The writer is an economist and serves as the Secretary-General of the United Nations Conference on Trade and Development
There is a worrying tendency in the international community to consider debts in developing countries sustainable because they can be repaid after some sacrifice.
But that’s like saying the poor family stays afloat because they always pay back their loan sharks. To take this view is to ignore the lack of skipped meals, investment in education, and health spending, which allows for forced interest payments. This type of debt trap is a social disaster in the making. After ten years the loan can be paid off but the family will be ruined.
This is a dilemma facing developing countries, both large and small. The pandemic, the cost of living crisis and rising interest rates have brought them to the point where they can only pay off their debts through austerity or through investments put forward in the Sustainable Development Goals (SDGs). Their debts are justifiable in that they can be repaid, but unsustainable in all other respects.
Moreover, this full-blown development crisis threatens a new decade in which the debt crisis at its core threatens to leave much of the world economy in limbo.
A repeat of the 1980s-style debt crisis is perceived to threaten global financial stability. But the public debt of developing countries, excluding China, will reach $11.5tn in 2021. According to some accounts, serious debt problems have largely limited a small share of this figure, owed by more fragile low-income countries such as Chad, Zambia or Ethiopia.
But the situation is rapidly deteriorating. During the pandemic, government debt in more than 100 developing countries (excluding China) increased by nearly $2tn, as social spending increased while revenue was frozen by lockdowns. Now, central banks are raising interest rates, exacerbating the problem. Rising rates lead to capital flight and currency depreciation in developing economies, as well as increased borrowing costs. These factors have pushed countries like Ghana or Sri Lanka into debt distress.
In 2021, developing countries paid $400bn in debt service, more than double the amount they received in official development assistance. Meanwhile, their international reserves shrank by $600bn last year, nearly three times the emergency support they received through the allocation of IMF special drawing rights.
So foreign debts are eating up an ever-larger slice of the ever-shrinking national resources pie. As inflation rises, natural disasters become more frequent, and food and energy imports rise in price, countries need more, not less, contingency planning assistance.
A more bold approach is needed. Recent efforts by the international community to agree large-scale emergency debt measures have fizzled. This is despite major efforts at the G20 through the now-defunct Debt Service Suspension Initiative, and through the Common Framework for Debt Treatment, which requires critical reforms such as suspending payments during negotiations and extending debt to middle-income countries. Suffering
The failure of these efforts has revealed the complexity of existing mechanisms, characterized by borrowers refusing to engage in restructuring with extraordinary powers of subversion. Crisis solutions are often too little, too late. The world lacks an effective system to deal with debt.
An independent sovereign debt authority that engages with lender and borrower interests, both corporate and private, is urgently needed. At a minimum, such an authority should provide coherent guidelines for suspending debt payments in disaster situations, consider the SDGs in debt sustainability assessments, and provide expert advice to governments as needed.
Furthermore, public debt registries for developing countries allow lenders and borrowers to access debt data. This will go a long way to increase credit transparency, strengthen debt management, reduce risk of credit distress and improve access to finance. Progress on both these fronts could begin with an independent review of the G20 debt agenda: India’s presidency could bring a historic opportunity to succeed where others have stumbled.
Tackling the current global debt crisis is not just a moral imperative. In the context of growing climate and geopolitical tensions, it is a major threat to global peace and security and economic stability. Without supporting countries to become sustainable, their debts will never realistically be repaid.