Extreme debt pressures in low-income countries requires global action, says International Development Committee
10 March 2023
The International Development Select Committee is urging the Government to step forward and ‘unclog the international gears’ of debt relief for low-income countries shackled by the soaring costs of servicing debt.
In a new report, Debt relief in low-income countries, MPs say the situation is ‘bleak’. Without sustained and effective intervention by the international community to tackle their debt distress, the development impacts of spiralling debt could have a ‘catastrophic’ impact, they warn.
Creditors to low-income countries fall into broadly three groups: multilateral creditors (international financial institutions such as the World Bank), official creditors (individual countries who hold debt on a bilateral basis) and private sector or commercial creditors (such as commercial banks and private bondholders). The relative scale of lending by private creditors and official creditors such as China has increased rapidly in recent years. The total volume of lending by public Chinese institutions has tripled since 2011, and China is now the largest official creditor in more than half of lower-income countries.
Low-income countries are spending more on debt servicing as a proportion of Gross National Income than at any point in at least the past 30 years. The amount of debt repayments that African countries are due to make in 2024 and 2025 is six times higher than the total sum those countries expended on servicing debt in 2021, according to evidence to the inquiry from the Foreign, Commonwealth and Development Office. The scale of debt in many low-income countries places significant limitations on their ability to fund basic public services and climate change mitigation.
The diversified nature of the creditor landscape makes it difficult to establish an international consensus on debt relief, say MPs, stressing the importance of strong political leadership. The UK has consistently championed debt relief in recent decades and has taken a leading role in many international initiatives, putting the Government in a strong position to take the initiative.
Participating in debt relief and restructuring is ‘not always an act of charity’, says the report. Securing consensus across creditors for large-scale debt relief is crucial but problematic. The report calls for ‘robust measures’ to bring official bilateral creditors, multilateral institutions, and the private sector together. Establishing a level playing field, potentially through the 2020 Common Framework, could be a solution but cannot be done without engagement by and support from China, warn MPs. Intervention and/or legislation may be required to compel all creditors, including the private sector, to participate in debt relief.
Cuts to the UK’s Official Development Assistance from 0.7% to 0.5% has significantly reduced its ability to support the development of low-income countries, making every penny spent by the UK on ODA count. The Committee calls on Government to acknowledge the interplay between debt and development in foreign policy, such as the next International Development Strategy and the forthcoming updated Integrated Review.
The Chair of the International Development Committee, Sarah Champion MP, said:
“Many low-income countries are in a debt crisis and face impossible trade-offs between servicing soaring debt and funding basic public services. The international community has tried to address debt relief for low-income countries through the ‘Common Framework’ – but progress is limited. Just four countries have applied for debt treatment and none has yet had their debt reduced.
“Meanwhile, there is a human cost: every dollar spent on service debt means a dollar less towards healthcare, the education of women and girls and tackling climate change. These principles are central to the Government’s strategy for international development. It is time for a reset.
“Today we ask the UK Government to use its reputation in this area to step forward and demonstrate global leadership. We look beyond the Foreign Office to His Majesty’s Treasury, where the overall responsibility for UK debt relief policy sits. It has never been more important to make every penny spent by the UK on Official Development Assistance count.”
Image: Pexels-Monstera 194110