UK-led action to address spiralling national debt in some of the world’s poorest countries could more than offset the impact of UK aid cuts, producing net funding gains across water, sanitation, education and health, new research has found.
One year ago today, the UK announced plans to slash its aid budget by 40 per cent, from 0.5 to 0.3 per cent of Gross National Income (GNI). This decision is expected to result in 2.9 million fewer children in school, 12 million more people without access to clean water and sanitation, and more than 600,000 additional deaths from preventable diseases, according to research produced last year.
At the same time, many of the world’s poorest countries have also slipped into spiralling debt distress in recent years, with low-income countries currently spending an average of 18 per cent of government revenue servicing foreign debts each year, compared with just 5 per cent in 2014.
Some 3.3 billion people around the world now live in countries that spend more on debt payments than on education or health – while The Independent has also reported how poor countries are now also paying billions more to cover debts than they receive in aid to fight the climate crisis.
Now, new analysis produced by the charity CAFOD – which is based on research from the University of St Andrews and Save the Children and shared exclusively with The Independent – finds that the devastating impact of UK aid cuts could be more than counteracted by debt relief, which would effectively see developing countries’ debts partially cancelled or restructured.
The analysis finds that if the debt-servicing costs of low-income countries were reduced to a “more sustainable level” of around 10 per cent, enough fiscal breathing room would be created to see massive gains across health, education, water works and sanitation.
While 12 million people are set to lose access to water and sanitation due to aid cuts, according to Save the Children, capping debt-servicing to 10 per cent could provide 11 million people with clean water and 23 million with basic sanitation, according to the latest analysis, essentially helping to deal with the issue.
The 2.9 million people pushed out of education by UK aid cuts would be more than offset by the 3 million additional children whose enrolment in school could be funded if debt-servicing was capped.
The impact of health cuts could also be significantly mitigated, preventing the systemic collapse predicted by the World Bank, and saving approximately 43,500 lives annually.
“If we get it global debt reform right, it has to the potential to outweigh the value of Overseas Development Assistance lost many times over, bringing real benefit to public services and the people that rely on them in the world’s poorest countries,” Noah Law, MP for St Austell and Newquay and member of the international development select committee, tells The Independent.
Lydia Darby, senior financial adviser at Save the Children, adds: “Children pay the price of unsustainable debt. Bringing debt payments down to a genuinely sustainable level, with fiscal breathing room to absorb any climate or economic shocks that might come, is essential to ensure governments can invest in their own people.
“Services critical for children’s survival and wellbeing, including health, nutrition and education, would benefit greatly if less money was being spent to service unsustainable debt.”
UK-led action on debt relief is ‘key’
Designing an effective debt-relief programme will be a complicated task, given the variety of creditors that exist for developing countries, including Western governments and China. That is as well as many private financial institutions that charge higher interest rates, as The Independent has previously reported.
But campaigners argue that the UK has a unique role to play in using legislation to drive forward debt relief, due to the fact that 45 per cent of bonded sovereign debts are governed under English law, as a result of the City of London’s importance as a global financial centre. That share increases to 90 per cent when only the debt-loaded developing countries currently eligible for debt relief under the G20 Common Framework – the existing multilateral debt-relief system – are considered.
Parliament’s international development select committee has itself made the case that the UK government has a key role to play in supporting debt relief.
While acknowledging that there is “limited scope” for the UK unilaterally cancel or provide debt relief due to the number of public and private creditors across the world, a 2023 report on debt by the committee said the UK government should consider new legislation to compel creditors to participate in debt-relief schemes if a majority of creditors agree.
The government subsequently rejected the committee’s recommendation and instead backed “market-based solutions”. The current Labour government is also pursuing market-based methods, with a group on debt relief, called the London Coalition, currently looking into debt relief on a voluntary basis.
For Maria Finnerty, chief economist at CAFOD, this will not be enough.
“We can only limp on without a functional debt-relief process for so long, while the number of countries in debt distress goes up and up. Sooner or later, something will have to change,” she says. “The cost to the UK Treasury is zero. The benefits are immeasurable. The only scarce resource is political will.”
Sarah Champion, MP for Rotherham and chair of the international development committee in parliament, adds: “With aid cuts biting and many low-income countries still shackled by the soaring costs of servicing debt, this new analysis should encourage real reflection in the FCDO.
“The international development committee previously called for the UK to take bold action that could have made a real difference on debt relief, but the government dismissed our proposals to bring private creditors to the table. Hopefully, this analysis will prompt ministers to look again at how we might alleviate the staggering debt burdens which prevent many low-income countries from making progress on everyday necessities such as health and education.”
In response to claims that the UK government could be doing more to tackle developing countries’ debts, an HM Treasury spokesperson said: “Private creditors must play their part in debt restructuring. We want to see an international financial system that supports development outcomes and helps low-income countries address their debt vulnerabilities.”
What debt relief would look like
While a debt cap of 10 per cent is used in the analysis from CAFOD, just what debt relief could look like in practice remains up for discussion.
A previous global debt-relief campaign – Jubilee 2000 – resulted in governments and institutions cancelling the modern equivalent of more than $100bn in debt across developing countries. However, the more complicated creditor landscape this time round means that the demands of the current campaign are more complex.
One option on the table is to reform the G20 Common Framework, which is the existing debt-relief mechanism devised in the aftermath of the Covid-19 pandemic. It has been widely panned for moving far too slowly – with delays then deterring investors, weakening currencies, and worsening economic crises – and also for not including binding timelines to force creditors to act quickly. These concerns have meant that very few countries have engaged in debt relief so far, according to campaigners.
Last year, the African Union published the Lome Declaration – named for the capital of Togo, where leaders were meeting – which describes how they believe the Common Framework could be reformed. It includes calls for enhanced transparency, the suspension of debt-servicing for all borrower countries after they apply for debt restructuring, and new programmes that could see the debts of countries forgiven in return for action on climate or nature.
Other, more ambitious options for debt relief that could be considered, according to CAFOD’s Finnerty, include a new UN framework on debt restructuring – similar to what has been introduced for global tax cooperation – as well as an International Bankruptcy Court for countries.
“Debt restructuring should ultimately be adjudicated by independent judges,” she says. “It would be chaos if, when a company went bust in the UK, there was no impartial bankruptcy court and they had to agree a deal individually with each of their creditors. It should be no different for countries.”
Campaigners we have spoken to acknowledge that the push for effective debt relief will likely take several years, with the UK’s 2027 G20 presidency often suggested as the moment when a new debt-relief programme could be realised.
The specific outcomes of the debt-relief campaign remain uncertain. But one matter on which everyone – including world-renowned economists, the governments of the G20, and many of the world’s major financial institutions – seems to agree is that something has to be done to change the status quo on developing-country debt, if these nations are to have a fair chance at funding public services and standing on their own two feet long-term.
“More than 50 of the world’s poorest countries are currently facing the worst debt crisis in history, leaving marginalised communities to bear the brunt of conflict and climate shocks,” comments Sandra Martinsone, policy and advocacy manager at the charity Bond.
“Failure to address this debt crisis will cost yet more lives, and undermines hard-won progress towards a more prosperous and stable world for us all.”
This article was produced as part of The Independent’s Rethinking Global Aid project
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