Debt relief in low-income countries – Report Summary

Summary

Low-income countries face a debt crisis. The combined effects of the covid-19 pandemic, Russia’s invasion of Ukraine and global inflation have placed low-income countries’ public finances under extreme pressure, and the situation continues to deteriorate. National debt is not an abstract number detached from day-to-day life. It incurs human costs. Every dollar spent by low-income countries on servicing unsustainable debt is a dollar not spent on providing basic healthcare, educating girls or tackling climate change. By diverting money away from vital public services, the opportunity cost of servicing unsustainable public debt can be devastating, and it can also undermine the effectiveness of UK aid.

In the aftermath of the pandemic, the international community sought to address the debt crisis through a new debt relief initiative: the ‘Common Framework’. Unfortunately, the Common Framework has stalled. Only four countries have applied for debt treatment under the Common Framework, and none has yet seen a reduction in debt. A global effort is required to deliver effective debt relief involving not only official bilateral creditors and multilateral institutions, but the private sector. However, private lenders and debt holders have little incentive voluntarily to engage in debt relief schemes or unilaterally to provide debt relief. Robust measures are necessary to facilitate the participation of all creditors. The UK is uniquely placed to tackle these issues, because of its international influence, its legal system and its track record of promoting positive change.

The financial capacity of the UK to help low-income countries through overseas aid has been diminished by cuts to the Official Development Assistance (ODA) target. However, by creating an effective debt relief system and supporting low-income countries to put their finances on a sustainable footing, the UK can have a meaningful impact on the development of low-income countries without spending large sums of money. We urge the UK Government to unclog the international gears of debt relief by demonstrating global leadership and by adopting an interventionist, legislative approach to incentivise and/or compel all creditors, including the private sector, to participate in debt relief.