Economy 6 min read By Arthur Ellington
Debt Relief Alone Won't Fix Developing Country Crisis, Says Growth Reset Proposal
More than half of developing countries face liquidity and financing challenges, with debt service consuming over 10% of revenue on average. A new Rockefeller Foundation proposal argues that a coordinated growth and investment reset, rather than debt restructuring alone, is needed as finance leaders meet in Bangkok.
More than half of developing countries are grappling with liquidity and financing constraints that make it difficult to fund basic expenditures, let alone the investment needed for growth, according to a new policy proposal from the Rockefeller Foundation. As global borrowing costs soar, the risk is that the current squeeze on fiscal space morphs into a new wave of full-blown debt crises.
The proposal, developed with leading experts, argues that the solution lies not in debt relief alone but in a coordinated growth and investment reset. It comes as finance leaders gather in Bangkok for the World Bank and IMF Annual Meetings, a gathering the authors say must confront the cycle of dependency head-on.
Even before the latest spike in global borrowing costs, most developing countries faced unprecedented debt service burdens. Following a series of global shocks, the average developing country now spends more than ten percent of its revenue on interest on debt, nearly double the burden a decade ago, crowding out investment for growth. In ten countries, interest payments eclipse the entire public investment budget. Debt acts as a ceiling on private investment, further stifling growth.
The results are stark. In the decade to 2015, real per capita incomes in Sub-Saharan Africa grew by about a fifth. In the decade since, they have not grown at all.
The situation is set to worsen. A wall of Covid-era, low-cost external borrowing is coming due just as global borrowing costs have skyrocketed, while sources of affordable financing have evaporated. International financial institutions have been an essential lifeline, providing enough to avoid widespread default, but they have stopped short of what is needed to get countries back to growth or to rebuild resilience. Since G20 creditors have continued to pull money out, much of the new multilateral funds have effectively gone back out the door to pay back creditors. China, for example, shifted from a net provider of finance to a net extractor over the last decade. As post-Covid debts mature, a record share of poor countries net-repaid the IMF in 2026, a drain set to widen by 2030.
Absent action, around 40 of the world's poorest countries will face a stark choice: make further sharp cuts to spending at significant cost to growth and human lives, or finance government deficits and debt rollovers through exorbitant private borrowing that is likely to lead to eventual default. Both roads lead to crisis, with debt-to-GDP spiralling upwards because growth is falling, debts are rising, or both. Living standards stay stagnant and social unrest keeps rising.
The IMF itself has recognised the problem. Managing Director Kristalina Georgieva recently told G20 finance ministers that high refinancing needs and rising debt-service costs are constraining many developing economies, limiting their capacity to finance critical spending on infrastructure, health and education, which undermines growth and, in turn, debt sustainability.
Counterintuitively, for most countries, drawing a line under this crisis does not require a debt initiative but a growth initiative. Long overdue improvements to the debt restructuring process remain crucially important for the handful of countries that need debt stock reduction. But more than 40 countries currently struggling with financing and liquidity challenges do not have debt stocks that require imminent restructuring. Rather than waiting until they need a restructuring, the proposal calls for a new toolkit that restores sustainability through dedicated support for growth.
It envisages a reset that replaces a piecemeal drip of financing with a coordinated and decisive surge. Creditor countries would need to recognise that supporting this surge, rather than using it to exit, is in their interest: growth is the surest way to get repaid. Support would also help countries ensure that future private debts are spent on growth-enhancing investments, more transparently managed and less shock-prone.
The Rockefeller Foundation argues that the reset is not fundamentally a question of money but of political will. Resources already positioned at international financial institutions, combined with innovative financing mechanisms developed over the past five years, mean that the reset could cost donors very little, a small fraction of the large-scale restructuring that will ultimately be needed if action is not taken.
Leaders such as President Mahama of Ghana are building the architecture for a new kind of cooperation, a global reset anchored in country-led growth powered by domestic resources and private investment. As finance leaders meet in Bangkok, the proposal urges them to discuss urgently how to end the cycle of dependency. High-ambition leaders building a new model of development deserve a high-ambition international financial system with the capacity to enable them to get there. The window is still open, but it is closing rapidly.
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