A new report the Debt Relief for a Green and Inclusive Recovery (DRGR) Project finds that of 66 economically vulnerable EMDEs, 47 emerging market and developing economies (EMDEs) with a total population of over 1.11 billion people will face insolvency problems in the next five years if they seek to ramp up investment to meet climate and development goals.
Main findings:
- External Public and Publicly Guaranteed (PPG) debt levels have more than doubled since 2008. In terms of debt service payments, 2024 is the costliest debt service year yet this century.
- Debt service payments are at an all-time high and are crowding out investment in development and climate. Nearly half of the world’s population lives in a country that spends more on external debt service than on investments in health or education.
- Private capital markets are out of reach for the majority of EMDEs. With bond yields higher than projected growth rates, EMDEs cannot rely on capital markets to roll over or issue new debt without jeopardizing their debt sustainability.
- In the next five years, an estimated 47 EMDEs would surpass the International Monetary Fund’s (IMF) external debt solvency thresholds as they mobilize capital to meet the 2030 Agenda and Paris Agreement needs. According to the enhanced global external DSA performed in this report, these EMDEs would reach unsustainable levels of external public debt by 2028 if they were to invest at the levels needed to meet internationally agreed climate and development goals.
- An additional 19 EMDEs lack liquidity and fiscal space for climate and development investment. While these countries will not likely face imminent insolvency issues, they will not be able to finance necessary investments without credit enhancement or liquidity support.
The new report performs an enhanced global external debt sustainability analysis (DSA) to estimate the extent to which EMDEs can mobilize the G20 Independent Expert Group recommended levels of external financing without jeopardizing debt sustainability.
Commenting on the report, Kevin P. Gallagher, DRGR Project Co-Chair; Director, of Boston University Global Development Policy Center; and Professor of Global Development Policy, at Boston University, said: “The international community has been here before. We must learn the lessons of history and avoid doing ‘too little, too late’ as in debt crises past. We can’t let this history repeat itself, or the material and moral costs will be insurmountable.”
Ulrich Volz, DRGR Project Co-Chair; Professor of Economics; Director, Centre for Sustainable Finance, SOAS, University of London added: “By ignoring critical development and climate investment needs, the debt sustainability analyses that are currently conducted by the IMF grossly underestimate debt sustainability problems in developing countries. Countries that are unable to invest in climate adaptation and resilience, health, education and food security will see their development prospects derailed, which will further undermine public debt sustainability.”
Maria Fernanda Espinosa, DRGR Project Co-Chair; CEO of Global Women Leaders, GWLvoices; former President of the UN General Assembly; Former Minister of Foreign Affairs and Defense, Ecuador noted: “This report has a clear message: prolonging the debt crisis will prolong the climate crisis. As countries prepare their next round of climate pledges for next year, a reformed sovereign debt architecture will be critical to ensure that countries can come forward with their highest levels of ambition and lay the foundation for a prosperous future.”
Policy recommendations
- DSAs, which are under review at the IMF, need to be enhanced and calibrated to account for critical development investment needs, as well as the potential of climate and other shocks.
- The G20 Common Framework needs to be based on enhanced DSAs, compel all creditor classes to participate and deliver a level of debt relief necessary to mobilize financing for climate and development goals.
- Measures need to be taken to support countries not in debt distress but that face liquidity rather than solvency problems and that lack fiscal space for investments in development. Credit enhancement should be provided 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.
DRGR Proposal
The DRGR Project has developed a proposal that is in many ways a modern-day version of the Brady Plan and the Highly Indebted Poor Countries (HIPC) Initiative of the 1990s combined. The DRGR proposal consists of three pillars:
- 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.
The DRGR proposal is designed to address the immediate challenges of facing indebted EMDEs while providing a stepping-stone towards establishing a new global debt architecture that is fair, transparent, efficient and cognizant of the needs of EMDEs.
- 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.
About the DRGR Project:
The DRGR Project is a collaboration between the Boston University Global Development Policy Center, Heinrich-Böll-Stiftung and the Centre for Sustainable Finance, SOAS, University of London which argues it is time for comprehensive debt reform. Utilizing rigorous research, the DRGR Project seeks to develop systemic approaches to both resolve the debt crisis and advance a just transition to a sustainable, low-carbon economy in partnership with policymakers, thought leaders and civil society around the world.
The bottom line: Debt relief is urgently needed to allow at least 47 economically vulnerable EMDEs to maintain debt sustainability while investing in climate and development. Otherwise, the international community risks a potential default on the 2030 Agenda and the Paris Agreement.
