Financing for Development Conference
Ideas to reform debt policy
and why the Fourth International Conference on Financing for Development (FfD4) is the right place to do so.
D+C, AI generated
What could be financed instead of debt: Many countries spend more on interest payments than on education. This article is part of a focus section on development finance accompanied by a series of AI-generated images.
The debt situation of developing countries has worsened in recent years, not least because of multiple crises like the Covid-19 pandemic, the war in Ukraine and the climate crisis. The International Monetary Fund (IMF) and the World Bank estimate that over half of low-income countries are heavily indebted. Ten years ago, it was only 30 %.
These crises have created an urgent need for substantial public spending. At the same time, they have also changed the macroeconomic environment and led to higher interest rates. Developing countries have to shoulder interest costs on external borrowing that are three times higher on average than those of industrialised countries (Spiegel and Schwank 2022). This limits their access to international financial markets and raises debt service payments.
The money that developing countries use to pay their debts is lacking elsewhere – particularly for investments in sustainable development. According to the United Nations, in 2023, 54 developing countries, including 25 African countries, spent over 10 % of their state revenue on net interest payments (UNCTAD 2024). Experts estimate that in 2024, 92 countries paid more for external public debt service than for investments in the UN Sustainable Development Goals (SDGs) (OECD 2025).
The Fourth International Conference on Financing for Development (FfD4) in Seville (Spain) in June offers an opportunity to reform global debt policy. Given that a broad spectrum of interest groups will attend, there is an opportunity to discuss solutions and arrive at a common understanding of possible reforms. It would be particularly beneficial to, first, improve existing instruments and, second, establish uniform principles for a global approach to debt.
Improving existing instruments
The G20 Common Framework for Debt Treatments is currently the only instrument to comprehensively restructure state debt. The G20 set up this shared framework in 2020. It lays out guidelines for restructuring and relief for heavily indebted low-income countries.
An important goal was to include all G20 countries. Previously, debt restructuring was primarily agreed upon within the Paris Club, which consisted only of western industrialised countries. Other G20 countries like India, China and Saudi Arabia were excluded. In the past 15 years, however, these countries have become important creditors to developing countries.
Despite the introduction of the G20 guidelines, so far only four debtor countries have taken part: Chad, Ethiopia, Ghana and Zambia. The main reasons for low participation are the typical challenges of debt restructuring mechanisms. These include coordination problems between creditors, a lack of transparency about the debt situation and unequal participation from various creditor groups. According to a World Bank study from 2021, close to 40 % of low-income developing countries had either never published debt data on their websites or had not updated their data in the previous two years.
Greater transparency
A key reform that ought to be made to the G20 Common Framework is increasing the transparency of debt agreements: Information about debt agreements should be better coordinated between creditors and debtors (Berensmann 2024). The zero draft outcome document of the FfD4 calls for the creation of a central international debt data registry (UN 2025). This registry could be housed in the Bank for International Settlements (Berensmann 2024).
Furthermore, incentives should be created for private creditors to take part in restructurings. These could include the implementation of anti-holdout laws, which limit the ability of creditors to disrupt negotiation processes and outcomes. Since some middle-income countries are also heavily indebted, countries with low middle incomes should receive access to the G20 Common Framework, too (Berensmann 2024).
To combat the debt and climate crisis at the same time, restructuring should be better linked to development and climate goals:
- Debtor countries should be obliged to use debt relief to create fiscal leeway to reach the SDGs (or climate goals in particular).
- The World Bank and IMF debt sustainability analysis should better incorporate climate risks – and the volume of a country’s investments in climate adaptation.
- Climate-resilient Debt Clauses should be integrated into sovereign bond contracts. This means that countries could defer debt payments if a previously defined climate shock or natural disaster occurs (Berensmann 2024). The zero draft outcome document of the FfD4 also mentions clauses that allow countries to defer debt service in times of crisis.
Uniform principles for managing debt
The FfD negotiations are an inclusive process involving many public and private actors. For that reason, the FfD4 conference in Seville offers a good opportunity to develop universal principles for sovereign lending and borrowing and to make recommendations for their implementation. The zero draft outcome document of the FfD4 suggests creating a working group for this purpose.
These principles should demonstrate, for example, how negotiations over debt restructurings can be led, how information can be exchanged and how fair treatment of creditors can be ensured. They would apply to all market participants before and during a debt crisis and should also be incorporated into other instruments, like sovereign bonds. They could help solve debt crises by improving cooperation between creditors and debtors and showing how restructurings work. The G20 Common Framework should also be connected to these universal principles.
Two main problems stand in the way of implementation: first, many sets of principles currently exist alongside each other, some of which have simply been proposed and others of which have already been implemented. They include the principles of the United Nations, the G20, the OECD and the Institute of International Finance, a global association of international financial institutions. The application of different principles to actions before and during a debt crisis creates uncertainty for both creditors and debtors, however. Thus, a unification of principles based on existing recommendations is needed.
Second, there are currently no appropriate incentives to encourage creditors and debtors to adhere to such principles. This problem could be addressed by:
- publishing a list of countries that adhere to these principles,
- encouraging rating agencies to consider compliance with these principles in their macroeconomic analyses,
- incorporating these principles into sovereign bond contracts and
- including these principles in the lending policies of the international financial institutions, like the IMF (Berensmann 2024).
As a broad-based and inclusive process, the FfD4 conference offers an excellent opportunity to discuss and initiate reforms to the global debt architecture. Against the current backdrop of geopolitical tensions, this chance should not be wasted.
Links
Spiegel, S., and Schwank, O., 2022: Bridging the ‘great finance divide’ in developing countries. Brookings Institution. brookings.edu/articles/bridging-the-great-finance-divide-in-developing-countries/
UNCTAD, 2024: A world of debt report 2024.
unctad.org/publication/world-of-debt
Berensmann, K., 2024: Reforming the global debt governance system: Exploring effective and feasible policy solutions. IDOS. FfD4 input elements paper_Debt and Debt Sustainability_IDOS__Kathirn Berensmann_15-10-2024
Berensmann, K., 2022: How could a new universal code of conduct prevent and resolve sovereign debt crises?
Proposals for design and implementation. Journal of Economic Surveys, Wiley.
onlinelibrary.wiley.com/doi/full/10.1111/joes.12509
UN, 2025: FfD4 Outcome document – Zero draft.
financing.desa.un.org/document/ffd4-outcome-document-zero-draft
OECD, 2025: Global outlook on financing for sustainable development 2025.
oecd.org/en/publications/global-outlook-on-financing-for-sustainable-development-2025_753d5368-en.html
Kathrin Berensmann is a senior researcher and project leader at the German Institute of Development and Sustainability (IDOS).
kathrin.berensmann@idos-research.de
