Time to resolve debt issues in the Global South

17 April 2020

The impact of the COVID-19 outbreak on the global economy is unprecedented. Whereas much of the attention is currently focused on the US, Europe and China, there are increasingly serious worries about the consequences for Latin America and Africa. The poor and vulnerable, mainly concentrated in the Global South1 and dependent on the huge informal sector, suffer the worst from crises. The Corona-crisis will not be an exception; unless swift, coordinated and unorthodox measures are taken.

In the fight against the Corona-crisis, the debt-position of the Global South should be taken into account. This article advocates policies to mitigate the direct economic and financial consequences of the crisis on developing countries, and warns that these countries should not be burdened with more unsustainable debt in the post-Corona world. In doing so, it challenges the free flow of capital that our global trade and financial system is based on.

The first part of this article analyses the situation in which developing countries find themselves since the rise of neoliberalism in the 1980s, focusing on their problematic private and sovereign debt situation and the causes thereof. The second part puts forward concrete policy measures that governments and multilateral institutions should take to relieve the liquidity needs and debt burdens of developing countries in the short term. Finally, the article discusses structural, long term policies that give developing countries more control over their economic development. It argues that policy coherence and multilateral coordination are key if these measures are to take root in a more structural way, taking into account the global challenges of inequality and climate change.



  • repayment moratoria and substantial debt reliefs;
  • the issuance of a sufficient amount of SDRs;
  • a Marshall Plan in the form of grants.


  • embedding Corona-crisis measures in a Global Green Deal;
  • facilitate enough public capital;
  • more coordinated and centralized forms of debt restructuring;
  • stronger regulation of global financial markets;
  • implementation of capital taxes;
  • implementation of capital controls;
  • stronger position of local development and central banks;
  • a restart for multilateral institutions.

Unprecedented debt levels

The Corona-crisis has struck the world in a moment of historically unprecedented debt levels. As a consequence, countries were not at all prepared to withstand a pandemic of this proportion. The crisis-fighting measures taken in the global financial crisis of 2008 have largely ended up in the wrong pockets and only piled new debt onto societies. Global total debt has reached a peak of $255 trillion in 2019 (322% of GDP)2, compared to $152 trillion when the financial crisis began.3 Developing countries and emerging economies reached a record of $55 trillion of debt, or 170% of GDP in 2018.4 China obviously accounts for a large part thereof, but also in low-income countries debt to GDP percentages rose by almost 20% in only ten years (from 48% to 67%). In 63 impoverished countries, the average government external debt payments rose from 5.5% (as part of government revenue) in 2011 up to 12.4% in 20195, and are estimated to rise starkly in the coming years.6 The Institute of International Finance (IIF) estimates that the global debt burden will rise significantly in 2020 due to the Corona-crisis, referring to the fact that governmental debt issuance more than doubled last month compared to former years.7

In order to understand the rising levels of both private and public debt in developing countries, we need to look at developments that started 40 years ago, leading up to the perfect storm that debt-ridden countries from the Global South find themselves in.

As academics have studied in meticulous detail by now, our debt-ridden global economy is rooted in four decades of neoliberalism. The neoliberal era was dominated by policy choices that favored deregulation and the overall stimulus of free capital flows. Neoliberalism paved the way for the dominant role of financial markets, activities and innovation, also known as financialization.8 Financialization has propelled the rise of private debt creation, in which the shadow-banking system9 played an important role. Less regulation and more financial institutions issuing debt has led to a huge volume of money seeking to be invested, also functioning as a “push-factor” vis-a-vis developing economies that have increasingly opened up their markets for foreign credit in the past decades. Simultaneously, free capital flows have been deeply entrenched in the global economy due to the significant increase of trade and investment treaties. However, a striking conclusion that the UNCTAD draws is that the higher growth-paths that should have resulted from more financial and trade openness – at least according to proponents – have not been delivered. On the contrary, the growth rates for developing countries seem to be lower instead of higher.10 A major cause of this growth-failure is the type of capital inflows that developing countries have experienced in the past decades.

Destructive capital flows

Capital inflows can help countries to develop their economy if they, for example, support domestic productivity or specific vital sectors. However, in a deregulated financial system, they can also wreak havoc. The levels of private, non-financial debt in developing countries since the new millennium have been increasing significantly, particularly in the past decade.11 As the Trade and Development Report 2015 shows, Foreign Direct Investments in developing and transition countries have increasingly become more short-term minded and riskier, and not only targeted at deficit countries, but also at countries with trade surpluses. Between 2002 and 2013, the amount of short-term speculative and equity capital inflows, as well as private non-publicly-guaranteed debt, increased for most developing and transition countries.12 These inflows significantly impact the total amount of capital flows, either upwards or downwards, while they are often unrelated to (long term) economic activities. An additional problem of unstable capital flows is that they might end up at markets that are often lightly-regulated, such as the stock market. This underlines the problem of uncontrolled free flows of capital, which leave countries vulnerable to financial shocks while governments often lack the means to take necessary measures to control volatility on their markets.

Another source of uncontrolled private capital flows is the unconventional monetary policy in the West that was prevalent in the past ten years.13 Historically low interest rates and quantitative easing programs have contributed to the private debt pile in developing countries. Rather than addressing the impact of the financial crisis through targeted fiscal policies, the crisis response in core capitalist countries relied heavily on monetary policy. Central banks set uniquely low interest rates in short term money markets, going so far as to charge negative rates. They also bought large volumes of financial market assets. In theory, the aim of these policies was to steer private sector investment towards risky but potentially economically productive uses. In practice, it became an important driver of hot money flowing into peripheral financial systems, also affecting the debt accumulation in developing countries.

Financialization has led to a situation where the ownership of debt in developing countries has changed, with all the associated political consequences. Comparing 2007 with 2018, debt has been passed on from the hands of domestic (central) banking systems and foreign official creditors to mainly the foreign and to a lesser extent also the domestic shadow banking system.14 Who owns debt matters. As the UNCTAD points out, this development implies that governments lose control over credit creation in their economies.15 As a consequence, these countries have compromised on economic sovereignty, while their vulnerability towards global economic shocks, particularly occurring in advanced economies, has increased.

Crises in advanced economies might lead to swift and sudden capital outflows, which developing countries are experiencing now. Simultaneously, developing countries' debt weighs more on countries during economic downturns because of increased borrowing costs. These effects are outside the control of states, and are exacerbated by what is known as “original sin”: developing countries are often forced to borrow in dollars, because they cannot borrow in their own currency. Sudden shocks in the foreign-exchange rate can quickly exacerbate debt problems, as was seen in emerging market crises witnessed in the past.16 As a consequence of this power imbalance, countries in the Global South lack the means to cushion against economic shocks; they simply do not have enough money to invest in their economy. The support packages that have been initiated in the US or EU Member States are unimaginable in developing countries, which basically means that they will be driven into the hands of multilateral organizations or other creditors that will operate on their own conditions. Of particular concern is the fact that developing countries most probably lack the international reserves to handle the economic shock once it fully kicks in – especially where reserves were accumulated through loans instead of export earnings.17 The solution cannot simply lie in piling up more debt by issuing more credit under strict conditions.

Debt no more!

Countries with high debts, or countries that are unlikely to service new debts, basically have three options to improve their economic position: they can increase their ability to pay debt, reduce their debt burden or inflate away the debt. The inflation rates of many developing countries are already quite high18, and dollar debts would become more costly as a result of domestic inflation. Improving the ability to pay during an economic downturn is highly unlikely for most countries, let alone developing countries. This means the focus should be on relieving the debt position of developing countries. There are several ways this could be achieved.

One solution is a moratorium on repayment, both bilaterally and on the multilateral level. This is an effective way to immediately relieve debtors in distress, both for economic actors within countries (such as renters or companies), as well as between countries or vis-a-vis the multilateral level. In a joint statement, the World Bank and the IMF “call on all official bilateral creditors to suspend debt payments from International Development Association (IDA)19 countries that request forbearance.”20 Managing Director of Africa Economics David Ndii for example suggests that “China, which is now taking the lion’s share of debt service for many countries, could demonstrate that it is indeed a friend of Africa by giving African countries some breathing space on debt repayments.”21

More recently, the UNCTAD has called for a debt jubilee of $1 trillion for distressed economies, comparable to the debt relief that was awarded to Germany after the Second World War. This week, the IMF announced a debt relief of approximately $214 million to 25 of the world’s poorest countries,22 and the G20 thereupon agreed on a bilateral debt repayments moratorium.23 But as the appeals of several NGOs point out, more swift debt relief, also in the form of permanent debt cancelations, will be needed.24 The UNCTAD also calls for a Marshall Plan of $500 billion support for Official Development Aid (ODA) receiving countries, largely in the form of grants.25 Grants mean that the support packages being transferred to developing countries by multilateral institutions are shielded from conditionality. The latter should also apply to new issued loans.

There is yet another route that the IMF (i.e., its members, in particular the US, EU, China, Japan and the UK) could take. David Adler and Andres Arauz point to the possibilities that the IMF's system of Special Drawing Right (SDR) provides in times of crises. SDRs are designed as a supplementary international reserve to support countries with liquidity and foreign currency shortages. If the IMF would give a certain amount of SDRs to country A for example, country A could trade these SDRs with country B in exchange for an amount of foreign currency which can be used to repay debts. Country B in its turn can trade its reclaimed SDRs for an amount of foreign currency with country C, etc. Issuing SDRs can best be compared to monetary financing in the sense that the IMF gives states new money without any expectation to repay. States thus acquire money and do not take on more debt. Developing countries are obviously the main beneficiaries of SDRs. Adler and Arauz propose that the IMF issues 3 trillion SDRs ($4 trillion) for the global economy, suggesting that richer countries donate their SDRs to the countries in need of liquidity. The UNCTAD has meanwhile supported a capital injection of $1 trillion through the use SDRs in the form of helicopter money26 (whereby citizens directly receive money in their bank account), and the IMF has asked the G20 for support in issuing a substantial amount of SDRs itself.27 This crisis could also be used as a window of opportunity to reshape the IMF altogether, as Kevin Gallagher has recently suggested in the FT, arguing that “the IMF should entirely become an SDR-based institution, as proposed by its classical chief economist, Jacques Polak, four decades ago.”28

Towards a new system

The longer term crisis-response should create an economy that is resilient, equitable and not debt-ridden (especially regarding private debt). Capital investments should be targeted at green, sustainable and inclusive growth in the Global South. One of the greatest proponents of a Global Green New Deal, Richard-Kozul Wright (also UNCTAD), has time and again stressed that any kind of contemporary New Deal should mainly rely on public instead of private capital, and take inequality and climate change explicitly into account.29 Richer countries should provide enough funding for developing countries in order to support them in achieving these goals.

The current system of debt restructuring, which is decentralized, nontransparent, complex and often ruthless, must be redesigned, and new global rules should be developed. An interesting proposal to look at in this respect is the UNCTAD's idea of global principles based on international public law, implying more coordination and centralization.30 Additionally, preparations must be made for further debt relief measures in the long run. States could finance them through significant taxes on capital and the rich. Also, lessons must be drawn from the HIPC (Heavily Indebted Poor Countries) Initiative, set up by the IMF, World Bank and other creditors in the second half of the ‘90s, to operationalize debt relief for the most troubled countries. As the NEF (New Economic Foundation) concludes, the program was still pinned to strict conditionality and lengthy homework assignments, which undermined the benefits that the HIPCs could have enjoyed with a less orthodox framework.31

Much stronger regulation of global financial markets is required, taming pro-cyclical free flows of private capital. Capital controls are vital for countries in order to protect their economies from disruptive in- and outflows of capital. They can take many different forms, such as capping outflows or portfolio restrictions.32 The role of development banks and public investment banks issuing loans in the local currency play is important, and the West can use its expertise to help in strengthening them in the Global South. Also, central banks in developing countries must be equipped to step up in times of crisis.33

Finally, apart from states, it is multilateral institutions that should push for these kind of global changes. They set the rules on global trade and investment and financial flows. The IMF, World Bank, WTO, BIS and the like should question their role in the process of four decades of deregulation and debt piling. Instead of protecting the interests of multinationals and financial markets as the main profiteers of the current globalization, they should put people and public goods before markets in their policy at all times.

The measures needed to counter the global effects of the Corona-crisis must force a breach with the current global trade and financial system and its debt-driven growth model. New policies should be related to the challenges that lie ahead in the 21st century, most importantly the fight against inequality and climate change. Much will depend on the flexibility and decisiveness of governments and international institutions, which are in the end dependent on political will. Governments should remember to “never waste a good crisis”, and the people to whom they are beholden have a duty to remind them.

Global FDI trends34

The UNCTAD calls the drop in global FDI flows “dramatic” and signals that Covid-19 is no longer “just” a global value chain problem.35 The falling demand and the economic impact of global supply chain disruptions will have spill-over effects on many countries, most strongly felt in the developed world and Asia. The downward pressure on FDIs might drop until an astonishing 40% during 2020 and 2021. This will cause severe shocks in several economic sectors, equally affecting local employment. Many countries in the developing world depend on exports of extractives (such as oil), manufacturing, garments, fresh products, tourism, etc – all sectors being seriously hit by the crisis. The outflow of non-residential portfolio flows to emerging markets at the end of March was already equivalent to all the inflows for 2019.36


1 The terms “Global South” and “developing countries” are used as equivalents in this piece. Of course, China forms part thereof.
2 Institute of International Finance (April 6 2020): Global Debt Monitor – COVID-19 Lights a Fuse
3 UNCTAD (9 March 2020): “The Corona virus shock: a story of another global crisis foretold and what policy makers should be doing about it” https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2688
4 World Bank (2020): Global Waves of Debt https://www.worldbank.org/en/research/publication/waves-of-debt
5 Jubilee Debt Campaign (January 2020): The growing global South debt crisis and cuts in public spending https://jubileedebt.org.uk/report/the-increasing-global-south-debt-crisis-and-cuts-in-public-spending
6 Even before the Corona-crisis, the estimation was 17.4% for 2022.
7 Institute of International Finance (April 6 2020): Global Debt Monitor – COVID-19 Lights a Fuse
8 UNCTAD (2019): Current challenges to developing country debt sustainability https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2476
9 Shadow banking is the generic terms for financial market activities performed by actors similar to banks but not regulated as banks.
10 ibid.
11 ibid.
12 UNCTAD (2015): Trade and Development Report 2015 - Making the international financial architecture work for development https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1358
13 Also see Natalya Naqvi (2018): Manias, Panics and Crashes in Emerging Markets: An Empirical Investigation of the Post-2008 Crisis Period https://www.tandfonline.com/doi/abs/10.1080/13563467.2018.1526263
14 UNTCAD (2019): Trade and Development report 2019 – Financing A Global Green New Deal https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2526
15 ibid.
16 Also see Judith Tyson & Thorsten Beck (October 2018): Capital flows and financial sector development in low-income countries https://www.odi.org/publications/11268-capital-flows-and-financial-sector-development-low-income-countries
17 ibid.
18 https://www.imf.org/external/datamapper/PCPIPCH@WEO/WEOWORLD/VEN/SDN
19 The IDA is World Bank's branch that aims to help the poorest countries.
20 https://www.imf.org/en/News/Articles/2020/03/25/pr20103-joint-statement-world-bank-group-and-imf-call-to-action-on-debt-of-ida-countries
21 https://www.theelephant.info/op-eds/2020/03/25/thoughts-on-a-pandemic-geoeconomics-and-africas-urban-sociology/
22 https://www.ft.com/content/c384ed59-1ca3-476f-9b89-eaf5cf31e42c
23 https://www.ft.com/content/5f296d54-d29e-4e87-ae7d-95ca6c0598d5
24 See for example the recent statements of Global Justice and Jubilee Debt Campaign: https://www.globaljustice.org.uk/sites/default/files/files/news_article/debt_media_briefing_ahead_of_g20_final.pdf & https://jubileedebt.org.uk/wp-content/uploads/2020/04/International-statement_English_04.20-4.pdf
25 https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2315
26 ibid.
27 https://www.bloomberg.com/news/articles/2020-04-06/imf-mulls-fed-like-program-to-supply-dollars-to-more-economies
28 https://ftalphaville.ft.com/2020/03/20/1584709367000/It-s-time-for-a-major-issuance-of-the-IMF-s-Special-Drawing-Rights/
29 Kevin P. Gallagher and Richard Kozul Wright (2019): A New Multilateralism for Shared Prosperity https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2057
30 UNCTAD, TDR 2019
31 NEF (2006): Debt relief as if people mattered – a rights based approach to debt sustainability https://neweconomics.org/2006/06/debt-relief-people-mattered/
32 For a concise overview of different kinds of capital controls, see Madhyam policy brief #1 (October 2018): What are capital controls? https://www.somo.nl/wp-content/uploads/2018/12/Paper-1.pdf
33 Boris Hofmann, Ilhyock Shim & Hyun Song Shin (7 April 2020): Emerging market economy exchange rates and local currency bond markets amid the Covid-19 pandemic https://www.bis.org/publ/bisbull05.htm
34 Disclaimer: this box is meant to reflect the current status quo of capital outflows in the Global South as a result of the Corona-crisis; as this article has pointed out, the type of FDIs that developing countries have been receiving in the past decades has often been destabilizing for their economies. This box under no circumstances implies that countries in the Global South are in need of the same kind of FDIs that are flowing our their countries now.
35 UNCTAD (March 2020): Investment Trend Monitor (updated 26 March 2020) https://unctad.org/en/Pages/MediaAlertDetails.aspx?OriginalVersionID=58
Also see UNCTAD: The Corona virus shock: a story of another global crisis foretold and what policy makers should be doing about it
36 https://twitter.com/econchart/status/1243315055954931715?s=20