaper than if one country bought the insurance on its own.

Grenada had this policy with CCRIF and was paid The $44 million immediately following Beryl will go towards repairing power lines, hospitals, ports and other infrastructure, as well as covering losses in agriculture and fishing.

“When a predetermined trigger event occurs, countries can receive quick payments that will help them meet immediate needs,” Jattansingh said. “And that could include debt relief as well as support for recovery efforts.”

Bhardwaj says that unlike a country with a large territory like Canada, when a storm hits a Caribbean island, it usually affects the entire country. A single storm could also shut down entire economies that may depend on tourism and agriculture.

Therefore, insurance coverage should reflect this. She proposes insuring the entire economy of a country so that the affected country can protect its GDP even if key sectors of the economy shut down and continue to meet its debt obligations.

IIED estimates that if the insurance risk of SIDS countries were pooled, the cost of protecting their entire GDP would be US$106.71 million per year.

Who is responsible?

Bhardwaj says the cost of these insurance premiums should not fall on small island countries, especially since they contributed little to the carbon emissions that caused the climate crisis.

She suggests that the money could come from global climate finance, specifically from the loss and damage fund that has been formally created. established at the COP28 climate conference in Dubai last year to compensate developing countries for the damage caused by climate disasters.

The sticking point last year was who would pay for it. Under the United Nations Framework Convention on Climate Change, the global convention that governs action to combat climate change, high-income industrialized countries such as the United States, Canada and European countries are required to provide financial resources to developing countries to combat and adapt to climate change. climate change. .

But rich countries argue that other emerging economies such as China, now the world’s biggest emitter of carbon dioxide, should also pay.

The climate finance debate is happening right now at COP29. Countries have pledged to contribute about US$700 million to a loss and damage fund, but that would be far from the total losses suffered by low-income countries, given that just one storm in one small country could cause billions of dollars in damage.

However, a loss and damage fund could finance insurance programs that would begin to lift countries out of the debt cycle.

“These countries are not on a level playing field,” Bhardwaj said.

“The global financial architecture is very biased and completely skewed in favor of richer countries, and poorer countries are getting poorer and poorer. They have no way to get out of this situation.”

With files from Anand Ram