Financing for development at cross-roads amid global economic and political instability: the role of the G-20
Introduction
The global landscape in 2025 is marked by unprecedented economic and political instability, posing significant challenges to financing for development (FfD). Developing nations face mounting debt burdens, climate vulnerabilities, and structural inequalities, while global economic growth remains sluggish amid trade tensions, geopolitical conflicts, and the lingering effects of recent crises. The G-20, as a forum representing the world’s largest economies, stands at a critical juncture to steer international cooperation toward sustainable and inclusive development. This writeup explores what is at stake, the reforms needed, the G-20’s role in addressing these challenges, and policy recommendations for policymakers.
The Stakes
The stakes for financing for development are immense, as failure to mobilize adequate resources threatens global stability, exacerbates poverty, and undermines progress toward the Sustainable Development Goals (SDGs). Developing countries face a very large financing gap that makes it quite difficult to achieve the SDGs by 2030, according to the United Nations Conference on Trade and Development (UNCTAD) (D'Souza and Jain, 2022). This gap is widened by several interconnected crises:
Debt Distress: A high percentage of low-income countries are at high risk of debt distress or already in default, with external debt servicing consuming so much of government revenues in some cases (Griffiths et al., 2020). Rising interest rates and a strong U.S. dollar exacerbate repayment challenges, diverting funds from critical sectors like health, education, and infrastructure.
Climate Crisis: Developing nations, despite contributing minimally to global emissions, face disproportionate climate impacts (Odeku, 2022). The cost of adaptation and mitigation is extremely high, yet current climate finance flows remain inadequate, with only $100 billion pledged annually under the Paris Agreement, often delivered as loans rather than grants (Sachs, 2019).
Economic Inequality: Global economic recovery is uneven, with advanced economies tightening monetary policies while developing nations grapple with inflation, currency depreciation, and capital flight (YOGANANDHAM, 2024). The International Monetary Fund (IMF) forecasts global growth at just 3.2% in 2025 which is insufficient to address unemployment and poverty in the Global South (Gern et al., 2024).
Geopolitical Tensions: Ongoing conflicts, trade wars, and sanctions disrupt supply chains, increase commodity prices, and limit access to markets and finance (Rasshyvalov et al., 2024). These tensions erode trust in multilateral institutions, hindering coordinated responses to global challenges.
Failure to address these issues risks perpetuating a cycle of poverty, instability, and environmental degradation, with ripple effects on global security and prosperity. The G-20, representing 80% of global GDP, has a unique responsibility to bridge these gaps and foster inclusive growth.
Necessary Reforms
In other to address the financing for development crisis, systemic reforms are required across global financial architecture, debt management, climate finance, and domestic resource mobilization. Key reforms include:
Reforming the Global Financial Architecture
The global financial system, primarily governed by institutions like the International Monetary Fund (IMF) and the World Bank, faces criticism for its lack of representation and inflexibility in addressing the needs of developing nations. To address these shortcomings, reforms are essential. One key reform involves enhancing representation by increasing the voting power of developing countries in the IMF and World Bank to better reflect their economic contributions and population size, as the current quota system disproportionately favors advanced economies, undermining the legitimacy of these institutions (Muhumed and Gaas, 2016). Additionally, Multilateral Development Banks (MDBs) must significantly scale up their lending capacity, as recommended by the Independent Expert Group on MDB Reform (Zhuo, 2024). Achieving this requires capital increases, the adoption of innovative financing instruments, and greater utilization of Special Drawing Rights (SDRs) (Cashman et al., 2022). Furthermore, promoting inclusive standards is critical, which entails revising credit rating methodologies to prioritize long-term development goals over short-term fiscal metrics that often penalize developing nations with higher borrowing costs.
Debt Restructuring and Relief
The G-20’s Common Framework for Debt Treatments, designed to address debt distress in low-income countries, has been criticized for its slow progress and limited scope, assisting only a small fraction of affected nations. To improve its effectiveness, comprehensive reforms are needed. One priority is expanding eligibility for debt relief to include middle-income countries and mandating the participation of private creditors (Cashman et al., 2022). Another innovative approach is the implementation of debt-for-development swaps, which would convert debt repayments into investments aligned with the Sustainable Development Goals (SDGs), such as education or renewable energy projects, thereby aligning the interests of creditors and debtors (Ahmad et al., 2024). Additionally, introducing automatic debt suspension mechanisms would provide immediate fiscal relief by pausing debt repayments during crises, such as natural disasters, allowing governments to redirect resources to urgent needs.
Scaling Up Climate Finance
Climate finance must undergo significant restructuring to prioritize accessibility for vulnerable nations and favor grants over loans, which often exacerbate debt burdens. Key actions are necessary to achieve this. First, advanced economies must not only meet but exceed the $100 billion annual climate finance pledge established under the Paris Agreement, with a proposed new target of $500 billion by 2030, as discussed at COP29 (O’Callaghan, 2024). Second, the Loss and Damage Fund, aimed at supporting countries most affected by climate impacts, must be fully operationalized and scaled to $100 billion annually, with contributions allocated based on historical emissions to ensure fairness. Finally, engaging the private sector is crucial, which can be achieved by developing blended finance models that leverage private capital for green infrastructure projects, supported by public guarantees and risk-sharing mechanisms to reduce investment risks and attract funding (Shames and Scherr, 2020).
Strengthening Domestic Resource Mobilization
Developing countries face significant revenue losses, estimated at $400 billion annually, due to illicit financial flows and tax evasion, as reported by the OECD (Brandt, 2023). To address this, reforms are needed to enhance domestic resource mobilization. A critical step is implementing a UN-led global tax convention to curb profit shifting and eliminate tax havens, ensuring that multinational corporations pay fair taxes in the countries where they operate. Additionally, introducing standardized digital service taxes would enable governments to capture revenue from tech giants, with the proceeds redistributed to developing nations to support development priorities. Furthermore, capacity building is essential to strengthen tax administration systems, with the goal of achieving a tax-to-GDP ratio of at least 20% in low-income countries, thereby improving revenue collection and reducing reliance on external financing (Benitez et al., 2023).
The Role of the G-20
The G-20 is uniquely positioned to drive these reforms due to its economic weight, political influence, and ability to coordinate among major creditors and donors. Its role spans agenda-setting, policy coordination, and resource mobilization.
Agenda-Setting and Leadership
The G-20 has a pivotal role in shaping global priorities by placing Financing for Development (FfD) at the forefront of its summits. Through its Development Working Group, the G-20 can drive transformative agendas that address pressing global challenges. One key focus should be championing a global compact to close the financing gap for the Sustainable Development Goals (SDGs), integrating FfD into broader economic recovery plans to ensure sustainable and inclusive growth. Additionally, the G-20 should promote integrated strategies that align climate finance with development objectives, emphasizing co-benefits such as job creation and improved energy access, thereby fostering synergies between environmental sustainability and economic progress.
Policy Coordination
As a unique forum that brings together advanced and emerging economies, the G-20 is well-positioned to bridge divides and foster consensus on complex and contentious issues. In the realm of debt coordination, the G-20 can strengthen the Common Framework for Debt Treatments by enforcing participation from all creditors, including private creditors and major bilateral lenders like China, while establishing clear timelines for debt resolution to expedite relief for distressed nations. Furthermore, the G-20 should lead negotiations on critical financial reforms, such as revising IMF quotas and increasing capital for Multilateral Development Banks (MDBs), to ensure equitable representation and resource allocation. Additionally, promoting fair trade policies and foreign direct investment (FDI) in developing countries by reducing barriers to market access and facilitating technology transfer can enhance economic opportunities and resilience in the Global South.
Resource Mobilization
The G-20 can play a catalytic role in mobilizing resources for development through direct commitments and innovative financing mechanisms. One critical action is to channel the $650 billion in Special Drawing Rights (SDRs) issued in 2021 to vulnerable countries, with G-20 members committing to reallocate some percentage of their SDR holdings to support those most in need (Zattler, 2024). As countries responsible for 75% of global emissions, G-20 members should also lead by example in climate finance, doubling their contributions and mobilizing private capital to support green initiatives. Moreover, fostering South-South cooperation is essential, with emerging G-20 economies like India, Brazil, and South Africa encouraged to share expertise, technology, and resources with other developing nations to promote mutual growth and resilience.
Monitoring and Accountability
To enhance accountability and ensure the fulfillment of FfD commitments, the G-20 must establish robust monitoring and evaluation mechanisms. One effective approach is to create a public dashboard that tracks progress on pledges related to debt relief, climate finance, and SDG investments, providing transparency and enabling stakeholders to hold members accountable. Additionally, conducting regular peer reviews of G-20 members’ contributions to global public goods can foster transparency and encourage adherence to commitments through peer pressure, ensuring that the G-20 remains a credible and effective leader in global development efforts.
Policy Recommendations
To translate these roles into action, policymakers should consider the following recommendations:
Launch a G-20 FfD Compact: At the 2025 G-20 Summit, adopt a comprehensive FfD Compact that commits members to mobilize $1 trillion annually for SDGs through grants, concessional loans, and private capital. The compact should include time-bound targets for debt relief, climate finance, and tax reforms.
Establish a Global Debt Authority: Create a neutral, UN-backed institution under G-20 oversight to coordinate debt restructuring, enforce creditor participation, and prioritize debtor countries’ development needs. This authority could pilot debt-for-climate swaps in 10 countries by 2027.
Scale Climate Finance with Equity: G-20 members should commit to a $500 billion annual climate finance goal, with 50% as grants and some percentage allocated to adaptation and loss and damage. A G-20 task force should develop standardized criteria for climate finance disbursements, prioritizing least developed countries (LDCs).
Promote a Global Tax Framework: Endorse a UN-led global tax convention by 2026, focusing on minimum corporate tax rates, digital taxation, and anti-avoidance measures. G-20 countries should lead by implementing these standards domestically and supporting capacity building in developing nations.
Enhance MDB Effectiveness: G-20 finance ministers should endorse a $500 billion capital increase for MDBs, coupled with reforms to streamline lending processes and prioritize high-impact projects. A G-20-led review should assess MDB performance annually.
Foster Inclusive Digital Financing: Support the development of digital financial infrastructure in developing countries, including mobile banking and blockchain-based payment systems, to improve access to finance and reduce transaction costs. G-20 members should fund pilot projects in 20 countries by 2028.
Conclusion
Financing for development stands at a crossroads, with global economic and political instability threatening progress toward inclusive and sustainable growth. The G-20, as a steward of global economic governance, has a pivotal role in addressing these challenges through leadership, coordination, and resource mobilization. By championing reforms in the global financial architecture, debt management, climate finance, and domestic resource mobilization, the G-20 can close the financing gap and foster resilience in developing nations. The proposed policy recommendations offer a roadmap for action, emphasizing equity, accountability, and innovation. As the world navigates this critical juncture, the G-20’s commitment to collective action will determine whether the promise of the SDGs is fulfilled or deferred.
Temidayo Ofusori is a researcher at the UKZN and writes in his personal capacity.
References
Ahmad US, Safdar S and Azam M (2024) An assessment of bilateral debt swap financing indispensable for economic growth and environment sustainability: a policy implication for heavily indebted countries. Environmental Science and Pollution Research 31(4): 5716-5734.
Benitez JC, Mansour M, Pecho M, et al. (2023) Building tax capacity in developing countries. International Monetary Fund.
Brandt K (2023) Illicit financial flows and developing countries: A review of methods and evidence. Journal of Economic Surveys 37(3): 789-820.
Cashman K, Arauz A and Merling L (2022) Special drawing rights: The right tool to use to respond to the pandemic and other challenges. Challenge 65(5-6): 176-198.
D'Souza R and Jain S (2022) Bridging the SDGs financing gap in least developed countries: a roadmap for the G20. Bridging the SDGs financing gap in least developed countries: a roadmap for the G20: D'Souza, Renita| uJain, Shruti. New Delhi, India: ORF, Observer Research Foundation.
Gern K-J, Kooths S, Liu W-h, et al. (2024) World Economy Summer 2024: Growth remains subdued.
Griffiths J, Panizza U and Taddei F (2020) Reducing low-income country debt risks. The role of local currency-denominated loans from international institutions. ODI Briefing Note (mayo).
Muhumed MM and Gaas SA (2016) The World Bank and IMF in developing countries: Helping or hindering? World 28(4): 237-249.
O’Callaghan B (2024) A COP29 Climate Finance Target that Makes Economic Sense.
Odeku KO (2022) Climate injustices due to the unequal and disproportionate impacts of climate change. Perspectives of Law and Public Administration 11(1): 103-110.
Rasshyvalov D, Portnov Y, Sigaieva T, et al. (2024) Navigating geopolitical risks: Implications for global supply chain management. Multidisciplinary Reviews 7.
Sachs NM (2019) The Paris Agreement in the 2020s: Breakdown or breakup. Ecology lq 46: 865.
Shames S and Scherr SJ (2020) Mobilizing finance across sectors and projects to achieve sustainable landscapes: Emerging models. EcoAgriculture Partners: Washington, DC, USA.
YOGANANDHAM G (2024) NAVIGATING GLOBAL ECONOMIC DYNAMICS: A MACROSCOPIC ANALYSIS OF MULTILATERALISM, RECOVERY, AND FISCAL STABILITY IN A POST-PANDEMIC WORLD. Degrés 9(2).
Zattler J (2024) Getting special drawing rights right: Opportunities for re-channelling SDRs to vulnerable countries. Reportno. Report Number|, Date. Place Published|: Institution|.
Zhuo L (2024) Unlocking the potential of multilateral development banks: boosting lending capacity and operational efficiency.
