Debt crisis and SDGs

Business Recorder

10-07-2025

'Today, 3.3 billion people live in countries that spend more on interest payments than on health, and 2.1 billion live in countries that spend more on interest payments than on education. Interest payments on public debt are therefore crowding out critical investments in health, education, infrastructure, and climate resilience. Governments—fearful of the political and economic costs of initiating debt restructurings—prioritize timely debt payments over essential development spending. This is not a path to sustainable development. Rather, it is a roadblock to development and leads to increasing inequality and discontent. – An excerpt from the recently published 'The Jubilee Report', which was chaired by economics Nobel laureate, Joseph Stiglitz
Developing countries, including Pakistan, are under serious debt crisis. More than accumulating the debt itself in recent years while the pace of new debt being taken has significantly slowed down, the main problem due to over-board exercise of austerity policies has been in the shape of interest payments on debt.
At the same time, the existential threat of climate change crisis has been fast-unfolding, which has created greater resilience, and sustainable development needs. Adopted in 2015, the Sustainable Development Goals (SDGs) with target for 2030, include important goals on health, education, and resilience. Lack of growth due to pro-cyclical austerity policies, and also high debt repayment needs have not allowed both low-income, and middle-income developing countries to spend adequately on meeting SDGs. Hence, the application of pro-cyclical policies has negatively affected economic growth, and with-it revenues, and exports and, in turn, have not allowed creation of effective debt repayment capacity in developing countries.
Moreover, lack of multilateral finance under weak multilateral spirit, and absence of an effective sovereign debt restructuring framework – especially one that meaningfully involves the private sector, given significant increase of debt from private sources over the last decade or so –has made it difficult for developing countries to restructure external debt, so that rather than facing huge challenge of gross external financing needs – like in the case of Pakistan – external debt is repaid in a sustainable manner, which means not postponing or reducing much needed spending for enhancing growth, or meeting SDGs.
A recently published seminal 'The Jubilee Report: A blueprint for tackling the debt and development crises and creating the financial foundations for a sustainable people-centered global economy' has shed very meaningful light on the fast-approaching global debt crisis situation, how it has negatively impacted growth, development-, and resilience related expenditure. Moreover, it also points out how pro-cyclical policy has exacerbated the debt, and development crisis facing developed countries.
Highlighting the issue with policies that has led to this debt crisis, in terms of the various stakeholders involved, the Report pointed out: 'All sides share responsibility for the current debt situation: Debtor governments that borrowed too much, often at too high rates and too short maturities, failed to adopt capital account regulations to deter destabilizing speculative flows, prioritized the short term, and now are not doing all they could be to resolve their debt crises—typically shying away from the international 'fights' that may be required to protect their citizens from excessive demands of their creditors; creditors that provided excessive financing, seeming experts on risk that knew they were lending under conditions that implied that there was a significant risk of default, but now, when the risks have materialized, are reluctant to provide the relief needed to restore debt sustainability; and international financial institutions (IFIs) whose lending policies enable these behaviors on both sides— policies that put off dealing both with today's debt and with the underlying flaws in a global financial architecture that repeatedly gives rise to such development and debt crises while an entire generation in the affected countries loses hope for development. There is also a broader reason for the debt situation—the international community failed to address the flaws in the global financial architecture and to enable and embolden the IFIs to take stronger measures to prevent and resolve these recurrent debt and development crises.'
At the same time, the few countries that did go for restructuring, including Sri Lanka, have not had the luck of a revisionist recovery plan from multilateral institutions like International Monetary Fund (IMF), who continue to prescribe pro-cyclical policies. At the same time, there has been no urgency shown by the global financial architecture, especially from the leading developed countries to throw their weight behind serious reform of not only multilateral financial institutions, but to also push them for improving the sovereign debt restructuring framework.
Globally renowned economist, Jayati Ghosh, in her June 16 'Institute for Political Economy' (IPE) published article 'Alternative debt restructuring strategy' pointed out in the case of Sri Lanka – but which is applicable for all debt distressed countries, including Pakistan – the need of a better policy response both from the country itself, and the IMF, without which the country is unable to spend appropriately towards meeting SDGs, and even ran the risk of defaulting again.
In this regard, she advised the following in the article: '[1] Foreign Exchange-Based Targeting: Link debt repayments to a fixed share of current foreign exchange earnings, rather than GDP, to reflect real capacity to pay. [2] Set Realistic Repayment Benchmarks: Cap total debt servicing (interest + principal) at a sustainable level—e.g., no more than 5% of current foreign exchange earnings. [3] Avoid Costly Global Borrowing: Reduce and eventually eliminate reliance on volatile and high-interest global financial markets from 2028. [4] Protect Economic Sovereignty: Resist IMF performance monitoring of domestic fiscal and monetary policy. [5] Join the Global South Debtors' Coalition: Collaborate with like-minded nations to pursue collective negotiation strategies and advocate for structural reform of the global financial system.'
In addition to the advice given above — which Pakistan should also include as much as possible its debt management, and growth strategy, including spending on SDGs – both the IMF, and the developing countries need to move away from the pro-cyclical policy stance, and towards adopting a counter-cyclical policy.
The issue with following this policy has been meaningfully explained by 'The Jubilee Report' as 'The current debt and development crisis in developing countries is not an isolated fiscal misfortune. The fact that excesses of debt have afflicted so many countries, with debt and development crises occurring so often suggests that are systemic causes and consequences. …One defining characteristic of this dysfunctional system is that, for developing countries, capital flows are procyclical: During global financing booms, money floods in; in busts, it flows out even more quickly. Successive phases of promising development cannot be counted on to continue. More often than not, a positive phase is a prelude to a painful contraction, especially when they are financed by debt. For advanced economies, the reverse holds true. In times of crisis, capital flows toward them. In a storm, safe financial 'havens' become all the more attractive. This asymmetry enriches the rich, impoverishes the poor, and reinforces itself, as the procyclical movements weaken the poor and the countercyclical movements strengthen the rich, making them an ever more attractive safe haven.'
It needs to be understood that pro-cyclical policy is due to neoliberal policy – which in addition to other things, in this particular aspect means adoption of weak regulation of capital movements and, for instance, not applying 'Tobin Tax' which, according to Britannica, is a '…proposed tax on short-term currency transactions… to deter only speculative flows of hot money — money that moves regularly between financial markets in search of high short-term interest rates' — and austerity-based policy – where policy rate is primarily used to control inflation, and creates a competition for foreign portfolio investment (FPI) between developing and developed countries, while institutional issues on the aggregate supply are not addressed, although those are significantly important in terms of determining inflation. Rising interest rates in turn mean higher debt repayment needs, and lower investment capacity at the back of increase in cost of capital. The same Report pointed out in this regard: 'Since 2015, gross capital formation in low-income countries has stalled at just 22 percent of GDP — well below the 33 percent average for middle-income countries.'
Here, the Report highlighted important factors behind poor performance of sovereign debt restructuring framework as 'Sovereigns in distress must negotiate with a complex array of creditors—public and private, bilateral and multilateral—without a guiding framework that ensures equitable, efficient, and timely resolutions. The creditors often have long experience in such renegotiations… [and] are typically well-diversified and can withstand long negotiations… Against this backdrop, new concerns are emerging that further complicate the landscape of sovereign debt and development finance. First, the emergence of major new creditors has made restructurings more complex. Since the 2010s, developing countries have increasingly borrowed not only from traditional Western governments and IFIs, but also from bond markets and non-Paris Club official creditors. …Second, the turn toward blended finance and public-private partnerships (PPPs) (sometimes argued to be substitutes for official development assistance) has created a new wave of contingent liabilities—typically opaque, procyclical, and difficult to restructure. These mechanisms promised to mobilize large volumes of private capital by using public resources to insure investors against losses. In practice, however, they have largely failed to deliver transformational investment…'
With regard to solutions, the same Report highlighted weaknesses in recent initiatives, and called for launching a second 'Highly Indebted Poor Countries Initiative' (HIPC); where the first one was launched in 1996. The Report indicated in this regard: 'The international community has a moral obligation to advance a 'HIPC II.' …Various recent initiatives such as the Common Framework for Debt Treatments and the IMF's Global Sovereign Debt Roundtable have fostered important dialogue among creditors. While some progress has been made — such as through the Debt Service Suspension Initiative — these measures remain insufficient to deliver the level of debt relief required to restore debt sustainability, a necessary condition for resolving the current debt and development crisis. A HIPC II would require a multilateral framework, supported by governments, that is accompanied by changes in lending policies and the legal frameworks of countries or States in which sovereign debt is issued.'
More broadly, the Report advised the following policy actions to deal with the current global debt crisis: 'Members of the Commission [that produced 'The Jubilee Report'] recognized recent efforts to address the debt crisis. For instance, some members recommend extending the Debt Service Suspension Initiative that was established in 2020 and expired in December 2021, which allowed low-income countries to suspend debt service payments to official bilateral creditors. The Initiative could be expanded to also include middle-income countries facing comparable distress, ensuring that more countries have the fiscal space they need to invest in recovery and resilience. Where debt is clearly unsustainable, treatment must go beyond suspension to reduction. …Debt-for-nature swaps can be a valuable tool in the development finance toolbox. By allowing countries to redirect a portion of debt repayments toward conservation projects such as biodiversity protection or climate adaptation and mitigation, they offer a dual dividend: fiscal relief and environmental stewardship. However, to fulfil their promise these instruments must be well designed. They should not restrict development priorities, such as by diverting scarce resources from urgent needs like poverty reduction or investments in infrastructure. Transaction costs should be kept low, and private intermediaries must not extract excessive profits. Above all, these agreements must be transparent and aligned with national development strategies. Importantly, debt-for-nature swaps are not substitutes for restructurings of unsustainable debts.'
Copyright Business Recorder, 2025