

Low-income countries (LICs) face significant challenges in meeting their development objectives, including the Sustainable Development Goals (SDGs), while at the same time ensuring that their external debt remains sustainable. In April 2005, the Executive Boards of the Fund and the Bank endorsed a joint framework for debt sustainability assessments (DSAs) in low-income countries. The aim of the DSF is to guide borrowing decisions of low-income countries in a way that matches their need for funds with their current and prospective ability to service debt, tailored to their specific circumstances.
Debt is a key component of long-term financing for sustainable development and structural transformation. The most important criterion for the long-term sustainability of debt obligations is that borrowing serves the purpose of increasing productive investment significantly with regard to the average interest rate and maturity of the debt stock. If this condition is met, increases in domestic income and export earnings are expected to cover the servicing of outstanding debt obligations. A second key criterion concerns the contractual conditions of (re-) financing such debt. The more closely lending conditionalities are aligned with the objective of mobilizing debt finance for structural transformation in developing countries, the higher the chances the debt can be serviced promptly.
External indebtedness poses important challenges for developing countries, particularly in a context of floating exchange rate systems, open capital accounts and fast integration into international financial markets. The historical position of developing countries as debtors in foreign currency has been a recurrent source of vulnerability to external shocks, for example during a commodity price slump. This is because the servicing of external debt obligations ultimately requires generating sufficient export earnings (or other forms of income). At the same time, exchange rate volatility is likely to affect the value of debt owed externally and that of export earnings in opposite directions. Thus, a depreciation of the local currency against hard currencies may result in increased export earnings (provided that the fall in the dollar price of local exports is compensated by a commensurate increase in export volumes),) but will automatically imply an increase in the value of foreign-currency denominated debt obligations in local currency.
Against a backdrop of insufficient international public finance flows and limited access to concessional resources,1 developing economies have increasingly raised development finance on commercial terms in international financial markets. They have also opened their domestic financial markets to non-resident investors, and they have allowed their citizens and firms to borrow and invest abroad. While increased access to international financial markets can help capital-scarce countries to quickly raise much-needed funds, it also exposes them to higher risk profiles of debt contracts, i.e. shorter maturities and more volatile financing costs, as well as to sudden reversals of private capital inflows. In conjunction with other exogenous shocks, such as natural disasters, pandemics or episodes of political instability, external debt burdens deemed sustainable by international creditors can quickly become unsustainable.
To build a more sustainable, inclusive and resilient global economy that works for all, we must also reform the international financial architecture with rules that are inclusive, effective and fair. Our inability to address debt challenges in many countries speaks to the glaring inequities that continue to characterize our global economic order.
As well as addressing the weaknesses of the Common Framework for Debt Treatment, we must urgently work toward a more comprehensive solution to sovereign debt challenges. The United Nations can provide a neutral and inclusive venue to bring together all countries, major creditors, debtors and other relevant stakeholders to discuss how to reform the international debt architecture. The 2022 Financing for Sustainable Development Report provides the basis for such discussions.
Halfway into the implementation of the 2030 Agenda, the world is at a watershed. The COVID-19 pandemic has caused a severe setback to the achievement of the Sustainable Development Goals (SDGs). The military conflict in Ukraine and heightened geopolitical risks are threatening the global recovery and pushing the most vulnerable further behind. The international community must join forces to prevent further suffering and loss. We must work together to mobilize all resources needed to secure a path to recovery and sustainable development for all.
The 2022 Financing for Sustainable Development Report identifies a “great finance divide” as a main driver of the divergent recovery. Developed countries were able to borrow record sums at ultra-low interest rates to support their people and economies, but the pandemic response and investment in recovery of poor countries was limited by fiscal constraints.
To overcome this “finance divide” and enhance developing countries’ access to financing for recovery and productive and sustainable investment is key in this time.
ASSIST DEVELOPING COUNTRIES IN ATTAINING DEBT SUSTAINABILITY

Economic growth must be inclusive to provide sustainable jobs and promote equality.
Enhanced transparency and a more complete information ecosystem will strengthen the ability of countries to manage risks and use resources well and in line with sustainable development.
