‘Poorer nations were more fragile before Covid-19, had less scope to stimulate economies, and are on the wrong side of the vaccine divide’ – Excerpt from a recent Guardian published article ‘The next global emergency? Deepening debt in the developing world’ by Larry Elliott
With higher inflationary push, mainly at the back of a supply-chain crisis, and high commodity and energy prices, and on the other hand, a drop in growth forecasts primarily due to returning covid-19 waves, has raised concerns regarding 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 boost economic growth, and will make it harder to reach needed boost in supply– although at least a substantial choking in supply chain may also be artificial, with greed playing a role here– with further negative consequences on already rising absolute poverty levels, the other big worry is in the shape of the health pandemic resulting in a debt pandemic as well.
The Guardian economics editor, Larry Elliott, in the same article highlighted the difficult debt situation facing developing countries, and how it has evolved over the years, as follows: ‘Problems have only gradually surfaced. In the first phase, developing countries borrowed money, some of it from multilateral institutions, some from individual countries and some of it from the private sector. At the time, this seemed relatively safe because the world economy was growing and demand for the commodities produced by low-income countries was strong. The assumption was that debt interest payments would be met by future export revenues. Then, commodity prices crashed in the mid-2010s and the [World] Bank and the IMF started to voice concerns. The pandemic ushered in a second phase because, while no part of the world was left untouched by covid-19, poor countries were hit harder than developed nations. …When the US Federal Reserve starts 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 increase still further as the Fed tightens policy. That will be the point of maximum danger.’
World Bank Group president, David Malpass, on one of the days during the 2021 Annual Meetings on October 13, 2021, highlighted with regard to the difficult debt situation as follows: ‘The debt challenges are confronting many countries. On Monday, we released the annual IDS [International Debt Statistics] report. And it showed a 12 percent increase in debt for the low-income countries, reaching $860 billion. We need new systems to push that along, because so many countries are in external debt distress or at high risk of it. We need a comprehensive approach, including debt reduction, swifter restructuring, and more transparency in order to make progress on this problem.’
Carmen Reinhart, the World Bank’s chief economist, said: “Economies across the globe face a daunting challenge posed by high and rapidly rising debt levels. Policymakers need to prepare for the possibility of debt distress when financial market conditions turn less benign, particularly in emerging market and developing economies.”
In the IDS 2021 report, Malpass highlighted the debt situation of Debt Service Suspension Initiative (DSSI) eligible countries as: ‘According to the latest data, total external debt stocks of low-income countries eligible for the DSSI rose 9 percent in 2019 to $744 billion, equivalent on average to one-third of their combined gross national income. Lending from private creditors was the fastest-growing component of the external debt of DSSI-eligible borrowers, up fivefold since 2010. Obligations to private creditors totaled $102 billion at the end of 2019. The debt stock of DSSI-eligible countries to official bilateral creditors, composed mostly of Group of Twenty (G-20) countries, reached $178 billion in 2019 and accounted for 27 percent of the long-term debt stock of low-income countries.’ Having said that, the lacklustre performance of DSSI was highlighted by Tim Jones, who is Jubilee Debt Campaign’s head of policy, and was quoted in the same article by Larry Elliott as saying: ‘“The G20 are asleep at the wheel as the debt crisis intensifies in lower 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 urgently need to compel private creditors to take part in debt restructuring.”’
For dealing 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, advocates of a SDRM have noted that companies have a legal way to rid themselves of unsustainable debts but nation states do not.’ Moreover, Larry indicated ‘One possible option would be collective action clauses that would bind all creditors to a restructuring deal in the event that a sizeable majority– say 66 percent– were in agreement. In those circumstances, individual creditors would be unable to hold out for a better deal.’
A recent Guardian article ‘Covid pandemic has pushed poor countries to record debt levels– World Bank’ quoted the comments of chief economist of the World Bank as: ‘Carmen Reinhart, the World Bank’s chief economist, said: “Economies across the globe face a daunting challenge posed by high and rapidly rising debt levels. Policymakers need to prepare for the possibility of debt distress when financial market conditions turn less benign, particularly in emerging market and developing economies.”’
