As developing nations’ debt soars, is Switzerland doing enough to help?

The financial center of Sao Paulo, Brazil. Fred Pinheiro / Alamy Stock Photo

The United Nations has sounded the alarm on the acute debt situation facing developing nations. Switzerland has allocated CHF39 million and is active in international organisations that are helping to refinance and restructure debts. But is that enough to make a difference?

As an indirect consequence of the Covid-19 epidemic, the debt of developing countries has exploded, putting almost half of the world’s population at risk. The debt burden can jeopardise the economic development of parts of the African and South American continents.

Last September Switzerland announced an increase of CHF39 millionExternal link ($43 million) to its annual contributions over the next five years to help developing countries deal with the crisis. This amount, which has been steadily increasing since 2017, is in addition to the more than CHF3 billion Switzerland allocates each year in state development aid. In 2021, the development aid budget exceeded CHF3.2 billion.

The economics ministry says that one of Switzerland’s foreign policy priorities for 2021-2024 is to “promote sustainable economic growth in developing countries through good governance and strong public institutions”.

This contribution coincides with a call from the United Nations Development Programme (UNDP) last October. In a report titled Avoiding ‘Too Little Too Late’ on International Debt ReliefExternal link, the UN agency warns of the catastrophic consequences of chronic over-indebtedness in the poorest countries.

“Many countries suffer from a debt burden that prevents them from financing pro-growth investment and increasing much-needed development spending,” the report warns.

While the issue of developing countries’ debt – and debt relief – is not new, the UNDP and NGOs are concerned at the scale of the problem, exacerbated by the Covid-19 pandemic and the war in Ukraine, which have squeezed public finances.  The total debt of developing countries reached 205% of gross domestic product in 2020, compared to 174% in 2018.

David Malpass, the president of the World Bank, warned last October of the severity of the situation, announcing that the world was facing a “fifth debt crisis”.

“Fifty-four countries can no longer pay the interest on their debt or repay it on their own,” says Dominik Gross, a Swiss expert on international finance and tax policy, and a member of the management team at Alliance Sud, a Bern-based NGO.

‘Ineffective and insufficient’

In February 2022, in response to this new crisis, Switzerland supported the temporary suspension of debt servicing for 48 countries. However, this initiative was criticised by the UNDP, which said it was not suited to the needs of the most vulnerable countries. In particular, it only covered bilateral debt and imposed access conditions that excluded some countries.

Since August 2021, in partnership with the International Monetary Fund, Switzerland has also participated in the implementation of Special Drawing Rights (SDRs) – an international monetary instrument to supplement the official reserves of member countries. To ease the financial burden linked to Covid-19, the IMF had approved a general allocation of SDRs equivalent to $650 billion.

But since SDRs are primarily distributed to member countries in proportion to their IMF quotas, only $275 billion went to developing nations.

Swiss expertise in debt management

Switzerland is one of the least indebted countries in the world, and as such contributes its expertise. It is also a member of all the international bodies working to restructure and alleviate the debt of developing countries. It is, among others, a member of the Paris Club (whose role is to find solutions to payment difficulties), of the International Monetary Fund, and of the World Bank, and has a seat in various G20 organizations.

Switzerland is one of the least indebted countries in the world

These different mandates allow it to act directly on debt restructuring and relief. While it never negotiates bilaterally, it operates within these international institutions through the economics ministry and the Swiss agency for development and cooperation.

In concrete terms, it “supports partner governments in planning (repayment and investment), approving budgets, implementing them, and finally reviewing them in accordance with international standards,” explains Lorenz Jakob of the economics ministry.

Switzerland proposes, for example, roadmaps on how to manage budgets, limit corruption or set tax levels. It provides middle-income countries with customised technical advisory services. It also helps these countries develop sound debt-management and risk-analysis frameworks to reduce their vulnerability to financial shocks. Beneficiaries of this programme include Albania, Egypt, Colombia, Ghana, Serbia and Tunisia.

In September 2020, for instance, it sponsored a World Bank initiative to enable Egypt to issue sovereign green bonds, considered by the World Bank as a sustainable “financial solution”.

“This programme didn’t target the countries most in need of additional reserves [i.e., the least prosperous] and was, in that sense, very inefficient,” explains Lars Jensen, an economist at the UNDP.

Implementation has been very slow. The IMF also pledged to provide an additional $117 billion in financing for the most fragile economies.

Finding Swiss-specific solutions

Switzerland’s engagement is viewed by some as inadequate. Several experts and NGOs point to a certain hypocrisy, particularly in its appeals against corruption, while Swiss companies are the subject of repeated scandals in these countries. Examples include Credit Suisse in MozambiqueExternal link, UBS in Papua New GuineaExternal link or the troubled links of Glencore, the Zug-based international trading giant, with ChadExternal link.

They also criticise Switzerland’s low financial engagement. “Given Switzerland’s role as the home of major private creditors, it is not enough for it to participate in IMF or World Bank debt-relief programmes with modest contributions,” Gross says.

Like the UNDP, he expects more participation from private companies, especially banks. While benefiting from the interest on the loans they grant to developing countries, banks have no obligation to contribute to development funding.

One solution that’s been discussed for many years to better integrate private capital is to bring Swiss banks, civil society and public development aid agencies to the table. “This would make it possible to negotiate Swiss-specific solutions for debt relief in these countries,” Gross says.

As early as the summer of 2020, Alliance Sud and other Swiss NGOs, including Swissaid, Fastenaktion, Bread for the World, Helvetas and Terre des Hommes Switzerland, criticised the government for not responding to their callExternal link, despite several interventions by members of parliament.

Alliance Sud also believes that Switzerland could transfer all of its SDRs (more than $11 billion in 2021External link) to over-indebted countries so that they have liquidity. “It does not need these assets,” says Gross.

But this would require a change in the law on financial aid that only parliament can initiate and for which there are currently no plans.

Global solution

“We are looking for a comprehensive response to help unlock development finance and encourage long-term private development finance in developing countries,” says Angela Lusigi, the UNDP’s representative in Ghana.

She proposes a comprehensive reform of the ratings system and support to reorient developing countries’ economies towards exports, which would allow them to accumulate foreign currency to pay down their debt.

“Switzerland supports debt restructuring for countries whose debt is no longer sustainable,” says Lorenz Jacob, a spokesperson for the economic cooperation and development division of the economics ministry.

International initiatives to assist indebted countries

Debt Service Suspension Initiative

The aim of the Debt Service Suspension Initiative, launched in 2020 by the IMF and the World Bank, was to provide financial resources to help eligible countries combat the Covid-19 pandemic. To participate in this initiative, the recipient country had to commit to using these resources to cover social, health or economic costs arising from the crisis.

Heavily Indebted Poor Countries Initiative

This initiative was launched in 1996 by the IMF and the World Bank. It was designed to ensure that the world’s poorest countries are not overwhelmed by their debt burden.

Common Framework

The Common Framework considers debt treatment on a case-by-case basis, based on requests from eligible debtor countries. In response to a request for debt treatment, a committee of creditors is convened. Negotiations are supported by the IMF and the World Bank, for example via debt sustainability analysis.

Debt Sustainability Analysis

The World Bank and IMF work with low-income countries to regularly analyse their debt sustainability. Both institutions use this framework to guide low-income countries’ borrowing decisions in order to balance their financing needs with their ability to repay, both now and in the future.

Edited by Virginie Mangin. Translated from French by Catherine Hickley/gw