Developing countries around the world are burdened by high levels of external debt owed to foreign creditors and international financial institutions. This debt not only impacts economic growth and development but also affects poverty reduction efforts and political stability. Restructuring third world debt can provide meaningful relief and support more sustainable growth over the long term.
Many developing countries have accumulated significant debts over past decades due to a combination of factors:
These debts now consume large portions of government budgets in interest and principal repayments, limiting spending on healthcare, education, and anti-poverty programs. According to Jubilee USA, nearly 60% of low-income countries were either in debt distress or at high risk in 2021.
Debt restructuring involves changing the terms of existing debt agreements to provide the borrowing country with some type of relief. This usually takes the form of:
This reduces short-term liquidity pressures and frees up government resources for more productive uses. The key benefit is providing breathing room for countries to get back on a path of inclusive and sustainable economic growth.
According to the Center for Global Development, well-designed restructuring programs can promote poverty-reducing growth in four main ways:
However, debt restructuring initiatives also come with risks and criticism:
The track record of past restructuring programs in developing countries is mixed:
So while restructuring third world debt holds meaningful potential, outcomes remain uncertain. Strong creditor-borrower engagement along with major domestic reforms are vital to success. The COVID crisis has also reminded us that external shocks can rapidly reverse economic progress in poorer countries.
In October 2020, the G20 launched the Common Framework for Debt Treatments to coordinate debt relief for low-income countries during the pandemic. Three countries – Zambia, Chad and Ethiopia – have applied thus far.
The G20 sustainability framework introduced in late 2022 also aims to promote more responsible lending and borrowing practices on all sides.
Other experts have called for more extensive use of “debt-for-climate” and “debt-for-nature” swaps that cancel debt in exchange for borrowing country commitments to environmental programs. For example, The Barbados Debt Relief and Blue Economy Transformation Initiative negotiated by Prime Minister Mia Mottley in 2022 exchanged debt relief from creditors for Barbados’ pledge to marine conservation efforts.
While debt restructuring is not a panacea, it remains an important tool for unlocking growth and stability in heavily indebted developing countries. The key is implementing such programs alongside domestic governance reforms and social spending initiatives that improve conditions for private investment and benefit those in poverty. With visionary leadership and creditor-borrower collaboration, debt relief can play a vital role in promoting inclusive, resilient and sustainable recoveries worldwide.
Please fill out the form below to receive a free consultation, we will respond to
your inquiry within 24-hours guaranteed.