By Marina Zucker-Marques and Kevin P.Gallagher
For three long years now, the Group of 20 (G20) Common Framework has been unable to put debt-distressed countries on a path toward debt sustainability and development.
The Common Framework is failing on three levels. It excludes middle-income countries, does not compel all creditors to engage and the level of relief that has been provided is out of sync with the financing needs of global development goals and Paris Climate commitments. While much has been said of the need for private creditors to participate in debt relief, one longstanding issue with the Common Framework is the lack of involvement from another key creditor: multilateral development banks (MDBs).
Although the Common Framework specifically notes that MDBs should participate in debt relief, MDBs have yet to present a concrete plan on how they will participate in solving the debt crisis. While the Paris Club countries have resisted the idea, China has long advocated for MDBs to share the burden and reiterated the call at the recent BRICS Summit.
MDB participation is essential if meaningful debt relief is to be provided. Our new report outlines how this can be done in a way that benefits all involved, including by providing meaningful debt relief, strengthening MDBs’ bottom lines, and preserving their preferred creditor ratings.
Despite the misconception that China is the primary creditor for debt-distressed countries, the reality is that bondholders and MDBs are by far their main creditors. Of 61 countries identified as in need of debt relief, 27 of them owe more than 50% of their Public and Publicly Guaranteed (PPG) debt to multilateral creditors, as shown in Figure 1. This means that if MDBs do not participate in debt relief, these countries will not have enough debt restructured to restore debt sustainability. What is more, given that many low-income countries mostly borrow from MDBs, also shown in Figure 1, a lack of participation from MDBs will especially affect the most vulnerable countries.
Figure 1: Debt Stock Exposure of New Common Framework Countries to Official Multilateral Creditors by Income Group as Share of Total External PPG Outstanding Debt
MDBs justify sitting on the sidelines by saying that their highly concessional lending terms are essentially ‘ex-ante’ debt relief. Yet, China’s overseas lending is also in part concessional. Even so, in our estimations of how to create fair burden sharing among creditors, MDBs could account for a relatively smaller share of losses to compensate for their concessional lending terms. But if MDBs aren’t a part of the picture, the remaining creditors – like China and private bondholders – will be obliged to shoulder a greater burden of losses.
As debt distress is costly, debt relief now will save MDBs on their bottom lines later. As part of their concessional policies, MDBs often consider the debt distress classification of their clients. This is a welcome policy to avoid debt overhangs for individual cases, but once debt crises become widespread – as they are now, shown in Figure 2 –a substantive number of countries become eligible for grants instead of affordable credits. Hence, MDBs would lose one of their funding sources – repayments from clients – and as a result, their total lending volume could be compromised.
Figure 2: Number of IDA-only Countries by Debt Distress Classification, as per IMF/World Bank Debt Sustainability Framework, 2013-2023
Additionally, participating in debt relief need not threaten MDBs’ credit ratings. First, financial institutions and donors can replenish the Debt Relief Trust Fund, which dates to the Heavily Indebted Poor Countries (HIPC) Initiative era and pools resources for debt relief efforts, or allocate a dedicated portion of funding to the World Bank’s International Development Association (IDA). Second, by increasing MDB equity – including through a capital increase, and rechanneling of Special Drawing Rights or Sustainable Future Bonds – MDBs could use but a fraction of their precautionary balances for debt relief. Finally, the establishment of an international financial transaction tax, as recently called for at the Africa Climate Summit, could not only help manage unsustainable capital flows but also generate revenue for debt relief.
Neither MDBs nor China are to blame for the debt crisis, but they both must be part of the solution. MDB action is not only feasible but can benefit all parties, including themselves.
Marina Zucker-Marques is a Post-doctoral Researcher at SOAS, University of London and affiliated with the Debt Relief for a Green and Inclusive Recovery Project. Previously, she worked at the United Nations Conference on Trade and Development (UNCTAD) in the Debt and Development Finance Branch. Follow her on X: @MarinaZucker.
Kevin P. Gallagher is the Director of the Boston University Global Development Policy Center and a Professor of Global Development Policy at the Boston University Frederick S. Pardee School of Global Studies. He is a Co-Chair Member of the Debt Relief for a Green and Inclusive Recovery Project. Follow him on X: @KevinPGallagher.