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As the fourth International Conference on Financing for Development (FfD4) kicks off in Seville, Spain, we look at how a massive debt burden on developing countries is holding them back. As an unfit global financial architecture makes accessing finance more difficult for countries in the developing world, governments are left with the option of either servicing the debt or serving the people. Read the first, second, third and fourth parts.
The mounting debt crisis in developing countries is often portrayed as a failure of fiscal prudence or governance. But The Jubilee Report, released recently, showed that this narrative is both misleading and incomplete. The truth is, today’s crisis is a systemic failure — of global financial architecture, creditor behaviour and neglect.
Debtor governments borrowed beyond their means, often under poor terms and short maturities. Creditors, including private investors and multilateral institutions, knowingly extended excessive and risky financing in the greed for better returns.
International financial institutions enabled the spiral by delaying hard conversations, offering bandaid solutions and propping up a system that privileges short-term returns over long-term resilience. At the root of the problem lies a gaping hole in the global economic order: There is no international mechanism to deal with sovereign debt distress. Unlike corporations that can declare bankruptcy and restructure, countries in crisis are left to navigate a complex maze of fragmented, creditor-dominated negotiations — with no framework for timely, fair or equitable outcomes.
Meanwhile, the deep asymmetries that define the global financial system continue to widen. Countries like the US and France — whose public debt now exceeds 100 per cent of gdp — are considered safe borrowers. Zimbabwe and Chad, with far lower debt-to-gdp ratios, are penalised with exorbitant interest rates and harsh borrowing conditions. This is because wealthy countries borrow largely in their own currencies, enjoy favourable credit ratings and are perceived as “low risk”. Developing countries, in contrast, borrow in foreign currencies, face high currency volatility and are often punished by credit rating downgrades during crises — raising the cost of capital just when they need it most.
If the world is serious about enabling climate action, it must first fix its broken financial system. First, debt resolution must be fair, fast and fit for purpose. “The current creditor-led approach thwarts developing countries’ maneuvering potential at the worst possible moment during a crisis,” said an expert from UNCTAD, requesting anonymity.
To this end, developing countries have demanded a UN-led multilateral sovereign debt mechanism as part of the asks from the recently concluded FFD4. In the pre-session negotiations building up to the conference, the Global North blocked progress most aggressively on the debt question. A global debt architecture that undermines development and climate goals is a direct threat to global stability. Even though the conference’s outcome text has been adopted, the language on the intergovernmental process on debt has been watered down.
Several policy options have also emerged in recent years, each offering pieces of the larger systemic solution. While the G20 Common Framework, a global initiative endorsed by the G20 and the Paris Club of creditors (of mostly Western nations), is meant to facilitate government debt restructurings, other more climate-specific proposals are emerging as well.
One such tool is debt-for-climate swaps, a version of debt-for-nature swaps, where creditors agree to forgive a portion of a country’s external debt in exchange for commitments by the debtor country to direct the savings towards policy actions and investments in climate resilience or conservation. Such swaps have been used in Seychelles, Belize, Cabo Verde and Barbados, among others, with some positive results. However, they remain small in scale, slow in uptake and ad-hoc in nature — rather than being an integral component of sovereign debt relief pathways.
They have been critiqued for many reasons including the fact that 37 of the world’s most severely indebted countries together account for just 0.5 per cent of global emissions. The debt relief from swaps is also too little, amounting to a total of just $3.7 billion till date and creating minimal fiscal space for poor countries.
According to the Centre for Global Development, a US-based think tank, more effective approaches would include reducing reliance on borrowing, improving debt management and accountability and reforming how debt is structured and handled. Another emerging innovation is the introduction of debt pause clauses or climate-resilient debt clauses in government debt contracts. These clauses allow debtor countries to temporarily suspend repayments in the wake of an extreme climate event. This provides temporary liquidity in the face of a disaster.
Barbados, Grenada and Bahamas are among countries where this approach has been utilised. But civil society has critiqued these in their present form as being inadequate. The fundamental problem is that interest continues to accrue as payments are suspended, thereby not offering any real reductions in the overall amount of debt. Further, since it is not mandatory and not all creditors have such clauses in place, the possibility of freed-up resources from one contract being used to repay another creditor is high.
The Expert Review on Debt, Nature and Climate, jointly established by Kenya, Colombia, France and Germany, has put forward suggestions that address the systemic roots of the climate-debt nexus. They called for a reform of the World Bank-International Monetary Fund Debt Sustainability Frameworks, which assess developing countries’ debt conditions and form the basis for countries’ ability to borrow internationally. Their proposed solutions speak about the inclusion of climate risks, nature-related risks and use of different climate scenarios to make these analyses more robust and climate-relevant.
Most importantly, debt cancellation must be on the negotiation table. The Jubilee Report argued that stopping negative net transfers — where countries pay more in debt than they receive in aid or investment — is fundamental. Aid and climate finance will remain inadequate if every dollar received is cancelled out by two dollars sent to creditors.