Last month, the Vatican hosted a conference to launch the Jubilee Report on tackling the debt and development crises commissioned by the late Pope Francis and based on work led by Nobel Prize-winning economist Joseph Stiglitz.
During the event, an important question was raised: are the debts accumulated by developing countries intended for production or consumption? The point of the question was that loans to finance investment are more likely to be repaid from the returns, whereas loans for consumption or non-productive sectors are effectively money down the drain, because they yield no returns.
In fact, for many developing countries, the situation has reached a point where they are taking out new loans merely to cover the burdens of old ones. These new loans neither contribute to financing investment for production nor to cover consumption expenses. This is a salient feature of the silent global debt crisis, which has trapped borrowers in a cycle of indebtedness.
The amounts many countries now have to earmark for debt-servicing payments exceed their budgetary allocations for education and healthcare combined. To make matters worse, the interest payments alone have nearly doubled over the past ten years. It is as though these countries have chosen not to default on their debt repayments at the expense of defaulting on their development goals.
Multiple actors have had a hand in producing this crisis. The developing economies adopted strategies of borrowing at a time of low interest rates but did not take the necessary precautions against interest rate hikes, currency fluctuations, or short maturity periods. Instead of relying so heavily on borrowing, with its attendant obligations and risks, these countries should have balanced their budgets, marshalled domestic resources, and readjusted their growth models with an eye to greater reliance on private investment in areas where it performs well and generates profits and, hence, taxable revenues.
In particular, they should have encouraged private investment in infrastructure and energy projects, which account for the bulk of their financing needs.
As Columbia University professor and former Argentinian economy minister Martín Guzmán has been reminding us that creditors also bear responsibility for the current crisis. They are the ones who extended loans while fully aware of the significant risk of default and charged inflated interest rates to compensate for that risk. Later, when these risks materialised, the creditors were reluctant to provide the relief needed to restore debt sustainability.
Nor are the international financial institutions blameless. They contributed to the slow pace of debt-restructuring negotiations between creditors and debtors. They also tolerated the diversion of long-term concessional financing to repay the private sector debts of countries on the brink of default, which meant diverting it away from the development purposes for which it was intended.
It is vitally important to formulate effective debt-management procedures based on several factors. First, they should distinguish between cases involving liquidity shortages and those on the verge of actual insolvency. Second, they need to take into consideration the debt structure and nature of the creditors (public or private sector). Third, the dangers of debt are not limited to low-income countries, as middle-income countries are also affected. Of the 54 African countries, 31 are middle-income.
These were among the main factors looked at by a task force appointed by UN Secretary General António Guterres to develop practical solutions to the debt crisis. It included former South African minister of finance Trevor Manuel, former prime minister of Italy Paolo Gentiloni, Boston University professor Yan Wang, and the author of this article.
We appreciate the fact that, for the proposed solutions to achieve their intended benefits, a solid scientific underpinning was a necessary but not a sufficient condition. They also had to be practically implementable, especially given the current international geopolitical disruptions. The group arrived at the following proposals, which are divided across three levels.
On the level of the global financial system, the task force recommended increasing financial support for World Bank and International Monetary Fund (IMF) specialised mechanisms and funds that provide liquidity and debt relief for both middle- and low-income countries; reforming the G20 Common Framework for Debt Treatment to include middle-income countries, suspend debt repayments during restructuring, shorten negotiation periods, and stimulate private sector participation through the IMF’s lending mechanisms in cases of arrears; introducing a balanced approach to suspending debt-servicing obligations during crises and shocks that undermine a debtor’s repayment capacities; reviewing the debt sustainability analyses conducted by the World Bank and IMF for both low- and middle-income countries; and redirecting unused Special Drawing Rights (SDRs) to inject liquidity, repurchase debt, and strengthen the financing capacities of international development institutions.
On the level of international cooperation, especially among countries of the Global South, the task force recommended establishing a centre for information sharing, technical assistance, financial innovation, and advice on debt swap mechanisms; creating a borrowers’ forum for the purposes of consultation, coordination in international platforms and organisations, and strengthening institutional capacities; and enhancing the capacity of debt management units.
On the level of country-level proposals, it recommended strengthening institutions and policies to manage liquidity, exchange rates, and interest rate risks that would include tighter safeguards to promote borrowing in local currency; improving the quality of projects seeking to attract investment and introduce specialised platforms for mobilising domestic and international resources; and reducing the costs of financing and transactions related to debt swaps and financial innovation instruments, which should be systematically linked to public policies and development plans, thereby relinquishing an ad hoc deal-making approach.
To achieve these proposals’ intended purpose – relieving existing debt burdens and preventing future crises – they must be implemented effectively within the framework of the financial commitments that are currently being discussed in Seville at the Fourth International Conference on Financing for Development.
This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.
* A version of this article appears in print in the 3 July, 2025 edition of Al-Ahram Weekly
Short link: