Cutting borrowing costs for poorer countries could release $900bn (£660bn) annually for development, according to a report to the UN secretary general launched in Oslo today. Prepared by Development Finance International (DFI) with Norwegian government support, it argues debt relief could restore funding for services squeezed by escalating repayment demands.
$8tn debt bill crowds out healthcare spending
The G77 developing countries spend a combined $8tn a year servicing debt, equivalent to an average 35% of government spending, the analysis found. Six billion people live in countries where debt service exceeds annual health budgets. Originally reported by The Guardian.
DFI described the situation as "the worst ever debt-provoked development crisis". The pressure isn't simply a balance-sheet problem: money committed to creditors can't also pay for hospitals, classrooms or measures to protect communities from climate disasters.
UN secretary general António Guterres has called for action to release resources for the sustainable development goals (SDGs). His proposals include restructuring debt for the hardest-hit countries and halving borrowing costs for those that need to raise money in financial markets.
Using International Monetary Fund (IMF) data, DFI modelled the effects country by country. Its findings underline the scale of the trade-off: governments face repayment schedules that consume resources they need to meet development commitments, even before another economic shock arrives.
For countries already struggling to fund public services, that leaves little room to respond when borrowing becomes more expensive. Cutting debt servicing costs for poorer countries is therefore central to the report's development argument: relief would let governments redirect money rather than find entirely new revenue sources.
Two debt-relief scenarios yield sharply different savings
Halving borrowing costs for the 33 countries paying the highest interest rates, while reducing repayments to 10% of government revenue for others, could free up as much as $3tn annually. Countries regularly hit by climate crises would be among those covered by the repayment reductions.
But DFI also outlined what it suggested was a more realistic option, excluding wealthier developing countries such as China. That approach could release $917bn a year, enough for beneficiaries to more than double their social spending.
Average savings would equal 9% of annual GDP in beneficiary countries. These are modelled gains, not funds that governments already have.
"If the international community can deliver comprehensive debt relief to countries which need it, and reduce the debt service burdens of many more, it will provide the fiscal space needed to fund the current SDGs," the Development Finance International report said.
The distinction matters: the broader scenario shows the potential scale of relief, while the narrower proposal concentrates attention on countries where the report considers a deal more realistic.
That doesn't make either outcome automatic. The estimates describe what coordinated changes to borrowing costs and repayment burdens could unlock, rather than a package creditors have agreed to deliver.
Private creditors complicate a new debt-relief push
Campaigners are urging Labour to use the UK's G20 chairmanship next year to advance debt relief. The report says burdens now exceed those before the Make Poverty History campaign in 2005, when Tony Blair's government used the G8 summit in Gleneagles to secure debt-relief pledges.
Today's creditor mix is harder to negotiate. Direct bilateral government lending has become less prominent, while private lending has grown.
The IMF warned that investors such as hedge funds expose borrowers to higher interest rates and currency shocks, including from conflict in the Middle East. Such inflows "tend to be more volatile than bank flows and are increasingly sensitive to global risk conditions", the International Monetary Fund warned.
Higher borrowing costs linked to the Iran war, which has restricted oil supplies and pushed up inflation, are expected to intensify the pressure in coming months.
Max Lawson, head of inequality policy at Oxfam, said: "Why should paying debts to rich bankers in London or New York be more important than feeding hungry people or getting kids in school? Global south governments were already on their knees, and are now facing a huge new food crisis caused by the [Iran] war. They need massive debt relief and they need it now."
Whether cutting borrowing costs delivers development funding will depend on international political agreement and creditor participation as mounting pressures test governments' already severely stretched finances.
Originally reported by The Guardian. View original.