As the Global South grapples with a deadly pandemic and growing climate concerns, the United Nations Development Program estimates developing countries and emerging economies owe close to $1.1 trillion in debt service payments in 2021 alone. Comprehensive debt relief is needed to avoid this looming crisis, but existing relief structures, such as the G20’s Debt Service Suspension Initiative and Common Framework for Debt Treatments, fall short in meeting the severity of the moment.
A new report from the Boston University Global Development Policy Center, the Heinrich Böll Foundation and the Centre for Sustainable Finance at SOAS, University of London proposes an ambitious blueprint for comprehensive debt relief, anchored by a Guarantee Facility for Green and Inclusive Recovery that would ensure critical participation from the private sector.
This Chart of the Week features Figure 7 from the report (below), which summarizes the three key pillars of the updated proposal for a green and inclusive recovery:
Enhance debt sustainability analyses
From the start, the proposal recognizes a shortcoming in current debt sustainability analyses (DSAs) from the International Monetary Fund (IMF) and World Bank in that they do not adequately consider climate and nature vulnerabilities, though many low- and middle-income countries are among the most vulnerable to the consequences of climate change. To meet this challenge, the report proposes enhanced DSAs (seen on the right of the figure) to set realistic and comprehensive analyses for debtor countries.
Create a Guarantee Facility to incentivize the private sector
Based on successful historical precedent, the linchpin of the proposal is the Guarantee Facility for a Green and Inclusive Recovery, which would be sponsored by the World Bank and designed to entice commercial sector engagement. The facility would back the payments of newly issued sovereign bonds, or “Recovery Bonds,” that will be swapped with a significant haircut for old and unsustainable debt. It would also provide a partial guarantee of the principal, as well as a guarantee on 18 months’ worth of interest payments, as the Brady Plan did. The Guarantee Facility would be built to offer a balance of “carrots” and “sticks” to entice the private sector: incentives that make participation more valuable than abstention and penalties for bondholders who don’t participate.
Devise green strategies led by country priorities
Finally, the proposal centers on providing debtor countries with more than temporary breathing space, but a real pathway to advance their own Green and Inclusive Recovery Strategies (GIRS). Leaders would draw upon their existing national plans – including their Nationally Defined Contributions for the Paris Agreement and their national sustainable development strategies – to enact new plans, policies and reforms. The GIRS would be buttressed by enhanced debt transparency, adopting sustainable borrowing practices and other best practices.