Nearly 70 countries are facing debt crises, with many of them also on the frontline of extreme weather events and struggling to meet the UN Sustainable Development Goals, a collection of 17 targets adopted by all United Nations\u2019 member states in 2015.<\/p>\n\n\n\n
Shaking up the status quo<\/h2>\n\n\n\n
The summit was first proposed by French President Emmanuel Macron in November<\/a> last year after the COP27 climate talks in Egypt and the G20 summit in Indonesia.<\/p>\n\n\n\n There were strong calls at both events for countries to come together and realign the support of international financial institutions for low-income and vulnerable countries. Many agreed the current system can no longer help these countries develop their societies and economies while dealing with a so-called \u201cpolycrisis<\/a>\u201d involving Covid-19, Russia\u2019s invasion of Ukraine, energy supplies, and currency inflation, which have brought compounding effects on countries.<\/p>\n\n\n\n More than 100 heads of state and government are expected to attend the event, including Mia Mottley, Barbados\u2019s prime minister, who has been central to putting financial reform on the climate agenda, Ali Bongo Ondimba, president of Gabon, and Ursula von der Leyen, president of the European Commission.<\/p>\n\n\n\n China confirmed its participation in April through a Sino\u2013French joint statement released during Macron\u2019s state visit to the country. It also \u201cindicated<\/a>\u201d that its representation would be \u201cat high level\u201d. However, it remains unclear whether Xi Jinping, China\u2019s president, will travel to Paris.<\/p>\n\n\n\n The summit builds on the Bridgetown Initiative<\/a>, an action plan launched<\/a> by Mottley at COP27. It urges an overhaul of global monetary arrangements that are based on a system<\/a> established some 80 years ago.<\/p>\n\n\n\n One focus is the reform of multilateral development banks (MDBs). These institutions, such as the World Bank, provide longer-run, affordable financing to governments for projects that the private sector would not finance, such as roads, railways and bridges.<\/p>\n\n\n\n Currently, the MDBs \u201caren\u2019t large enough to meet needs\u201d, Kevin Gallagher, director of the Boston University Global Development Policy Center, tells China Dialogue.<\/p>\n\n\n\n Furthermore, their policies \u201care not consistent with green and inclusive development\u201d, Gallagher notes. A third problem is that the \u201cvoices and representation of the developing countries are small relative to the Western powers that do not borrow\u201d, he continues.<\/p>\n\n\n\n Mottley underlined<\/a> another problem at COP27: \u201cThe global north borrows with interest rates between one and four percent. The global south, around 14%. And then we wonder why energy partnerships are not working.\u201d Moreover, high inflation means the cost of borrowing is growing.<\/p>\n\n\n\n These issues were spotlighted in April at the spring meetings of the World Bank and the International Monetary Fund (IMF), an agency of the United Nations, which monitors the international financial system and global economic development. The World Bank\u2019s steering committee and US treasury secretary Janet Yellen both urged<\/a> further reforms this year to improve the bank\u2019s response to climate change and other challenges.<\/p>\n\n\n\n At a webinar<\/a> earlier this year, French officials announced the priorities for the summit of a new global financial pact:<\/p>\n\n\n\n \u2022 To restore fiscal space <\/strong>to countries facing short-term difficulties, especially the most indebted countries<\/p>\n\n\n\n \u2022 To foster private sector development<\/strong> in low-income countries<\/p>\n\n\n\n \u2022 To encourage investment in \u201cgreen\u201d infrastructure<\/strong> for the energy transition in emerging and developing countries<\/p>\n\n\n\n \u2022 To mobilise innovative financing<\/strong> for countries vulnerable to climate change.<\/p>\n<\/div><\/div><\/div>\n\n\n\n Kevin Mo, principal of the Institute for Global Decarbonization Progress (iGDP), a green consultancy with offices in China and Europe, tells China Dialogue that the Paris summit has a clear goal: to reach consensus on debt restructuring and climate finance. The former involves changing the terms on loans to make them easier to pay back.<\/p>\n\n\n\n The lack of climate finance has been a long-standing issue and the core of international climate negotiations for more than a decade.<\/p>\n\n\n\n The main sticking point is the fact that developed countries, the main greenhouse gas emitters historically, fell short on delivering a pledge they made in 2009 to provide US$100 billion in climate finance to developing countries every year by 2020. The money was meant to support the latter to adapt to the impacts of climate change and reduce emissions.<\/p>\n\n\n\n Developed countries were pressured at last year\u2019s climate talks in Egypt to set up a separate \u201closs and damage<\/a>\u201d fund to help vulnerable countries deal with the irreversible consequences of climate change, such as rising sea levels. But it remains unclear which countries will pay and how big the fund will be.<\/p>\n\n\n\n In addition to insufficient climate finance, a debt crisis started to unfold among developing countries in the wake of Covid-19, complicating their efforts to achieve net zero. <\/p>\n\n\n\n \u201cA key point here is that debt in African countries isn\u2019t growing from excess borrowing. It\u2019s growing because interest rates are going up,\u201d Jade Scarfe, an analyst at Development Reimagined, a development consultancy with offices in China and Africa, tells China Dialogue.<\/p>\n\n\n\n Financial institutions around the world have been increasing their interest rates in a bid to cool inflation driven up by Covid-19 and the war in Ukraine. As a result, developing countries\u2019 debt also went up.<\/p>\n\n\n\n The debt crisis is deeply connected to the world\u2019s fight against climate change because the countries mired in debt are often the ones most vulnerable to climate change. Sri Lanka and Zambia are two such nations. Both have defaulted, meaning it will be harder and more expensive for them to get loans if they are hit by disasters.<\/p>\n\n\n\n Pakistan is another example. Already straddled with debt, it was devastated by floods last summer that caused more than $10 billion<\/a> of damage and pushed it further towards defaulting.<\/p>\n\n\n\n When countries struggle to pay off debt, they have less money to invest in decarbonisation, adaptation and other means of responding to climate change. For example, Nigeria, which witnessed its worst floods<\/a> in decades last year, had to spend 96%<\/a> of every tax dollar servicing debts.<\/p>\n\n\n\n For about two years now, creditor nations and multilateral lenders have been trying to find ways to restructure the hundreds of billions of dollars of debt owed by developing countries under the G20\u2019s Common Framework for debt treatment. But the talks have been in a logjam.<\/p>\n\n\n\n Martin Kessler, executive director of Finance for Development Lab, a Paris-based think-tank, tells China Dialogue that China has \u201ca huge role to play\u201d at the Paris summit because it is one of the largest economies in the world and the main bilateral lender to developing countries.<\/p>\n\n\n\n Kessler says there is a big gap between the Chinese view and that of the Paris Club<\/a>, an informal group of creditor nations formed in 1956, whose role is to find workable solutions to payment problems faced by debtor nations. Paris Club membership is dominated by developed, global north countries.<\/p>\n\n\n\n China is facing increasing pressure from the US and other western nations to reduce the amount of money owed to it by some of its debtors. But China insists<\/a> that the MDBs and other lenders should also provide debt relief and restructuring. This jars with received wisdom in Western capitals that the MDBs should be exempt from debt-relief requirements in order to maintain their top credit rating, which is required for them to offer concessional loans \u2013 made on more favourable terms than market loans \u2013 to development projects.<\/p>\n\n\n\n \u201cThe question is how China\u2026 can join the club to better the common framework for debt restructuring?\u201d says Kessler.<\/p>\n\n\n\n Some experts point out the need to recognise differences and work towards an agreement based on that.<\/p>\n\n\n\n The way China handles loans, such as its lending models and classification of sovereignty and commercial debt, are different from the traditional ways followed by members of the Paris Club, Kevin Mo of iGDP says. He believes the negotiations between China, the Paris Club and private sector creditors are \u201ca process of reaching a new consensus\u201d on debt management.<\/p>\n\n\n\n The fact that China plans to send \u201chigh level\u201d representatives to the Paris summit shows its willingness to discuss debt restructuring, Mo states.<\/p>\n\n\n\n He adds that if different parties can form \u201csome\u201d agreement and achieve \u201cquick wins\u201d on climate financing and debt restructuring in Paris, this could gather momentum for the G20 summit in India in September and COP28 in Dubai in November and December.<\/p>\n\n\n\n Kessler highlights a specific way in which China can contribute: Special Drawing Rights (SDR), a type of reserve asset issued by the IMF.<\/p>\n\n\n\n In 2021, the IMF issued $650 billion worth of these assets to its member nations to help them recover from the pandemic. However, due to its quota system, which is based on the size of a country\u2019s economy, African countries received just $33 billion, or 5% of the total.<\/p>\n\n\n\n Later that year, China said it was \u201cready to\u201d channel $10 billion worth of its SDR, or a quarter of its allocation, to African countries to support their recovery.<\/p>\n\n\n\n Kessler believes there are \u201ca lot of\u201d opportunities for \u201cconstructive collaboration\u201d between China and other parties, particularly the rechannelling of the SDR.<\/p>\n\n\n\nMDBs aren\u2019t large enough to meet needs<\/blockquote>Kevin Gallagher, Boston University<\/cite><\/div><\/div>\n\n\n\n
Too much debt, too little climate finance<\/h2>\n\n\n\n
![\"People](\"https:\/\/dialogue.earth\/content\/uploads\/2022\/09\/20220906_Pakistan-floods-crossing-river_Alamy_2JWDND3.jpg\")
<\/div>China has \u2018a huge role to play\u2019<\/h2>\n\n\n\n
Opportunities for \u2018constructive collaboration\u2019<\/h2>\n\n\n\n