By Kevin P. Gallagher
History is repeating itself, but Western leaders are experiencing a selective memory loss that is preventing learning the lessons of that history.
If developing countries are to mobilize the necessary resources to recover from multiple crises and have a chance of meeting our shared development goals and climate commitments, the G20 Common Framework needs to promote fair burden sharing among all creditors and link debt relief to achieve those commitments. This was done before and must happen again.
Developing countries are experiencing the worst period of debt and fiscal stress in this century at precisely the time when they need to be mobilizing $1 trillion annually in order to meet development goals and climate commitments. According to the United Nations Development Program, the same number of developing countries exceed sustainable debt thresholds as was the case on the eve of the Highly Indebted Poor Countries (HIPC) Initiative—the last major debt relief effort—when debt distress jeopardized the ability of countries to mobilize the necessary resources to meet the UN’s Millennium Development Goals.
According to the World Bank, private bondholders are due 48 percent of debt service payments, followed by multilateral development banks (MDBs) (18 percent), the Paris Club (14 percent), and China (7 percent). Yet, the G20 Common Framework doesn’t compel all creditor classes to engage in debt relief. The Paris Club leads by example. Private bondholders and China point fingers at each other—claiming if just one provides relief, the debtor country will pay the other instead of mounting a recovery. Meanwhile, the MDBs sit on the sidelines.
Leaders of Western-led international financial institutions have lined up to lambast China’s call for MDBs to step up their role. In February, the World Bank’s outgoing President David Malpass accused China of ‘stringing out the process’ and the International Monetary Fund’s (IMF) Kristalina Georgieva said China’s proposal was ‘not possible’.
A quarter century ago during the HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI), the World Bank and other MDBs (the Inter-American Development Bank and the African Development Bank) played leadership roles in debt relief—without jeopardizing their preferred creditor status (PCT) or AAA credit ratings. The MDBs used their earnings and donations to write off the debt of qualifying countries. What is more, the World Bank partially guaranteed newly restructured bonds to compel private bankers to restructure sovereign debt with middle-income countries.
The G20 Common Framework calls on the MDBs to develop options for debt relief without jeopardizing their PCT or AAA ratings, but they have not done so. The World Bank did bump up its lending to poor countries in 2020 and 2021, but that tapered in 2022, despite the fact that a G20 Expert Panel ruled that MDBs could be lending hundreds of billions of dollars without jeopardizing their credit ratings.
The MDBs could mobilize their unused balance sheets to provide debt relief without hurting PCT and AAA ratings. This could be supplemented with a small portion of the hundreds of billions of Special Drawing Rights sitting on the balance sheets of Global North countries. As in the past, the MDBs could also guarantee restructured private sector and commercial debt as a carrot to compel the private sector and China’s commercial banks to come along, while allowing for lending into arrears by debtors.
The United States is the largest shareholder at the World Bank and hand-picks the World Bank president. The U.S. can test if China is simply trying to stall the process by offering to exchange MDB participation in debt relief for China’s commensurate action and linking debt relief to development goals and climate commitments.
If China isn’t bluffing, the whole world will benefit.
Kevin P. Gallagher is the Director of the Boston University Global Development Policy Center and Professor of Global Development Policy at the Frederick S. Pardee School of Global Studies at Boston University. He is the co-author of the 2022 book ‘The Case for a New Bretton Woods.’ Follow him on Twitter: @KevinPGallagher.