How the G20 can help prevent a default on climate and development goals

June 13, 2024|Written by and |G20

In many emerging market and developing economies (EMDEs), the significant investments needed for shared climate and development goals are being compromised by severe, consecutive global and domestic crises, exacerbating not only existing economic vulnerabilities but also sovereign debt.

Despite poorer countries having contributed the least to the climate crisis, they are caught in a vicious cycle of debt and climate in which fiscal space constrains investment, and underinvestment leads to more devastating climate shocks. These losses saddle already strained governments with higher debt burdens that ratchet up the cost of capital and push investment even further out of reach.

This year is also the costliest year for debt service payments this century. Debt interest payments have crowded out government spending on health or education in many EMDEs. The triple crisis of debt, development and climate brings significant consequences not only to global financial stability but also to human well-being.

While some debt workout mechanisms exist, such as the G20’s Common Framework for Debt Treatments, they remain grossly insufficient in delivering meaningful debt relief that would not only allow these countries to recover but also domestically mobilise the needed US$2tn annually, as estimated by the G20 independent expert group. Recent research reveals that out of 66 economically vulnerable EMDEs, 47 will face insolvency problems in the next five years if they seek to ramp up investment to meet climate and development goals.

The current status quo is not compatible with a shared resilient future, and bold reforms are needed now, not years down the road. As members of the G20 working group on international financial architecture gather in Brazil this week, they have a crucial opportunity to substantively address these intertwined crises.

Alongside 19 other former central bank governors and finance ministers, we have co-signed a letter calling on the G20 to implement three key policy reforms to ensure the necessary investment is delivered to achieve shared development and climate goals by 2030. These include reforming the G20 common framework, revamping the debt sustainability framework and ensuring a stepwise increase in affordable financing.

Reforming the G20’s common framework

As of March 2024, only four countries have applied to the common framework for debt treatment, and only one – Zambia – has reached a deal after three challenging years of negotiation.

If the framework is to really deliver, three reforms are necessary.

First, it is not enough for debt relief to merely return a country to an unstable baseline. It must provide ample space for climate-resilient, development-centred investments which can help avoid a return to debt distress.

Second, all creditors must be brought to the negotiating table, without which comprehensive debt relief will not be possible. For example, 16 countries owe over half of their external sovereign debt service to multilateral creditors. Without multilateral development banks (MDBs) at the table in a manner that preserves the banks’ credit ratings, these countries cannot receive meaningful debt relief.

Third, the common framework must also apply a comparability of treatment principle, with each creditor – from private bondholders to MDBs – providing fair levels of debt relief.

A revamped debt sustainability framework

A reformed common framework must be grounded in a revamped debt sustainability framework which accounts for investment needs to meet the Sustainable Development Goals and the Paris Agreement to which all G20 countries have committed.

The debt sustainability analyses conducted by the International Monetary Fund (IMF) have faced criticisms of biased projections and not adequately incorporating climate financing needs or impacts from related shocks. These analyses paint an inaccurate picture and obscure which treatment – whether comprehensive debt relief or liquidity support – is most appropriate for a country to restabilise and invest in its future.

Critically, the debt sustainability framework for low-income countries produced by the IMF and the World Bank is currently under review by both institutions, presenting a unique opportunity for reform so that countries are better supported as they navigate challenging financial and fiscal decisions. However, time is of the essence in completing this review.

Ensuring a stepwise increase in affordable financing

Debt relief alone is not a panacea, nor is it necessary for all countries facing tight fiscal space. For countries in or near debt distress, debt relief must be just one part of a broader package including concessional finance underpinned by deep reforms of the international financial architecture.

For countries not facing immediate debt distress, a stepwise increase in affordable financing (and credit enhancement where appropriate) can help ensure that climate and development investments do not come at the cost of debt sustainability.

To continue on the current path risks a default on climate and development goals, but bold and ambitious leadership from the G20 on the triple crisis of debt, climate and development can turn the tide, catalysing a green, inclusive and prosperous future.

This page was last updated June 13, 2024

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