Canada offers to pause debt repayments for countries hit by natural disasters

Prime Minister Justin Trudeau told Caribbean leaders on Wednesday that Canada will allow countries to suspend debt repayments in the event they’re hit by a natural disaster.

In doing so, Canada joins with other international lenders, such as the World Bank, which has agreed to insert climate clauses in its new loan agreements with countries.

Trudeau announced the new debt clause at the Canada-CARICOM summit in Ottawa. It’s the first such summit held in Canada and outside the Caribbean by the regional economic and political bloc.

“Canada will now offer climate debt resilient clauses (CDRCs) in all sovereign lending,” Trudeau told the summit during a session on climate change.

The Bridgetown Initiative, a set of recommendations on debt relief, low-interest lending and climate change promoted by Prime Minister Mia Mottley of Barbados, called for such climate clauses. CARICOM has adopted the initiative.

The Bridgetown Initiative calls for an overhaul of an international financial system that dates back to the Second World War. Proponents of the new initiative say the system no longer serves countries whose economies could be wiped out by a hurricane, forcing them to deal with both disaster relief and high-interest debt repayments at the same time.

“We have maintained that the one-size-fits-all prescription and the … rules that are imposed on us are not of our own making [and] cannot continue,” Mottley said.

Like the debt clauses the World Bank offered in June, Canada’s promise of pauses on repayment due to natural disasters would apply only to new loans.

The World Bank is an international financial institution that provides loans and grants to low- and middle-income countries. Canada was among the 188 countries that founded the multilateral institution in 1944.

Mottley pointed out that the debt pause promised by the World Bank applies only to the principal of the loan, not to the interest. As a result, she said, the World Bank relief clause offers little help to countries in crisis.

“Instead of having debt pause clauses for all existing debt for vulnerable countries, we are now being told that it is likely to be future debt,” she said.

Several Caribbean islands were under a tropical storm watch on Wednesday. The threat of the weather system prompted Prime Minister Roosevelt Skerrit of Dominica to leave the summit earlier than planned, despite having a leadership role at the meeting.

Natural disasters like these, Mottley and others stated, have exacerbated the debt crisis faced by countries in the region.

She said philanthropy and multinational companies “must play their part” to help the World Bank finance climate adaptation and other initiatives among developing countries, such as those in the Caribbean.

Governments alone, Mottley said, cannot fund a World Bank that’s up to the current task.

“So that we have three sources of funding: public money, private-sector capital … and philanthropy, and we can then have a World Bank that is scaled up to help meet the needs of the world,” she said.

Mottley suggested this could be done through “a global mechanism,” but she didn’t specify what that mechanism would be.