Sovereign Debt Crisis in the Global South

GS2 – International Relations

Context:

At the FfD4 Summit in Seville, the doubling of the Global South’s share in global debt—from 16% in 2010 to 30% in 2023—highlighted systemic flaws in the international financial system.

Current Trends
  • Debt Servicing Surge:
    Developing countries spent $1.4 trillion on foreign debt in 2023—the highest in two decades.
  • Growing Fiscal Strain:
    Over 54 countries now spend more than 10% of their revenues on interest payments, with Africa being most affected.
  • Development at Risk:
    In many LMICs, debt servicing costs exceed investments needed for climate action and basic services.
Structural Inequities in Global Financial Systems
  • Discriminatory Lending Rates:
    Developing countries pay 2–4 times more in borrowing costs than the US, and 6–12 times more than Germany.
  • Bias in Credit Ratings:
    Credit rating agencies treat the Global South as inherently “high-risk”, costing Africa $24 billion in interest and $46 billion in lost lending, as per UNDP.
  • Inequitable Pandemic Spending:
    • Global North: Spent 12% of GDP on COVID recovery.
    • Emerging markets: Managed only 6%.
    • Low-income countries: Just 3%.
  • Skewed Access to Climate Finance:
    Heavily indebted nations struggle to secure climate finance, worsening developmental and ecological disparities.
Implications
  • Human Development Impeded:
    Debt burdens are shrinking budgetary space for education, healthcare, and infrastructure, stalling progress on SDGs.
  • Climate Inaction:
    Nations cannot fund adaptation and mitigation efforts, heightening vulnerability to climate crises.
  • Eroded Sovereignty:
    Governments are increasingly forced to choose between repaying debt or serving citizens’ needs.
Way Forward
  1. Reform Credit Ratings:
    Demand transparency and accountability, incorporating climate vulnerability and development priorities in credit evaluations.
  2. Establish UN-Led Sovereign Debt Mechanism:
    Introduce a globally coordinated restructuring process to prevent perpetual debt cycles.
  3. Expand Climate-Specific Concessional Finance:
    Mobilise affordable finance for LMICs to pursue climate goals without worsening debt.
  4. Strengthen South-South Finance Cooperation:
    Promote alternative instruments and regional resilience funds free from conditionalities of the Global North.
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