Policy reform is essential to achieving debt sustainability and advancing SDGs

A new report sheds light on the current calls for reforming the Global Financial Architecture to restore debt sustainability and achieve the Sustainable Development Goals (SDGs). The report was conducted by Dr Abel Gwaindepi (Senior Researcher at the Danish Institute of International Studies) and Professor Amin Karimu (Senior Research Fellow at EfD South Africa - EPRU, in response to a call made by the European Parliament’s Committee on Development (DEVE). The analysis has a particular focus on the Global South.

There is global consensus on the need to reform the existing global financial architecture  (GFA). This includes a movement towards a more inclusive, fairer, just and responsive system. There is a clear link between the slow progress towards Sustainable Development Goals (SDGs) and global financial systems. In particular, debt levels are increasingly concerning in lower-income countries (LICs) as debt payments take resources away from essential services such as healthcare systems, education, and infrastructure such as reliable transport, energy, and water systems. This is particularly serious on the African continent which has 34 of the world´s 39 most indebted countries.

Climate change and pandemics have brought this issue to the forefront by showing that, in times of global crisis, there aren’t sufficient and equitable safety nets in place for all countries. As seen during COVID-19, with lack of vaccine funding and distribution inequalities, the GFA could not deliver for LICs when under pressure. This is partly due to the overly complicated and unrepresentative governance structure of the global financial system, which was more suited for a bygone era. This has marginalized many nations and furthered the agenda of high-income countries. Developing countries are thus finding it harder to access development finance, and becoming more vulnerable due to their debts.

Stakeholders show differing policy ideals

The paper used information gathered from stakeholders which include the  IMF, the World Bank, the UN Conference on Trade and Development (UNCTAD), the European Network on Debt and Development (EURODAD), the African Forum and Network on Debt and Development, the Tax Justice Network Africa, the Centre for Global Development (CGD), the European Investment Bank (IEB) and African Development Bank (AfD) and other regional development banks, the G20, think tanks and CSOs.

The study found that multilateral development banks (MDBs) generally support modest reforms, while civil society organizations (CSOs), think tanks, and political leaders from the Global South advocate for more radical changes. MDBs propose better resource mobilization, capacity building for responses to global challenges, and better operational efficiency. In contrast, reform proposals put forward by CSOs, think tanks, and Global South politicians tend to be more radical with the need to overhaul the entire GFA. They warn that without significant reforms, alternative institutions are likely to emerge.

The EU plays an important role

The EU, its member states, and its institutions have played a significant role in reform agendas in the past and have the capacity to influence the required reforms. This can be attributed to the associated economic stability, influence, financial regulation frameworks, and experience in policy development. GFA policy reform will require substantial coordination between different policies and debt resolution mechanisms. Thus, achieving debt sustainability and meeting the SDGs will require an active role from the EU and its institutions. They should, according to the report, take proactive measures in forming necessary partnerships with international financial institutions to form a reform agenda with clear priorities. Consultations with Global South countries will be necessary for this.

The current debt architecture requires substantial changes

While most GFA reforms can be achieved through incremental approaches, debt architecture will require fundamental changes. While there is room for small pragmatic changes within the GFA, slow progress has been made thus far, showing the limitations of the current approaches. This has created doubt regarding whether these institutions will make the needed changes autonomously, especially given that time is of the essence and the scale of resources needed are unprecedented.

The authors argue therefore that the European Parliament should lead in debt relief and cancellation efforts. It should increase solidarity with low-income countries for better representation in the governance of international financial institutions. It should also mobilize resources to help mitigate climate-related losses and promote green financing targets and projects. Finally, the European Parliament should lead institutional and global financial system reform with better coordination and coherence in various international forums.

To read the paper entitled “Reform of the Global Financial Architecture in Response to Global Challenges. How to restore Debt Sustainability and achieve SDGs?” click here.

Holly Johnson