The Hidden Consequences of Climate Finance

Locally Led Adaptation & Resilience

Advocacy

Poor Countries Face Rising Debt from World Bank ́s Concessional and Non-Concessional Loans to Adapt to Climate Change

Adaptation finance is dominated by loans. For many developing countries, these loans make up a significant share of climate funding. However, loans are not the straightforward solution they appear to be. With recent hikes in global interest rates, many of these loans — especially non-concessional ones that don’t offer softer terms — are placing a heavier financial burden on countries already struggling with debt.

As a result, developing nations are paying back far more than they receive in adaptation funding, diverting precious resources from critical needs like healthcare and education. Adaptation finance relying on loans rather than grants risks locking low-income countries into cycles of debt, hindering their ability to invest in resilience against climate impacts.

For example, our analysis of World Bank projects shows a clear trend: although the World Bank is a major contributor to adaptation finance, a significant portion of its loans are offered on non-concessional terms.

These loans come with standard market interest rates, which are now much higher than they were a few years ago, drastically increasing the debt of the recipient countries.

Many NGOs, including CARE, argue that adaptation finance should prioritize grants over loans. Grants are particularly important for projects that do not generate revenue, such as adaptation and loss and damage interventions, as well as initiatives for knowledge management and capacity building. These types of projects do not produce income to offset debt, making loans a poor fit. Furthermore, grants should be the primary means of financing for the most vulnerable and re- source-limited countries, including Least Developed Countries (LDCs). Although LDCs have contributed only minimally to the climate crisis, they are among the most exposed to its impacts and lack the resources to bear additional debt burdens.

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