When G20 Finance Ministers sit down later today for their fourth meeting this year, they are sure to reflect on yesterday’s worrying assessment about the global economy by the IMF, and what they can do to prevent further uncertainty and financial turmoil.
Paradoxically, one of the issues flagged as a significant concern by the IMF was the growing risk of government debt distress across many low- and middle-income countries, as this was an area the G20 prioritised after the COVID pandemic hit in 2020, but has continued to fall down their agenda in the years since. Then they established the Debt Service Suspension Initiative (DSSI) and provided significant financial contributions to the IMF’s Catastrophe Containment and Relief Trust (CCRT), both of which provided billions of dollars in debt relief, but whose support has since ended. In addition, despite the G20 Common Framework being announced to much fanfare in November 2020, two years on and we are yet to see any government fully receive debt relief through it and the G20 haven’t shown much willingness to take action to fix it.
We and many other organisations have continually warned the G20 not to step back on debt. Now the trajectory is worsening further, and there is a broad body of evidence of the impact it is having, and will continue to have, on the lives of the world’s poorest children, which underscores why the G20 must step up.
Government debt and interest payments on it are increasing
Despite hopes of a world built back better following COVID lockdowns, 2021 saw divergent economic growth between higher and lower income countries, and 2022 has been marked by global stagflation. The result has been muted economic growth across many low- and middle-income countries compared to pre-pandemic levels, which has had knock on impacts on government revenue - a situation which is set to continue into the medium term (Figure 1).
Figure 1 – continued limited growth in non-grant government revenue is expected in the future
Margaret is leaving a gift in her will to Save the Children
Source: Latest available IMF Article IV staff reports for respective countries
At the same time, the costs of servicing debt have increased, following global rises in inflation and interest rates. This is set to see interest payments on debt increase by over 50% in low-income countries and almost one third across middle-income countries. According to the IMF only 7 (10%) of the world’s poorest countries are currently at no or low risk of debt distress. Whilst multilateral development banks, like the World Bank, and the IMF are looking to scale up access to affordable lending, this is insufficient to meet needs. Many governments wanting to boost non-debt related expenditure for critical investments – whether to tackle hunger, support citizens through the current cost of living crisis, address the climate emergency, or build human capital and support children’s rights and services - will have to borrow at increasingly unfavourable terms.
Debt burdens are impacting governments’ ability to fulfil children’s basic rights
Increased borrowing costs and limitations on revenue generation are forcing many governments to make choices that will ultimately reduce their ability to meet children’s needs now or in the future. Either i) cut back on non-debt related public spending over the next few years as interest rates rise, or ii) borrow more now at increased costs, risking debt sustainability in the longer term.
There is growing body of evidence that is highlighting the impact this is having:
Our new report on education financing published today shows that 1 in 6 low- and lower middle-income countries are already spending more on external debt servicing than they are on education, and across selected country case studies, increased spending on interest payments in the coming years is set to either constrain or lead to falls in education funding (see Figure 2).
Figure 2 – Medium term trends in government spending on interest payments and education
Margaret is leaving a gift in her will to Save the Children
Source: Budget and medium-term plan documents of the respective governments; IMF Article IV staff reports of the respective countries.
Notes: Education funding related to the specific country sectoral definition, relates to general government and where possible external funding has been removed
Other new analysis by Eurodad has also highlighted the significant impact debts burdens are having on Small Island Developing States’ ability to adapt to climate change, where debt payments are dwarfing international climate finance received. In addition, debt burdens also constraining governments whose citizens require urgent assistance due to conflict and climate change induced disasters, such as in Ukraine and Pakistan, both of whom have requested urgent debt relief (to which creditors to Ukraine have recently agreed).
Solutions require collective response, with G20 leadership essential
The pathway to ensuring government debt sustainability is complex, and there is no one size fits all approach. However, collective global action is needed to ensure:
i) There are effective structures for immediate short debt relief and longer debt restructuring.
ii) There is a significant scale-up in access to affordable lending to prevent a worsening debt crisis and enable scaled up financing for development.
iii) Reforms are made to the global tax and trade systems, and wider global financial architecture, to remove barriers that are preventing low and middle-income countries from advancing sustainable development strategies and increasing government revenue.
Whilst the G20 meeting today will not, and cannot, provide immediate solutions to these, it is vital that debt sustainability is front and centre of the agenda, and they resume the leadership role they played in 2020 to drive collective action. A worsening debt crisis risks further global instability and is not in the interests of anyone. Ultimately, the G20 are best placed to spearhead immediate actions, including:
Announcing a return of immediate debt relief mechanisms – There is a clear need to bring back the G20 DSSI and expand the number of eligible countries. It cannot be right that many G20 countries agreed to grant Ukraine DSSI style relief, but are not offering the same to other governments in critical need. Yesterday the US signalled their willingness to bring it back, which other governments should support. Likewise, the G20 could signal intent to ramp up support to the IMF CCRT and ensure it is fit for purpose in supporting governments as they tackle multiple crises.
Fixing failings of the Common Framework – Since the G20 initiated the Common Framework in 2020, they have largely watched on as major challenges to its implementation have unfolded. There is an urgent need for the G20 to draw on past lessons from the Highly Indebted Poor Country (HIPC) initiative and drive reform, including on private creditor participation and breaking down other barriers that are preventing governments applying for relief, such as fears over reduced access to credit.
Step up to ensure access to affordable lending – The G20-initiated review into multilateral development banks’ capital adequacy presented practical recommendations which require political will to implement. Today’s meeting is an ideal opportunity for G20 countries to collectively announce actions on these, such as providing callable capital, willingness to support changes to capital adequacy formulas and providing a critical convening role for key actors. At the same time, there is an urgent need to announce additional support for expedited concessional lending through the IMF and multilateral development banks, through aid and non-aid resources like SDRs. On the latter, slow progress on fulfilling the G20 commitment to recycle $100 billion in SDRs and implement technical solutions to facilitate recycling is robbing struggling countries of desperately needed resources.
The G20 can no longer afford to step back on the global debt crisis, children’s lives and futures across the world are at significant risk from the worsening turmoil being created by it. The world’s lower-income and climate-vulnerable countries must not be forced to choose between protecting and investing in their children or paying off their creditors. The G20 have the power to act, and renewed action can, and must start today.
