Rising debt pressures across developing and low-income economies have intensified calls for a fundamental overhaul of the global financial architecture, as governments face growing difficulties in managing repayments while maintaining resources for economic development. The issue gained renewed attention during the International Monetary Fund (IMF) and World Bank annual meetings held in Bangkok last month, following concerns raised at the United Nations Fourth Financing for Development Conference in Seville in July 2025. Pakistan’s Planning Minister Ahsan Iqbal also highlighted the need for substantial reforms while addressing the Sustainable Development Policy Institute’s 29th Sustainable Development Conference, warning that limited adjustments would not be sufficient to address the scale of the global financial challenges. The growing gap between debt obligations and governments’ capacity to manage them is reducing fiscal space for infrastructure, public services and development programmes, particularly in countries already facing economic instability.
According to the Institute of International Finance, global debt reached a record $348 trillion at the end of 2025, while average per capita debt exceeded $42,000, almost three times the world’s average income per person of approximately $14,400 in 2025, based on World Bank figures. Higher international interest rates and the strength of the US dollar have further increased borrowing and repayment pressures for developing economies. The revenue gap between wealthy and poorer countries makes the situation more difficult, as low-income states generate government revenue equivalent to only 12% of their gross domestic product, compared with 26% in high-income economies. This difference leaves developing countries with fewer resources to meet external obligations and respond to economic shocks. Rising oil prices, particularly during periods of geopolitical tension in the Middle East, can add further pressure on oil-importing economies that are already dealing with limited foreign exchange reserves and high debt-servicing costs.
The scale of the problem is also reflected in the growing number of countries experiencing serious debt difficulties. The IMF’s September 2025 debt sustainability assessment showed that nearly half of low-income countries were either already facing debt distress or at high risk of entering it. Since 2020, countries including Zambia, Ghana, Sri Lanka and Ethiopia have defaulted on their debt obligations. At the same time, more than 837 million people remain in extreme poverty worldwide, according to World Bank figures, with many living in economies where governments have limited capacity to finance development and social protection. Pakistan’s own economic experience demonstrates how quickly financial vulnerabilities can intensify when external conditions deteriorate. During its near-default episode in 2023, the country’s foreign exchange reserves held by the State Bank of Pakistan fell to approximately $3 billion, covering less than three weeks of imports. Inflation reached 38% in May 2023, according to the Pakistan Bureau of Statistics, while the central bank’s policy rate increased to 22%, reflecting the severity of the economic pressure.
The international response to sovereign debt distress has so far remained fragmented, with existing arrangements struggling to deliver timely and comprehensive solutions. The G20 Common Framework, introduced to facilitate debt restructuring for vulnerable economies, has faced lengthy negotiations, implementation delays and relatively limited outcomes. The situation has become more complicated as the international creditor base has expanded beyond traditional Paris Club lenders to include private bondholders, non-traditional bilateral creditors and institutions providing collateralised loans. These different lending arrangements make negotiations more difficult and can delay the resolution of financial crises. A predictable and rules-based sovereign debt restructuring mechanism has therefore emerged as a major reform priority. Introducing supporting legislation in New York and London could strengthen such a framework because the legal systems of both jurisdictions govern nearly all international sovereign bonds. Another important proposal is to shift debt restructuring from a reactive process to a preventive mechanism, allowing countries to receive temporary relief before their financial conditions deteriorate into a full-scale default.
Automatic debt standstill provisions could provide one way to achieve this objective by temporarily suspending repayment obligations when predefined and transparent conditions are met, including severe natural disasters. Existing climate-resilient debt clauses introduced by the World Bank allow eligible countries to defer repayments for up to two years following a natural disaster. At the Seville conference, the Debt Pause Clause Alliance, involving bilateral and multilateral creditors, also committed to supporting similar arrangements. However, these provisions need to be extended across a wider range of lenders and international bondholders to provide comprehensive protection. Pakistan’s experience during the 2022 floods highlights the potential importance of such mechanisms, as the disaster caused more than $30 billion in damages and economic losses. A temporary suspension of debt payments during that period could have released financial resources for emergency assistance, reconstruction and recovery when public spending requirements were at their highest.
Reforms are also needed to encourage private creditors to participate more effectively in debt restructuring negotiations. Countries seeking early financial relief often face higher borrowing costs as soon as they signal possible debt difficulties, discouraging governments from approaching creditors before their situations become critical. Although collective action clauses have become standard in many newly issued international bonds, additional safeguards are required to ensure fair treatment between official bilateral and private creditors. Legal measures limiting litigation by creditors that refuse restructuring agreements could also prevent a small number of lenders from delaying or blocking broader debt settlements. Alongside these changes, multilateral development banks need stronger capital positions and expanded concessional financing facilities so they can provide affordable funding to vulnerable economies. Counter-cyclical lending arrangements that automatically increase financial support during global economic downturns could help governments maintain essential development spending rather than introducing severe spending cuts during periods of financial pressure.
Greater transparency in public debt management is another major requirement for improving the international financial system. Governments and lenders need to publish detailed information about individual loans, including their terms, repayment schedules and associated financial obligations. A publicly accessible global debt registry, updated regularly, could reduce information gaps between borrowers and creditors while improving accountability in international lending. Debt sustainability assessments also need to move beyond conventional financial and economic indicators by incorporating climate risks and the long-term development benefits of investment. The IMF and World Bank are reviewing their debt sustainability framework for low-income countries, with an updated version expected in 2027. Climate-related risks currently feature mainly through stress testing, but they need to become part of baseline economic projections. Investments supporting climate resilience and the Sustainable Development Goals should also be considered when evaluating a country’s ability to manage its debt over the long term.
For Pakistan, the growing international debate presents an opportunity to influence discussions on debt restructuring and financial support for developing economies. As chair of the IMF-World Bank Boards of Governors for 2027, the country is expected to take a more active role in advancing reforms that address the financing difficulties of vulnerable states. Pakistan faces significant exposure to climate-related disasters and substantial debt-servicing obligations, making measures such as automatic repayment pauses particularly relevant to its economic circumstances. The country can use its chairmanship to advocate for the wider adoption of debt pause clauses among international lenders while building cooperation with other debtor nations seeking more predictable restructuring arrangements. Domestic reforms will remain equally important, including broadening the tax base, improving revenue collection and strengthening public debt management. Without coordinated action by governments, creditors and international financial institutions, the existing global financial architecture risks continuing to address debt crises only after they have become severe, leaving developing economies with fewer resources to support growth and protect vulnerable populations.
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