New Report — Spillover Effects: The Fossil Fuel-Debt Trap in the Global South

The escalating debt crisis confronting the Global South is not a temporary liquidity shortfall but a structural crisis rooted in historical patterns of extraction, unequal financial architecture and asymmetric power relations. It is an injustice. Across Africa, Latin America, the Caribbean, the Middle East and parts of Asia, sovereign debt has reached levels that severely constrain fiscal autonomy and long-term planning. In 2024, the external debt of low- and middle- income countries approached an all time high of US$8.9 trillion, with interest payments alone reaching a record US$415.4 billion. Many governments now allocate more resources to servicing debt than to health, education, or climate action. Public finance has increasingly shifted to managing vulnerability, addressing crises and meeting short-term repayment obligations for historical debt.

At the same time, fossil fuel dependence remains one of the most persistent macroeconomic vulnerabilities shaping sovereign risk. For fuel-importing countries, oil and gas price volatility destabilises trade balances and widens fiscal deficits. For exporters, commodity cycles and stranded asset risks expose public budgets to long-term instability. Energy systems therefore sit at the core of fiscal structure, foreign-exchange dynamics and political incentives. Fossil fuels are also the biggest cause of climate-driven loss and damage, escalating into trillions of dollars across the Global South. Not to mention millions of premature deaths and the escalating degradation and disruption of critical ecosystems – all which have massive costs to lives and economies.

The global transition away from fossil fuels may currently be a contested political issue – but economically it is already underway, albeit in a disorganised manner. While progress against the Paris Agreement – to hold global warming to under 1.5 degrees celsius through emissions reductions – has been insufficient, nations across the world are working towards a greater share of renewables in their energy mix. This has resulted in prices for renewable technologies dropping rapidly, with solar and offshore wind now 41 percent and 53 percent less expensive than fossil fuels. Investment patterns are also shifting away from fossil fuels. Fossil fuel-reliant countries could see a drop of 51 percent in government oil and gas revenues over the next two decades. There is currently no global plan in place to govern this transition, despite the huge risks it poses to nations, societies and ecosystems.

This introduces both urgency and opportunity for countries in the Global South that are both indebted and fossil fuel dependent. On one hand, climate change intensifies fiscal strain through extreme weather events, sectoral disruption and damage to infrastructure and food systems. On the other hand, due to debt injustice, those nations face incredible barriers to fair finance for renewable energy infrastructure. Transitioning away from fossil fuels is one way to reduce both debt and dangerous emissions in the long run. Nations can progress towards sovereign and community ownership of renewable energy systems rather than fossil fuel systems based in – often unequal – interdependencies with multinational corporations and other countries.

This report illustrates how debt distress and fossil fuel reliance are not separate crises but mutually reinforcing ones. High debt-service obligations crowd out investment in renewable energy, grid modernisation and social protection, while fossil fuel contracts, subsidies and revenue structures embed fiscal rigidities that deepen indebtedness and delay structural reform. Together, they form a structural trap in which governments facing refinancing pressures prioritise short-term liquidity and revenue certainty over long-term transformation. The result is a cycle of economic entrapment – enforced by international and multilateral institutions – that locks countries into volatile energy systems and recurring debt adjustment, constraining sustainable development and climate ambition. The fossil fuel industry is invested in maintaining this entrapment. It is profiting off of it, while selling a falsehood of fossil fuels as a driver of development, energy security and economic growth to decisionmakers in the Global South. Fossil fuel companies are the biggest user of Investor State Dispute Settlements, wrenching over US$327 billion from nations taking steps to transition away from fossil fuels. They are interested in maintaining their profit margins and their undue influence over political decisionmaking.

This report examines how the fossil–debt nexus operates across diverse contexts through five country case studies: Colombia, Egypt, Guyana, Jordan and Sri Lanka. These cases illustrate different manifestations of the same structural dynamic, whether through import vulnerability, emerging fossil fuel production, or crisis-induced default. They demonstrate that the linkage between fossil dependence and sovereign debt is not incidental but systemic. The report shows that the global transition away from fossil fuels is absolutely incumbent on building fairness into the global macroeconomy. The growing demands from nations across the Global South and civil society to address unjust escalating debt and the unfair rules of the international financial system are rooted in a rich body of evidence.

READ THE REPORT HERE: Spillover Effects- The Fossil Fuel–Debt Trap in the Global South Report