Global south countries forced to rely on fossil fuel

Poor countries with heavy debts have been forced to continue to rely on fossil fuels for generating revenue to return the loans taken from richer countries and private lenders to meet various economic exigencies like the pandemic three years ago, a new report said.

These countries, mostly in the global south, may find it impossible to phase out fossil fuels and transition to renewable energy as revenues from fossil fuel projects “are often overinflated and require huge investments to reach expected returns, leading to further debt,” said the analysis, ‘The Debt-Fossil Fuel Trap’, published on August 21 by the anti-debt campaigners Debt Justice and partners in affected countries.

The global south — a term used for developing, less developing and underdeveloped countries, located in Africa, Latin America, and Asia — countries are increasingly being burdened by enormous debts in recent years. Their “external debt payments (money borrowed from richer countries, or multilateral creditors like the World Bank and IMF, or private lenders such as banks) has gone up by 150% between 2011 and 2023, reaching their highest levels in 25 years”, said the report. Moreover, 54 countries are in a debt crisis — they had to cut their public sending budgets during the pandemic to repay the loans, the analysis found.

The situation is worsened by extreme weather events, which force these countries to borrow more money as they lack adequate finances and resources for adaptation, mitigation and tackling loss and damage. For instance, Dominica’s debt as a percentage of GDP rose from 68% to 78% after Hurricane Maria hit the island in 2017.

To deal with the mounting debts, these countries have turned to extracting more fossil fuels. Take the example of Argentina, which has been supporting fracking projects in the Vaca Muerta oil and gas field in Northern Patagonia to generate revenues to ease the country’s debt crisis. Notably, the IMF has also backed these projects.

The report also highlighted that despite many assurances, to stop investing in fossil fuels in global south countries, richer countries and multilateral and bilateral lenders have financed “fossil fuel projects, often through loans, adding to debt burdens and keeping countries locked in fossil fuel production.”

One of the ways this happens is through loan contracts like resource backed loans (RBLs). In RBLs, “repayment is either made directly in natural resources (in kind) such as oil or minerals, or from a resource-related future income stream; or repayment is guaranteed by a resource-related income stream, or where a natural resource asset serves as collateral,” the analysis noted.

A case in point is Suriname, a South American country, which defaulted on its debt in late 2020, and in 2021. Following this, it started negotiations with its bilateral and private creditors to reduce its debt down to a sustainable level. In the final deal, it was agreed that creditors would get the right to 30% of Suriname’s oil revenue until 2050, up to a maximum of $689 million after Suriname received the first $100 million in royalties.

The report has laid out a few recommendations to help global south countries exit the “debt-fossil fuel trap”. It said clean energy, wealthy governments and institutions must implement “ambitious debt cancellation for all countries that need it, across all creditors, free from economic conditions.”

They should also stop accepting repayments made through fossil fuel projects’ revenue. Meanwhile, “Bilateral and multilateral finance should be aligned with a 1.5 degree warming scenario and fair shares calculations, and not be used to finance fossil fuels.”