A growing number of influential voices, such as Indermit Gill, Chief Economist at the World Bank, and Cyril Ramaphosa, President of South Africa in announcing the priorities of their G20 presidency, are signaling a significant shift in the global discourse on debt. The focus is moving away from short-term liquidity fixes towards a growing recognition that comprehensive debt relief is essential for sustainable development and climate action. Here’s a look at the changing debate.
by Arabella Wintermayr (Editor) & Sarah Ribbert (Project Coordinator)
Dear Reader,
The international discourse on debt is undergoing a significant shift. Until recently, the global debate has been centered around liquidity support, providing struggling economies in the Global South with just enough financing to meet their immediate repayment obligations. Yet, as World Bank Chief Economist Indermit Gill incisively observes, this approach merely “extends their purgatory.” The pressing reality, laid bare in the World Bank’s latest “International Debt Report”, is that comprehensive debt relief is imperative for a large number of highly indebted nations.
Its findings emphasize what has long been evident: many emerging market and developing economies (EMDEs) face unsustainable debt burdens that hinder their path to growth and stability. In 2023 alone, developing countries paid a record $1.4 trillion to service their debts – equivalent to nearly four percent of their gross domestic product. Interest payments rose by almost a third to $406 billion, the highest level for the poorest nations since 1999. Gill does not mince words in the report’s foreword: The financing system is broken, he says, because “multilateral institutions and sovereign creditors bear almost all the risk, while private creditors reap almost all the rewards”.
Gill diagnoses a “metastasizing solvency crisis” that is wrongly regarded as a liquidity problem – and urges to acknowledge reality
“Since 2022, foreign private creditors have withdrawn almost $141 billion more in debt service payments from public debtors in developing countries than they have disbursed in new financing,” he notes. Gill diagnoses a “metastasizing solvency crisis” that is wrongly regarded as a liquidity problem – and urges to acknowledge reality: “[T]he poorest countries facing debt distress need debt relief if they are to have a shot at lasting prosperity.”
We suggest that this solution should involve the G20 reforming or replacing the Common Framework with a framework analogous to the successful Highly Indebted Poor Countries Initiative (HIPC) that grants debt relief to poorer nations, freeing up resources for low-carbon, socially inclusive and resilient growth investments.
South Africa Makes Debt Relief a G20 Priority
Gill’s recognition of this urgency is shared by an increasing number of influential voices from Africa, with this call for comprehensive debt relief gaining momentum. Cyril Ramaphosa, President of South Africa, has made “debt sustainability for low-income countries” one of three priorities in his speech at the launch of the country’s G20 presidency. “A key obstacle to inclusive growth in developing economies, including many in Africa, is an unsustainable level of debt which limits their ability to invest in infrastructure, healthcare, education and other development needs,” he pointed out. Ramaphosa’s leadership seeks to galvanize consensus at a pivotal moment, aiming to “advance sustainable solutions to address high structural deficits and liquidity challenges, while extending debt relief to developing economies.”
Adding urgency to the discussion, former Nigerian Vice President Yemi Osinbajo highlighted the stark consequences of inaction in a Financial Times op-ed: “[N]owhere is the debt situation as critical as in the Global South, where debt-service payments are at an all-time high, draining resources from essential development and climate goals.” Osinbajo stressed that Africa is particularly hard-hit, facing its worst economic crisis in eight decades. Recent shocks – such as the COVID-19 pandemic, interest rate hikes in advanced economies, and rising geopolitical tensions – have driven public debt in Africa up by 240 percent between 2008 and 2022.
Nigerian President Bola Ahmed Tinubu compares superficial liquidity injections to “pedaling harder on a bicycle as its tires go flat”
Osinbajo argued that the current debt treatment mechanism, the G20 Common Framework, is not fit for purpose as it fails to provide a predictable pathway to comprehensive debt relief. He outlined a new approach that takes into account the investment needs for climate resilience and green growth. Osinbaja warned that the debt crisis will exacerbate social instability without these changes, further undermining efforts to meet climate and development goals. “The world must embrace innovative, equitable solutions,” he concluded, emphasizing that “half-measures are no longer enough.”
Nigerian President Bola Ahmed Tinubu echoes these sentiments, comparing superficial liquidity injections to “pedaling harder on a bicycle as its tires go flat” in a Politico op-ed. As Tinubu emphasizes, nearly half of Africa’s countries are either already in debt distress or teetering on the brink and the funds needed to combat the climate crisis are in direct conflict with servicing mounting debt obligations. Tinubu argues that the cost of not addressing Africa’s debt crisis is far greater than the immediate debt relief that is required. “If we are truly all in this together,” he contends, “a debt ‘haircut’ now would ultimately be cheaper than the bill for reconstruction in the wake of disasters like typhoons and floods.”
Tinubu asserts that providing debt relief to Africa is not just an economic imperative, but a necessary one for the global community. “The good news is that none of this is inevitable,” he concludes. “Africa needs relief, and the world needs Africa.”
Mark Sobel, the U.S. Chair of the Official Monetary and Financial Institutions Forum (OMFIF) and a veteran U.S. Treasury official, says short-term liquidity is “likely to result in a need for continued ‘extend and pretend” refinancings, creating “greater hardships for the poorest” and sowing “the seeds for massive debt relief in the future”.
Mark Sobel, the U.S. Chair of the Official Monetary and Financial Institutions Forum (OMFIF) and a veteran U.S. Treasury official with two decades of experience in international financial diplomacy reinforces this point in a recently published Op-Ed. The piece, for which Sobel collaborated with Kevin Gallagher, warns against what they term “extend-and-pretend refinancings”. Short-term fixes, they argue, only create “greater hardships for the poorest” and sow “the seeds for massive debt relief in the future.” This critique is particularly striking as it challenges the IMF’s stance that indebted nations primarily need additional liquidity to overcome financial hurdles.
Turning Rhetoric into Action
The growing chorus around the need for comprehensive debt relief marks a crucial shift in addressing the challenges in the Global South. The mounting debt burden is not just a financial issue; it’s deeply connected to the escalating climate crisis, particularly in Africa, where debt-servicing costs drain resources needed for sustainable development and climate action.
Therefore, structural barriers must be dismantled to free up resources for climate adaptation and long-term prosperity. The “Baku to Belém Roadmap”, part of the New Collective Quantified Goal (NCQG) adopted at COP29, offers a promising pathway, aiming to mobilize $1.3 trillion annually by 2035 through a mix of public, private, and multilateral contributions. This roadmap not only seeks to increase fiscal space but also brings debt discussions into the heart of climate finance, setting the stage for decisive action at COP30 in Brazil. Another opportunity will be the Fourth International Conference on Financing for Development, to be held in Spain in 2025, where debt will be high on the agenda.
Indeed, the tide is turning toward a holistic approach to solving the debt crisis – one that embraces the urgent need for debt relief while addressing the intertwined challenges of economic instability and climate vulnerability. If these discussions lead to meaningful commitments, 2024 could mark a turning point in global financial reform, supporting developing economies to tackle both economic and climate challenges. The chance for transformative change is within reach, and the world must act in 2025 decisively to seize it.
Thanks for reading, and until next time.
Drop us a line with your thoughts: ribbert@boell.de