Developing countries are in urgent need of debt relief. As of end of the 2024, 35 low-income countries were either in debt distress or at high risk of it. But even countries that are not in debt distress face mounting pressures, with rising debt service costs exacerbated due to the effects of the pandemic, the invasion of Ukraine, and the tightening of monetary policy that followed. The UN Trade and Development reports that many developing nations spend significantly more on debt repayment than on essential services like healthcare or education. The main reason is that they borrow at interest rates 2–4 times higher than those in developed countries, like the United States, and 6–12 times higher than in Germany. Such high rates severely constrain their ability to invest in development projects.  

The international financial architecture further exacerbates this issue because it is highly asymmetrical and not fit for purpose–captured by and working in the interests of a narrow set of players.  

The FfD4 negotiations present a critical opportunity to reform this system. The outcome of this process should include concrete commitments, clear language, and an implementation strategy that directly addresses the needs for urgent debt relief for low-income countries. 

How does the current FfD4 draft address the issue of sovereign debt? 

The Zero Draft of the FfD4 Outcome Document has relevant content that addresses several critical areas of debt and debt sustainability. The proposals are structured under four main sub-sections: 

1. Sustainable and responsible borrowing and lending, as well as debt crisis prevention: This part focuses on the early stages of the debt cycle. 

2. Immediate provision of debt relief: This section stresses the urgent need to provide debt relief and of providing the fiscal space necessary for countries facing debt challenges to invest. 

3. Improving debt restructuring processes in the absence of sovereign debt restructuring mechanisms: This part looks at debt architecture for debt crisis resolution. 

4. Reform of Debt Sustainability Analysis (DSA) and Credit Ratings of Sovereigns: This section looks at revising both the International Monetary Fund’s and World Bank’s DSA methodologies and sovereign ratings. 

Throughout the debt and debt sustainability section, the Zero Draft of the Outcome Document distinguishes two sets of countries facing debt challenges: those that are highly indebted (measured by debt-to-GDP ratios) and are facing solvency problems, and those that face high debt servicing costs and liquidity constraints. The draft also calls for DSA reforms, specifically to "more accurately distinguish between solvency and liquidity" . 

What gaps remain in the FfD4 approach to sovereign debt? 

First, distinguishing between insolvent and illiquid countries in a binary way makes little sense in the sovereign realm. Upholding this distinction creates a conceptual issue and has important practical implications: The language seems to suggest that a debt relief initiative should be focused exclusively on countries facing liquidity challenges (item 49a). Meanwhile, countries facing debt distress seem to be “covered” under the third heading, on the reform of debt architecture. Yet, both groups require urgent debt relief.  

Second, while it is encouraging to see support for expanding and operationalizing an initiative like the Debt Sustainability Support Service (DSSS), it is unclear whether the DSSS is the best initiative for other developing countries, aside from the Small Island Developing States (SIDS) for which it was specifically designed. Considering the extensive political bargaining required to adopt any debt initiative–the Common Framework for Debt Treatment being a prime example–and the challenging geopolitical context, it’s difficult to foresee this endorsement  withstanding the upcoming drafting negotiations.  

Third, the call for support lacks expressions of firm commitments. Merely stating that the FfD4 “supports” certain objectives is not enough – the document must contain concrete language on what this support entails in practice. A good example is the call for increased capacity building for developing countries to better manage their public debt (item 48b). To address this, the language used needs to make it explicit that more bilateral and multilateral grants will be provided to deliver such capacity building.  

Finally, the draft seems, at times, to reinvent the wheel, proposing new initiatives rather than focusing on the implementation of existing ones. An example is the call for new principles for sovereign lending and borrowing (item 48a). Such principles already exist. New principles are not needed; rather the existing ones must be enforced.  

How can these gaps be addressed?  

Endorsing the development of an ambitious debt relief initiative for developing countries is paramount. However, it is unrealistic to expect consensus on the technical design of such an initiative during the FfD4 negotiations. Thus, the draft should include the following four elements:  

1. Strong language calling for establishing an ambitious G20-approved debt relief initiative for countries unable to invest in development due to debt distress, or because of high debt servicing costs and liquidity constraints. 

2. A call for the establishment of an independent expert group to the G20, with representation from debtors, Paris and non-Paris Club creditors, and other relevant stakeholders, to propose and build consensus towards a debt relief initiative, under consideration of the Debt Sustainability Support Service, and analogous initiatives. This independent expert group should also conduct a broader stakeholder process and be transparent about its recommendations to the G20.  

3. The expression of "support" should accompany funding commitments, such as capacity building initiatives for greater parliamentary oversight. 

4. Greater focus on implementing, operationalizing, and enforcing proposals, such as the principles for sovereign lending and borrowing, rather than reinventing the wheel. 

The Financing for Development conference is a chance to rethink how the international financial architecture can address sovereign debt challenges and how countries can borrow responsibly to finance development. But to make it happen, the outcome document must go beyond acknowledging the problem. Concrete and actionable commitments are essential to ensure meaningful progress on the debt relief countries urgently need. 

Banner photo: Credit to IISD/ENB | Mike Muzurakis