The Trap of Financial Capital: The Impact of International Bonds on the Debt Sustainability of Developing Countries

A recording of these remarks can be found on YouTube and Tencent Video

H.E. Mr. Rahamtalla Mohamed Osman, African Union Representative to China, 

Prof. Tang Xiaoyang, Chair of Department of International Relations, Tsinghua University,

Distinguished Guests,

I thank Tsinghua University for the invitation to address the Launch Event of “The Trap of Financial Capital: The Impact of International Bonds on the Debt Sustainability of Developing Countries”.

Over the past decade, the sovereign debt of developing countries has built up steadily, with an increasingly diverse pool of creditors. As a result of recent global crises, already vulnerable countries have subsequently been hit by massive shocks.

The COVID-19 pandemic and its related socio-economic impacts exposed and amplified such vulnerabilities through further increases in debt levels, with a significant deterioration in debt sustainability, particularly in developing countries.

According to the World Bank, total indebtedness in emerging and developing economics rose to a 50-year high – the equivalent of more than 250% of government revenues. 60% of the poorest countries are now at high risk or already in debt distress, and more than a quarter of middle-income countries are at high risk of fiscal crisis.

Compared with developed countries, many developing countries faced significantly higher borrowing costs or were completely shut out of markets, hindering their response and recovery efforts. On average, developed countries use 3.5% of revenue to pay interest on their debt, versus 14% of revenue for the least developed countries.

This high level of debt service constrains the fiscal policy space and crowds out public spending in areas critical to the attainment of the Sustainable Development Goals (SDGs), including education, infrastructure, social protection, and green development. As highlighted in the 2022 Financing for Sustainable Development Report, the world now faces “great finance divides”, leaving poorer countries unable to raise sufficient resources and borrow affordably to invest, hindering progress towards the SDGs.

The global community has responded quickly but far from adequately to address the debt sustainability crisis. The Common Framework for debt treatment beyond the Debt Service Suspension Initiative represents a meaningful step forward in the international debt architecture.



However, as noted by the Financing for Sustainable Development Report 2022, progress has been slow and more needs to be done to address rising debt risks and the high cost of borrowing.

United Nations Secretary-General, Mr. António Guterres has urged that “Unless we take decisive action on debt and liquidity challenges, we risk another ‘lost decade’ for many developing countries, putting the achievement of the SDGs by the 2030 deadline definitively out of reach.”  

We need to prevent liquidity crises from becoming solvency crises. In particular, we need to help illiquid countries survive the current crisis.

Once countries become insolvent, it is paramount to restructure their debt quickly and decisively to avoid huge social and financial costs. In this sense, debt transparency is key, as is the coming together of all stakeholders in a coordinated manner, without allowing some to cut side deals or jump the creditors’ queue.

With less than eight years in the Decade of Action to achieve the SDGs, it is critical for debt-stressed low- and middle-income countries to reduce their debt burdens, and restructure their sovereign debt in an effective and fair manner, thereby making peace agreements stronger, societies more resilient, and economics more dynamic.

Today’s event provides us with a timely opportunity to refocus public attention on debt sustainability and to rethink approaches to addressing the debt crises of developing countries.  

I believe that in every challenge lies opportunities. The emergence of new issues related to growing debt creates risks but also opens new possibilities to rethink the global architecture and reach consensus in response to the increasing complexity of debt financing.

For example, in the face of the urgent need for climate action, we call for a new funding model for infrastructure: to crowd-in the private sector, de-risk investments, improve cost recovery and strengthen infrastructure governance, in order to make infrastructure more resilient and sustainable. Multilateral Development Banks can play a bigger role on this.

We should also prioritize innovative mechanisms for sovereign debt restructuring that strengthen debt management in developing countries while supporting affordable SDG financing. A direct connection between debt restructuring and investment in sustainable development through nature/climate swaps could provide opportunities for raising capital in low- and middle-income countries to address environmental and other policy challenges and support green growth.

Debt restructuring should not solely focus on restoring countries to short-term financial stability. There is a need to ensure that debtor countries will be able to invest in long-term priorities such as sustainable development and climate action, which will be crucial for future resilience.

In addition, building upon the capacity of emerging and developing countries, notably improving debt data transparency for better debt management practices, by leveraging the UN’s mandate to better outline the linkages between debt sustainability and sustainable development, can also help to alleviate these crises.

The UN Deputy Secretary-General, Ms. Amina J. Mohammed is promoting a comprehensive SDG Stimulus Plan to be taken up by the G20, MDBs, IMF, etc.

The SDG Stimulus aims to increase SDG-based investments (education, health, digital, green energy, sustainable agriculture) through a major increase of official long-term financing (including MDBs, GPII (G7), etc.) plus a restructuring as needed of existing debts. 

The approach is based on the idea that a major investment push in Africa and other developing regions will boost growth and the transformation to green, digital, knowledge-based development.

It is time for the international community to work together to avoid further expansion of the debt crisis in developing countries and advance solutions for debt resolutions. We must strengthen international cooperation and build more robust multilateral frameworks for debt restructuring that include all key stakeholders.

Ladies and Gentlemen,

Our ambitions to achieve sustainable development and leave no one behind will not be met without the voices and progress of the developing world.

The United Nations is a long-standing forum for preventing and resolving sovereign debt crises. But the international community must go further to create appropriate space for durable and global solutions that support the external debt sustainability of developing countries, beyond this pandemic and towards the implementation of the 2030 Agenda for Sustainable Development.  

I wish you successful deliberations.

Thank you.