Weather disasters are forcing developing countries further into debt to rebuild damaged infrastructure, pushing up interest costs and slicing money out of future budgets for urgent social needs like education.
Uganda had to borrow more this year because of extreme weather events, Ramathan Ggoobi, permanent secretary in the Ministry of Finance, Planning and Economic Development, told GlobalMarkets.
“On average, our budget financing requires about $500m [of borrowing] a year,” Ggoobi said. “But this year, I am going to borrow $800m to address infrastructure challenges because roads have been swept away by floods.” Much of this will be borrowed internationally, he added.
“Climate change is already affecting every inhabited region across the globe,” according to the World Meteorological Organisation, “with human influence contributing to many observed changes in weather and climate extremes.”
Heavy rain and flooding in Uganda in April to June destroyed many roads and bridges and impacted almost 20,000 people, particularly women, data from the UN’s International Organization for Migration show.
But it is not just extreme rain impacting Uganda’s funding programme. During periods of drought, Ggoobi said the country needed to find funds to purchase food and aid, while at the same time not receiving tax revenue from the affected regions. “This leaves a shortfall, and I have to find a way to balance it out,” he added. “And the only result I have is borrowing.”
Dealing with the fallout of severe weather is “something we can’t run away from,” Ggoobi said.
Because of extreme weather, African countries are losing on average 2% to 5% of their GDP, the World Meteorological Organisation said. Some countries are spending up to 9% of their annual budgets responding to extreme weather events.
This is driving more African sovereigns towards unsustainable increases in borrowing, said Hailemariam Desalegn Boshe (pictured), former prime minister of Ethiopia, on a discussion panel hosted by the Atlantic Council this week.
“Interest rate payments are one of the key challenges we face, as they eat into subsequent years’ resources,” said Ggoobi. “If I borrow money today to fill such gaps, I have to budget for interest repayments.”
Uganda’s interest bill has now topped Ush11tr ($320m) annually. “That’s quite a massive amount of money to be paying in interest cost,” he continued. “And that definitely has an impact on the resources available to finance other critical needs, not including building resilient infrastructure.”
To avoid these events putting unbearable strain on African sovereigns’ debt, work is needed — both investment and fostering a greater understanding with creditors.
“There is a need to understand these mega-shocks,” Hailemariam said. This understanding “needs to be integral” to any analysis of debt stress, he said. “Climate, for developing countries, is an issue of macroeconomic stability.”
During times of economic shock exacerbated by extreme weather, “there should be room given to countries to respond, either by [creditors] suspending debt servicing” or by providing solutions to countries to address climate shocks, Hailemariam said.
The WMO estimates adapting for climate extremes will cost sub-Saharan Africa $30bn to $50bn annually, some 2% to 3% of the region’s GDP.