Should Multilateral Debt be Restructured?

The international system is undergoing a structural transition from a unipolar order characterized by United States dominance toward a more multipolar system marked by the rise of other major powers, particularly China. This shift coincides with historically elevated global debt levels, with 3.4 billion people living in countries where interest payments exceed public spending on education or health^[1]. An estimated 54 nations are under debt stress^[2], compounded by geopolitical fragmentation, shrinking fiscal space, aging populations and the threat of climate change. Multilaterals such as the World Bank and the IMF have long served as stabilizing forces for developing countries. As lender of last resort, the IMF plays a critical role in stabilizing nations facing balance of payments crisis. Traditionally, multilateral debt is not restructured as a principle, however, during Sri Lanka’s debt restructuring, China argued^[3] for it also to be included as bilateral or commercial debt is, raising a fundamental policy question on the basis of managing forms of sovereign debt in restructuring processes. Restructuring multilateral debt risks counterproductivity, undermining preferred creditor status, destabilizing institutional financing models and weakening the financial integrity of the lenders. Therefore, the global’s consideration of how to reconcile these competing pressures is paramount to shaping the future of sovereign debt governance and global financial stability. 

Why does multilateral debt matter to developing nations?

In 2023, developing countries paid approximately $1.4 trillion^[4] in foreign debt repayments with interest payments alone amounting to $406 billion. Against this backdrop, multilateral lending remains one of the most useful methods of external financing for developing countries through long-term support, stabilization during crises and sustained access to global markets. Multilaterals such as the World Bank and the Asian Development Bank offer concessional financing with extended grace periods, long maturities and lower interest rates. These terms reduce debt-servicing burdens while enabling governments to maintain investment in preferred sectors. Financing from multilaterals comes with stringent guidelines and procurement processes ensuring proper funding allocation designed to improve transparency and ensure that funds are directed toward public goods, including education, health, infrastructure, and poverty alleviation. These safeguards play an important role in strengthening accountability and corruption deterrence. 

Another crucial function of multilateral borrowing emerges during periods of economic distress. When sovereigns lose access to international capital markets and face sharply rising borrowing costs from commercial creditors, multilateral institutions often continue to provide financing, contingent on engagement with the IMF. Sri Lanka provides a clear illustration: despite being effectively excluded from private markets, the World Bank and Asian Development Bank maintained support conditional on IMF program participation^[5]. IMF engagement serves not only as emergency financing but also as a credibility signal to bilateral and private creditors, facilitating the eventual restoration of market access. 

The operational viability of multilateral lending during crises depends in large part on preferred creditor status, which maintains strong credit ratings, and enables institutions to borrow at low cost in international markets. This structure allows multilaterals to continue extending affordable financing even when borrower countries remain in default or restructuring negotiations with other creditors. As a result, multilateral claims are still executed even in times of distress, providing access to capital despite the vulnerable economy. 

Beyond financing, multilateral institutions provide technical expertise, policy guidance and institutional strengthening. A combination of affordable finance, crisis resilience and capacity building makes multilateral debt central to development finance, macroeconomic stability and long term economic growth sustainability in the developing world. 

What is the case for Restructuring Multilateral Debt?

The principal argument in favor of restructuring multilateral debt centers on the comparative treatment for creditors. When multilateral debt is excluded from restructuring, this results in other creditors having to make deeper concessions during debt restructuring in order to make the debt sustainable for the debtor country. This asymmetry is increasingly evident in low and lower middle income countries. In 2023, roughly one third of Sri Lanka’s debt was owed to multilateral institutions^[6], and almost 45% of external debt^[7] in low income countries were owed to these institutions. In Sri Lanka’s case, even superannuation funds^[8] were restructured with lower interest rates reducing returns for retirement beneficiaries and underscoring the distributional consequences of such asymmetries.

China has a particularly influential but simultaneously vulnerable position within this dynamic. In 54 of 120 developing countries with available data, debt service payments to China exceed the combined payments owed to the Paris Club which include all major Western bilateral lenders^[9]. As the world’s largest bilateral creditor, China bears a disproportionate share of restructuring costs when multilateral claims remain exempt. Chinese policymakers also view multilateral lending as indirectly safeguarding Western interests, given the governance structure of institutions such as the World Bank and the IMF, where the United States holds the largest voting share. From this perspective, the exemption of multilateral claims effectively shields Western-backed capital while amplifying losses borne by non-Western bilateral lenders.

Still, serious considerations must be made when weighing the benefits of restructuring, especially that of the implications of credit assessments. Because rating agencies treat multilateral claims as effectively immoveable, their presence can support higher sovereign credit ratings and lower perceived default risk. While this may reduce borrowing costs in the immediate term, it can also intensify losses on commercial creditors during restructuring periods during which multilateral claims would be protected.

Finally, advocates of multilateral debt restructuring emphasize its potential humanitarian and developmental benefits. With nearly half the world’s population living in countries where interest payments exceed spending on health or education, valuable social investment is constrained^[10]. Additionally, growing climate pressures receive minimal fiscal space for government spending. Multilateral debt restructuring could expand these constrictions and permit resource reallocation towards humanitarian needs and development.

Why is multilateral debt restructuring harmful?

The argument against restructuring primarily focuses on the preservation of preferred creditor status, which ensures the ability of multilateral institutions to provide low cost financing for the developing world. If claims were subject to restructuring, perceived creditor risk would increase, leading to higher borrowing costs for these institutions and ultimately, higher lending rates for recipient countries.

Restructuring multilateral debt could also undermine the AAA ratings which enable the banks to lend long term capital for infrastructure investment, climate financing and development projects. The IMF in particular is a lender of last resort, ensuring elevated risks when lending to these countries at that stage. Thus, requiring restructuring of these riskier claims would further increase funding costs and weaken the institution’s capacity to continue operations for other distressed countries. Unlike most bilateral and commercial lenders, multilaterals keep lending even when a country is in selective default status as seen with Sri Lanka. 

Restructuring multilateral debt could also compromise the neutrality of these organizations by positioning them as direct financial stakeholders in debt negotiations. Multilateral institutions frequently serve as intermediaries and coordinators among debtor governments, bilateral creditors, and private lenders. For many low-income countries, the IMF plays a central role in facilitating negotiations and providing policy credibility for more powerful creditors. If multilaterals were required to defend their own balance sheets within restructuring frameworks, their ability to act as neutral could be challenged.

Current Geopolitical Risk Assessment

Debt restructuring can become highly geopolitical when creditor frameworks are fragmented. This dynamic is present in cases such as Sri Lanka and Pakistan. Contrastingly, Argentina’s repeated defaults have generated minimal geopolitical interest as its external liabilities are largely dominated by international bondholders and the IMF. China accounts for less than 1% of Argentine debt, making it a marginal stakeholder in this example.^[11] Pakistan presents an entirely different profile, dominated by multilateral institutions accounting for nearly half of Pakistan’s external debt, with Chinese claims amounting to nearly a quarter of this total.^[12] In the event of a default, challenges would likely mirror those observed in Sri Lanka, particularly if strategic competition between China and Western creditors further complicates the dynamic.

Zambia further illustrates the complexity of restructuring when Chinese and multilateral creditors dominate the creditor landscape. Protracted negotiations delayed Zambia’s debt resolution by approximately three and a half years, prolonging uncertainty and constraining investment and fiscal planning. Early in the process, China restricted the disclosure of bilateral loan terms, complicating information sharing and slowing coordination among creditors.^[13] Zambia’s case also unfolded under the G20 Common Framework, which formally commits participating creditors, including China, to the principle of comparable treatment for low-income countries. 

Conclusion

The debate over restructuring multilateral debt highlights a fundamental tension between creditor equity and the stability of the global financial architecture. While extending restructuring to multilateral claims could reduce the adjustment burden borne by bilateral and commercial creditors and expand fiscal space for development spending, such a shift carries substantial institutional risks. Higher perceived credit risk would likely raise borrowing costs for multilateral institutions, potentially eroding their AAA credit ratings and weakening preferred creditor status. These features are central to the capacity of multilaterals to provide low-cost, countercyclical financing and to operate effectively as lenders of last resort during crises.

The experience of countries such as Sri Lanka and Zambia underscores the indispensable role that multilateral institutions play in restoring macroeconomic stability and coordinating creditor negotiations. In Sri Lanka’s case, IMF program engagement was essential for unlocking broader restructuring agreements and reestablishing market access following the 2022 crisis. Preferred creditor status remains the foundation of these institutions’ ability to continue lending even when sovereigns are excluded from private capital markets. Undermining this framework risks weakening the very mechanisms that enable crisis resolution and development finance.

The path forward will likely require innovative solutions rather than an entire restructuring of multilateral claims. The G20 Common Framework could be strengthened and include middle income nations too. To address the coordination failures as seen in Zambia, the Framework could be further strengthened by adding the collective action clause which is in place for bondholders to improve burden-sharing and reduce coordination frictions, though enforcement challenges among powerful bilateral lenders would remain significant.

Incremental burden-sharing mechanisms may also offer a compromise. Extending maturities on multilateral loans can provide meaningful liquidity relief while preserving credit ratings and preferred credit status. Such a practice would align with existing refinancing tools already utilized by bilateral creditors. 

Finally, governance reform requires careful consideration. Adjusting voting rights to fully reflect emerging bilateral lenders like China and India, could enhance institutional legitimacy and encourage cooperation within the global debt architecture, which remains largely shaped by post-World War II power dynamics. Ultimately, this coordination amongst creditors is essential to provide long-lasting solutions to sovereign debt distress. Without it, the cost of fragmented efforts will continue to fall disproportionately on developing economies and undermine global financial stability. 

 

Talal Rafi is an economist based in Sri Lanka. He has served as a consultant to the Asian Development Bank and to the European Union. He was a Director at Ernst & Young, a member of the Global Macroeconomic team at Deloitte and a board member of Sri Lanka’s state foreign policy think tank, the Lakshman Kadirgamar Institute (LKI). He contributes as a regular columnist to the International Monetary Fund’s Public Financial Management Blog and is a member of the World Economic Forum’s Expert Network. His writings have been published by the World Bank, International Monetary Fund, Asian Development Bank, World Economic Forum, Johns Hopkins University (SAIS Review), Chatham House London and the London School of Economics.

^[1] UN Trade and Development (UNCTAD), A World of Debt 2025 (Geneva: UNCTAD, 2025), https://unctad.org/publication/world-of-debt

^[2] United Nations, “UN Development Programme Calls for Debt Relief Now for 54 Countries,” accessed November 14, 2025, https://www.un.org/en/information-centre-caribbean/un-development-programme-calls-debt-relief-now-54-countries

^[3] Joe Cash, “Explainer: What Is China’s Position on Restructuring Debt Owed by Poor Nations?” Reuters, June 22, 2023, https://www.reuters.com/sustainability/what-is-chinas-position-restructuring-debt-owed-by-poor-nations-2023-06-22/r: 

^[4] World Bank, International Debt Report 2024, December 3, 2024, https://www.worldbank.org/en/news/press-release/2024/12/03/developing-countries-paid-record-1-4-trillion-on-foreign-debt-in-2023

^[5] Central Bank of Sri Lanka, “The Government of Sri Lanka and the World Bank Sign an Agreement for Financing of $150 Million to Strengthen the Resilience of Sri Lanka’s Financial Sector,” February 2, 2024, https://www.cbsl.gov.lk/en/news/gosl-and-world-bank-sign-an-agreement-of-usd-150-to-strengthen-sri-lanka-financial-sector

^[6] Peter Breuer, Sandesh Dhungana, and Mike Li, “Sri Lanka’s Sovereign Debt Restructuring: Lessons from Complex Processes,” International Monetary Fund, September 23, 2025, https://www.imf.org/en/publications/wp/issues/2025/09/05/sri-lankas-sovereign-debt-restructuring-lessons-from-complex-processes-570102

^[7] Ishac Diwan, “Why Is the Cost of Borrowing for Developing Countries So High?” FinDevLab, September 15, 2025, https://findevlab.org/why-is-the-cost-of-borrowing-for-developing-countries-so-high/

^[8]Breuer, Dhungana, and Li, “Sri Lanka’s Sovereign Debt Restructuring.”

^[9] Duke Riley, “Peak Repayment: China’s Global Lending,” Lowy Institute, May 2025, https://interactives.lowyinstitute.org/features/peak-repayment-china-global-lending/

^[10] UNCTAD, A World of Debt 2025.

^[11] International Monetary Fund (IMF), “Argentina: First Review under the Extended Arrangement under the Extended Fund Facility,” August 1, 2025, https://www.imf.org/en/publications/cr/issues/2025/08/01/argentina-first-review-under-the-extended-arrangement-under-the-extended-fund-facility-569162

^[12] International Monetary Fund (IMF), “Pakistan: First Review under the Extended Arrangement under the Extended Fund Facility,” May 17, 2025, https://www.imf.org/en/publications/cr/issues/2025/05/17/pakistan-first-review-under-the-extended-arrangement-under-the-extended-fund-facility-567021

^[13] David Grigorian and Aditya Bhayana, “Zambia: A Case Study of Sovereign Debt Restructuring under the G20 Common Framework,” Centre for Global Development, October 24, 2024, https://www.cgdev.org/publication/zambia-case-study-sovereign-debt-restructuring-under-g20-common-framework