While official loan assistance is supposed to promote economic growth in developing countries, repayment of the debts resulting from such loans could crowd out their essential fiscal spending and thus inhibit their sustainable growth when developing countries face a heavy debt burden due to failures in economic or fiscal policies, changes in the international economic environment, or other reasons. Although debtor countries themselves must resolve this issue through various efforts, including economic and fiscal reforms, the international community needs to respond when excessive debt stands in the way of the debtor countries’ sustainability and development path.

In regard to international efforts to address debt issues, debt relief measures have been implemented including through the Enhanced HIPC InitiativeNote 32 for Heavily Indebted Poor Countries (HIPC)Glossary and the Paris Club’s Note 33 Evian Approach.Note 34 However, in recent years, despite debt relief in some low-income countries, private debt has accumulated in addition to public debt, thus raising renewed concerns about their worsening debt sustainability. The reason behind this situation on the debtors’ side is pointed out as being that debtor countries lack the capacity to gather and disclose their own debt data and appropriately manage their debt. The reasons on the creditors’ side are pointed out as being that the funding providers have diversified the proportion of loans increasingly coming from emerging donor countries and private creditors, including the provision of untraditional and non-concessional loans such as collateralized financing, while the proportion of loans by Paris Club creditors has been decreasing.

The COVID-19 pandemic has had a serious impact on the debt issues of low-income countries. In response to this situation, the G20 and Paris Club launched the “Debt Service Suspension Initiative (DSSI)”Glossary in April 2020 and implemented measures to temporarily suspend payment of public debt owed by low-income countries. It is estimated that at least 12.9 billion US dollars of total debt service was deferred under the DSSI between May 2020 and December 2021, benefiting 48 countries.Note 35 Although the DSSI ended at the end of December 2021, since then, the G20 and Paris Club creditor countries have jointly provided debt treatments under the “Common Framework for Debt Treatments beyond the DSSI,”Glossary agreed on in November 2020.

One of the factors that can significantly affect debt sustainability of countries, including low-income countries, is infrastructure investment. Infrastructure projects such as ports and railroads come at a large cost, and debt service repayments can become a significant burden for the borrowing countries. When financing infrastructure projects, it is necessary for both the borrowers and lenders to fully consider debt sustainability. Loans without consideration of debt sustainability are criticized as a “debt trap” by the international community.

The “G20 Principles for Quality Infrastructure Investment”Note 36 incorporated the importance of considering country-level debt sustainability as well as project-level financial sustainability. They also include the principles of openness, transparency, and economic efficiency in view of life-cycle cost. Each G20 country is required to implement these principles as an international standard in their infrastructure investments and to work to ensure that these principles are implemented in the countries receiving loans.

● Japan’s Efforts

In providing ODA loans, Japan makes its decisions based on the careful consideration of the cooperation structure, debt service repayment ability, operational capacity, credit protection measures, etc. of the recipient countries. Most of the recipient countries make repayments as scheduled. However, there are exceptional cases in which they face serious difficulties in their repayment due to events that could not be foreseen when they received ODA loans. In such cases, based on international agreements such as the aforementioned Enhanced HIPC Initiative and Paris Club agreements, Japan provides debt relief in the form of debt rescheduling,Note 37 cancellation, and reduction only to the minimum extent necessary. As of the end of 2023, Japan has cancelled ODA debts worth a total of approximately 1.129 trillion yen toward 33 countries since FY2003. As part of Japan’s debt relief efforts, in January 2023, Japan signed and exchanged notes concerning debt relief for Ukraine (debt service suspension). In August, Japan signed and exchanged notes with Argentina to reschedule some arrears. In addition, Japan, as one of the co-chairs of the Official Creditor Committee (OCC) for Sri Lanka, led the negotiation processes, and the OCC and the Government of Sri Lanka reached an agreement in principle on debt restructuring in November.

At TICAD 8 held in August 2022, Japan announced and is currently working on financial cooperation of up to 5 billion US dollars under the fifth phase of the “Enhanced Private Sector Assistance for Africa”Glossary (EPSA5) covering the period from 2023 to 2025. This includes a new special window of up to 1 billion US dollars to support countries that are engaging in reforms for enhancing debt transparency and sustainability and thereby making steady and significant progress in their debt situations.

From the perspective of ensuring debt sustainability, an important element of the “G20 Principles for Quality Infrastructure Investment,” Japan is working on the improvement of the capabilities related to public debt and risk management among management personnel at the finance ministries of developing countries through contributions to international organizations, as well as through training and the dispatch of experts by JICA. For example, in FY2022, Japan provided support for capacity building in debtor countries, including training in collaboration with the World Bank for 31 administrative officers from 29 countries, including Kenya and Ethiopia, on contingent liability risk management, and new financial contributions to the respective trust funds of the International Monetary Fund (IMF) and the World Bank.

1. Note 32: An initiative agreed at the Cologne Summit (Germany) in 1999.
2. Note 33: An informal group of creditor countries to discuss rescheduling of public debts. The name of the Paris Club derives from the fact that France has chaired meetings and invited creditor countries to Paris upon requests from debtor countries.
3. Note 34: A new Paris Club approach to debt restructuring (the Evian Approach). Debt relief measures focus more on the debt sustainability of recipient countries, especially low-income and middle-income debtor countries other than HIPC, and take case-by-case measures corresponding with the circumstances of each debtor country.
4. Note 35: See World Bank website (https://www.worldbank.org/en/topic/debt/brief/covid-19-debt-service-suspension-initiative).
5. Note 36: See the glossary “Quality Infrastructure.”
6. Note 37: Debt rescheduling is one form of debt relief, wherein payment is postponed for a certain period of time in order to reduce the burden of debt payment on the debtor country.

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