As president of the G20, Brazil should propose a discussion on broad debt relief for developing countries and the inclusion of all creditors in renegotiations.
By Marina Zucker-Marques and Maria Fernanda Espinosa
Developing countries, especially those with lower incomes, are confronting a daunting array of challenges that significantly impede their socio-economic development. In a decade where developing countries (excluding China) require an additional US$1 trillion annually of external resources for sustainable development and climate goals, they are also disproportionately bearing the brunt of a climate crisis they played little or no part in creating. Amid monetary tightening in advanced economies, stalled funding commitment by rich nations and increasing debt service burdens, developing countries are struggling to marshal the resources necessary for climate adaptation and development. The current international financial architecture is not just perpetuating global inequalities, it is actively deepening them, ensnaring developing countries in a cycle that obstructs their path to sustainable development.
Debt relief is central to Brazil’s G20 agenda
As 2024 unfolds and with the Group of 20 (G20) Summit hosted by Brazil, there is a crucial opportunity to reshape the system to better serve the needs of developing countries. Under Brazil’s presidency, the G20 agenda prioritizes social inclusion, sustainable development and combating hunger and poverty. Central to achieving these goals and mitigating global inequalities is the pivotal discussion on debt relief at the G20 process, which Brazil may charge with updating and expanding the G20’s debt relief initiatives to enable meaningful debt relief. For this, it will be crucial to discuss debt relief initiatives beyond debt-for-nature instruments and build consensus on policies that incentivize the participation of all creditor classes in debt relief efforts, including the private sector and multilateral development banks.
“The Brazilian presidency must defend a comprehensive debt relief program that actually increases fiscal space. Another crucial aspect is the inclusion of all classes of creditors, including the multilateral banks, which were excluded from the negotiations.“
At least 69 developing countries are currently in need of debt relief. Increasingly, policymakers are faced with the impossible choice of servicing debt at the expense of public welfare. At least 18 countries are facing an overlapping crisis of debt and famine, and without debt relief the hunger crisis will worsen. For 48 countries – home to 3.3 billion people – interest payment expenditure surpasses budgets for key public services like education or health. Moreover, prioritizing debt service over social spending is especially detrimental to women, who have been shown to bear the brunt of austerity policies. The Brazilian presidency must defend a comprehensive debt relief program that actually increases fiscal space. Another crucial aspect is the inclusion of all classes of creditors, including the multilateral banks, which were excluded from the negotiations.
The Common Framework falls short of delivering debt relief
If granted, debt relief would immediately increase the fiscal space of developing countries and allow them to invest in priority areas such as sustainable development and the fight against hunger and poverty. Yet, the current international system lacks an effective debt restructuring mechanism. The G20’s initiatives, such as the Debt Service Suspension Initiative (DSSI) and the Common Framework, have had limited success and have failed in several respects. Notably, middle-income countries, which constitute a significant portion of the global economy, do not qualify for treatment under the Common Framework, which also does not compel all creditors classes – in particular, the private sector and multilateral development banks – to engage in debt relief. Moreover, the level of relief that has been provided is out of sync with the financing needs of the United Nations 2030 Sustainable Development Goals (SDGs) and the Paris Climate commitments.
The Brazilian G20 presidency should advocate for an updated Common Framework that recognizes the urgent need to invest in green investments and SDGs and accounts for meaningful debt relief that enables the Global South to meet their social-economic priorities. Although the discussion on debt-for-nature swaps has gained popularity in recent years, studies have shown that these instruments are not adequate to reduce debt levels and restore debt sustainability. The Brazilian G20 presidency should go beyond the discussion of these instruments and advocate for a comprehensive debt relief program that can substantially increase fiscal space.
Including all creditors in debt relief
Another crucial aspect is the inclusion of all creditor classes in debt restructuring negotiations. Although the private sector holds roughly half of emerging market and developing economies’ external public debt, they have been reluctant to participate in debt relief. When they have participated, they impose stiff conditions to indebted countries. Moreover, multilateral development banks have been excluded from debt relief negotiations, despite the fact that 27 countries in debt distress are mostly indebted to these institutions.
The G20 presidency should work towards building consensus on how to effectively include all creditors in debt relief in a fair and efficient manner. For the private sector, an updated take on the Brady bonds of the 1990s – when private creditors provided debt relief in exchange for bonds with greater assurance of collectability, and which helped ease the 1980s Latin American debt crisis – could be a solution to incentivize participation from a broad range of creditors. Previous experiences shows that MDBs can provide debt relief safely and efficiently. The Brazilian G20 presidency could foster an empirical-based assessment of how including MDBs in negotiations could improve debt sustainability and development prospects in low-income countries.
Breaking the Vicious Cycle of Debt and Inequality
To shatter the cycle of global inequality, the starting point must be effective debt relief. The stark reality facing developing countries is not just a crisis of resources but a crisis of systemic imbalances that deepen disparities and stifle development. Debt relief offers a tangible solution to unlock development potential, enabling countries to invest in sustainable development, health, education and combat hunger and poverty.
Looking ahead, Brazil as the G20 President should seek to align its actions with its aspirations for a fairer world, starting by alleviating the debt burden that weighs heavily on the shoulders of those least able to bear it.
Marina Zucker-Marques is a Postdoctoral Research Scholar with SOAS, University of London and Researcher with the Debt Relief for a Green and Inclusive Recovery Project.
María Fernanda Espinosa is the Executive Director of GWLvoices and Co-Chair of the Debt Relief for a Green and Inclusive Recovery Project. She previously served as the Minister of Foreign Affairs and the Minister of Defense of Ecuador, and as a Former President of the United Nations General Assembly.
This Op-ed was first published by Valor Econômico on January 30, 2024.