From South Africa to the United States: How two G20s can address the issues of debt and fiscal stress constraining global growth

Despite a generation of relief initiatives, persistent debt distress in low- and middle-income countries must be a cause for concern for all. Either the world now has a stubborn illness or the cure has not worked efficiently. There is a third possibility: the care
givers themselves are down with the flu. South Africa’s G20 presidency has provided a platform to discuss this issue, with South Africa providing a bridge between the developing countries and the G7 and G20. In all these settings, at least a third of the countries suffer from some form of fiscal stress. Can South Africa’s G20 find consensus on a way forward?

The scale of the debt crisis problem is staggering: developing countries paid a record $1.4 trillion to service their foreign debt in 2023, with interest payments surging to $406 billion – a 20-year high nearly a third more than the previous year. The Jubilee Report, the United Nations Secretary General’s report for the International Conference on Financing for Development in Seville and the Healthy Debt for a Healthy Planet report all offer suggestions for tackling the debt crisis sustainably. The biggest impediment is the pace of implementation and the compounding challenges facing countries. Slow implementation of the G20 Common Framework for Debt Treatments has discouraged many countries from restructuring their debt. Without fiscal space for long-term productive investments, they are stuck in a low-growth, high-debt equilibrium state.

Collectively these reports call for:

• Mainstreaming nature and climate into macroeconomic and fiscal analysis;
• Reducing debt pressures to enable nature- and climate-related investment;
• 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 multilateral development banks and other development finance institutions;

Equipping countries to manage debt and investment more sustainably through a ‘one-stop shop’ on sustainable debt advice and capacity building.

Bridging the fiscal divide 

These measures appear straightforward. Yet the current international context and the fiscal position of the advanced economies make implementation thorny.

First, advanced economies do not agree on the need for additional spending 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 summers in Italy reshaping the nature of its summer economy. Excluding the costs of building resilience or rebuilding economies 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 burdens 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 investment 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 competition is increasing capital costs and undermining long-term global growth. The almost $2 trillion in subsidies provided 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 generally 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 capital costs imply a correspondingly higher cost for emerging markets, many of which contracted the loans when capital cost significantly less.

An opportunity to reset global finance

To address the debt burden of emerging 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 domestic 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 complement 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 economies 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.