10 July 2022, 23:00:00

Integrating Nature into Debt Sustainability Analysis

This report highlights the importance of integrating nature-related risks into debt sustainability frameworksfor institutions such as the International Monetary Fund (IMF).

It provides compelling quantitative evidence that the inclusion of nature collapse scenarios is necessary to provide a full picture of debt sustainability risks to sovereigns.

A four-step process for integrating nature-related risks into Debt Sustainability Analysis (DSA)is applied to six countries – Bangladesh, Brazil, Canada, Indonesia, Nigeria and Vietnam – using novel World Bank estimates of the macroeconomic cost of a partial collapse of ecosystem services.

The results show that nature loss matters for debt sustainability.

Key Messages:

· Omitting nature risks in debt sustainability analysis could lead to inaccurate policy recommendations and increase the risk of avoidable debt crises for many countries.

· Under a scenario of partial nature collapse the debt-to-GDP ratio could rise steeply for developing countries such as Bangladesh (15 percentage points), Nigeria (13 percentage points), Indonesia (11 percentage points) and Brazil (7 percentage points).

· Partial collapse of ecosystem services – such as forestry, fisheries and pollination services –will have more adverse economic effects on debt metrics than the Covid-19 pandemic for many countries.