For many developing countries, the ongoing conflict in the Middle East is yet another shock to already fragile public finances. Higher energy, food, and fertilizer prices are worsening balance-of-payments pressures, raising inflation risks, and forcing difficult tradeoffs between debt service and essential public spending. While discussions to end the conflict are ongoing, the timeline for restoring normal trade flows remains unclear, and lingering uncertainty will keep prices high.
Even before the conflict, many developing countries were already facing stubbornly high debt stocks and record interest burdens, driven by a combination of repeated shocks, large fiscal deficits, high borrowing costs, and insufficient concessional financing. The current toolkit for providing relief has repeatedly struggled to respond with the speed, scale, and differentiation that vulnerable countries need. For countries facing insolvency, restructuring remains slow and costly. For countries facing liquidity pressures, the existing approach offers too little affordable long-term financing and few tools to ensure that new support creates the necessary breathing room. As the economic fallout from the conflict continues, actors in the debt ecosystem should use this moment to recognize the gaps in the current architecture and identify necessary reforms.
Fortunately, there is no shortage of creative proposals, thanks to a growing body of recent reports and expert commissions. The challenge now is to determine which of these ideas can make the greatest difference for countries experiencing debt pressures, and which can realistically be advanced in the current political and financial environment. Our new paper applies that lens, identifying two conditions that are essential for translating ideas into action. First, proposed solutions must deliver meaningful benefits for a targeted subgroup of countries facing similar debt challenges and financing constraints. Second, they must be reconciled with what is feasible in today’s constrained funding and geopolitical environment.
On the first point, recent experience shows that there is not a single developing-country debt problem—and therefore there will not be a one-size-fits-all solution. Any proposal must be clear about which problem it is trying to solve, for which countries, and on what time scale. Our paper organizes proposals around two distinctions: whether they target liquidity or solvency challenges, and whether they address current crises or strengthen countries’ future resilience (Table 1). Current liquidity proposals, for instance, seek to create breathing room so that new financing supports adjustment, investment, or essential spending rather than debt service. Current solvency proposals focus on making restructuring faster, more predictable, and less costly. Future-oriented reforms aim to build flexibility into debt contracts or expand crisis-response tools to reduce the risk that future shocks tip countries into illiquidity or insolvency. This framework helps move the debate from a long list of proposals to a clearer assessment of what each idea is designed to do, which countries it would help, and which initiatives could be complementary.
Table 1. Illustrative framework for categorizing reform proposals
| | Present cases | Future cases |
|---|
| Liquidity | New concessional money that supports growth rather than debt service - Create a refinancing facility to ease debt service burdens
- Implement a new Debt Service Suspension Initiative (DSSI)
- Improve the World Bank’s guarantee facility to lower the cost of new debt issuances
- Expand and standardize debt-for-development swaps
- Condition international financial institution (IFI) support on securing positive net flows from other creditors, ensuring that new official financing supports country needs rather than repaying existing creditors
| Rapid response to create liquidity when future shocks hit - Scale standardized debt service pause clauses across creditor groups that automatically defer payments when there is an exogenous shock of a certain magnitude
- Recapitalize and reform IFI trust funds to provide liquidity support during crises (e.g., the IMF’s Catastrophe Containment and Relief Trust)
|
|---|
| Solvency | More predictable and timely creditor negotiations that reduce the burden of restructuring - Make the Common Framework faster, more transparent, and user-friendly to incentivize countries that need it to seek debt restructuring
- Create a fast-track Common Framework window for the poorest countries without market access
- Expand the perimeter of the Common Framework to include middle-income countries
- Reform creditor committees to hold parallel consultations and/or negotiations between official and private creditors
- Have the IMF provide technical support or use “good offices” to convene technical discussions
- Enact reforms in New York and London to address holdout creditors and ensure equitable burden sharing between private and official creditors
| New debt obligations that are more flexible in future restructuring - Scale contractual enhancements (e.g., majority voting provisions)
|
|---|
On the second point, proposals must recognize and satisfy the prevailing political constraints. Technically sound proposals are unlikely to move forward if they depend on large new bilateral grant contributions, trigger opposition from either the US or China, fail to account for the incentives facing borrowers and creditors, or lack the necessary political backing at the IMF, World Bank, or other relevant fora. Any serious proposal should answer a basic set of implementation questions: who pays, which countries would actually use it, how official and private creditors would be brought in, and where the political support for implementation would come from.
The paper’s annex applies this framework to many of the most discussed recent proposals, summarizing what each is intended to do, how it could be implemented, and the key constraints that it would need to overcome. Our aim in this paper is not to push any specific initiative, but to help structure the debate so policymakers and experts can move toward a shared reform agenda that the international community could realistically adopt and advance.
Moving toward that shared agenda will require more work in the near term, including deepening the analysis of which countries need which tools, developing the most promising proposals in greater operational detail, testing them with borrowers and creditors, and identifying the institutions and political processes through which they could be taken forward. While US Treasury Secretary Scott Bessent has indicated an interest in advancing debt transparency and restructuring issues through the G20 this year, it remains unclear whether the US has the appetite to tackle either issue in a way that makes a substantive difference. The UK’s G20 presidency in 2027 may offer a more promising opportunity to take a comprehensive look at the sovereign debt architecture and build support for a reform package. In the meantime, as long as energy and food prices remain elevated, vulnerable countries will face even more compressed fiscal space—and will be left trying to manage those pressures with a toolkit that remains limited.
