The author is an economist serving as Secretary-General of the United Nations Conference on Trade and Development.
There is a worrying tendency in the international community to consider debts in the developing world as sustainable because they can be repaid after some sacrifices.
But it’s like a poor family will survive because they always pay back their loan sharks. To take this view is to ignore the food foregone, the lack of prior investment in education and health spending that makes room for forced interest payments. Such a debt trap is a social disaster. Ten years from now the debt will be paid but the family will be ruined.
This is the dilemma faced by many developing countries, both large and small. Pandemics, life crises and rising interest rates have pushed them to the point where they can only repay their debts through austerity or investments already made in the Sustainable Development Goals (SDGs). . Their debts are sustainable in the sense that they can be repaid, but unsustainable in every way.
Moreover, this full-blown growth crisis, along with the debt crisis, threatens a new lost decade for much of the global economy.
A repeat of a 1980s-style debt crisis that could threaten global financial stability is unlikely. But the public debt of developing countries, excluding China, reached $11.5 trillion in 2021. By some accounts, serious debt problems are largely confined to a small fraction of this figure, owed to the most vulnerable low-income countries such as Chad, Zambia or Ethiopia. .
But the situation is rapidly deteriorating. Over the course of the pandemic, government debt in more than 100 developing countries (excluding China) increased by nearly $2 trillion, as social spending soared while revenue froze due to lockdowns. Now, central banks are raising interest rates, adding to the problem. Rising rates mean capital flight and currency depreciation in developing economies, as well as rising borrowing costs. These factors have pushed countries like Ghana or Sri Lanka into debt problems.
In 2021, developing countries paid $400 billion in debt service, more than twice the amount they received in official development assistance. Meanwhile, their international reserves fell by more than $600 billion last year, nearly three times more than they received in emergency aid through the IMF’s Special Drawing Rights Allocation.
So foreign debt is eating up a bigger slice of the ever-shrinking national resource pie. As inflation rises, natural disasters become more frequent and the cost of food and energy imports increases, countries need more emergency planning support, not less.
A much bolder approach is needed. Recent efforts by the international community to agree on large-scale emergency debt measures have failed. This is despite significant efforts at the G20 through the now-defunct Debt Service Suspension Initiative, and the Joint Framework for Debt Treatment, which requires significant improvements, such as the suspension of payments during negotiations and debt moderation. Expansion into income countries. Trouble.
The failure of these efforts has revealed the complexity of the current procedures, which are characterized by creditors who refuse to engage in restructuring with extraordinary powers of sabotage. Crisis solutions are often too little, too late. The world lacks an effective system to deal with debt.
An independent sovereign credit authority aligned with the interests of lenders and borrowers, both institutional and private, is urgently needed. At a minimum, such an authority should provide coherent guidelines for suspending debt payments in disaster situations, ensure that the SDGs are considered in debt sustainability assessments, and provide governments in need with Expert advice should be provided.
Additionally, a public debt registry for developing countries would allow both lenders and borrowers access to debt data. This will go a long way in enhancing credit transparency, strengthening debt management, reducing the risk of debt distress and improving access to financing. Progress on both these fronts could begin with an independent review of the G20’s debt agenda: India’s chairmanship could bring a historic opportunity to succeed where others have failed.
Addressing the current global debt crisis is not only a moral imperative. In the context of increasing climate and geopolitical unrest, it is the greatest threat to global peace and security and financial stability. Without helping countries to become sustainable, their debts will never be realistically repayable.