Breaking the trap: Debt dynamics and sustainable finance in the global south

This paper is authored by Udaibir Das and Hansika Nath, ORF, New Delhi.

Sustainable development finance is trapped in a structural bind: The needs are rising, but the instruments are skewed toward debt. Developing economies must mobilise an estimated $4.2 trillion annually to meet the Sustainable Development Goals (SDGs) and climate targets, according to the UN Conference on Trade and Development (UNCTAD). Simultaneously, over two-thirds of public climate finance for transitions provided by developed countries to developing countries is extended as loans rather than grants, thereby reinforcing debt burdens. Meanwhile, approximately 3.3 billion people reside in countries that allocate more funds to debt service than to either education or health, indicating that debt service already supplants core development spending.

Sustainable finance

Standard prescriptions, such as sequencing reforms, blended finance, and capacity building - do not address the paradoxes at the heart of today’s debt-sustainability nexus. This paper identifies four such paradoxes: the opportunity-cost dilemma, the credit-rating penalty, the temporal mismatch (Mark Carney’s Tragedy of Horizons), and the risk-amplification cycle. Country experiences, from debt-distressed economies in Africa and Latin America to large emerging markets like India, reveal consistent patterns: national initiatives can ease pressures, but systemic paradoxes persist.

These paradoxes translate into concrete financing constraints that governments face daily.

This paper can be accessed here.

This paper is authored by Udaibir Das and Hansika Nath, ORF, New Delhi.