One notable development that’s been gaining attention in recent times is the escalation of sovereign debt across developing economies. According to a report by the Debt Relief for a Green and Inclusive Recovery (DRGR) Project, the sovereign debt of emerging markets and developing economies (EDME) saw a 178% increase between 2008 and 2021. The increase pushed the debt figures from USD 1.4 trillion to a whopping USD 3.9 trillion, painting a picture of an impending debt crisis in the Global South.
Understanding the Inadequacies of the G20’s Common Framework
Created to provide debt relief, the G20’s “Common Framework” has evidently missed its target. This shortcoming mainly stems from its failure to bring all creditors, including those in the private and commercial sectors, into agreement. Additionally, the inability to align debt relief with developmental and climatic goals further diminishes the effectiveness of the framework.
The Nature of Emerging Market Economies
Emerging market economies typically refer to developing nations whose engagement with global markets intensifies as they grow. Although similar to developed markets in some aspects, countries such as India, Mexico, Russia, Pakistan, Saudi Arabia, China, and Brazil, still retain characteristics of developing economies.
Factors Fuelling the Debt Crisis
EDMEs are confronted with several challenges that stunt their economic growth. Notable among these factors are the sluggish recovery from the COVID-19 pandemic, high food and energy prices, escalating climate impacts, the effects of Russia’s war in Ukraine, and the impact of a strong US dollar coupled with depreciating currencies for many EMDEs.
Implications of the Debt Crisis on Vulnerable Countries
Countries most vulnerable to climate change are typically more susceptible to significant debt distress. This increased climate vulnerability negatively impacts the sovereign borrowing space. High debt service payments also pose a challenge, forcing countries to allocate extensive parts of their foreign reserves for debt payment. However, immediate debt relief to EDMEs could allow them more fiscal and borrowing flexibility to adopt low-carbon, socially inclusive, and resilient development models.
Proposed Solutions to the Debt Crisis
The DRGR report recommends several measures to tackle this issue. They propose a three-pillar approach to reform the Common Framework, starting with public creditors granting significant debt reductions. The second pillar suggests that private and commercial creditors should also provide comparable debt reductions. For the remaining debt, new bonds backed by a guaranteed fund should be issued by the government. The final pillar is aimed at countries not at risk of debt distress, proposing that international financial institutions provide credit enhancement.
An Urgent Call for Debt Restructuring
The report further highlights the need for an urgent restructuring of USD 812 billion of debt owed by 61 high-risk countries. They predict that at least USD 30 billion in debt should be suspended over the next five years for the most distressed countries.
Understanding the G20 Common Framework
Endorsed by the G20 and the Paris Club in 2020, the Common Framework was designed to provide structural support to Low Income Countries (LICs) with unsustainable debt. It sought to offer a coordinated approach addressing the debt vulnerabilities of LICs exacerbated by the COVID-19 pandemic.
The DRGR project is a joint effort between Boston University Global Development Policy Center, Heinrich-Böll-Stiftung, and the Centre for Sustainable Finance at SOAS University of London. Together, they aim to provide solutions that combine debt relief with green and inclusive recovery.
