Plan to Address the Debt Crisis

A Global Call to Action on Debt and Development

Following a significant moment in the Fourth International Conference on Financing for Development, there is a growing consensus among governments, international financial institutions, and civil-society organisations. They are preparing for action ahead of the United Nations General Assembly (UNGA) in September. This comes after recent reports, including Healthy Debt on a Healthy Planet, the Jubilee Report, and the Report of the UN Secretary-General's Expert Group on Debt, have highlighted the severity and urgency of the intertwined debt and development crises.

In 2024, developing countries paid US$25 billion more to external creditors than they received in new disbursements. This means that 3.4 billion people—more than 40% of the world’s population—live in countries that spend more on interest payments than on health or education. The situation has been exacerbated by the global financial system, which is not designed to meet the needs of people and the planet. Developing countries face high borrowing costs and uneven prudential regulation due to historical inequities and low bargaining power. Without transparency, accountability, and strategic investment planning, borrowing and lending policies have failed to mobilise productive investments that drive sustainable growth.

Capital flows are highly volatile, with money flooding into developing countries during booms and leaving in the wake of shocks. Additionally, laws and policies governing debt restructurings have long encouraged delay rather than resolution. The response to the Covid-19 pandemic further exposed these weaknesses, as developing countries lacked a global safety net to support their citizens. While new allocations of the IMF’s Special Drawing Rights helped somewhat, they were insufficient to address the scale of the crisis.

Recent efforts to address debt distress, such as the G20 Common Framework, have fallen short. Restructurings continue to move slowly and remain opaque, with outcomes determined by differences in bargaining power between countries and their creditors. The process now involves a wider array of players, including the Paris Club of sovereign creditors, newer bilateral lenders like China, and private creditors. This complexity makes restructuring processes even more challenging. Even when relief is provided, it often arrives too late and achieves too little.

Addressing Root Causes

Given the complexity of the crisis, there is no single solution, but there are effective, practical approaches. One key step is to reform how the World Bank and IMF conduct debt-sustainability analyses. The current approach lacks inclusivity, does not fully account for climate- and nature-related risks, and does not consider the use of funds. These technical issues have held back the kind of productive borrowing needed to improve human capital, increase infrastructure investment, and strengthen climate resilience.

At the same time, there is a strong case for creating new structures and institutions, starting with a Borrowers' Club. Since lenders have coordinated for decades, borrowers must do the same to compete effectively. Such coordination would enhance their collective bargaining power and ensure their interests are considered. It could also provide a platform for South-South learning, technical assistance, and improved debt management.

Past attempts at borrower coordination have lacked resolve, but there is now new momentum. What is needed is the establishment of shared strategic goals, a governance structure, and adequate funding.

Reforming the Restructuring Process

To improve the restructuring process, incentives for both creditors and debtors must be changed. One option is to incorporate automatic debt-service standstalls for countries facing unsustainable debt burdens. The IMF could also use its policy of lending into arrears to guarantee that multilateral financing serves its purpose rather than being used for repayment of distressed bonds that need restructuring.

Reforming the legislation that governs restructurings to deter holdouts must be a priority. This includes changing the "compensatory" pre-judgment interest rate in New York State for debts in arrears, which has been fixed at 9% since 1981, and introducing caps on recovery. It is clear why creditors are hesitant to engage in negotiations.

Across these key solutions—reforming debt-sustainability analyses, establishing a Borrowers’ Club, and improving the time and depth of restructuring—the strength of commitment is as important as the ideas themselves. In 2000, a powerful global coalition delivered significant relief for low-income countries. Today, broader and deeper reforms are needed to solve the immediate crisis affecting many low- and middle-income countries, prevent future crises, and promote growth, job creation, and prosperity. As we look towards the UNGA in September, the focus should be on driving progress on these practical solutions.