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 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 preferred creditor status and AAA credit ratings for participating international organizations.
- Private and commercial creditors should grant commensurate debt reduction as public creditors. These creditors will be compelled to enter negotiations through Brady bonds backed by a guarantee fund and a payments standstill for five years for all creditor classes.
- For countries not in debt distress but that lack fiscal space, credit enhancement should be provided by international financial institutions to lower the cost of capital for 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.
Figure 1: Three Pillars of the DRGR Proposal