U.N. Secretary-General Antonio Guterres Urges Debt Relief for African Countries

During a West Africa trip, the United Nations chief also called for more investment for states particularly affected by climate change to help their economies recover from the COVID-19 pandemic and cushion the effects of the war in Ukraine.

“International financial institutions need to take urgent action on debt relief by increasing liquidity and fiscal space so that governments can avoid default and invest in social safety nets and sustainable development,” Guterres said according to Reuters.

The United Nations has made proposals to the World Bank and IMF to mobilize various resources and instruments for debt relief, but so far the actions taken have been insufficient, he added.

Poor countries face economic ruin from simultaneous crises of food, energy and finance due to supply disruptions caused by Russia’s invasion of Ukraine, the U.N. Secretary-General emphasized a few days earlier.

Furthermore, he stressed major imbalances in investment in recovery after COVID: Per capita economic growth in Africa is expected to be 75% lower than the rest of the world over the next five years.

Concerns about a looming debt crisis in the Global South are steadily growing. DRGR, therefore, proposes comprehensive debt relief that is oriented around green, inclusive recovery.


A Green Strategy to Defuse the “Debt Bomb”

According to the IMF, 60 percent of low-income countries are at high risk or already in debt distress. Moreover, a growing number of middle-income countries is also suffering from high debt service burdens. The Russian invasion of Ukraine has further escalated the situation, creating a perfect storm. Against this backdrop, Co-author Ulrich Volz presents the DRGR proposal at “ISPIonline” as a promising approach to tackle the debt crisis.

A debt crisis is looming in the Global South. According to the International Monetary Fund (IMF), 60 percent of low-income countries are at high risk or already in debt distress. Moreover, a growing number of middle-income countries is also suffering from high debt service burdens. Debt-to-GDP ratios and external debt service as share of government revenue, which had been on the rise already prior to the Covid-19 crisis, have further increased considerably in many countries since the start of the pandemic. MISEREOR and estimate that 135 countries in the Global South are now critically indebted. Almost 50 developing countries experienced a downgrade in their sovereign debt credit rating, shutting several of them out of international capital markets. Almost a quarter of emerging market governments that have issued debt in foreign currency have their bonds trading in distressed territory, with spreads more than 1,000 basis points above US Treasuries. As highlighted by the IMF, the composition of financing is continuing to evolve towards new, more expensive sources. Monetary tightening in the US and other advanced economies is driving up the cost of debt and make international refinancing ever harder for those countries that still maintain access to international capital markets.

A perfect storm triggered by the war?

The Russian invasion of Ukraine has further escalated the situation, creating a perfect storm. The war has sent shockwaves through the global economy and caused the largest commodity shock since the 1970s. Whereas oil, gas, and grain exporters may get temporary relief in the short term, many developing and emerging market countries – including in Sub-Saharan Africa – are net fossil fuel and grain importers. With world food prices at a record high, UN Secretary-General António Guterres has warned of a “hurricane of hunger”. The effects of the war in Ukraine are likely to significantly worsen the social and economic situation in many developing and emerging market countries, further undermining debt sustainability.

High levels of public debt service and insufficient fiscal and monetary space have already constrained the crisis responses of most low and middle-income economies. While advanced countries were able to implement extremely expansionary fiscal and monetary policies in response to the pandemic crisis, few countries in the Global South had this option. In many low- and middle-income economies, external public debt service is greater than health care expenditure and education expenditure combined. The IMF has warned of a dangerous divergence in economic prospects across countries due to large disparities in vaccine access and in the policy space governments have to support the economy. Talk of “building back better” remains hollow if governments are struggling to stay afloat. Rather, as the Financial Times’ Martin Wolf put it, the spectre of a lost decade looms for vulnerable nations, threatening “economic long Covid”.

Fewer resources for the green transition

The precarious debt situation is not only threatening recoveries. It is also impeding much-needed investments in climate resilience. These investments are urgent: Governments must climate-proof their economies and public finances or potentially face an ever-worsening spiral of climate vulnerability and unsustainable debt burdens. There is a danger that vulnerable developing countries will enter a vicious circle in which greater climate vulnerability raises the cost of debt and diminishes the fiscal space for investment in climate resilience. As financial markets increasingly price climate risks, and global warming accelerates, the risk premia of these countries, which are already high, are likely to increase further. The impact of Covid-19 on public finances risks reinforcing this vicious circle. In many countries, including many Small Island Developing States, high public service is crowding out critical investment that is needed for climate-proofing economies and enabling a green, resilient, and equitable recovery.

Multilateral support is not sufficient

Since the start of the pandemic, financial support provided by the IMF and multilateral development banks has provided a lifeline to many governments in the Global South. However, those large portions of these public transfers have been used by debtor governments to pay debt service to external private creditors. The net debt transfer from many developing country governments to external creditors stands in stark contrast to the urgent need of these countries to ramp up investment in crucial areas of development at home.

The measures taken by the international community to date have not sufficiently addressed the worsening debt sustainability problem. The G20’s Debt Service Suspension Initiative (DSSI), which ended in December 2021, provided a mere USD 13 billion in temporary relief to 48 low-income countries through a suspension of debt-service payments owed to their official bilateral creditors. Private creditors, who hold the biggest share of developing country debt, did not participate at all. And both interest and amortisation payments have to be made after a repayment period of five years and a one-year grace period in a net present value neutral manner.

The Common Framework for Debt Treatment beyond the DSSI that the G20 established for the same 73 countries eligible for DSSI treatment to address insolvency and protracted liquidity problems has also fallen short. Like the DSSI, the Common Framework excludes middle income countries. Moreover, it lacks incentives and mechanisms to bring debtor governments and private creditors together. As pointed out by the World Bank “[t]he lack of measures to encourage private sector participation may limit the effectiveness of any negotiated agreement and raises the risk of a migration of private sector debt to official creditors.” The uptake to date has been poor: to date, only three countries – Chad, Ethiopia, and Zambia – have applied for a debt treatment under the Common Framework. Each of these cases has experienced significant delays.

A proposal to scale up efforts

Against the backdrop of the exogenous Covid-19 shock, the enormous investment needs to meet development and climate goals, and the hesitancy of debtor governments to seek relief when the current framework for debt restructuring is putting them in an unfavourable position, a new approach to tacking the debt crisis is urgently needed that will facilitate timely and orderly restructuring and provide a clear pathway for debtor governments to green and inclusive recoveries. A pragmatic scheme is required that will deliver meaningful and timely debt relief to those countries that require it. Given that private creditors hold a majority of public external debt of developing countries, private sector involvement is crucial.

To bring private creditors to the negotiation table, a carrots-and-sticks-approach is needed, that is, a combination of positive incentives (“carrots”) and pressure (“sticks”). With colleagues, I have put forward a proposal for debt relief for a green and inclusive recovery. In terms of incentives, we propose the creation of a new Facility for Green and Inclusive Recovery administered by the World Bank that is designed to entice the commercial sector to engage in debt restructurings. The Facility, which could be established relatively quickly, would back the payments of newly issued sovereign bonds that would be swapped with a significant haircut for old and unsustainable, privately held debt. Private creditors would benefit from a partial guarantee of the principal, as well as a guarantee on 18 months’ worth of interest payments, analogous to the Brady Plan that helped to overcome the stalemate of debt crisis of the 1980s.

In terms of pressure, the financial authorities of the jurisdictions in which the major private creditors (both banks and asset managers) reside and that govern the majority of sovereign debt contracts – most importantly the United States, the United Kingdom, and China – could use strong moral suasion and regulations on accounting, banking supervision, and taxation to improve creditors’ willingness to participate in debt restructuring.

Debt relief should not only provide temporary breathing space. It should empower governments to lay the foundations for sustainable development by investing in strategic areas of development, including health, education, digitisation, cheap and sustainable energy, and climate-resilient infrastructure. As part of our proposal, debtor countries would commit to reforms that align their policies and budgets with Agenda 2030 and the Paris Agreement. The country commitments would be designed by country governments under the involvement of the parliaments and in consultation with the relevant stakeholders.

Ahead of the 2021 United Nations Climate Change Conference in Glasgow, the V20 Finance Ministers – which represent 55 climate-vulnerable nations with a total population of 1.4 billion people – issued a Statement on Debt Restructuring for Climate-Vulnerable Nations, drawing on our proposal. It the statement, the V20 Finance Ministers called for “a major debt restructuring initiative for countries overburdened by debt – a sort of grand-scale climate-debt swap where the debts and debt servicing of developing countries are reduced on the basis of their own plans to achieve climate resilience and prosperity”.

The international community at a crossroads

The international community is at a juncture where it needs to decide if it wants all countries to be able to achieve the Agenda 2030 and invest in climate action. Countries that are overindebted will be able to do neither. Linking debt relief with action on the SDGs and climate is one way of keeping the Agenda 2030 alive. But while debt for climate and sustainability swaps have recently received a lot of attention, it should be highlighted that the experiences with conventional debt-for-development or -nature swaps and comparable debt mechanisms such as debt-for-education swaps have been rather mixed. Small piecemeal approaches clearly will not suffice to meet the challenge. For this reason, the major advanced economies and China need to overcome the current deadlock and agree on a bold, global initiative for debt relief to allow all countries the opportunity to invest in swift recoveries from the pandemic and the chance to achieve the shared goals of the Agenda 2030.

This article was first published at on April 29, 2022.


T7 Task Force: “Global Financial System Must Be Rewired”

“Think7”, an engagement group of leading think tank from the G7 countries, proposes policy-recommendations to support the German persidency. The DRGR Co-authors Ulrich Volz and Stephany Griffith Jones are part of the task force “Sustainable Economic Recovery” which, inter alia, emphasizes the importance of scaling up sustainable and climate finance for developing countries.

To scale up sustainable finance and align all financial flows
with climate and sustainability goals, the policy brief, which was drafted by Griffith-Jones and Volz as well as

  • Kathrin Berensmann (German Development Institute),
  • Simon Dikau (Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science),
  • Anthony Lacavaro (People Centered Internemakes), and
  • Irene Monasterolo (EDHEC Business School and EDHEC-Risk Institute),

makes ten recommendations for the G7.

To enable sustainable recoveries from Covid-19 and meet the goals set out in the Paris agreement and in the Agenda 2030 for Sustainable Development, the global financial system needs to be rewired. Finance needs to properly account for sustainability risks and impacts, and it needs to be aligned with internationally agreed sustainability goals.


In addition to measures that focus primarily on the G7 itself – such as implementing science-based taxonomies for sustainable finance, or introducing a harmonized standard for mandatory disclosures of climate-related risks and opportunities mandatory for large private companies and supervised financial institutions – the Task Force does also take the relationship of the Group of Seven with developing countries into account.

It emphasizes the importance of scaling up sustainable and climate finance for developing countries, as they face enormous investment needs in climate adaptation and mitigation. The pandemic and the consequences of the Russian invasion in Ukraine have further widened the financing gap for advancing the Sustainable Development Goals. Even before Covid-19, the United Nations estimated that the countries concerned were facing an annual funding shortfall of $2.5 trillion in this context.

Critically, all G7 members need to fulfil their development and climate finance commitments. In terms of climate finance, the G7 should go beyond the US$100 billion annually committed and live up to their historical responsibilities to address loss and damage in the Global South. To this end, they should provide additional funding to a newly established a Loss and Damage Facility as proposed by the G77 and China at COP26 in Glasgow.

Moreover, all G7 countries should commit to donating all Special Drawing Rights (SDRs) they have received from the International Monetary Fund’s historic $650 billion allocation in August 2021 either to multilateral development banks or other prescribed holders of SDRs so they can be used to finance sustainable development and climate action.

Last but not least, G7 countries should also work with China, other G20 countries and groups of debtor countries on an ambitious scheme for sovereign debt relief from private and public creditors for all countries that need it to provide the basis for green and inclusive recoveries


Read the full policy brief here or visit the to learn more about the engagement group’s work.


Sri Lanka May Be the Next Country to Introduce ‘Debt-For-Nature’ Swaps to Mitigate Economic Crisis

‘Debt-for-nature’ swaps are re-emerging as a solution to economic crises caused by the pandemic. Now, the United Nations has called on Sri Lanka to negotiate “debt-for- nature” swaps tied to environmental protection to ease the country’s economic meltdown.

According to an article by Financial Times, the UN Development Program submitted the proposal, along with the suggestion of introducing a temporary basic income, in a document that has now been submitted to President Gotabaya Rajapaksa’s government and will be considered by the Cabinet, which was recently sworn in.

Earlier, the government, which has to pay about $8 billion in debt and interest this year, suspended bond payments and began negotiations for an IMF bailout package. The heavily indebted island nation had been unable to repay loans due to low foreign currency reserves, triggering an economic and political crisis with mass protests over food, fuel and medicine shortages.

UNDP argues that Sri Lanka, which has long-term debts of about $45 billion to creditors such as international bondholders and countries like India and China, needs immediate financial support. The UN body has therefore asked Sri Lanka to seek swaps and short-term financing from said countries to ease the economic pain ahead of IMF assistance.

Sri Lanka is in the midst of its worst economic crisis in decades – but the country’s situation is not unique. Concerns about a debt crisis in the Global South are steadily growing. DRGR, therefore, proposes comprehensive debt relief that is oriented around green, inclusive recovery.


Growing Global Debt Crisis to Worsen With Interest Rate Rises, Jubilee Debt Campaign Warns

Developing country debt payments are higher than at any point since 2001, after skyrocking in 2020 and staying at that level in 2021. Rising US and global interest rates in this year could further intensify the debt crisis many lower income countries are facing, the camapaign predicts.

Figures published by Jubilee Debt Campaign show that developing country debt payments have increased 120% between 2010 and 2021: Average government external debt payments were 14.3% of government revenue in 2021, up from 6.8% in 2010.

Like the DRGR project, the authors caution that huge debt obligations are preventing many countries from addressing and recovering from the covid pandemic. More than that: In many low- and middle-income countries debt service is impeding crisis responses, constraining the ability to adapt to the impending climate crisis and threatening the achievement of the 2030 Sustainable Development Agenda.

The campaign points out that rising interest rates, in the U.S. and globally, could further exacerbate the debt crisis in 2022. Jubilee’s figures do not only show how crucial debt relief is at this point – they also underscore the importance of involving private lenders in the process: In 2022, of external debt payments due to be paid by low and lower middle-income governments, 47% are to private lenders, 27% multilateral institutions, 12% China and 14% governments other than China.

See the Debt Data Portal for key statistics and analysis on the debts of countries and governments.


No Time for Lost Decade

Why Debt Restructuring Must Be Linked with Climate and Development Goals

A Call by DRGR Co-author Kevin P. Gallagher, Boston University

Fallout from the COVID-19 pandemic and Russia’s war in Ukraine will require large scale sovereign debt restructuring to prevent another lost decade of development for many emerging markets and developing countries; during the same ten years they urgently need to mobilize trillions of dollars to combat and adapt to climate change.

Just before the Russian invasion of Ukraine, the World Bank sounded the alarm that fiscal and monetary tightening in the advanced economies could lead to another sudden stop in capital flows to emerging markets and developing countries, followed by capital flight, exchange rate depreciation, and debt crises.

War only makes matters worse, as many emerging market and developing countries will suffer from skyrocketing oil, gas, and grain prices. Worse still, a default on Russia’s or Ukraine’s bonds could amplify that same cycle of depreciation and crisis.

A debt crisis could stymie the global recovery, cause a lost decade of development, and dash prospects of meeting climate targets in the Paris Agreement. Thus, debt relief efforts require urgent reinvigoration if they are to alleviate debt distress and unlock investments for a sustainable and inclusive recovery.

As the UN Intergovernmental Panel on Climate Change reiterated in March, global carbon dioxide emissions need to be slashed by over 40 percent in less than a decade, while at the same time countries need to invest in resilience and adaptation to worsening climate change impacts. To that end, the UN’s lower-bound estimates say an additional $8.8 trillion must be mobilized. The World BankOECD, and outside experts see that figure as closer to $30 trillion.

According to the International Monetary Fund (IMF), when done right, such investments can put the world economy on the right trajectory, in which growth becomes more robust, resilient, inclusive, and sustainable while avoiding catastrophic human, economic, and ecological costs.

The World Bank and the IMF have correctly called for a revamp of the Group of 20’s (G20) Common Framework for debt treatment. Almost two years into the G20’s attempt to create an emergency workout system during the pandemic, not one country has successfully completed the process. The lack of a success story and fears of credit rating agency downgrades and of losing access to private capital markets have resulted in few countries participating, despite their desperate circumstances.

Moreover, the Common Framework was not open to all countries facing debt distress, only the poorest, while the private sector and commercial actors from China balked at participating. Aside from the IMF’s Catastrophe Containment and Relief Trust, which provided $1 billion in relief for its debtors, multilateral creditors have not participated in debt relief, either. Worse, the G20 scheme does not link restructuring to resilient, inclusive, and low-carbon outcomes.

A robust and ambitious proposal linking debt restructuring with climate action came ahead of the 2021 United Nations Climate Change Conference (COP26) by ‘the Vulnerable 20 Group (V20),’ comprised of 48 finance ministers from the most climate-vulnerable emerging markets and developing countries. Similar to detailed proposals by outside experts, the V20 called for a “grand-scale climate-debt swap where the debts and debt servicing of developing countries are reduced on the basis of their own plans to achieve climate resilience and prosperity.”

Here’s how it could work. The IMF and the World Bank would reform their Debt Sustainability Analysis to incorporate climate risks and the spending needed to scale-up investments in climate resilience and the 2030 Agenda for Sustainable Development for each country. Such an analysis would determine if a country needs restructuring and the level of haircut provided. Eligible countries would then receive debt relief on their bilateral and multilateral debt. Bilateral debt restructuring would occur through the Paris Club and using exit instruments such as in China’s proposed ‘Shanghai Model’ to achieve sustainable outcomes. Analogous to the Heavily Indebted Poor Countries (HIPC) Initiative, multilateral creditors would sell gold to cover debts owed to them while maintaining their preferred creditor status.

Such action would be predicated on commensurate restructuring by private creditors and commercial creditors from other countries, like China. As a carrot, private creditors under a new scheme would receive ‘Brady-bond-like’ treatment through a guarantee facility at the World Bank designed to provide credit enhancements for new bonds linked to climate and development goals. These bonds would be swapped by private creditors and commercial creditors in China for old debt with a significant haircut. If debt service on the new bonds is missed, collateral from the guarantor would be released to the creditor, and the missed payment would have to be repaid by the sovereign to the guarantee facility. It is important to include guarantees as called for by the V20 to minimize the risk of credit downgrades as a result of restructuring.

As a stick, there could be a standstill on debt payments to all creditors during the negotiations, and lists of non-participating creditors could be published by the G20 to put a spotlight on their inaction. History has shown that the longer restructuring is delayed, the higher the costs borne by economies and livelihoods in the long run. And now we know that if we derail development and delay climate action, the costs of inaction could be catastrophic.

Debt restructuring is not a silver bullet against financial distress, economic contraction, and the climate crisis. It must be coupled with significant regulation of capital markets to better align with financial stability and shared climate and development goals. What is more, the IMF will need to issue regular allocations of Special Drawing Rights that are coupled with mechanisms to re-channel those allocations from countries that do not need them to countries that do. Multilateral development banks will also need to issue major capital increases and a redirection of their focus.

But without significant restructuring, there is just no way emerging markets and developing economies can withstand the costs of Russia’s war and recover from COVID-19 on a pathway that leads to greater resilience, heightened inclusivity, and closer alignment with the Paris Agreement. The IMF and World Bank have both called for reinvigorating the G20’s Common Framework, and the IMF’s Managing Director has pledged to deliver a debt-for-climate change proposal. It is urgent we add to this momentum and bake debt restructuring into climate change action.

There is just no time to lose.

This post was first published on on April 22, 2022.


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