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Introduction: 

Developing countries often grapple with the challenge of balancing economic growth with the burden of rising debt. As they invest in infrastructure and social programs through borrowing, they risk fiscal vulnerabilities and dependence on external creditors. Addressing this dilemma is crucial for sustaining growth while managing the complexities of debt sustainability.

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Challenges faced by developing nations in financing their growth while managing debt sustainability:

• High Debt Levels: Developing countries accumulate debt to fund infrastructure and social programs, but high levels can lead to debt distress, making repayment challenging and affecting credit ratings.
  For example: Sri Lanka’s heavy debt burden, largely stemming from large infrastructure projects funded by external loans, has strained its fiscal position, prompting negotiations for debt restructuring and refinancing.
• Limited Access to Financing: Many developing nations struggle to access affordable financing due to lower credit ratings, perceived risks, or lack of collateral, hindering investments in critical sectors and infrastructure necessary for sustainable development.
  For example: Sub-Saharan African nations like Niger and Chad struggle to access affordable financing due to low credit ratings and perceived risks.
• Vulnerability to External Shocks: Like commodity price fluctuations, global financial crises, and sudden interest rate changes, which destabilise economies, reduce revenue, and worsen debt burdens.
  For example: Countries like Nigeria and Venezuela, reliant on oil exports, face vulnerability to global oil price fluctuations. 
• Fiscal Constraints: High debt servicing costs can limit spending on healthcare, education, and infrastructure, hindering long-term economic growth.
  For example: Greece’s debt crisis led to significant budget allocations for debt servicing, limiting funds for essential services.
• Global Financial Market Dynamics: Global financial market volatility affects borrowing costs and capital access for developing nations. Investor sentiment shifts and economic changes can disrupt debt refinancing, increasing financial vulnerability.
  For example: Brazil’s debt management strategies are influenced by global financial market fluctuations, impacting borrowing costs and international capital access.

Strategies for developing countries to overcome the challenges in financing growth while managing debt sustainability:

• Enhancing Access to Affordable Financing: Improve credit ratings through structural reforms, enhance financial inclusion, and diversify funding sources.
  For example: Ghana’s reforms improved macroeconomic stability and credit ratings, boosting access to international capital for development projects.
• Managing Vulnerability to External Shocks: Diversify the economy away from dependency on volatile commodities, establish fiscal buffers, and strengthen resilience to global economic fluctuations.
  For example: Chile’s ESSF acts as a fiscal buffer against copper price volatility.
• Balancing Fiscal Constraints: Prioritise public spending efficiency, increase revenue through tax reforms, and implement targeted social programs.
  For example: Rwanda’s revenue reforms and efficient public expenditure management have driven sustained economic growth, and improved fiscal sustainability.
• Ensuring Debt Sustainability: Implement debt sustainability frameworks, conduct regular debt sustainability analyses, and adopt proactive debt management strategies.
  For example: Mexico’s Fiscal Responsibility Law mandates debt sustainability analysis to maintain sustainable debt levels and ensure long-term economic stability.
• Navigating Global Financial Market Dynamics: Strengthen policy coordination, build resilience to external shocks, and engage in strategic debt management practices.
  For example: Malaysia’s proactive debt management and policy resilience mitigated global financial crises, preserving investor confidence and stable economic growth.

Conclusion:
Achieving sustainable debt management while fostering economic growth requires countries to maintain fiscal discipline, enhance institutional capacities, diversify their economies, invest in human capital, and adapt to global financial dynamics. By prioritising these strategies, nations can navigate challenges effectively, ensuring long-term stability and prosperity amidst a dynamic global economic landscape.

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