COP28 should tackle global debt issues

Three years into the “decisive decade” to limit global warming, the looming global debt crisis has become one of the biggest obstacles to financing a just transition. Global public debt has reached a total of US$92 trillion, of which almost 30% is owed by developing countries (mainly China, India and Brazil; UNCTAD, 2023). Debt repayments, often to private creditors, are sucking resources out of necessary investments to mitigate and adapt climate change, creating a climate finance gap that threatens the liveability of our planet.

Despite rising concerns about unsustainable debt burdens, little progress has been achieved. In June 2023, French president Macron’s summit for a new global financial pact sought to address the crisis but failed to deliver concrete results. At the most recent IMF meetings in Marrakesh, increasingly high debt levels and yields were a prominent theme, but other than reiterating concerns and former commitments, no significant breakthroughs were brokered. The Independent High-Level Expert Group--a group of world leading economists and finance leaders convened by the COP Presidency—will present recommendations for a new framework for international climate finance with a particular focus on addressing debt distress in vulnerable countries during COP28 (IHLEG, 2023). The group seems to recognise that access to finance (both for development and climate action) and dealing with debt issues are two sides of the same coin. And for good reasons.

Many countries in the Global South are trapped in a debt-loop, forced to pay increasingly higher interest rates while borrowing large sums to finance their economies. Between 2010 and 2021, developing countries’ public debt rose from 35% to 60% of GDP (UNCTAD, 2023). Currently, of the low-income countries eligible for special IMF support, 10 are in debt distress, 26 face high risk, and 26 are at moderate risk (IMF, 2023). The latest UNCTAD Trade and Development Report identifies so-called “frontier market economies” (FME’s), referring to a group of small yet investable markets that are part of the next generation of Emerging Market Economies, as a particular concern. These low- or lower-middle-income developing countries have accumulated large debt stocks in the period between the financial crisis and the pandemic, while facing substantial repayment obligations in the coming years (UNCTAD, 2023).

Two dimensions of this debt crisis are of particular concern: first, the amount of external public debt (expressed as percentage of GDP), referring to government debt owed to foreign creditors, has increased. Second, a larger chunk of total external debt is owed to private creditors. The latter negatively impact developing countries due to more volatile and expensive borrowing costs compared to concessional finance and more complex debt restructuring processes (UNCTAD 2023). Today, half of developing countries spend more than 1.5% of their GDP and 6.9% of their government revenues on interest payments, while 19 countries are spending more on interest than on education and 45 more on interest than on health (UNCTAD, 2023). For FMEs, the numbers are even worse: 26 out of 37 countries spend more on public external or publicly guaranteed debt than on education or health (reference date 2021, UNCTAD, 2023).

Increasing debt and borrowing costs are a major problem for developing countries. Not only do they reduce a country’s ability to invest in development and climate action, but they also increase the risk of future debt crises. The higher and more expensive the debt, the more difficult for countries to meet their obligations and the greater chance of default. For some countries, this has already become a pressing issue. 19 countries face more than 10% bond spreads (referring to the difference in interest rates at which governments can borrow money) over US Treasuries (which are considered one of the safest assets). 16 of these countries are MICs (which means they are excluded from concessional and low-interest financing provided by institutions such as the World Bank) and 12 are not eligible to participate in the Common Framework (explained in the below; UNCTAD, 2023). These countries are thus stuck between a rock and hard place--barely able to access finance, while their high debt burden remains pressing.

Meanwhile, the climate finance gap (i.e., the amount of money needed to address the effects of climate change sufficiently) for developing countries minus China will rise to 1 trillion if no measures to increase climate funds are taken (Songwe et. al., 2022). Oxfam estimates that the annual shortfall for necessary investments in health, education, social protection and tackling climate change in low- and middle-income countries amounts to almost US$4 trillion (Oxfam, 2023). How are these countries supposed to make the necessary investments in development and climate action while their debt levels and borrowing costs remain so high?

The international community is aware of these dilemmas, but has so far failed to sufficiently address them. In 2020, the G20, with support of the Paris Club, established its “Common Framework for Debt Treatments beyond the DSSI” (Debt Service Suspension Initiative), prescribing a “timely and orderly debt treatment for DSSI-eligible countries”, including participation of private creditors (G20, 2020). The Common Framework built on the Debt Service Suspension Initiative, which was developed during the pandemic in support of low-income countries. 48 of 73 eligible countries had their debt service payments suspended until the end of 2021 (IMF, 2022). So far, however, only Chad, Ethiopia, Ghana and Zambia have applied for debt treatment under the Common Framework, and only Chad and Zambia managed to reach an agreement (IMF, 2023).

The Common Framework has been widely criticized as insufficient, amongst others because it sticks to the current case-by-case approach for debt restructuring, allowing for different treatment of debtors that cope with similar debt burdens, instead of aiming for fair debt restructuring based on comparability (Munevar, 2020). Even the World Bank points to old challenges faced by earlier debt relief initiatives, such as the lack of mechanisms to enforce private sector participation, and new challenges, such as a more complex and fragmented creditor base (World Bank, 2022). With so little debt canceled, the Common Framework clearly needs substantial teeth to become effective.

Despite this lack of success – and amidst monetary and fiscal contraction – the G20 does not show much willingness to take a great leap forward. The G20 New Delhi Leaders’ Declaration in 2023 only reaffirms the Common Framework, but does not explain how it will implement it, let alone express more bold ambitions.

This lack of political will and concrete steps starkly contrast with the demands put forward by African leaders during the Africa Climate Summit held between September 4 and 8 in Nairobi. The Nairobi declaration calls for debt pause clauses, the extension of sovereign debt contracts, a 10-year grace period for repayment, principles of responsible sovereign lending and accountability encompassing credit rating, risk analysis and debt sustainability assessment frameworks. It also draws attention to the fact that developing countries pay five to eight times the amount of what wealthy countries pay in terms of borrowing costs (African Leaders Nairobi Declaration, 2023).

The demands of the Nairobi declaration are more aligned with the proposed reforms to the international financial architecture put forward by the UN. In a similar line of reasoning, the UN Common Agenda (not to be confused with the G20 Common Framework) advocates for responsible borrowing and lending principles and more debt transparency (including Debt Sustainability Analyses and credit ratings), and points to the higher borrowing costs for developing countries as one of the main inequities within the global financial system. Additionally, the UN calls for a debt workout mechanism to address comparability of treatment between public and private creditors, and for an independent sovereign debt authority, including a legal mechanism, to facilitate timely, orderly, effective and fair debt resolutions (UN, 2023). Recently, the High-Level Advisory Board on Effective Multilateralism, established by the UN’s Secretary-General, voiced a similar proposal in its report, in the form of a global coordination platform for rapid, systemic and reliable debt treatment (HLAB 2023).

UNCTAD has been calling for a multilateral legal framework to facilitate effective and fair sovereign debt restructuring for decades (UNCTAD) and has laid down a comprehensive roadmap (UNCTAD 2015). Key principles for a sovereign debt workout mechanism have also been put forward by numerous CSOs, for example by a broad coalition at Eurodad (Eurodad, 2019). Eurodad calls for an “honest broker” independent of any creditor to coordinate debt restructuring. Additionally, the network argues that Debt Sustainability Analyses should be carried out by an independent body, while taking the impact of a country’s debt on its ability to meet development goals into account. As these calls grow stronger in an increasingly indebted world, fundamental proposals need to materialize fast.

Today, countries in the Global South are confronted with enormous challenges related to climate change - predominantly caused by the richest countries in the Global North - while lacking the means to respond adequately. Instead, they are forced to take on more debt, which comes with strings attached and is becoming increasingly costly and complex.

The COP, which will convene its 28th conference in November, needs to make a clear demand that finance for development and climate action and resolving debt issues must go hand in hand. It will be up to national governments, multilateral institutions, CSOs and other stakeholders to set the terms for a multilateral framework for debt restructuring that brings all creditors and borrowers to the table. These discussions could be kicked off at the COP, based on the many recommendations that have been tabled.

In the absence of concrete measures, debt issues will remain unresolved, risking new debt crises and preventing the necessary investments in development and climate action. Evidently, it is in our common interest, from South to North, to prevent this from happening.