Public debt has soared to all-time highs and is now greatly outpacing global GDP (Gross Domestic Product), a new report published by the UN Global Crisis Response Group warns. In 2022, global public debt (which includes both government domestic and external debt) reached a record-breaking $92 trillion, of which 70% is owed by developed countries and 30% by developing nations. This makes it increasingly complicated for developing nations to invest in their development and slows down progress on achieving the Social Development Goals (SDGs).
In the year 2000, global public debt stood at just $17 trillion, meaning that it has risen 500% over the last 20 years while global GDP has risen only three-fold in the same span of time. Furthermore, the report warns that the number of countries facing extremely high levels of debt has risen from just 22 countries to 59 in 2022, and nearly half of all countries now have public debt that exceeds 60% of their GDP.
Furthermore, although only 30% of global public debt is owed by developing countries, their rate of public debt is increasing much faster than in developed countries, and there are now an estimated 3.3 billion people who live in nations that are forced to pay more on servicing debt than on education or healthcare.
Developing nations caught in a vicious debt trap
For developing nations, over the past decade, there has been a worrisome increase in the share of external public debt that is owed to private creditors. This trend has been observed across all regions of the globe, with 62% of developing countries’ total external public debt now owed to private creditors. This is in contrast to 2010 when only 47% of developing countries’ external public debt was owed to private creditors and 30% to multilateral institutions (which typically offer much lower borrowing rates).
Today, countries in Africa are forced to borrow money on average that is eight times higher than the rate paid in Germany, and this is even without considering the costs of exchange rate fluctuations. Thus, the exorbitant borrowing costs make it extremely difficult for developing countries to fund investments in their own development, which, in turn, further undermines debt sustainability.
To reverse course on this vicious cycle of ever-increasing debt, the authors of the report recommend that the SDG Stimulus package be adopted by UN member nations, in adherence with the Summit for the Future’s plan to completely reform the international financial and taxation system.
The SDG Stimulus plan
Released by the UN Secretary-General in February 2023, the SDG Stimulus report outlines a plan to help developing countries achieve the 2030 UN Agenda Sustainable Development Goals (SDGs) by mobilizing $500 billion a year in private-sector capital.
Currently, the UN assesses that unsustainable debt burdens, high inflation rates around the world, weak economic growth, tightening monetary and financial conditions, as well as destruction wreaked by unilateral sanctions and the continuing fallout from the Covid-19 pandemic have created a severe risk of reverse progress on achieving the SDGs by 2030.
Of these, the burden of debt overhang is perhaps the greatest threat to developing countries, as half of the world’s poorest countries as well as 25% of middle-income countries, which collectively host the majority of extremely poor people, are at a high risk of financial crisis. Furthermore, the UN predicts that an additional 175 million people are at high risk of entering debt distress by 2030, of which 89 million are women and girls.
The UN Secretary-General’s report warns that a “great financial divide” exists between developing countries and those who are burdened with extreme levels of public debt. For instance, even before the recent sharp rises in interest rates, developed countries were able to borrow from international capital markets at an interest rate of around 1% while least-developed countries were forced to pay between 5-8%. Sovereign bond yields in 14 developing countries are now over 10 percentage points above US treasury yields, and an additional 21 countries have yields over 6 percentage points above US treasury yields.
This high cost of borrowing for developing countries does not just prevent them from investing in the SDGs; it also raises the risk of (new) debt crises around the world. The UN Secretary-General’s analysis found that many countries who have suffered from costly debt crises in the past would have been able to remain solvent if they could have had access to financing at the low rates that wealthier countries enjoy.
Therefore, the proposed solution is the SDG Stimulus, by which up to $500 billion a year in private capital would be made available to developing countries at favorable rates in order to address both short-term urgencies and to make long-term investments into sustainable development.
Although the UN Secretary-General’s report admits that this plan is ambitious, it does state that it is achievable. Furthermore, it casts these reforms as a “win-win” for the world as the social and economic rates of return on sustainable development in developing countries is “very high.”
However, the report does admit that an urgent political will by wealthy nations and the governing bodies of international financial institutions to take concerted and coordinated steps to implement the SDG Stimulus proposal in a timely manner is needed.
International financial architecture reform
Beyond the coordinated and urgent political will needed to adopt the recommended measures of the SDG Stimulus plan, the United Nations admits that a key goal of the upcoming Summit of the Future (to be held in 2024) must be a complete reform of international financial architecture in order to address both the sky-high rate of growing global public debt and to achieve the Sustainable Development Goals (SDGs).
The current international financial architecture system was formulated in the United States at the end of World War II, but the UN believes that it is now “failing” a stress test of historic proportions. The UN believes this is because the system was designed by, and for, wealthier countries at a time when neither climate risks nor social inequalities (including gender inequality) were considered challenges to sustainable development. Furthermore, the current system has become increasingly at odds with the needs of the world today, making the existing international financial architecture “entirely unfit for purpose,” according to the United Nations.
Perhaps the biggest drawback of the existing financial system is that it has been unable to support the mobilization of financing for investments needed to achieve the SDGs because it is “plagued” with inequities, gaps, and inefficiencies, including:
- Higher borrowing costs for developing countries
- Vast variations in countries’ access to liquidity in times of crisis
- Dramatic underinvestment in pandemic preparedness and climate action
- Repeated sovereign debt crises and volatile capital flows, which have dire consequences for sustainable development in poorer countries
Furthermore, the UN warns that international tax architecture has also failed to keep pace with current global needs as wide-scale tax evasion restricts developing nations’ ability to finance investment in their own sustainable development.
To address these issues, the UN is calling for a complete reform of international financial architecture, including:
- Transforming the governance of international financial institutions
- Lowering the cost of sovereign borrowing and create a lasting solution for countries facing debt distress
- Reducing debt risks to support SDGs
- Massively scaling up climate and development financing
- Strengthening the global financial safety net (and provide liquidity to countries in need)
- Resetting the rules for the financial system to promote “stability with sustainability”
- Redesigning global tax architecture for inclusive and equitable sustainable development
In short, the UN is warning that, unless the entire global financial and tax system is radically reformed, developing countries will continue to be swamped by record-high levels of public debt, and the world will fall short of the investment resources needed to achieve the Sustainable Development Goals.
