By Marina Zucker-Marques
This week, policymakers, civil society leaders, researchers, and others will gather in Washington, D.C., for the 2024 International Monetary Fund (IMF)/World Bank Group Spring Meetings.
The meetings come as many emerging market and developing economies (EMDEs) are facing an inflection point.
To achieve the United Nations 2030 Sustainable Development Goals (SDGs) and the Paris Agreement targets, EMDEs (excluding China) need a major investment push of $3 trillion annually by 2030 – $2 trillion from domestic resources and $1 trillion from external sources. Mobilizing such massive investment volumes is challenging even in the best of times, but for several EMDEs, their ability to mobilize financing is increasingly jeopardized by high debt burdens and even higher interest rates.
How can EMDEs secure the funding necessary to fulfill the SDGs and Paris Agreement, all while maintaining debt sustainability?
A new report by the Debt Relief for a Green and Inclusive Recovery Project performs an enhanced global external debt sustainability analysis (DSA) with 66 economically vulnerable EMDEs to estimate the extent to which they can mobilize the recommended levels of external financing without jeopardizing debt sustainability.
We find that 47 EMDEs with a total population of over 1.11 billion people will face insolvency problems in the next five years as they seek to ramp up investment to meet climate and development goals. We also identified an additional 19 EMDEs that lack liquidity and fiscal space for climate and development investment and will not be able to finance necessary investments without credit enhancement or liquidity support.
Given these stark findings, it is clear that rather than refinancing at high interest rates, debt relief must be provided to these 47 EMDEs if there is to be the hope of achieving the SDGs and Paris Agreement. Avoiding debt relief now could further exacerbate debt vulnerabilities while leaving countries without fiscal space for a longer period. What is more, given the diverse creditor landscape of the 21st century, it is essential that all creditor classes – including China, the Paris Club, bondholders, and multilateral development banks (MDBs) – participate with fair comparability of treatment.
However, the international community lacks adequate tools to assess which countries need debt relief and by how much. The IMF conducts its own DSAs to identify countries’ vulnerability to sovereign debt distress, and DSAs are also used to assess the level of debt relief needed during restructuring. However, the IMF’s DSA has fallen short in several aspects. Our enhanced global external DSA addresses a crucial shortcoming by incorporating the recommended levels of external financing needed to achieve the SDGs and the Paris Agreement into the analysis.
Even accounting for the high impact of green investments on growth – which would alleviate debt burdens – our study still identifies 47 EMDEs as being at risk of facing insolvency problems within the next five years, as depicted in blue in Figure 1. A majority of these EMDEs are in Africa and include economies like Mozambique, Kenya, and Cote d’Ivoire, among others. Another 19 countries – including Mongolia, Rwanda, and Bangladesh – will lack liquidity and fiscal space to invest in climate and development and would benefit from credit-enhancing programs.
The 47 EMDEs identified as in need of debt relief owe $383 billion in nominal debt, mostly to multilateral creditors ($91.5 billion to the World Bank and $57.6 billion to other multilateral creditors), bondholders ($59.6 billion) and China ($55.1 billion). This varied distribution shows that the participation of all creditor classes is essential to restoring a country to debt sustainability and unlocking a pathway towards green and inclusive economic growth.
China has called for the participation of MDBs in debt relief – which can be done while also protecting the financial health of these institutions. For several countries identified as in need of debt relief, achieving debt sustainability hinges upon including MDB claims in debt restructuring negotiations. For instance, between 2023-2030, 94 percent of Nicaragua’s debt service will be paid to MDBs, showing that for debt sustainability to be achieved, MDBs must be at the negotiating table. Additionally, bondholders who price default risk with high interest rates should assume higher losses during debt relief.
Debt relief alone will not be enough to achieve the SDGs and Paris Agreement, but it will help bridge an important gap. Beyond debt relief, the international financial architecture must also be reformed to better support the needs of the 21st century, including an expanded Global Financial Safety Net and more concessional finance from MDBs.
The international community urgently needs to change course to prevent a default on development and climate goals and to forge a path toward shared prosperity and economic growth. For this to happen, debt relief must be granted to debt-distressed EMDEs. Additionally, the international financial architecture must be reformed to ensure the participation of all creditor classes and the implementation of DSAs that realistically account for the needs of a 21st-century economy.
Marina Zucker-Marques is a Senior Academic Researcher with the Global Economic Governance Initiative at the Boston University Global Development Policy Center. Follow her on X: @MarinaZucker.
