Growing concerns about developing country debt
“Poorer nations were more fragile before Covid-19, had fewer opportunities to boost economies and are on the wrong side of the vaccine divide” – Extract from a recent Guardian published article âThe next global emergency? Growing Debt in the Developing World “by Larry Elliott
With a higher inflationary surge, mainly as a result of a crisis in the supply chain, and high prices of raw materials and energy, and on the other hand, a decline in growth forecasts mainly due to the Return of waves of covid-19, has raised concerns about stagflationary pressure. Overall, this has led to a greater push towards a tighter monetary stance going forward.
While a higher policy rate may make it difficult to revive economic growth and will make it more difficult to obtain the necessary increase in supply – although at least a substantial choking of the supply chain could also be artificial, greed playing a role here – along with other negative consequences for already rising absolute poverty levels, the other big worry is the shape of the health pandemic also resulting in a debt pandemic.
The Guardian The editor of economics, Larry Elliott, in the same article highlighted the difficult debt situation of developing countries, and how it has evolved over the years, as follows: âThe problems only arose gradually. . In the first phase, developing countries borrowed money, partly from multilateral institutions, others from individual countries and partly from the private sector. At the time, this seemed relatively safe as the global economy was growing and demand for commodities produced by low-income countries was high. The assumption was that the interest payments on the debt would be covered by future export earnings. Then, commodity prices collapsed in the mid-2010s and the [World] The Bank and the IMF have started to voice their concerns. The pandemic ushered in a second phase because, while no part of the world has been spared by covid-19, poor countries have been hit harder than developed countries. â¦ When the US Federal Reserve begins to raise interest rates, the third phase will begin. Many poor countries have borrowed in US dollars, and the cost of servicing these loans – already high – will rise further as the Fed tightens its policy. This will be the point of maximum danger.
The President of the World Bank Group, David Malpass, during one of the days of the 2021 Annual Meetings on October 13, 2021, underlined with regard to the difficult situation of the debt: âThe challenges of the debt are faced by many countries. On Monday we released the annual IDS [International Debt Statistics] report. And it showed a 12% increase in debt of low-income countries, reaching $ 860 billion. We need new systems to move this forward, because so many countries are in or at high risk of external debt distress. We need a comprehensive approach, including debt reduction, faster restructuring and more transparency in order to move forward on this issue. ‘
Carmen Reinhart, Chief Economist of the World Bank, said: âEconomies around the world face a daunting challenge posed by high and rapidly increasing levels of debt. Policymakers need to be prepared for the possibility of debt distress when financial market conditions become less favorable, especially in emerging and developing economies.
In the IDS 2021 report, Malpass highlighted the debt situation of countries eligible for the Debt Service Suspension Initiative (DSSI) as follows: âAccording to the latest data, the total external debt stocks of low-income countries eligible for the DSSI grew 9% in 2019 to reach $ 744. billion dollars, which is equivalent on average to one-third of their combined gross national income. Loans from private creditors were the most dynamic component of the external debt of DSSI-eligible borrowers, quintupled since 2010. Obligations to private creditors stood at $ 102 billion at the end of 2019. Outstanding debt debt of DSSI-eligible countries to official bilateral creditors, composed primarily of Group of Twenty (G-20) countries, reached $ 178 billion in 2019 and represented 27% of long-term debt outstanding. term of low-income countries. ‘ That said, DSSI’s poor performance was highlighted by Tim Jones, who is the head of policy for the Jubilee Debt Campaign, and was quoted in the same Larry Elliott article as saying, â’The G20 is asleep at the wheel so as the debt crisis intensifies in low-income countries. Jones also said. “The current rise in global interest rates will worsen the crisis, preventing countries from recovering from the pandemic. The G20 has a need urgently to force private creditors to participate in debt restructuring.
To deal with the source of the debt crisis coming from the private sector, it is indeed important to put in place a sovereign debt restructuring mechanism (SDRM). Larry pointed out in this regard in the same article “Over the years, proponents of an SDRM have noted that corporations have a legal way to get rid of their unsustainable debts, but nation states do not.” Further, Larry indicated that “one possible option would be class action clauses that would bind all creditors to a restructuring deal in the event that a significant majority – say 66% – agree.” In these circumstances, individual creditors could not claim a better deal. ‘
A recent Guardian article “The Covid pandemic has pushed poor countries to record debt levels – the World Bank” quoted the comments of the chief economist of the World Bank as follows: “Carmen Reinhart, the chief economist of the World Bank said, âEconomies around the world face a daunting challenge posed by high and rapidly increasing debt levels. Policymakers need to prepare for the possibility of debt distress when financial market conditions become less favorable, especially in emerging and developing economies. “