Chart of the Week: Three Pillars of Debt Relief for Green & Inclusive Recovery

By Maureen Heydt

In November 2020, the Global Development Policy Center, Centre for Sustainable Finance at SOAS, University of London, and the Heinrich Böll Foundation published a report outlining an ambitious new proposal for comprehensive debt relief in order to jump start a green and inclusive recovery from COVID-19.

The proposal includes mechanisms for involving the private sector and middle-income countries, two groups that historically have not participated in comprehensive debt relief programs.

The proposal consists of three pillars and aims at achieving maximum creditor and debtor participation:

Three Pillars of Debt Relief for Green and Inclusive Recovery

Source: Debt Relief for a Green and Inclusive Recovery, 2020. Graphic design: S. Langer/Feinkost Designnetzwerk.

Under Pillar 1, comprehensive debt relief would be granted by public creditors to eligible heavily indebted countries with an unsustainable debt burden – analogous to, but improving upon, the HIPC Initiative model. These countries would receive debt relief on their bilateral and multilateral debt in order to provide the fiscal space for investment in health and social spending to fight the pandemic and in climate adaptation. Governments receiving debt relief would then align subsequent recovery policies and outlays with the 2030 Agenda for Sustainable Development and the Paris Agreement.

Concomitantly, under Pillar 2, the same group of eligible countries would be granted debt relief by private creditors conditioned by parallel programs with the International Monetary Fund. Private creditors participating in the debt restructuring would swap their old debt holdings with a haircut for new “Green Recovery Bonds.”

As in the case of the restructuring of publicly held debt under Pillar 1, a portion of the reduced debt service burden would then be used for spending on a green and inclusive recovery, with governments aligning their policies and public budgets to the 2030 Agenda for Sustainable Development and the Paris Agreement.

Pillar 3 addresses debt relief for countries that are not heavily indebted but lack the fiscal space to invest in a green recovery from COVID-19. For these countries, so-called debt-for-climate swaps would facilitate raising climate ambitions by allowing for additional actions or investments in climate adaptation or mitigation. The concept could also be scaled up by creating an incentive scheme for the issuance for any new sovereign debt that is sustainability-aligned.

So far, the initiatives put forth by the G20 and others have not gone far enough to deal with the tripartite crises of unsustainable debt, climate change and COVID-19. The three pillars of debt relief for a green and inclusive recovery offers a way forward.