LAGOS – Last month’s meeting of G20 leaders in Johannesburg faced a harsh reality: the governments of many developing countries are spending too much on debt servicing. To keep money flowing to foreign creditors, they had to cut spending on education, health and infrastructure. These countries were able to avoid default for the time being, but at the expense of their own development.
The fact that governments in Africa, Asia and Latin America are having to close hospitals and cancel school feeding programs to pay off debts is not only a moral failure, but also a strategic one. A world in which countries cannot invest in sustainable growth and development will struggle to achieve stability, prosperity and resilience in the face of climate change.
Five years ago, in the midst of the COVID-19 pandemic, the G20 launched the Common Framework for Debt Treatment with the aim of helping highly indebted countries restructure their obligations in an orderly, rapid and fair manner. But the promised relief did not materialize. According to the International Monetary Fund and the World Bank, 37 of the 67 low-income countries eligible for concessional financing are in the debt-distressed or high-risk category, but only four (Chad, Zambia, Ghana and Ethiopia) applied for restructuring under the mechanism. Their experiences reveal the weaknesses of the Common Framework: it offers too little relief and comes too late.
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In response, the G20 tasked technocratic bodies with finding a way to speed up the process and increase the extent of relief. But it is not enough to deny the importance of this technical work. The debtor countries still believe that the politicians are not decisive enough. We are no longer talking about a “debt crisis” so much as we are talking about a “debt swamp”: a world in which everyone is stuck waiting for a change that never comes.
Meanwhile, foreign private creditors have been withdrawing capital from developing countries since 2022. The message is clear: the risks are too high and there is no sensible solution in sight. If investors leave, governments will have to look for other sources of financing.
The Multilateral Development Banks (MDBs) and the IMF came to the rescue. The result is that the percentage of foreign debt of countries in
The development of which they are creditors has skyrocketed and now exceeds 75% in twenty countries. This creates a vicious circle: If the majority of a country’s national debt is held by multilateral organizations that do not receive any discounts during restructuring, the reluctance of private creditors to invest becomes even greater.
To emerge from the debt quagmire, G20 leaders must restore confidence in the Common Framework and act urgently. This means giving debtor countries the certainty that requests for relief will be processed quickly, fairly and generously. The recent statement by the G20 leaders and the statement by their finance ministers on debt sustainability were inadequate as they only repeat the technical work. Stronger commitments backed by concrete actions are needed.
First, G20 leaders must destigmatize restructuring. When debt inhibits growth, calling for debt relief and committing to reforms must be seen as an example of good economic governance.
Second, the relief must be significant. A symbolic cut that leaves countries with limited fiscal space will only prolong the crisis. G20 leaders must proactively increase debt relief funds. Although taxpayers in high-income countries (which in many cases are also heavily indebted) may be unwilling to bear these costs, it is also expensive to continue bailing out private creditors indirectly through the multilateral development banks. The sooner debt relief is granted, the cheaper it will be.
Thirdly, private creditors must make their contribution. Based on the principle of comparability, private creditors must cover every dollar of debt relief provided by official creditors, and G20 leaders must integrate this policy into their national legislation. The self-regulatory model that bondholders have adopted over the past two decades has not worked for other private creditors, and all it takes is one creditor not accepting a restructuring to cause them to fail.
Some argue that countries receiving debt relief will find it more difficult to obtain financing in the future. However, the reality is that they already face prohibitive financing costs. Cleaning up their balance sheets will attract investors more quickly than applying austerity measures. The losses suffered by investors will make them more demanding and impose risk premiums on countries that do not improve their debt management, providing a welcome incentive for good governance.
The G20 faces a confluence of geopolitical, climate and economic disruptions. But the debt quagmire of developing countries is on everyone’s mind. Only by solving this fundamental challenge can there be hope of overcoming the others. G20 leaders have already expressed their commitment to debt relief, now they need courage to finish the job.
Translation: Esteban Flamini
*Olusegun Obasanjo, former President of Nigeria, is a member of the Club of Madrid.
Copyright: Project Syndicate, 2025. www.project-syndicate.org