As G20 leaders met in Johannesburg last month, they faced a grim reality: many developing-country governments are spending more than they can afford on debt service. To keep funds flowing to foreign creditors, policymakers have been forced to cut spending on education, healthcare and infrastructure. These countries have so far avoided default, at the expense of their own development.
The fact that governments across Africa, Asia and Latin America must close hospitals and cancel school lunch programs to service their debt is not only a moral failure; it is a strategic one. A world where countries cannot invest in sustainable growth and development would struggle to achieve stability, prosperity and climate resilience.
Five years ago, amid the COVID-19 pandemic, the G20 launched the Common Framework for Debt Treatment to help heavily indebted countries restructure their debts in an orderly, prompt and equitable manner. However, the promised relief has not materialized. According to the IMF and the World Bank, 37 out of 67 low-income countries eligible for concessional funding are in or at high risk of debt distress, but only four — Chad, Zambia, Ghana and Ethiopia — have applied for restructuring under the mechanism. Their experiences have revealed the weaknesses of the common framework: it offers far too little relief — and too late.
In response, the G20 has outsourced the problem to technocratic bodies, tasking them with accelerating the process and increasing relief. While this technical work is important, it is not enough. Debtor countries still fear that the policy is half-hearted. Policymakers talk less about a “debt crisis” and more about a “debt morass” — a world where everyone is stuck, waiting for a change that never comes.
Foreign private creditors have been withdrawing their capital from developing economies since 2022. The message is clear: the risks are too high, and no meaningful solution is in sight. When investors leave, governments are left scrambling to borrow from other sources.
Multilateral development banks (MDBs) and the IMF have come to the rescue. As a result, their share of developing countries’ external debt has soared, exceeding 75 percent in about 20 countries. This creates a vicious cycle: when multilateral organizations that do not take a haircut in restructurings hold most of a country’s sovereign debt, private creditors become even more reluctant to invest.
To escape the debt morass, G20 leaders must restore confidence in the common framework and act with a sense of urgency. That means reassuring debtor countries that applications for relief would be handled quickly, fairly and generously.
The G20 leaders’ statement, and their finance ministers’ statement on debt sustainability, merely reiterated the technical work and fell short of what is needed. Stronger commitments must be backed by tangible action.
First, G20 leaders must reduce the stigma of restructuring. When debt becomes a drag on growth, seeking relief and committing to reform should be seen as responsible economic governance.
Second, relief must be meaningful. A token reduction that leaves countries with still-limited fiscal space only prolongs the crisis. G20 leaders must replenish debt-relief funds. While taxpayers in high-income countries, many with their own ballooning debts, might balk at these costs, continuing to bail out private creditors indirectly through MDBs is expensive. The sooner debt relief is provided, the cheaper it would be.
Third, private creditors should be required to do their part. Based on the comparability-of-treatment principle, every dollar of debt relief from official creditors must be matched by private creditors. G20 leaders must support national legislation that enforces this policy. The self-regulatory approach taken over the past two decades by bondholders has not worked with other private creditors — and all it takes is a single holdout creditor to scupper a debt-restructuring process.
Some say that debt relief would make borrowing more expensive for debtor countries in the future. The reality is their borrowing costs are already prohibitively high. Cleaning up their balance sheets would attract investors more quickly than implementing austerity measures. Investors, having incurred losses, would become more discerning and demand risk premiums from countries that fail to improve their debt management — a welcome incentive for good governance.
The G20 must contend with a confluence of geopolitical, climate and economic shocks. The developing world’s debt morass cuts across them all. Only by addressing this underlying challenge can we hope to overcome all the others. G20 leaders have already committed to debt relief. Now they need the courage to finish the job.
Olusegun Obasanjo, a former president of Nigeria, is a member of Club de Madrid.
Copyright: Project Syndicate
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