Debt in Low-Income Countries: Evolution, Implications, and Remedies

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Financing Low-Carbon Transitions through Carbon Pricing and Green Bonds

“…Often these instruments are perceived as alternative choices, but this paper finds there are important gains from deploying them jointly, provided countries have sufficient fiscal space. Debt levels are rising in many low-income countries (Essl et al 2019), and in such circum-stances it is preferable for climate policy to be financed by taxation or budget reallocation instead of deficit spending (Forni et al 2019). However, for advanced economies, Blanchard (2019) observes that sovereign debt, in contrast to corporate debt, is not rising that much, so there may be space for pursuing climate policies by green bonds and carbon pricing.…”

“…Notwithstanding these potential benefits, the use of green bonds can be problematic in countries with existing high public or private debt. Debt levels are rising in many low-income countries (Essl et al 2019), and in such circumstances it is optimal for climate policy to be financed by taxation or budget reallocation instead of deficit spending (Forni et al 2019). However, the greatest mitigation effort should be borne by the largest carbon emitters, which are mostly high and middle-income countries that have already issued green bonds.…”

“…With recent investor declarations, 11 there is a perception that demand for green bonds currently exceeds supply, 12 and some evidence that green bonds helped sovereigns attract new investors who had not previously invested in those countries. 13 Lastly, green bonds have a communications role. Many sovereigns and corporates have made long-term climate commitments.…”

“…12 A recent survey with 540 large investors reported that only 14% of them believed that current supply of ESG fixed income products is sufficient for the market, and that only 6.6% are satisfied with the current bond market penetration of ESG disclosures (RBC Global Assessment Management 2018). 13 Given that green bonds attract new socially responsible investors and asset managers, several issuers report the diversification of their investors base as a benefit of this type of security (OECD 2017, GIZ 2018). We can also observe this benefit for some governments and sovereign bond issuers (Climate Bonds Initiative 2018 (Flammer 2018) and are a diversification opportunity for investors that currently rely on equity and energy assets, as those co-move weakly with the green bonds market (Reboredo 2018).…”

Financing Low-Carbon Transitions through Carbon Pricing and Green Bonds

“…12 A recent survey with 540 large investors reported that only 14% of them believed that current supply of ESG fixed income products is sufficient for the market, and that only 6.6% are satisfied with the current bond market penetration of ESG disclosures (RBC Global Assessment Management 2018). 13 Given that green bonds attract new socially responsible investors and asset managers, several issuers report the diversification of their investors base as a benefit of this type of security (OECD 2017, GIZ 2018). We can also observe this benefit for some governments and sovereign bond issuers (Climate Bonds Initiative 2018 and thereby allowing the displacement of emissions rather than their net reduction.…”