The Impact of Climate-Related Investments on Fiscal and Debt Sustainability Across Africa

Climate change is a global environmental crisis that has perpetuated economic and fiscal challenges for countries all over the world. Concurrent with the awareness of climate change risks, there is growing unease regarding the disproportionate impact of climate change on less-developed countries, particularly those in Africa. Countries with persistently low per capita growth, such as those in Africa, tend to experience larger external debt as a share of gross domestic product (GDP) compared with high-income countries.

According to the International Monetary Fund (IMF), 54 percent of low-income African countries are already in debt or facing a considerable risk of debt distress which could force a systematic default. Of greatest concern is that the growing debt burden reduces the capacity for timely public investment in critical infrastructure needed to build resilience against existential threats like climate change.

A new technical paper from Abbi Kedir, Morakinyo Adetutu, Kayode Odusanya and Dianah Ngui for the Task Force on Climate, Development and the IMF utilizes panel data from 46 African countries between 2000 and 2021 to explore how fiscal spending and debt burdens evolve if African countries increase public spending on climate change strategies.

Main findings:

• Increased spending on environmental protection is associated with higher external debt. This indicates that the potential improvements arising from environmental protection investments by African countries are offset by the impact of the investments on sampled countries’ external debt position.
• There is a widespread lack of climate investments across the sampled countries during the study period 2000-2021. 25 of the sampled countries (e.g., Cote d’Ivoire, Ghana, Nigeria and Rwanda) had no climate-related investment during the study period.
  • The authors argue this lack of investment accounts for the finding that persistence of country fiscal or debt positions has greater statistical bearing than climate-related investments.
• Consistent with emerging calls for debt relief for effective climate change management, the cost of servicing public debt imposes a binding constraint on countries’ performance in managing climate risk.

The finding that high costs of public debt erode the positive impact of climate investments across Africa has clear implications for African economies.

Policy recommendations:

• Development partners should increase grant funding—particularly for climate adaptation projects that offer long-term benefits but lack direct returns to help with repaying loans.
• Eligibility and compliance requirements for access to international climate funds like the International Monetary Fund’s (IMF) Resilience and Sustainability Facility (RSF) must be tailored to the unique capacity constraints of low-income countries.
• African governments must prioritize environmental protection in national budgets and improve public financial management to absorb climate funds effectively.
  • Debt restructuring and concessional lending options should be explored in tandem with climate initiatives.
• With nearly 80 percent of climate investment data from African countries showing zero entries, better tracking and reporting mechanisms are urgently needed to assess the scale, scope and impact of climate expenditures.

Overall, the technical paper stresses the link between climate finance and fiscal reform. Only by tackling debt burdens and expanding fiscal space can African countries take decisive, impactful action to safeguard their future against climate disruption.