Introduction
The question of how best to encourage and expand the role of the private sector in meeting the financing and debt relief needs of the developing world has been a long-standing challenge. Today, however, finding an answer has become urgent. The COVID-19 pandemic forced most countries—including poor and middle-income countries—to increase public expenditures to meet the ballooning health and welfare needs of their citizenry, while at the same time saddling them with heightened levels of public indebtedness and debt service.
Today’s reality has become even more dire. The ongoing war in Ukraine, spiking inflation, rising interest rates, and a strengthening U.S. dollar together have sharply increased the debt burdens of many countries, pushing their refinancing risks toward crisis levels. According to the International Monetary Fund (IMF), nine countries were in debt distress by the end of February 2023, and 27 others were at high risk of experiencing debt distress. Several lower-middle-income countries are similarly afflicted.
At the same time, the flow of private capital to emerging markets has slowed. In fact, net fund flows to emerging markets turned negative last year. Thus, both the scarcity and cost of new funding are compounding the distress facing these fragile economies.
The official sector, led by the Group of Twenty (G20), has acknowledged the precarious position of the poorest countries. Initiatives were launched in April and November of 2020—the Debt Service Suspension Initiative (DSSI) and the subsequent Common Framework for Debt Treatments beyond the DSSI (the Common Framework), respectively—intended to ease the near-term debt burden of these countries and to facilitate external debt adjustments. Each of those initiatives contemplated private sector participation as a critical element.
