The debt crisis won’t be solved by debt relief alone. Developing countries need a growth reset

Debt relief alone cannot resolve the developing nations' debt crisis; they require a growth reset. Leaders like Ghana's President Mahama advocate for global cooperation centered around domestic growth driven by resources and private investment. However, the reality is stark, with more than half of developing countries grappling with liquidity and financing difficulties that hinder basic spending and crucial investment for growth.

Rising global borrowing costs have turned this crisis into a looming threat of full-blown debt crises. While international financial institutions, borrower and creditor nations, and private actors hold the power to prevent crises and help countries pivot to higher, sustained growth, progress has been stagnant. Post-Covid era debts are due soon, while affordable financing sources have disappeared.

International financial institutions have helped avoid defaults, yet they have not provided enough to spur growth or rebuild resilience. Moreover, many G20 creditors have pulled money out, leaving much of the new multilateral funds to repay creditors. China, for instance, shifted from a net provider of finance to a net extractor over the last decade.

Should post-Covid debts mature, most poor countries will net-repay the IMF in 2026, further widening the gap by 2030. Without action, 40 of the world's poorest countries will face a stark decision: cut spending severely, risking growth and human lives, or finance deficits and debt rollovers through expensive private borrowing that could lead to default.

Both options lead to crisis: spiraling debt-to-GDP, stagnant living standards, and increasing social unrest. The IMF has acknowledged this issue. IMF Managing Director Kristalina Georgieva expressed concerns to G20 finance ministers, stating that high refinancing needs and rising debt-service costs constrain many economies, limiting their ability to fund critical spending on infrastructure, health, and education, which curtails growth and ultimately compromises debt sustainability.

The solution doesn't lie in debt initiatives but growth initiatives. Improvements to debt restructuring are crucial for a few nations needing stock reduction, but over 40 countries facing financing and liquidity challenges don't require immediate restructuring. Instead, we need a new toolkit that restores sustainability through dedicated growth support.

Rather than waiting for restructuring, a coordinated and decisive surge in support is necessary. The focus should be on a Growth and Investment Reset rather than piecemeal financing drips. This reset should involve recognizing that supporting growth benefits creditors. Resources at international financial institutions, coupled with innovative financing mechanisms, could cost donors little, far less than the extensive restructuring needed if we don't act.

As finance leaders convene in Bangkok, they should urgently discuss ending the cycle of dependency. High-ambition leaders envisioning a new development model deserve an international financial system capable of enabling them to achieve it. The opportunity is still present, but it is fading rapidly.