Is Climate Change Making Africa Pay More to Borrow?

When Cyclone Idai struck Mozambique in 2019, it killed more than a thousand people and caused damages exceeding $2 billion, more than half the country’s annual budget (1). In West Africa, floods in Nigeria displaced over one million people in 2022 (2). In East Africa, prolonged drought has forced governments to divert scarce resources to emergency relief (3). These are not isolated events; they are signs of how climate change is rewriting Africa’s economic future. The consequences are not only human suffering but also higher borrowing costs and rising debt distress. For Africa, climate risk is not a future problem. It is already a financial crisis.

Problem Statement

For decades climate change was framed as an environmental or humanitarian challenge,  rising seas, droughts, and storm (4). But global markets are now catching up to the truth: climate risk is also credit risk (5). Evidence shows climate-vulnerable countries face interest rates between 117 and 275 basis points higher than peers. Over the past decade, this climate risk premium has added an estimated $40–62 billion in extra interest payments for vulnerable nations (6).

Africa is at the center of this problem. Nine of the ten most climate-vulnerable countries are on the continent, including Niger, Chad, Sudan, Somalia, and Madagascar. Vulnerability is matched with weak readiness. While countries like Rwanda and Cape Verde show stronger adaptive capacity, many large economies, Nigeria, Egypt, South Africa, lag behind (7).

Figure 1 Africa’s Climate Vulnerability and Readiness Rankings.

The result is a distorted financial landscape where African countries, already least responsible for emissions, pay more to borrow while struggling to invest in resilience. The burden is visible in the numbers. In Sub-Saharan Africa, interest payments as a share of government revenue rose from around 5% in 2010 to more than 10% in recent years, nearly double the global average of 6%. In Eastern and Southern Africa, the ratio peaked above 10% in 2018, while Western and Central Africa crossed 9% in 2021. These figures highlight how climate risk compounds an already unsustainable debt burden.

Figure 2 Line chart of Interest Payments (% of Revenue), 2009–2022 for Sub-Saharan Africa vs. World.

When Disaster Meets Debt

Climate disasters often trigger sovereign stress in real time. Mozambique’s cyclone, Nigeria’s floods, and repeated droughts in the Horn of Africa all illustrate how revenue bases collapse, emergency spending spikes, and borrowing costs climb. This cycle worsens debt fragility, leaving countries trapped in a “disaster–debt loop.”

Global Lessons

·       Barbados’ Hurricane Clauses: By embedding natural disaster clauses in sovereign bonds, repayments pause automatically after shocks. This frees fiscal space without default. In Barbados, such clauses could unlock resources worth 18% of GDP after a major storm.

·       Ecuador’s Debt-for-Nature Swap: Ecuador bought back $1.6 billion of commercial debt and replaced it with a conservation bond, freeing $450 million for marine protection while reducing debt stock.

·       Caribbean CCRIF Facility: By pooling risk, the CCRIF insurance facility has paid out nearly $400 million since 2007, often within two weeks of a disaster.

Africa’s Reality

Sub-Saharan Africa is one of the regions most exposed to climate shocks, yet it continues to lag in the financial innovations needed to manage this risk. Droughts, floods, and cyclones routinely devastate livelihoods, erode tax revenues, and force governments into costly emergency spending. While the Africa Risk Capacity (ARC) was established as a regional insurance mechanism to provide rapid payouts after climate disasters, its scale remains modest compared to the magnitude of Africa’s climate exposure. In recent years, ARC has disbursed millions of dollars in timely support — including US $2.8 million to Lesotho, US $1.46 million to Somalia, and US $11.6 million to Malawi in response to severe droughts (8). These interventions illustrate the model’s potential but also highlight its limitations: coverage remains patchy, funding inadequate, and awareness low when compared to facilities like the Caribbean Catastrophe Risk Insurance Facility (CCRIF).

The shortcomings are equally evident in sovereign debt negotiations. In Zambia’s recent debt restructuring, climate risk was not integrated into the framework, despite the country’s frequent droughts that undermine agriculture and hydroelectric power generation (9). Ghana’s debt sustainability assessments also excluded climate shocks from stress tests, presenting an incomplete picture of fiscal fragility. Such omissions mean that African countries continue to face the so-called climate premium: investors price in vulnerability by charging interest rates that are on average 117–275 basis points higher than peers, costing vulnerable nations an additional US $40–62 billion in interest payments over the past decade (10).

The paradox is stark. Africa pays more to borrow precisely because it is vulnerable to climate shocks, yet its efforts to invest in resilience are rarely acknowledged or rewarded by financial markets. Without systematically mainstreaming climate risk into financial planning, debt management, and adaptation strategies, the continent risks remaining trapped in a cycle of vulnerability, high borrowing costs, and limited resilience.

Rewire2Build Perspective

At Rewire2Build, we argue that Africa cannot afford to remain a price taker in global finance. Climate change is already shaping creditworthiness, interest rates, and debt sustainability. Rewiring financial systems means embedding climate scenarios into every budget, bond issuance, and debt negotiation. Ministries of Finance must work hand in hand with Ministries of Environment. Central banks and regulators should stress-test against climate scenarios. Regional blocs like the AU and ECOWAS should champion expanded ARC coverage.

Above all, resilience must be seen as fiscal prudence. Every dollar invested in climate-proof infrastructure today reduces tomorrow’s borrowing costs. Adaptation is not charity; it is a financial strategy.

Actionable Takeaways

·       Integrate climate risk into debt frameworks. Ministries of Finance must embed climate scenarios directly into debt sustainability analyses (DSAs). Ignoring droughts, floods, or cyclones in fiscal projections distorts reality and leaves countries exposed. By running disaster-linked stress tests, governments can present a truer picture of repayment capacity and strengthen their negotiating position with creditors.

·       Scale up the Africa Risk Capacity (ARC). ARC has proven its ability to deliver rapid payouts after droughts and floods, but its current capitalization is a fraction of what the continent requires. Scaling it up — through greater member-state contributions and international backing — would provide Africa with a credible, first-line defense against climate shocks and reduce the need for costly emergency borrowing.

·       Embed natural disaster clauses in African bonds. Following Barbados’s example, African governments should push to include “hurricane clauses” or “drought clauses” in future bond issues. These provisions would automatically suspend debt repayments after disasters, giving countries breathing space without triggering default.

·       Leverage debt-for-climate swaps. Ecuador’s 2023 deal shows how sovereign debt can be restructured into conservation or adaptation bonds. African states can pursue similar swaps — reducing debt burdens while unlocking financing for climate-proof infrastructure, water security, or ecosystem protection.

·       Engage creditors on climate justice. The IMF, World Bank, and rating agencies must be pressed to recognize climate risk as financial risk. Current models penalize vulnerable countries with higher rates while failing to reward adaptation investments. A rebalanced framework is overdue.

·       Invest in resilience as a financial strategy. Climate-proof roads, energy grids, and water systems are not optional. They safeguard creditworthiness, protect growth, and lower future borrowing costs. Adaptation spending must be framed as fiscal prudence — an investment that pays for itself.

Conclusion

Climate change is no longer just an environmental crisis. For Africa, it is an economic and financial emergency. Vulnerability is high, readiness is uneven, and borrowing costs are rising. But this trajectory is not inevitable. By rewiring financial contracts and institutions to reflect climate risk fairly, Africa can transform vulnerability into leverage for resilience. The choice is stark: continue paying for a crisis Africa did not create, or build systems that reward resilience and unlock fairer finance. The tools exist. The time to act is now.

Reference

1.        World Bank. Project Appraisal Document . 2019;

2.        UNICEF. Nigeria Flood Response Report Nigeria HIGHLIGHTS. 2023 [cited 2025 Aug 31]; Available from: www.unicef.org

3.        Hunger in the East and Horn of Africa 2 Commons Library Debate Pack.

4.        Boitan IA, Marchewka-Bartkowiak K. Climate change and the pricing of sovereign debt: Insights from European markets. Res Int Bus Finance. 2022 Dec 1;62:101685.

5.        Fodha M, Kirat D, Zaki C. On Stranded Assets and Climate Risk: Are Financial Markets the Last Resort? [cited 2025 Aug 31]; Available from: https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter.

6.        Fresnillo L, Crotti i. Riders on the storm. 2022;

7.        Rankings // Notre Dame Global Adaptation Initiative // University of Notre Dame [Internet]. [cited 2025 Aug 31]. Available from: https://gain.nd.edu/our-work/country-index/rankings/

8.        Official Press Release The ARC Group makes climate insurance payouts to the Federal Republic of Somalia and the Start Network | African Risk Capacity Group [Internet]. [cited 2025 Aug 31]. Available from: https://www.arc.int/news/official-press-release-arc-group-makes-climate-insurance-payouts-federal-republic-somalia-and?utm_source=chatgpt.com

9.        Zambia received “debt-for-nature” proposal from WWF for restructuring – ThePrint – [Internet]. [cited 2025 Aug 31]. Available from: https://theprint.in/environment/zambia-received-debt-for-nature-proposal-from-wwf-for-restructuring/1322713/?utm_source=chatgpt.com

10.      IF Insights: Is the “Africa Risk Premium” fact or myth? - International Finance [Internet]. [cited 2025 Aug 31]. Available from: https://internationalfinance.com/finance/if-insights-the-africa-risk-premium-fact-or-myth/?utm_source=chatgpt.com