Climate debt storm threatens financial stability

Bangladesh's hard-won economic resilience is being tested as the twin pressures of climate change and mounting external debt converge to threaten its financial stability.

The country's debt-sustainability outlook, once viewed as robust, is deteriorating amid intensifying climate disasters, faltering export growth, and tighter international credit conditions, according to a new report launched at an international conference yesterday.

The Centre for Policy Dialogue (CPD) organised the event-- A World Beyond Crisis: Climate Solutions That Work -- at the BRAC Centre Inn, Dhaka, attended by policymakers, researchers, youth leaders, and practitioners to explore equitable and practical climate solutions.

"The results from multiple scenarios and stress tests indicate that the economic loss and damage due to climate change pose a significant threat to Bangladesh's short-run debt sustainability, particularly when combined with other shocks such as an increase in interest rates for variable interest rate loans or a fall in exports," said the report authors, led by CPD Executive Director Fahmida Khatun.

The report comes ahead of the upcoming 30th United Nations climate change conference (COP30), to be held in Belém, Brazil, in November.

It said Bangladesh has struggled with macroeconomic management in recent years, and several red flags are now clearly visible.

"Against this stressed financial background, climate change-related economic loss and damage might generate instability and undermine Bangladesh's debt sustainability."

The report highlights that Bangladesh, which is scheduled to graduate from the Least Developed Country (LDC) category in November 2026, is navigating a challenging economic phase marked by low revenue collection, liquidity crises in its banking sector, and a depreciating exchange rate.

The paper said over the past 10 years, the ratio of foreign debt-to-exports increased from 59 percent in the fiscal year (FY) 2011-12 to nearly 117 percent in FY23.

"This indicates that the growth of exports has been lower than that of external loans, especially in recent years, which increases the risk of an overwhelming debt burden for the country."

The primary catalyst for immediate debt distress, the report suggests, is the financial weight of climate change.

Economic losses from climate-induced natural disasters surged nearly tenfold, from roughly Tk 18,425 crore between 2009 and 2014 to a staggering Tk 1,79,200 crore in the 2015 and 2020 period.

The combined losses and damage from all the disasters between 2009 and 2020 stood at around Tk 2,00,000 crore, said the report, citing an estimate by the Bangladesh Bureau of Statistics.

Floods accounted for over half of the losses.

This fragile environment has already triggered alarm among global credit agencies: Moody's, S&P Global, and Fitch Ratings have all downgraded Bangladesh, citing "heightened external vulnerability and liquidity risks", "deteriorating reserves", and a growing susceptibility to economic shocks.

The report said that Bangladesh's external debt surpassed $100 billion by the end of 2023, nearly double the level recorded a decade earlier.

The government's fiscal space has narrowed sharply. Public investment remains essential to sustain growth and build climate resilience, it added.

The report warns that a growing share of new borrowing is occurring under less concessional terms, exposing Bangladesh to higher refinancing costs.

At the programme, Prof Rehman Sobhan, chairman of CPD, said Bangladesh faces two intertwined challenges: the immediate impacts of climate events such as floods and cyclones, and the broader, long-term costs of climate change, including adaptation and mitigation measures.

"It is crucial to understand the marginal cost of debt sustainability (the cost of raising one additional dollar of debt) attributable to climate factors, especially as the financial landscape evolves."

He said the current allocation for climate-related spending -- around 4-5 percent of the development budget -- is meagre in relation to the country's Gross Domestic Product (GDP).

However, he said, "We need to see not only what is allocated but how effectively those funds are being utilised."

Sobhan called for a clearer breakdown of domestic versus external funding for climate issues and added that grant financing should be prioritised for non-income-generating climate projects.

He warned that global developments, including shifts in international aid priorities and commercial financing patterns, could influence Bangladesh's climate finance landscape.

Referring to the so-called "Trump variable", Sobhan said any change in the US administration's stance on climate issues could have cascading effects on funding availability worldwide.

He pointed to emerging financing opportunities in Asia, including loans and aid from new sources such as China, suggesting that Bangladesh should explore these avenues to supplement traditional funding mechanisms.

The report emphasised the need for better data on the economic impacts of climate change, incorporating loss and damage considerations into debt sustainability analyses, and seeking support from the Loss and Damage Fund established to support developing countries vulnerable to the adverse effects of climate change.