Breaking the Vicious Cycle of Debt and Climate Crisis: Debt Relief for a Green and Inclusive Recovery

It is now widely recognized that emerging market and developing economies (EMDEs) excluding China need to mobilize $3 trillion annually – $1 trillion from external sources and $2 trillion domestically – by 2030 to meet shared climate and development goals. These investments are not only essential to avoiding the relative catastrophic economic, social and environmental costs of inaction, but can also transform the world economy into one that is low-carbon and more equitable and resilient.

But on the opposite trend, EMDEs are currently slashing essential basic services and forgoing investments in education, health and climate resilience to meet record levels of external public debt service. What is more, given high interest rates, mobilizing much needed investments at high costs could quickly build up debt vulnerabilities and deepen a debt crisis. With the Brazilian G20 Presidency, there is a crucial opportunity to reshape the system to better serve the needs of developing countries. 

In a new Think20 (T20) policy brief, Marina Zucker-Marques, Maria Fernanda Espinosa and Jörg Haas propose significant reforms to make the G20 Common Framework for Debt Treatments more efficient, inclusive and oriented towards climate and development goals. 

Policy Recommendations:

• Public and multilateral creditors should grant significant debt reductions that can bring a distressed country back to debt sustainability and put the country on a path to achieving development and climate goals. 
• Private and commercial creditors should grant commensurate debt reductions alongside public creditors with a fair comparability of treatment. Creditors should be compelled to enter negotiations through a combination of carrot and stick incentives.
• Credit enhancement should be provided for countries that lack fiscal space, alongside a temporary debt service suspension to lower the cost of capital and increase fiscal space for investing in a green and inclusive recovery. 

This comprehensive approach could resolve the debt crisis in EMDEs while forging a fairer global financial system. The G20 has a critical role in implementing these solutions to help avoid a potential lost decade and, instead, enable a decade of action.