An 0ver-board austerity policy, along with highly sub-optimal regulation of global finance in the wake of neoliberal assault of last four decades, or so, has meant that interest payment on debt, especially in developing countries, has increased tremendously because firstly, of seeing inflation mainly determined by aggregate demand, whereby overboard monetary austerity policy leads to more than required increase in interest rate.
Secondly, a downturn, as has been seen in a number of countries in the wake of the covid-19 pandemic, results in the flight of capital to safe havens in the developed world. This puts pressure on developing countries to increase their interest rate to compete for foreign portfolio investment– otherwise a wrong policy choice since it is highly volatile in nature, and given more reliable foreign direct investment (FDI) is negatively impacted by higher cost of capital– but this entails a generally heavy toll on economic growth. This procyclical nature of capital, due to the underlying weak regulation of financial markets, on one hand deepens the downturn, and on the other increases debt burden.
A September 16, Project Syndicate (PS) published article ‘Developing countries are paying too much to borrow’ pointed out in this regard ‘Why are low- and lower-middle-income countries’ (LLMICs) external borrowing costs so high? … The issue is urgent because official aid is projected to fall sharply in 2025-26. Not only has the United States shut down the US Agency for International Development, the world’s largest bilateral donor, but several European countries have also slashed their own aid budgets. Moreover, these moves come on the heels of a sharp tightening in traditional capital markets. Since 2022, developing countries have lost access to commercial finance, making it exorbitantly costly– or simply impossible– to refinance maturing debt. …Unfortunately, the pandemic-era surge in counter-cyclical lending by the IMF, the World Bank, and regional development banks has receded. By 2023, net transfers by these institutions and the Paris Club of sovereign creditors to LLMICs had already fallen to around $30 billion– less than half the $70 billion in 2020– and the IMF’s own net transfer had turned negative.’
The story would generally stop here a few decades ago, as very less attention was paid to economic, epidemiological, and environmental resilience-related aspects. This has drastically changed over time, mainly due to the fast-unfolding nature of the climate change crisis, and the related ‘Pandemicene’ phenomenon. In the meantime, lack of multilateral spirit, which on one hand has fallen severely short in terms of provision of climate finance, on the other hand, are rich, advanced countries with a lot of say in multilateral institutions to reform for instance, global sovereign debt architecture.
The climate change crisis requires that resilience is built-up quickly on one hand, and on the other, there is a need to invest in renewable sources of energy to rein in global warming. One major step in this regard is dealing with the debt crisis facing developing countries in particular. This is all the more important, because debt related needs continue to grow as well, given the increase in intensity, and frequency of climate change related disasters.
Moreover, there is also a lack of understanding of the misgivings of seeing inflation as overly a demand-side phenomenon, and as a consequence this has put too much focus on using the interest rate instrument, while the need is for adopting a more balanced aggregate demand-side, and supply-side policy emphasis. This one side, has increased interest payments on debt, and reduced fiscal space with countries to spend towards increasing resilience against existential threats, and on the other, has even contributed to inflationary pressures through the channel of cost-push inflation. For instance, the recent line of argument by State Bank of Pakistan, through its monetary policy statement (MPS) released on September 16, while inflationary pressures currently are primarily a supply-side phenomenon, at the back of flood catastrophe, has wrongly linked it to the interest rate.
The climate change crisis requires that resilience is built-up quickly on one hand, and on the other, there is a need to invest in renewable sources of energy to rein in global warming. One major step in this regard is dealing with the debt crisis facing developing countries in particular. This is all the more important, because debt related needs continue to grow as well, given the increase in intensity, and frequency of climate change related disasters. For instance, one-third of Pakistan was inundated by floods, which has a strong causal imprint of climate change. Back then, in 2022, billions of dollars were lost to the economy, in addition to significant loss to life. Around three years later, a substantial flood has once again hit the country– once again significantly climate change induced– with significant loss to the economy.
A January 2024 published article ‘Developing countries need debt relief to act on climate change’ by PS, pointed out in this regard ‘Developing economies have faced a series of external shocks in recent years, including the covid-19 pandemic, war-related disruptions of food and energy supply chains, and an uptick in global inflation. Moreover, their access to capital markets has been curtailed, preventing them from rolling over maturing loans, as they would do in normal times. As a result, countries have been forced to channel a large share of their tax and export revenues to service their debt, avoiding default at the cost of priorities like infrastructure investment, social-welfare programs, and climate action. …If nothing is done to help countries facing liquidity crises, the world will risk a wave of destabilizing debt defaults, and progress on the green transition will be severely undermined, with catastrophic implications for the entire world.’ Although the article is a bit dated, not much has changed in terms of the debt distress facing developing countries in particular, and if at, the situation overall has worsened for developing countries.
مصنف نے اپنی پی ایچ ڈی کہاں سے کی ہے اور کس مضمون میں کی ہے؟