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Equipping countries to manage debt and investment more sustain- ably through a ‘one-stop shop’ on sustainable debt advice and capacity building.
erally hurts developing and low-income countries. Weak macroeconomic and structural fundamentals in developed countries put pressure on interest rates, creating a triple prejudice for emerging market economies, especially LMICs. Investors can make attractive returns in advanced economies without exposure to emerging market risk; G7 countries have no fiscal space to transfer resources; and rising cap- ital costs imply a correspondingly higher cost for emerging markets, many of which contracted the loans when capital cost sig- nificantly less. AN OPPORTUNITY TO RESET GLOBAL FINANCE To address the debt burden of emerg- ing market economies, therefore, the G20 must address issues of global imbalances. The push to implement sound macro- economic policies, including restoring fiscal discipline in the US, reviving domes- tic consumption in China and accelerating innovation in Europe, will reignite global growth, reduce debts and deficits, and ultimately bring down the cost of capital – especially for developing countries. Developing countries need to improve their domestic resource mobilisation, create the conditions to attract private capital and advocate for the successful issuance of new special drawing rights at the International Monetary Fund to com- plement reform actions of the developing countries. With global collective effort, the refrain of LMICs in debt distress may begin to abate. South Africa’s G20 has effectively highlighted the issues of emerging econ- omies and low-income countries. As the G20 presidency moves to the US in 2026, the issues of the developed economies will hopefully receive more attention, and together a solution to relaunch global growth can be found. The solutions exist. What the world needs is the will.
BRIDGING THE FISCAL DIVIDE These measures appear straightforward. Yet the current international context and the fiscal position of the advanced econo- mies make implementation thorny. First, advanced economies do not agree on the need for additional spend- ing on resilience, notwithstanding the dramatic and increasing climate events. Recent earthquakes in the Philippines followed by historic floods is only one example; another is scorching hot sum- mers in Italy reshaping the nature of its summer economy. Excluding the costs of building resilience or rebuilding econ- omies is like a household preparing a budget but omitting half the electricity cost because daylight lasts for 12 hours through the year. Second, with high and rising debt bur- dens in G7 countries, coupled with high debt service costs, interest payments alone are now 4% of gross domestic product and exceed aid budgets. In 2025, Japan’s annual interest payments will exceed $400 billion – over ten times its whole aid budget. China, which provided invest- ment flows into developing countries in the 2000s, now faces contracting growth, due to structural issues within its own economy exacerbated by tariff wars with the US. Third, the current geopolitical com- petition is increasing capital costs and undermining long-term global growth. The almost $2 trillion in subsidies pro- vided by the US, the United Arab Emirates and China to accelerate competition in artificial intelligence is diverting capital from developing countries to developed economies. Some LMICs benefit, but the sub-optimal allocation of resources gen-
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Scaling proven approaches to tackle debt, nature and climate together, through expanding the use of contingency clauses in debt contracts and standardising and scaling up ‘debt for nature’ and ‘debt for climate’ swaps; Unlocking private capital via new mechanisms and instruments with guarantees from multilat- eral development banks and other development finance institutions;
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With growth slowing and families struggling to make ends meet, it is an appalling injustice when money ends up in the hands of criminals – money that could be spent on much-needed global growth and development” // VERA SONGWE Vera Songwe is chair and founder of the Liquidity and Sustainability Facility and a senior non-resident fellow at the Brookings Institution with Global Economy and Development and the Africa Growth Initiative. She co-chairs the Independent High Level Expert Panel on Climate Finance, launched by the 27th and 28th Conferences of the Parties to the United Nations Framework Convention on Climate Change. She co-authored the Finance for Climate Action report and the report on Raising Ambition and Accelerating Delivery of Climate Finance. She co-chaired the Task Force on a Global Mobilization against Climate Change for Brazil’s 2024 G20 presidency.
lsfacility.org
61 globalgovernanceproject.org
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