Low-income countries are being crippled by unsustainable debt. Many governments now spend more servicing their debt repayments than they do on their healthcare and education systems. Clearly, the international debt architecture is failing. Despite $130 billion of debt cancellation in the last jubilee year, today developing countries find themselves trapped in a far harsher cycle of debt, because the international community has not addressed the root causes of the problem.
There are some staggering facts from the World Bank’s recent International Debt Report in December 2024 that found that last year these countries spent an astronomical $1.4 billion to service foreign debt of which $406 billion was in interest payments alone. Debt servicing is expected to make up 55% of the budgets of low-income countries budgets in Sub-Saharan Africa this year.
If you or I spent over 55% of our income on paying off debt I’m sure you’d agree that that would be an unsustainable state of affairs.
Moreover, 61% of all global sovereign debt is owed to private creditors, like banks, hedge funds and asset managers. In 2023 alone, private creditors took $68 billion more in interest and debt repayments from low-income countries than they had actually lent to them.
What makes the system unjust is that if a low-income country seeks debt relief after defaulting, there is no legal obligation that compels private creditors to agree to any debt relief agreements reached by government creditors. In fact, private creditors can simply take these countries to court if they cannot continue to repay their debt. There is no legally binding mechanism to make them behave in good faith.
These private credit schemes are proving to be very lucrative deals for private creditors and very damaging to low-income countries. As such, tackling private debt is a vital part of debt cancellation for debt distressed countries.
The G20 accept that some debt is unsustainable and have sought to write off debt owed to these vulnerable countries by setting up a common framework that debt distressed countries can apply to for debt relief. The debt owed comes in three forms: bilateral debt (debt owed to the other countries) or debt owed to financial institutions, like the International Monetary Fund and then there is debt owed to private creditors. Whilst Governments and international financial institutions reached agreements with debt distressed countries like Zambia and Chad private creditors have ignored the spirit of the G20 framework and have either dragged their heels or demanded higher sums than other creditors or else just not negotiated at all.
Considering that usually most of the debt owed by debt-distressed countries is to private creditors and that there is nothing to compel private creditors to agree debt relief something needs to be done to overcome this impasse. One solution is to limit the amount that private creditors can recover in UK courts if a debt distressed country defaults on its payments. As most of the debt owed is in the forms of bonds issued in the UK then this would be powerful tool to encourage private creditors to cooperate with debt relief negotiations.
In my debate on debt cancellation I also made some other suggestions to tackle unsustainable debt in developing countries.
Reforming the governance of international financial institutions like the IMF would prevent the issuance of debt bailouts with conditions that trap countries in a cycle of debt repayments rather than allow them to invest in their infrastructure – when countries like Ghana and Sri Lanka are on their 17th IMF bailout something has to change.
Greater transparency through public debt registers detailing which countries owe debt to what private creditors would make Governments accountable and limit their scope to deal with exploitative private lenders without scrutiny from their people.
Allowing debt distressed countries who have been the victim of a natural disaster like storm Beryl have their debt servicing payments automatically cancelled would also be an act of humanity to allow those badly hit countries get back on their feet and provide life-saving assistance to those in need.
The fact that 25 years after the Jubilee 2000 campaign successfully ensured that $130 billion was written of in debts to 36 low-income countries, we are in a worse situation than before is pause for thought. It is time to deal with the root causes of this and end this vicious cycle of debt once and for all.
25 years after the Jubilee 2000 campaign, many low income countries remain trapped in a punishing cycle of debt
