Developing Countries Must Be Provided with Debt Relief to Prevent Financial Brink, Preserve Progress, Deputy Secretary-General Tells Development Finance Dialogue
Following are UN Deputy Secretary-General Amina Mohammed’s remarks at the Development Finance Innovation in a Capital-Constrained World Dialogue, in Washington, D.C., today:
It is my pleasure to join you for this necessary and urgent discussion on how to ensure development finance meets the needs of developing countries — ambitions for inclusive growth and sustainable development, in a world facing multiple crises and capital constraints that both slow and limit recovery prospects. I would like us to keep four things in mind today as I make my remarks: scale, urgency, justice and solidarity.
The war in Ukraine, in all its dimensions, is having an alarming impact on a world economy already battered by COVID‑19 and climate change. It is creating a perfect storm of crisis on food, energy and finance, with particularly devastating impacts on developing economies.
According to preliminary analysis by the Global Crisis Response Group, launched by the Secretary-General in mid-March, at least 107 developing economies, home to 1.7 billion people, are severely exposed to at least one of the three global transmission channels in this crisis: food, energy or finance. Sixty-nine of them, some 1.2 billion people, are severely exposed to all three.
An urgent way out must be found to stem the slide and preserve development achievements built over decades [and] to get these countries back on track to recover and continue their journey to sustainable development. This is the foundation for peaceful and stable societies. That way out must provide hope for all and not just some. So far, we are not heading in the right direction.
Systemic inequalities in the global financial system and weakening global solidarity have driven responses that are both incommensurate to the magnitude and scale of the problem and grossly unequal. The result is that the poorest and most vulnerable countries are struggling to keep their heads above water and to ease the burden and provide a quality standard of living for their people. Many developing countries are facing these crises with depleted domestic resources and weaker multilateral policy buffers.
At least 108 developing countries now face new economic shocks with higher debt levels than in 2019. Government debt in developing countries rose from 58 to 65 per cent of gross domestic product (GDP) between 2019 and 2021. The World Bank now predicts that an astounding quarter of a billion people could be pushed into extreme poverty this year, an upwards revision of 77 million, due to the fall-out of the war in Ukraine — and countries’ inability to respond to them.
The self-reinforcing nature of the global shocks witnessed over the past few years, be they health, social, climate, or geopolitical in nature, demonstrate the need to reform a flawed international financial system that is not prepared for systemic and global crises and that has dramatically worsened inequalities.
Yet despite this irrefutable fact, the international community has failed to come together to deliver the support needed at-scale. Vaccine inequity hinders achievement of the World Health Organization (WHO) target of vaccinating 70 per cent of people in all countries by mid-year.
Today, developed countries use 3.5 per cent of revenue to pay interest on their debt, versus 14 per cent of revenue for least developed countries. And while the average interest cost of outstanding debt in developed countries is around 1 per cent, it remains much higher for developing countries.
For example, in 2021, yields in 40 per cent of African bonds exceeded 8 per cent. As a result, developing countries have exhausted their capacity to borrow their way out of crisis. In 2020, this meant that 59 developing countries spent more on external public debt payments than on public health care.
Meanwhile, the expiration of the Debt Service Suspension Initiative at the end of 2021 has left the Common Framework for Debt Treatment as the main debt relief mechanism, despite only three countries having signed up — and that none have seen their debt be successfully restructured.
Without urgent action, this trade-off between investments in debt and investments in people will only increase, feeding the flames of greater civil unrest while undermining prospects for the attainment of a resilient, inclusive, and equitable world.
So, what can we do? Last week, I launched the 2022 Financing for Sustainable Development Report, which was produced by a Task Force of more than 60 international agencies. Several recommendations from the report are relevant for our discussion today.
First, the international community must immediately ensure that countries have the adequate fiscal space and liquidity needed to survive today’s cascading crises. International financial institutions should prioritize flexibility and speed to ensure the timely provision of emergency concessional financing, including grants, while advanced economies should support the immediate re-channelling of special drawing rights to countries in need, including by channelling them through multilateral development banks, which have experience as long-term lenders and deep regional and technical expertise.
Access limits must also be increased and maintained for rapid finance assistance, including by increasing the annual access limits to the Rapid Credit Facility and Rapid Financing Instruments to crisis levels and extending the existing limit to at least 2024.
To increase their lending capacity, multilateral development banks also need capital increases and to make optimal use of their resources and balance sheets. Realizing the full mobilization potential of multilateral development banks will require bold action. The Secretary-General’s Global Investors for Sustainable Development Alliance has developed concrete recommendations for multilateral development banks and development finance institutions to enhance the mobilization of private investment.
Second, rising debt risks must be addressed now to avoid another lost decade of development. In light of the realities of the current moment, the Group of 20 (G20) should reactive the Debt Service Suspension Initiative for two years and reschedule maturity for two to five years.
Efforts are also needed to improve upon the Common Framework for Debt Treatment to ensure that countries can benefit from timely debt restructuring. This includes expanding the Common Framework to highly indebted middle-income countries, calling for timely creditor coordination, and suspending or eliminating IMF (International Monetary Fund) surcharges in 2022.
Efforts are also needed to lower the cost of borrowing for developing and emerging economies, which continue to face disproportionately prohibitive rates, including by fully capitalizing innovative proposals such as the Liquidity and Sustainability Facility for Africa —and replicating it in other regions.
Third, it is necessary to fully align financial flows with the Sustainable Development Goals and the Paris Agreement on climate change. It would be a tragedy if donors increased their military expenditure at the expense of official development assistance. Supporting millions of refugees from Ukraine and elsewhere is critical but should not reduce cross-border support to poor countries in need.
In this regard, it is not too late for the global community to act. At the international level, the Resilience and Sustainability Trust should be swiftly operationalized, while debt-for-climate, nature, and Sustainable Development Gains swaps should be massively scaled up.
Across the board, efforts are needed to go beyond GDP to determine eligibility to finance, particularly given the multidimensional nature of vulnerability in the context of our rapidly evolving and warming world. National planning and donor coordination, including country platforms and integrated national financing frameworks, form part of the solution.
The idea of country platforms to strengthen donor coordination is not new. But to be effective, it will be important that principles of development cooperation effectiveness, reiterated in the Addis Ababa Action Agenda, are at the centre of these platforms — aligning activities with national priorities, ensuring countries are in the lead, strengthening partnerships, and increasing transparency, predictability and mutual accountability.
Integrated national financing frameworks can complement country platforms. An integrated national financing frameworks helps countries ensure that their national development strategies are financed, with the aim of increasing investment, overcoming obstacles, and managing risks.
In 2019, 16 countries committed to pioneering the integrated national financing frameworks approach. Today, that number stands at around 80 countries. Integrated national financing frameworks can lever off the work on countries platforms, many of which have focused on specific sectors, such as the energy sector, to increase policy coherence across different sectors and alignment with the Sustainable Development Goals.
Ultimately, we need to pull developing countries back from the financial brink. The focus should be providing immediate relief through increased liquidity and urgent debt relief. We need to explore innovations that increase the overall supply of finance. And we will need to reform the international financial and debt architecture to meet goals of the 2030 Agenda for Sustainable Development.
Without exaggeration, the decisions today could determine whether the world emerges stronger and more resilient, or whether almost half of humanity is left behind. We must act together, and we must act now. Thank you.