How does the future look for low-income countries with record-high debt levels? | Experts’ Opinions

According to a recent World Bank report, governments around the world responded to the COVID-19 pandemic with fiscal, monetary, and financial stimulus packages. While these measures were aimed at addressing health emergencies, cushioning the impact of the pandemic on the poor, and putting countries on a path to recovery, the resulting debt burden of the world’s low-income countries rose by 12% to a record US$860 billion in 2020. Excessive levels of foreign debt can hamper the ability of countries to invest in their economic future, experts warn.

Read the in-depth experts’ predictions on the record-high debt level of low-income countries and the impact on their economies in their responses below.

What are, in your opinion, the greatest consequences of debt for low-income countries?

“The start of the COVID crisis in early 2020 has led to significant changes in economic patterns, with the suspension of international air travel, a reduction in the purchases of some goods and services, as a great majority of workers in developed countries were forced to confine, and the growth of online ordering. It has also seriously affected developing countries whose GDP relied heavily on tourism (Cape Verde, Kenya, Ghana, Seychelles, the Caribbean …and of course Asia, which was mostly cut-off from the rest of the world for nearly 18 months). While revenue went down, expenses went up in order to launch testing and vaccinations in countries with a poor health system and a limited social nest egg. This has put a serious burden on many developing countries who have seen their debt-to-GDP ratio go through the roof (Cape Verde for instance registered a debt increase from 121% to 160% of GDP). While growth is restarting in 2021 in many parts of the world, the situation of resources in poor countries is worsening, as the prices for energy have been rising significantly in the last few months, adding to the misery of some countries, while potentially helping resource-rich countries.”

“The pandemic has radically changed and shifted economic policy consideration, including debt management. Before COVID-19, unsustainable debt management was a challenge for low-income countries and today the burden is even more tedious. Domestically, the countries have to cope with health issues with limited resources while running the economic recovery policy plan. This is unbearable if not controlled well and will impose an enormous burden in the future. The countries would not only be left behind in accelerating the recovery to overtake the equilibrium, but also carrying the surging debt because of the need of financing.”

“The greatest consequences for low-income countries because of the increase in the debt burden are:

• The financial situation confronting less developed countries could worsen if the rate of interest increases. Pressure to raise interest rates has intensified after rising energy costs and supply shortages;
• A downturn in financial market conditions could result in the possibility of debt distress;
• The debt levels may become unsustainable and affect the possibility of economic recovery and inhibit poverty reduction.”

“The greatest consequences for low-income countries because of this debt is that they have been forced to choose between a COVID-19 response and the mitigation of and adaptation to impending climate change impacts at the very time when all nations must be making appropriate longer-term climate change investments in education, health, and infrastructure.”

What should the international community do to mitigate the effect of debt?

“As the overall debt of developing countries has grown to levels unseen in the last 50 years, the international community (WB, IMF, G20) has set up from May 2020 a debt service suspension measure, to avoid a debt crisis in countries hard-hit by the COVID crisis. This has allowed a number of countries to reserve resources to provide health services and economic relief to their citizens, but some have not used this mechanism in order to preserve their ability to raise fresh debt. Many countries are asking debt owners to provide debt relief and while some limited bilateral debts have been erased, a larger movement is needed in order to provide breathing room for those countries. However, this debt relief burden has to be shared fairly. The current crisis should not be used as a pretext for Chinese debt holders to take over the collateral that countries on the Belt and Road Initiative have been offering: ports, mines, precious deposits, and other valuable assets. It is important that all sovereign and non-sovereign debt owned by countries, development banks and quasi-state corporations is entered in the negotiations so that developing countries retain their potential for development after the current crisis subsides.”

“Some international development organizations have debt relief policy packages on this situation to lessen the impact. To mitigate the risks, there is supervision and evaluation on how to manage debt forgiveness. This is crucial as the low-income countries need to acknowledge their priorities such as dealing with the health issue in the initial stage and then setting an agenda for speeding up the economic recovery plan. The community might want to curtail the debt impact, but what is more important to suggest is how these countries can not only recover but also become stronger. The ability to adjust the recovery pace is fundamental of the future’s power to overcome unexpected challenges. This is also aligned with the G20’s idea to not leave no one behind as all of the countries are suffering from this pandemic. Therefore, the world together improves the health, economy and political relations.”

“In order to mitigate the effect, the international community should develop a comprehensive policy to include:

• Debt reduction;
• Debt service suspension;
• Restructuring unsustainable debt situations and prolonged financing gaps;
• Encourage less developed countries to engage with the official creditors. An International Debt Statistics (IDS) report emphasized a need for creditors and borrowers to cooperate to avert the risk of sovereign debt crisis caused by the pandemic;
• Improved debt transparency is vital to investment and debt sustainability. Creditors and debtors are encouraged to adopt transparency to allow analysis that would let countries determine sovereign debt levels that are compatible with growth and poverty reduction.”

“The international community must step up its responses since 1) developed countries mostly caused the climate changes that we will experience, and 2) there are likely economies of scale that can be applied in addressing these issues due to knowledge gained from the replication of adaptation in other lands. Developed countries have learned both how best to respond to COVID, and how to respond to climate mitigation. Developed countries, many of which are only just learning how to respond in terms of adaptation, must still do more (climate justice).”

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