Rich countries force poor nations to rely on fossil fuels: What a new report says

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.

“They propose that foreign currency could be saved by supplying oil and gas domestically while additional foreign currency can be generated through oil and gas exports. The former economy minister Martin Guzman suggested that exports could hit $15 billion by 2027,” the report said.

Experts, however, have raised serious concerns regarding the development. They have pointed to the environmental devastation that fracking — a drilling method used to extract oil or natural gas from deep in the Earth’s surface — could cause. Moreover, many analysts believe that proposed benefits may not materialise given the risks of relying on fossil fuel revenues and given the huge amount of investment required to scale up extraction in the next few years, which will require taking on more debt from external creditors.

“The country’s strategy to reduce debt may end up adding to debt levels without generating adequate revenue to repay,” which could force Argentia to further expand its fossil fuel projects, the report added. This is known as the “debt-fossil fuel trap”.

Rich countries, IMF and World Bank keep global south’s fossil fuel projects running

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.

“Once again, this deal keeps Suriname trapped in oil exploitation whilst being incentivised to maximise oil revenues,” the report said.

Ending the high debt burdens

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.”