Emergency Spending Trap: Climate Change and Rising National Debt

Developing countries have been falling deeper and deeper into the vicious cycle of climate change. They have found themselves in an emergency spending trap, where they are suddenly diverting key fiscal resources into restoring the nation after frequent natural disasters. As a result, economic growth is halted and many countries turn to high-interest loans to manage the crisis, further exacerbating these countries’ resource deficits. 

Year after year, developing countries face natural disasters, like the flood crises in Pakistan and Bangladesh. These situations are brought about because countries in the South Asian region are extremely vulnerable to climate change, yet Pakistan and Bangladesh collectively contribute less than 1% to global greenhouse emissions (Crippa, Guizzardi, and Pagani, 2025) ^[1]. 

The economic effects of natural disasters

The sudden nature of events, like floods, trigger emergency relief responses. Consequently, the government has to allocate funds for reconstruction and recovery. Often, the governments have not budgeted sufficient funds to combat these disasters, which compels them to turn to external lenders. Borrowing rates increase after these floods because there is heightened risk for lenders as they face a higher chance of default on loans since borrowers' ability to repay is compromised by property damage and loss of income. The increased cost of borrowing for these countries and this emergency spending cycle shifts government funding away from growth projects like infrastructure and improved healthcare. 

Additionally, developing countries tend to produce the majority of domestically consumed produce. Furthermore, countries such as Pakistan rely heavily on agricultural exports, so their current account deficit is amplified when their crops are damaged by natural disasters. In 2022, the agricultural losses were estimated to be nearly 4 billion USD (Finance Division, 2022) ^[2]. As the agricultural sector makes about 24% of Pakistan’s GDP (Pakistan Bureau of Statistics, 2022) ^[3], the destruction of agriculture fuelled Pakistan’s economic turmoil. Moreover, these natural disasters also heighten food insecurity as these countries usually rely on their own crop supply to provide sufficient food in the country. The lower crop yield decreases the food supply in the country, urging these countries to import more, worsening the current account deficit. 

In the long term, this emergency spending trap also poses a significant opportunity cost and imperils the economic growth potential of these countries. This spending trap means that capital that was supposed to be used for long-term productive investments—like building schools, training healthcare workers, or producing renewable energy sources—is perpetually reallocated to service disaster-related debt. As a consequence, countries like these develop at an even slower rate. Additionally, developing countries have a limited fiscal budget due to lower incomes and higher poverty rates and less tax revenue being collected. So, every decision made about resource allocation results in a huge opportunity cost. 

The biased effect of natural disasters on developing countries

One of the main reasons developing countries face great losses due to natural disasters is because of the fact that the infrastructure is not sufficient to prevent the destruction caused by floods or earthquakes. So, there is a large wastage of money, as every year, buildings are deteriorated and then reconstructed by the government with their short supply of funds. 

When infrastructure is destroyed, people are displaced and there is less access to basic services such as hospitals and clean water. People in developing countries face financial vulnerability; they have no emergency savings to fall back on in these dire situations. Consequently, the poverty rates increase. In 2022, the national poverty rate of Pakistan increased from 4.0% to 4.3%, leaving 9 million people at risk of being pushed into poverty (Knippenberg, Amadio, and Meyer, 2024) ^[4].

Means of combatting natural disasters

There are many solutions that can be implemented to combat this problem. For example, these countries must implement long-term projects to have sustainable infrastructure, like dams, bioshields and buffer zones. One of the major issues with undertaking a project like this is the lack of funding. Global organisations like the IMF provide a Humanitarian and Disaster Relief fund. However, the financial aid provided is not enough to cover the cost of a significant portion of the damages. 

One way to tackle the funding issue is to introduce Debt-for-Climate swaps, where countries can access loans with a lower interest rate in exchange for allocating the savings towards building disaster-resilient infrastructure and natural buffer zones. This would alleviate the financial burden on the country and encourage these countries to implement long-term solutions.

Another way to ensure vulnerable countries have quick and relatively cheap access to funds during natural disasters is by having macro-level insurance. These insurance policies would pay out based on natural triggers, like extreme rainfall levels. This would ensure countries have easy access to funds and also prevent countries from accessing finances via high-interest sources, ultimately relieving countries of a potential financial crisis.

In conclusion, it is vital to shift the focus from short-term aid to a long-term climate financing structure. Natural disasters have a tendency to exacerbate developing countries’ fiscal deficit by increasing food insecurity, destroying infrastructure and diverting resources away from long-term growth projects. So, developing countries need to have sustainable solutions without having to sacrifice economic progression. 

Citations 

1. Crippa, M., D. Guizzardi, and F. Pagani. “GHG Emissions of All World Countries. 2025” Emissions Database for Global Atmospheric Research. https://edgar.jrc.ec.europa.eu/report_2025#intro 

2. Finance Division. “Pakistan Floods 2022 Impact Assessment.”  2022. https://www.finance.gov.pk/survey/chapters_23/Annex_III_Pakistan_Floods_2022.pdf.

3. Pakistan Bureau of Statistics. “Agriculture Statistics 2022.”.2022. https://www.pbs.gov.pk/agriculture-statistics/.

4. Knippenberg, Erwin, Mattia Amadio, and Moritz Meyer. 2024. “Poverty Impacts of the Pakistan Flood 2022.” Economics of Disaster and Climate Change 8 (3): 2025 453-471. https://doi.org/10.1007/s41885-024-00155-3.