The burden of unsustainable debt and crippling interest bills has been high on the international agenda for some years. Declarations from the UN secretary-general, the pope, the president of the African Union, the managing director of the IMF, Nobel laureates, and a variety of other national and international leaders have stressed that addressing the widespread and growing debt problem facing low- and middle-income countries (LMICs) is an urgent priority. And yet, progress has been disappointingly limited, while the magnitude of the problem continues to grow.
Two factors lie behind this. First, unlike in the past, this time around there is not a single generalized debt problem that warrants a single wholesale solution. Different groups of countries face different types of debt distress and need solutions tailored to their specific situations. Second, while many of the proposed solutions are technically sound, they fail the political realism test. In today’s international politics, fiscal pressures in creditor countries and a reduced commitment to development assistance stymie any initiatives that require major new outlays of donor funds. In a paper published earlier this year, my CGD colleagues and I set out the criteria that need to be met for any debt proposal to move forward in the current context.
Building on that paper, colleagues from the Rockefeller Foundation, CGD, and a number of other policy and research institutions have been exploring what international actions could meaningfully improve the prospects for heavily indebted countries. The resulting proposal—A Growth and Investment Reset—is outlined in a paper released today. We hope the proposal will be advanced in discussions at next week’s IMF-World Bank Annual Meetings in Bangkok and taken up as part of the agenda of the UK G20 Presidency in 2027.
It is important to be clear about what this proposal won’t achieve. It does not aim to help the handful of countries currently undergoing debt restructuring or whose unsustainably high debt stocks make restructuring unavoidable. Most of them are being treated under the Common Framework, which, despite recent improvements, remains cumbersome, slow, and unpredictable. Proposals to improve the Common Framework have been set out elsewhere, and implementation will require agreement and compromise among the principal creditors. Nor will this proposal help the subset of fragile and conflict-affected states that also have high levels of debt. Their ability to embark on ambitious reform and investment programs to accelerate growth will remain severely compromised until their political and security situations have stabilized.
Where this proposal can help is in easing the liquidity constraints imposed by high debt service, which hold back growth in many LMICs that stand ready to undertake the policy reforms and investments needed to accelerate it. These countries are currently trapped in a low-growth equilibrium, where high debt service crowds out investment for growth and social stability, while a share of the new financing from multilateral lenders goes toward repaying official bilateral and private creditors that are reducing their exposure. The proposal responds to this through coordinated action on three fronts:
- An ambitious and credible program of policy reforms and investments to deliver accelerated growth in the participating country
- A surge in international financial institution (IFI) financing to underpin this ambitious growth strategy; this financing would be both affordable and long-term to reflect the nature of the reforms and investments that it enables
- A commitment by official bilateral creditors to maintain their net exposure in the country for the duration of the program. Private debt would be refinanced where it is unsustainably expensive
According to research done for the Rockefeller Foundation, up to 40 LMICs could be eligible to participate in such a “Reset.” Countries would be considered as they develop credible growth strategies that go beyond existing policies and investment plans.
By relying on the IFIs to provide the surge in additional financing, this proposal minimizes the budgetary implications for creditor countries. And by making growth the ultimate objective, it moves the conversation toward a more broadly shared goal than debt relief for its own sake. Even so, hurdles remain. The IFIs will need a clear signal from their major shareholders to embark on any large increase in financing, alongside a combination of shareholder support and internal financing decisions to make that funding available on affordable terms. Borrowing countries will need to commit to reforms and investments that may not be politically easy. And bilateral creditors will need to make commitments on maintaining exposure when many of them have been pulling funds out in recent years. The upcoming UK Presidency of the G20 provides a promising forum for building political consensus on these issues.
The most compelling argument for the proposal is the cost of inaction. To quote from the paper: “We are not in a systemic solvency crisis yet. . . but if we continue on as is, this liquidity crisis. . . will eventually turn into the more familiar insolvency crisis—one that is far harder and far more costly to fix.”
