Debt relief for a green and inclusive recovery: A policy towards sustainability

DRGR Cover 2021 (1)

Since the heights of the financial market turmoil and the large-scale withdrawal of international capital from developing and emerging economies at the outbreak of the Covid-19 crisis in March 2020, markets have stabilised. Some – but by no means all – developing and emerging economies have seen a return of capital and an easing of borrowing conditions. 

Although a rise in commodity prices and more favourable conditions in bond markets may provide temporary relief, they mask the underlying fact that many developing and emerging economies are facing severe debt sustainability problems. As a result, they will be constrained in their attempts to mobilise the resources necessary for a full green and inclusive recovery that puts them on a track to meet their climate and development goals.

The International Monetary Fund warns of a divergent recovery where the advanced economies and China will see a more robust return to growth due to aggressive fiscal and monetary stimulus and advances in vaccination programmes. In contrast, many developing and emerging countries face protracted recoveries due to a lack of fiscal and monetary policy space and slow progress in vaccinations. A rise in US interest rates could cause severe financial stress for developing and emerging markets, by prompting capital outflows and exchange rate depreciations that would inflate concerning levels of external debt.

Already now, debt service is hampering crisis responses and worsening development prospects across the Global South. In many developing and emerging countries, external public debt service is greater than health care expenditure and education expenditure combined. Thus, instead of being able to support their people to weather the crisis and invest in a sustainable recovery, governments are required to repay their creditors. UNDP estimates that close to US$1.1 trillion is due in debt service payments by developing and emerging countries in 2021 alone. Just 2.5% of that amount would be enough to vaccinate two billion people under the COVAX initiative.

On top of the Covid-19 response, there is an urgent need to scale-up investment in development and climate resilience. Many countries, including many Small Island Developing States, are suffering a triple crisis: debt, Covid-19, and climate change. The service of public debt crowds out room for crucial investments that developing countries need to undertake in order to climate-proof their economies and achieve a green, resilient, and equitable recovery. These investments are urgent: Governments must climate-proof their economies and public finances or potentially face an ever-worsening spiral of climate vulnerability and unsustainable debt burdens

Closed shops and businesses in Delhi during the Covid-19 pandemic

There is a danger that vulnerable developing countries will enter a vicious circle in which greater climate vulnerability raises the cost of debt and diminishes the fiscal space for investment in climate resilience. As financial markets increasingly price climate risks, and global warming accelerates, the risk premia of these countries, which are already high, are likely to increase further. The impact of Covid-19 on public finances risks reinforcing this vicious circle. For instance, debt service in Caribbean countries, which are among the most climate-vulnerable in the world, currently absorbs between 30% and 70% of government revenues, providing little room for supporting livelihoods during the crisis, not to speak of much-needed investments in climate resilience.

The G20 Common Framework for Debt Treatments established in November 2002 will not suffice to tackle the debt problem facing many developing and emerging economies. The G20’s Common Framework urgently needs to be revamped to include middle-income countries and allow for comprehensive debt relief by both public and private creditors oriented around a green, inclusive recovery. The international community, and the G20 in particular, need to agree on an ambitious agenda for tackling the debt crisis and providing countries with the fiscal space for sustainable crisis responses.

Against this backdrop, an international team of economists from SOAS and elsewhere has developed a proposal for comprehensive debt relief for both over indebted low- and middle-income countries, opening an avenue towards a green and inclusive recovery.

Our proposal emphasises the need to enhance the Debt Sustainability Analysis carried out by the IMF and the World Bank to account for climate risks and essential spending needs to scale-up investment in climate resilience and the Agenda 2030 for Sustainable Development. To facilitate restructuring negotiations with private creditors, we propose a Guarantee Facility for Green and Inclusive Recovery managed by the World Bank. 

This Guarantee Facility would provide credit enhancements for new bonds that would be swapped for old debt with a significant haircut (Figure 1). Governments receiving debt relief would develop their own Green and Inclusive Recovery Strategy and commit to reforms that align their policies and budgets with the Sustainable Development Agenda and the Paris Agreement. Some portion of the restructured repayments would be channelled into a Fund for Green and Inclusive Recovery or an already existing national fund that could be used for this purpose. The government would be free to decide how to spend the money from this Fund, as long as it is demonstrably helping a green and inclusive recovery and contributes to achieving the SDGs.

Figure 1: Guaranteeing a green and inclusive recovery*

Our proposal would not only address short-term challenges but also lay the foundation for more sustainable growth and development. It could also provide a stepping stone towards a new global debt architecture that is fair, transparent, and efficient as well as cognisant of the needs of developing and emerging countries.

The G20 need to act now. Neither low- nor middle-income countries can afford a debt overhang during the greatest crisis of generations. They should also not be hamstrung in responding to the unfolding climate crisis during the most important decade for resource mobilisation of our times. The world cannot afford to do too little too late while facing a planetary emergency.


The report, Debt Relief for a Green and Inclusive Recovery: Securing Private-sector Participation and Creating Policy Space for Sustainable Development, has been co-published by the SOAS Centre for Sustainable Finance, Boston University’s Global Development Policy Center, and the Heinrich Böll Foundation.

The report was launched on 28 June 2021 during London Climate Action Week, with keynote addresses by Alicia Bárcena Ibarra, the Executive Secretary of the United Nations Economic Commission for Latin America and the Caribbean; Louis Kasekende, the Executive Director of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa; and José Antonio Ocampo, Professor of Professional Practice in International and Public Affairs at Columbia University’s School of International and Public Affairs. A recording of this event is available here.

*Source: Volz, U., Akhtar, S., Gallagher, K.P., Griffith-Jones, S., Haas, J., and Kraemer, M. (2021). Debt Relief for a Green and Inclusive Recovery: Securing Private-Sector Participation and Creating Policy Space for Sustainable Development. Berlin, London, and Boston, MA: Heinrich-Böll-Stiftung; SOAS, University of London; and Boston University.


Dr. Ulrich Volz is a Reader in Economics at SOAS and Founding Director of the SOAS Centre for Sustainable Finance.

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