CDP Background Paper No. 58

By CDP Working Group on external debt

This paper discusses the escalating external debt distress and financial constraints faced by many least developed countries (LDCs) and other developing countries, particularly in the light of the COVID-19 pandemic, rising interest rates, high food and energy prices and currency depreciation. It stresses the importance of a comprehensive financing strategy to address the large scale of investment needs of developing countries. The paper underscores the urgent need for short-term solutions such as multilateral financing and debt renegotiation to tackle the current debt crisis, while simultaneously establishing long-term solutions to prevent future debt crises. It calls for improvements in the contractual approach with private creditors, including enhanced collective-action clauses and a more predictable framework for debt restructuring. To support vulnerable economies, additional SDR allocations contingent on well-defined economic shocks and re-channelled through multilateral development banks, can play an important role. At the same time, there is a need to efficiently allocate concessional finance for climate adaptation and mitigation and for developed countries to transfer additional resources to compensate for historical carbon debt to developing nations. It is also important that developing countries implement preventive measures to strengthen debt management to avoid future debt crises.