The Global South Debt Crisis How 52 Countries Are Spending More on Debt Payments Than on Healthcare and Education Combined

Expert Comment — Global Programme

2026 07 08

TThe global debt crisis that began with Sri Lanka’s default in 2022 has spread to encompass 52 developing countries. Total developing country external debt has reached $3.9 trillion, and debt service payments absorb an increasing share of government revenues. For the first time in history, developing countries are spending more on debt payments than on healthcare and education combined. The international financial architecture designed to address sovereign debt crises has proven inadequate for the scale of the current crisis. The Paris Club, the IMF lending framework, and collective action clauses in bond contracts were designed for a different era.

The G20 Common Framework for debt treatment, agreed in 2020, was intended to provide a coordinated mechanism for restructuring developing country debts. The framework has been tested in Chad, Ethiopia, and Zambia, with results that can at best be described as mixed. The processes have been slow, uncertain, and insufficient to restore debt sustainability. China, which has become the world’s largest official creditor, has resisted meaningful haircuts on its loans. The Common Framework’s failure reflects a fundamental design flaw: it requires voluntary cooperation among creditors who have different interests and different legal frameworks.

The human cost of the debt crisis is measured in lives. Countries that spend more on debt payments than on healthcare cannot afford vaccines, medicines, or hospital equipment. Countries that spend more on debt than on education cannot afford teachers, textbooks, or school buildings. The debt crisis is not merely a financial problem. It is a development emergency that threatens to reverse decades of progress in poverty reduction, health, and education. The international community has a moral as well as an economic imperative to address the debt crisis more effectively.

China has become the world’s largest official creditor, lending over $1 trillion to developing countries through its policy banks, state owned enterprises, and commercial lenders. Chinese lending is opaque, with limited information about the terms, conditions, and amounts of individual loans. The lack of transparency makes it difficult to assess the sustainability of debt in countries that have borrowed heavily from China. China has resisted participation in the G20 Common Framework for debt restructuring and has insisted on bilateral negotiations rather than multilateral processes. China’s approach to debt restructuring reflects its broader approach to international development: transactional, bilateral, and focused on Chinese interests rather than international norms. The integration of Chinese lending into the international debt architecture is one of the most important challenges facing the global financial system.

Private creditors, including bondholders and commercial banks, hold a significant share of developing country debt. The coordination of debt restructuring among private creditors is even more difficult than coordination among official creditors. Bondholders are numerous, diverse, and have different legal rights depending on the jurisdiction and governing law of their bonds. Collective action clauses in bond contracts, which allow a supermajority of bondholders to agree to restructuring terms that bind all bondholders, have become standard in new bond issuances but are not present in older bonds. The holdout creditor problem, in which a small number of creditors refuse to participate in a restructuring and seek full repayment through litigation, has complicated several recent debt restructurings. The reform of sovereign debt restructuring mechanisms to address the holdout problem is an important priority.

The link between debt and climate change is increasingly recognised as a critical dimension of the debt crisis. Developing countries that are most vulnerable to climate change are also those with the highest debt burdens. The need to invest in climate adaptation and mitigation while servicing high levels of debt creates an impossible choice. Several proposals have been advanced to address the climate debt link, including debt for climate swaps, climate resilient debt clauses, and the inclusion of climate contingencies in debt restructuring agreements. The implementation of these proposals has been limited. The integration of climate considerations into sovereign debt management is one of the most important innovations needed in the international financial architecture.

The reform of the international debt architecture is essential for addressing the current crisis and preventing future crises. The G20 Common Framework needs to be strengthened, with clearer timetables, automatic participation requirements, and more generous debt treatment. China needs to be brought into the multilateral debt restructuring process. The use of collective action clauses needs to be expanded. The IMF needs additional resources and new instruments for debt restructuring. The debt restructuring process needs to be faster, more predictable, and more equitable. The reform agenda is ambitious, but the human cost of inaction is measured in lives.

The current debt crisis is not the first developing country debt crisis and it will not be the last. The 1980s debt crisis, triggered by rising US interest rates and falling commodity prices, led to a lost decade for Latin America. The 1990s Asian financial crisis spread from Thailand to Indonesia, South Korea, and beyond. The 2000s saw debt relief for heavily indebted poor countries through the HIPC Initiative and the Multilateral Debt Relief Initiative. Each crisis has generated innovations in debt restructuring, but the underlying vulnerabilities remain. The current crisis is different in important respects: the scale of Chinese lending, the role of private creditors, and the impact of climate change all create new challenges. The historical pattern suggests that debt crises are recurring features of the international financial system and that each crisis requires new approaches and new instruments.

The debt crisis is having a devastating impact on progress towards the Sustainable Development Goals. Countries that spend more on debt payments than on healthcare cannot achieve universal health coverage. Countries that spend more on debt than on education cannot achieve universal primary education. The SDGs require significant increases in public spending in developing countries, but the debt crisis is forcing spending cuts. The United Nations estimates that developing countries face a $4 trillion annual financing gap for the SDGs. The debt crisis is widening this gap and threatening to reverse decades of progress. The international community must recognise that debt sustainability and sustainable development are inextricably linked. Progress on the SDGs requires progress on debt restructuring.

The IMF plays a central role in the debt restructuring process. The IMF provides financing to countries in debt crises, conditions its lending on policy reforms, and assesses the sustainability of debt in its debt sustainability analyses. The IMF’s role has been criticised from multiple directions. Some argue that the IMF’s conditions are too strict and impose unnecessary austerity on countries already facing severe economic challenges. Others argue that the IMF’s lending is too generous and enables countries to avoid necessary reforms. The IMF’s debt sustainability analyses have been criticised for being too optimistic about countries’ ability to repay their debts. The IMF is undertaking reforms to address these criticisms, but the pace of reform is slow and the challenges are substantial. The effectiveness of the international debt architecture depends on the effectiveness of the IMF.

Civil society organisations have played an important role in advocating for debt relief and holding governments and creditors accountable. Organisations such as the Jubilee Debt Campaign, the Debt Justice Network, and ONE Campaign have raised public awareness about the debt crisis, lobbied governments for reform, and supported civil society organisations in debtor countries. The role of civil society in the debt crisis is essential for ensuring that the voices of affected communities are heard and that debt restructuring processes are transparent and accountable. The international community must support the role of civil society in debt advocacy and ensure that civil society organisations have the resources and access they need to participate effectively in debt restructuring processes.

The path forward for addressing the global debt crisis requires action on multiple fronts. The G20 Common Framework must be strengthened, with clearer rules, faster processes, and more generous debt treatment. China must be integrated into the multilateral debt restructuring framework. Private creditors must participate in restructuring on comparable terms. The IMF must have the resources and instruments necessary to support countries in crisis. Debt sustainability analyses must be realistic and forward looking. The link between debt and climate must be addressed through innovative instruments such as debt for climate swaps. Civil society must be engaged in debt advocacy and accountability. The reform agenda is ambitious, but the consequences of inaction are unacceptably high. The human cost of the debt crisis is measured in lives.