Economic policy, sadly, is not learning from its mistakes, even not the graver ones, including over-board practice of austerity policies. More dangerously, this is happening even as the world is faced with polycrisis, including the existential threat of climate change crisis– and the related ‘Pandemicene’ phenomenon– which is fast unfolding, resulting in significant increase in the frequency, and intensity of climate catastrophes, for example, the recent rise in the frequency of earthquakes, and cloudbursts.
Hence, on one hand, economic, environmental, and epidemiological related resilience needs are increasing both in terms of adequately reforming underlying institutions, organizations, and markets, and also in terms of financing needs, which are rising in the wake of climate related disasters. It was only in 2022 that Pakistan– which is among the top-ten climate change vulnerable countries– saw one-third of its land come under water due to climate change-induced heavy rainfall, and floods, with considerable loss to life, and billions of dollars worth of damages caused to public infrastructure, and private property, while in recent weeks there have been a number of episodes of cloudbursts, and flooding in the mountainous northern areas of the country, which being one of the biggest repository of glaciers on earth is already under huge stress from fast melting of glaciers due to fast-increasing global warming.
Rising interest payments, in turn, have markedly reduced the capacity of developing countries in terms of reduced fiscal space, and negative impact on foreign exchange reserves, especially those countries that are highly debt distressed, including Pakistan, especially at a time when their resilience, and rebuilding needs have increased a lot due to the fast-unfolding climate change crisis, and due to significant increase in climate change related disasters
On the other hand, while it was not already a great cause of concern in the shape of weakening multilateral spirit, especially in terms of provision of adequate level of climate finance, and more broadly financing needs for meeting sustainable development goals (SDGs), both under the influence of ‘Chicago boys’-style local policymakers, and as per the highly Neoliberalism-influenced policy prescriptions of International Monetary Fund (IMF) programmes, there has been practiced– in the case of Pakistan, and globally in general for a number of years– over-board austerity policies.
Identifying the financing needs to adequately deal with climate change crisis, and achieving SDGs-related targets, an article published by United Nations Conference on Trade and Development (UNCTAD) in March 2024, and titled ‘Trillion-dollar shift urgently needed to align global finance with climate and development goals’ pointed out in this regard ‘An estimated $4 trillion needs to be mobilized each year to fight climate change and achieve the Sustainable Development Goals (SDGs) UNCTAD’s latest Trade and Development Report says. …The estimated financing needs represent just 1% of total global financial assets, currently valued at more than $470 trillion.’
Hence, while there has been highly inadequate provision of development/climate/SDG-related finance from both multilaterals, and major advanced countries– some of which are also highly responsible traditionally for significantly increasing global warming– over-board use of policy rate to control inflation – and also to wrongly compete for otherwise highly volatile ‘hot money’ or foreign portfolio investment (FPI), rather than improving economic institutional quality to bring-in much more durable form of investment in the shape of foreign direct investment (FDI)– when inflation is not just a monetary phenomenon, but at least equally a fiscal/governance/supply-side phenomenon, and requires a much more balanced aggregate demand-, and supply-side policy emphasis, has overall led to substantial increase in interest payments on debt.
An article titled ‘Turning ambition into action will require systemic reform of trade, investment and finance to meet today’s development challenges’, which was published by UNCTAD on July 7, pointed out in this regard ‘3.4 billion people live in countries that spend more on debt interest payments than on health or education.’]
Rising interest payments, in turn, have markedly reduced the capacity of developing countries in terms of reduced fiscal space, and negative impact on foreign exchange reserves, especially those countries that are highly debt distressed, including Pakistan, especially at a time when their resilience, and rebuilding needs have increased a lot due to the fast-unfolding climate change crisis, and due to significant increase in climate change related disasters.
UNCTAD’s report ‘A World of Debt 2025’ published in June adds to a list of important reports that have been recently produced to raise alarm over the significant increase in global debt in recent years. For instance, an August 19, Project Syndicate (PS) published article ‘An Agenda for tackling the debt and development crises’ pointed out in this regard ‘Recent reports that we each co-authored– Healthy Debt on a Healthy Planet, the Jubilee Report, and the Report of the UN Secretary-General’s Expert Group on Debt – along with many other experts’ work, have definitively established the severity and urgency of these intertwined crises and their devastating consequences. In 2024, developing countries paid $25 billion more to external creditors than they received in new disbursements. …Given historical inequities and low bargaining power, developing countries consistently face high borrowing costs and uneven incidence of prudential regulation. Without measures to ensure transparency, accountability, and strategic investment planning, borrowing and lending policies have failed to mobilize the productive investments that drive sustainable growth. Moreover, capital flows are highly volatile, with money flooding into developing countries during booms and flooding out in the wake of shocks. Meanwhile, the laws and policies governing debt restructurings have long encouraged delay, not resolution.’
UNCTAD’s report on debt, referred to in the previous paragraph, for instance indicated that public debt globally had been increasing at a very fast pace. It strongly feels as if the world is for some time in deep waters of debt, where the depth is increasing over time. The report pointed out in this regard ‘Global public debt continues to increase rapidly, driven by cascading crises as well as the sluggish and uneven performance of the global economy. In 2024, public debt, comprising domestic and external general government debt, reached US$102 trillion, an increase of US$5 trillion from 2023…’
As per the report, global public debt was a little more than $50 trillion in 2010, and while it took a little more than nine years for debt to increase to $75 trillion– that is for an overall addition of around $25 trillion in roughly a decade– the next around $25 trillion have been added in just around five years, that is before end of 2024, indicating in turn, that the pace of increase in debt has roughly doubled in the wake of the Covid-19 pandemic, significant rise in climate change related needs– particularly in the last few years on account of fast-unfolding nature of climate change crisis as evidenced both in the significant rise in the frequency of such disasters, and also as global warming continues to reach new highs– and wrongly over-board practice of austerity policies given the significant rise in inflation was primarily due to global supply chain crisis– in the wake of Covid-19 pandemic, and the Ukraine-Russia conflict, and therefore needed a much more balanced aggregate demand-, and supply-side policy emphasis.
Moreover, debt distress was markedly higher in developing countries than developed countries. In this regard, the report indicated ‘The public debt landscape and its dynamics are marked by significant regional disparities. The nominal value of public debt in developing countries is rising twice as fast as in developed countries… Nevertheless, the latter continue to account for the lion’s share of global public debt (69%). …58 developing countries (40% of those with available data) continue to struggle with high debt levels, exceeding the notional threshold of 60% of GDP… This includes 23 countries in Africa (43% of the region’s total), 18 countries in Latin America and the Caribbean (55%), and 17 in Asia and Oceania (31%).’
Development countries, in general, are also under high debt distress in terms of their external debt built-up, and interest service payments. The same report pointed out in this regard ‘In 2023, developing countries’ external public debt reached US$3.3 trillion—an increase of roughly US$102 billion compared to the previous year. …For more than half of developing countries, external public debt equated to 88% or more of the value exports of goods and services, and primary income receipts… External public debt service burdens, however, show little sign of improvement, with related payments reaching as much as US$487 billion in 2023. Of particular concern is the evolution of the ratio of external debt service to government revenues. Half of developing countries are allocating at least 8.6% of their public revenues to servicing external debt—nearly twice the 4.7% recorded in 2010… The ratio of external public debt service relative to export revenues has also doubled, from a median value of 3.2% in 2010 to 6.5% in 2023. This implies that servicing external public debt now absorbs a much larger share of foreign exchange earnings in developing countries.’
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