Earlier this month, the World Bank released its International Debt Report for 2024, confirming the persistence of the most serious challenges to development efforts: the contraction of external financing and the depletion of domestic financing to service mounting debt.

As interest rates rose to their highest level in two decades, the debt-servicing costs of low- and middle-income countries (LMICs) reached an all-time high of $1.4 trillion. Over $400 billion of this went to interest payments, which surged by one third. At the same time, net financial flows from private-sector creditors turned significantly negative, with these withdrawing more from LMICs than they have transferred to them.

Because of the prohibitive costs of borrowing from international markets, the only recourse for the developing countries is international development institutions. During the last two years, they collectively provided $85 billion more than they collected in debt-service payments. While this amount may cover some urgent needs and salvage some progress towards critical development goals in the poorest and lowest-income countries, it is far from sufficient for the middle-income countries (MICs) which do not qualify for preferential borrowing terms from international development organisations.  

Moreover, the MICs encounter unsurpassable financing ceilings due to the relatively low paid-in capital (contributions from member countries) of these multilateral organisations and their fear of losing their high credit ratings if they risk higher levels of financing.

The developing countries today are caught between defaulting on their debts and avoiding default by sacrificing crucial investments in education, healthcare, and essential development needs. If debt-servicing exceeds half the national budget, as is the case in some African countries, how will they ever fund development?

They might have the most elaborate development strategies imaginable, but if these are not financed, all of them become nothing more than painful memories of ambitions shattered on the rocks of reality. That reality was shaped in large measure by poor prioritisation, the mismanagement of resources, and overly optimistic assumptions about easy access to international financing.

The evidence from recent reports on development financing is conclusive. The era of international development assistance, which has undergone many changes since the multilateral development organisations were founded in the aftermath of World War II, is nearing its end.

These aid flows were also to a considerable extent implicitly intended as a form of symbolic compensation for centuries of the colonial-era plundering of the wealth of formerly colonised countries. It is astonishing how decision-makers today will utter platitudes about a rapidly changing world gripped by geopolitical conflicts, only to express their bewilderment at the decline in easy international financing and how hard it is to persuade traditional financing sources to renew their pledges instead of constantly reneging on them.

This is not to suggest that developing countries abandon efforts to mobilise international financing from all possible sources. There are convincing arguments that it can be mutually beneficial if the parties involved use it wisely within the framework of international partnerships. However, this is a call for the closer study of the new global realities, where economic weights have shifted along with political orientations.

The need to address the current silent crisis of international debt is particularly urgent, especially given the shifts in the creditor pool in recent years. For example, the Paris Club of creditor countries now account for only 10 per cent of international financing compared to 40 per cent at the beginning of the century. Can the rules that applied to dealings with the traditional creditors now apply to the new ones?

The roots of the global debt crisis also need to be re-examined. While the UN Sustainable Development Goals (SDGs) have established a frame-of-reference for economic, social, environmental, and governance development, they still leave, as they should, a lot of room for individual countries to develop the growth model they deem most appropriate.

Some countries have adopted a balanced and comprehensive model. This provides for investments in people, infrastructure, technology, and the environment, is financed by marshalling domestic savings and resources, and is led by the private sector, thereby avoiding the traps and pitfalls of external borrowing.

Other countries have chosen a different path based on different priorities, relying on high-profile projects managed by state bureaucracies and turning to locally or externally sourced loans for finance. They are now reaping the consequences of their choices.

As preparations get underway for the fourth Financing for Development (FFD4) Conference to be held in Spain in June 2025, stakeholders should meet and discuss how to deal with debt and financial sustainability.

It is suggested that they focus on four key issues: (1) rules and standards for prudent borrowing and responsible lending to prevent future debt crises; (2) proposals to promote fiscal space to enable more investment in achieving the SDGs; (3) reforming the global financial architecture to facilitate the rapid settlement of sovereign defaults so that the developing countries can quickly resume their development plans; and (4) revising the methodology for assessing optimum debt financing for the LMICs.

These assessments should reflect spending priorities in sustainable development, incorporate climate and environmental risks, differentiate between investment spending and consumption spending, and distinguish between temporary liquidity problems and systemic insolvency risks that could lead to default.

People might argue that solutions already exist to the problem of debt, some based on initiatives by the G20 group of countries and others. Some of these initiatives focus on poorer and more vulnerable countries, and others might adopt models that showcase fiscal innovation and swap procedures. It is certainly worth considering their suitability on a case-by-case basis.

However, there remain significant missing links, as none of the existing solutions  address the debt crises of the middle-income countries, how to deal with the new official creditors and private-sector lenders, and cases of excessive domestic borrowing.

There are well-studied and viable options out there. It is time to push for their adoption.

This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.

* A version of this article appears in print in the 12 December, 2024 edition of Al-Ahram Weekly