A debt crisis is looming in the Global South. Although international capital has partially returned to developing and emerging economies, in many low- and middle-income countries debt service is impeding crisis responses and contributing to worsening development prospects and a compromised ability to adapt to the impending climate crisis as well as threatening the achievement of the SDGs.
The G20 Common Framework for Debt Treatments will not suffice to tackle the debt problem facing many developing and emerging economies. This is a systemic problem, and a global and systemic response is needed. The international community, and the G20 in particular, need to agree on an ambitious agenda for tackling the debt crisis and providing countries with the fiscal space for sustainable crisis responses.
The Debt Relief for Green and Inclusive Recovery (DRGR) Project is a collaboration between the Boston University Global Development Center, Heinrich-Böll-Stiftung and the Centre for Sustainable Finance, SOAS University of London to advance innovative solutions to address the looming sovereign debt crisis.
The DRGR Project works with policy makers, thought leaders and civil society from around the world to develop systemic approaches to both resolve the debt crisis and advance a just transition to sustainable, low-carbon economy.
What is THE DRGR PRoPOSAL?
The DRGR proposal is in many ways a modern-day version of the Brady plan and the Highly-Indebted Poor Countries (HIPC) Initiative of the 1990s combined. While the G20 Common Framework has been a step in the right direction, it has yet to deliver meaningful debt relief.
The DRGR proposal offers a set of incentives and sticks to ensure that the widest possible section of creditors participate in the restructuring and relief process. Furthermore, it also addresses the hesitation that many debtor governments have in seeking restructuring by providing a clear and predictable roadmap of the steps involved and ensuring haircuts are sufficient for countries to meaningfully invest in their national plans on sustainable development.
For developing economies, regardless of income level, the DRGR proposal has three pillars, illustrated in Figure 1.
- Public and multilateral creditors should grant significant debt reductions that not only bring a distressed country back to debt sustainability but put the country on a path to achieving development and climate goals—in a manner that preserves the financial health and credit rating of multilateral institutions.
- Private and commercial creditors should grant commensurate debt reductions alongside public creditors with a fair comparability of treatment. These creditors must be compelled to enter negotiations through a combination of ‘carrot’ and ‘stick’ incentives.
- Credit enhancement should be provided for countries not in debt distress but that lack fiscal space to lower the cost of capital, alongside other forms of support like a temporary debt service suspension to ensure countries remain liquid while increasing fiscal space for investing in a green and inclusive recovery.
Resources that are freed up either by debt relief measures or by credit enhancements will be channeled to support recoveries in a sustainable way, boosts economies’ resilience and foster a just transition to a low-carbon economy. Countries’ specific investment priorities should be informed by their Nationally Determined Contributions (NDCs) (as determined through the Paris Climate Agreement), their “Climate Prosperity Plans” or another document that outlines spending target.
However, debt relief alone is not a substitute for a permanent sovereign debt workout mechanism and the deeper reforms needed to reform the global financial architecture. It should be provided as part of a package of new liquidity and affordable development finance, alongside reforms to the global financial architecture.
Figure 1: Three Pillars for Debt Relief for a Green and Inclusive Recovery
Find answers to frequently asked questions on the debt crisis, the DRGR proposal and how to guarantee sustainable development.
THE DRGR PROPOSAL EXPLAINED
Video: Sovereign Debt Relief for Climate Vulnerable Countries
November 2024
Developing countries are trapped in a vicious cycle of debt, climate change and underinvestment. As they spend more on debt interest than on healthcare, education, or climate resilience, the human costs are severe. The Debt Relief for a Green and Inclusive Recovery Project offers a bold solution: transformative debt relief to support sustainable development and climate action. It’s time to break the cycle and build a resilient, green and equitable global economy.
Now is the time for action. Learn more in our video.
Policy Brief: Another Lost Decade or a Decade of Action?
April 2023
Climate-related shocks are becoming more frequent and severe. More than ever, countries must invest in climate resilience and just transitions, but for many emerging market and developing economies (EMDEs), high debt burdens put achieving climate and development goals out of reach.
Will the 2020s be a decade of action to achieve shared climate and development goals, or will it amount to another lost decade of development?
This policy brief by Marina Zucker-Marques and Ulrich Volz explains the proposal advanced by the Debt Relief for Green and Inclusive Recovery (DRGR) Project.
Video: Explaining the Debt Relief for a Green and Inclusive Recovery Proposal
November 2023
The countries of the Global South have contributed little to climate change. But they are particularly vulnerable to its impacts. Now, as a result of COVID-19, high interest rates and climate-related disasters, debt levels in the Global South have skyrocketed. As a consequence, a triple crisis of debt, climate change and lost development is emerging. How can highly indebted developing countries respond to these challenges?
This video explains how the DRGR proposal would work. In less than three minutes.
fLAGSHIP REPORTS
Defaulting on Development and Climate – Debt Sustainability and the Race for the 2030 Agenda and Paris Agreement
April 2024
Time is running out to achieve the goals set out in the United Nations 2030 Agenda for Sustainable Development and the Paris Agreement. Not meeting these goals will have tragic impacts on the lives of present and future generations; yet, emerging market and developing economies (EMDEs) are facing conditions that inhibit their ability to mobilize investment, including historic levels of external debt, higher interest rates and low growth prospects to 2030. The report “Defaulting on Development and Climate – Debt Sustainability and the Race for the 2030 Agenda and Paris Agreement” performs an enhanced global external debt sustainability analysis (DSA) to estimate the extent to which EMDEs can mobilize the recommended levels of external financing without jeopardizing debt sustainability.
Guaranteeing Sustainable Development
April 2023
The report “Guaranteeing Sustainable Development“ analyzes new data on the level and composition of public and private external sovereign debt for emerging markets and developing economies (EMDEs). It estimates the size of debt restructuring and suspension necessary for the 61 EMDEs in or at high risk of debt distress to achieve debt sustainability and put them on a path towards meeting their development goals and climate commitments.
Securing Private-Sector Participation and Creating Policy Space for Sustainable Development
June 2021
The report “Securing Private-Sector Participation and Creating Policy Space for Sustainable Development” updates our proposal with more details on how countries can develop their green and inclusive recovery strategies, and how the private sector can be induced to participate in debt reduction.
Debt Relief for a Green and Inclusive Recovery
November 2020
The proposal “Debt Relief for Green and Inclusive Recovery” published by the Heinrich Böll Stiftung, the Center for Sustainable Finance at SOAS, University of London and Boston University Global Development Policy Center suggests that low and middle-income countries with unsustainable debt burdens receive substantial debt relief by public and private creditors, in order to provide fiscal space for investment in Covid-19-related health and social spending, climate adaptation and green economic recovery strategies. Private creditors participating in the debt restructuring would swap their old debt holdings with a haircut for new “Green Recovery Bonds”. (Spanish translation available)