Developing economies in Asia and the Pacific are caught in a dangerous feedback loop: rising debt burdens are constraining their ability to invest in climate action, while climate shocks are worsening fiscal pressures and increasing debt risks. Unless this vicious cycle is broken, many countries across the region risk “defaulting” not only on their debt, but also on their development and climate goals.
Asia and the Pacific is both a global economic engine and a climate hotspot. Under a high-emissions scenario, climate change could reduce regional GDP by up to 17% by 2070, while intensifying disasters and sea-level rise threaten hundreds of millions of people living in vulnerable coastal areas. At the same time, the region faces enormous financing needs: climate adaptation alone may require up to $431 billion between 2023 and 2030.
Yet just as climate investment needs a surge, fiscal space is shrinking. Excluding the People’s Republic of China (PRC), external sovereign debt in developing Asia and the Pacific has more than doubled since 2008, while debt servicing costs have risen sharply, absorbing an increasing share of government revenues. Approximately, 2.2 billion people, approximately 83 percent of the population of developing Asia (excluding PRC), live in countries where governments spend more on debt payments than on essential services such as healthcare.
A vicious cycle of debt, climate, and underdevelopment
Debt and climate risks are highly interconnected challenges. High public debt constrains governments’ ability to invest in climate resilience, disaster preparedness, and sustainable infrastructure. When climate disasters occur, they generate substantial economic losses, erode fiscal revenues, and necessitate additional borrowing – further weakening debt sustainability.
Asia and the Pacific is especially exposed to this dynamic, experiencing more natural disasters than any other region globally. By 2030, annual economic losses from disasters are projected to exceed $160 billion, yet only a small share of these losses is insured. This leaves countries trapped in a recurring cycle of shock, recovery, and rising indebtedness.
At the same time, the region faces mounting pressure from both escalating climate costs and increasingly expensive debt. This dual burden is undermining progress toward sustainable development commitments. Across the region, 58 percent of country-level Sustainable Development Goal (SDG) indicators show stagnation or regression, and only 8 percent are currently on track to be achieved.
The risk of falling behind on development goals is particularly acute for low-income and small island economies such as Lao People’s Democratic Republic, Maldives, and many Pacific Island states. In these countries, high climate vulnerability and elevated debt distress reinforce one another, creating a structural trap: without investment in resilience, climate risks intensify; yet without sufficient fiscal space, such investments remain out of reach.
How to avoid defaulting on development?
Despite mounting risks, the global system for dealing with sovereign debt problems is not fit for purpose. Existing mechanisms, such as the G20 Common Framework, have proven slow, incomplete, and often fail to deliver meaningful debt relief. Coordination among creditors remains weak, particularly given the growing role of private bondholders and non-traditional lenders.
At the same time, the International Monetary Fund’s debt sustainability analyses (DSA) underestimate the scale of the challenge. They typically assess a country’s ability to service debt based on current conditions, without adequately accounting for future climate risks or the large investments required for sustainable development. This leads to overly optimistic assessments, delayed restructurings, and insufficient relief.
This debt backdrop means that countries are tacitly encouraged to postpone debt restructuring for as long as possible, fearing protracted and uncertain processes. In an attempt to manage the situation, governments often resort to austerity measures that undermine growth, reduce social spending, and limit investment in climate resilience. In effect, many countries end up “defaulting” on development and climate action rather than on their debt.
Breaking this cycle and ensuring the region meets its development goals, relies on an ambitious and integrated series of reforms of the international architecture for resolving sovereign debt problems.
First, DSA frameworks must be reformed to properly incorporate climate risks and development needs. Countries cannot be expected to meet their debt obligations if doing so prevents them from investing in resilience and long-term growth.
Second, countries facing unsustainable debt need timely and substantial debt relief, with full participation from all creditor groups – bilateral, multilateral, and private – and fair burden sharing across them.
Third, debt relief should be explicitly linked to investments in green and inclusive development. By freeing fiscal space and channeling resources into climate adaptation, mitigation, and sustainable infrastructure, restructuring can become a catalyst for resilience rather than a temporary fix.
Finally, countries that are not yet in distress but face rising borrowing costs require better access to concessional finance and instruments such as climate-linked bonds or debt-for-nature swaps, to prevent future crises.
Asia and the Pacific stands at a critical juncture: without decisive action, rising debt burdens and escalating climate risks will continue to reinforce each other, undermining progress toward the SDGs and the Paris Agreement. Yet this trajectory is not inevitable. With a reformed international financial architecture that aligns debt sustainability with climate resilience and development needs, today’s vicious cycle can be turned into a virtuous one.
Read more in the latest book from ADBI Press: Accelerating Climate Action in Asia and the Pacific: Fiscal Policy Solutions.
