“Uncertainty” is the word that best describes the current times as Russia’s war comes on top of an ever-changing and persistent pandemic, now in its third year. The most vulnerable in this situation are those countries buried in debt. Some of these are rich, others are very poor. For example, the external debt of the least developed countries is expected to reach US$43 billion, while the total amount of sovereign debt in the world is US$240 billion. As some economists put it, “the distressed debt is threatening to drag the world into a historic cascade of defaults”. Read more on this subject by analyzing some experts’ opinions below.
Key Takeaways:
- The burden of debt for some nations is sustained by the ongoing Russia-Ukraine war, the effects of the COVID-19 pandemic, and climate change
- Sri Lanka has defaulted on its debt for the first time in its history as the country struggles with its worst financial crisis in more than 70 years
- Several financial experts think the cancellation of debts is appropriate which has both economic and political justification
Why are developing countries facing a renewed debt crisis?
“The story of the oil price crash (in the 1980s) is being repeated today for vulnerable developing countries (DCs) still dependent on export revenues. Commodity exporting DCs mostly lack a sufficient processing infrastructure and are therefore extremely sensitive to price volatility, fueled by speculation on the major international stock markets. The effects of COVID-19 are having an impact on debt and increasing the already particularly high debts that developing countries must repay to creditors.”
“Generally, countries face debt crisis because their expenses for interest payments exceed their earnings. Sometimes this could combine with extraordinary circumstances, e.g., the huge explosion in Lebanon, but usually the default is “man-made” by public authorities. As simple as that.”
“With regard to the question, I can mention three biggest elements: weak fiscal equilibrium signaled by huge subsidies for electricity, gas, fuels and food, and exports of few raw materials, in some cases just one (oil), the main raw materials for production and consumption are imported, and big fiscal expending in bureaucracy.”
What are the biggest consequences of a default for a developing country?
“For developing countries, the biggest consequence can be either no- or restricted access to the international financial markets. The countries in default have limited opportunities to refinance their external debt. This could lead to inflation, the devaluation of local currency, increased local taxes, gradually cutting the financing of social obligations including education, healthcare, pensions and public sector salaries leading to general economic decline. What could be the likely result? Pictures from Sri Lanka, where the president fled the country, rebels seized his palace and swam in his pool, give a clear answer.”
What should the international community do in this regard?
“If we want to restore some freedom of action to developing countries, it is necessary to remove the domination that constitutes their foreign debt. Such a cancellation has both economic and political justification. For developing countries, the cancellation of foreign debt is essential because it would restore the room to maneuver to countries that would no longer be obliged to export their wealth and could devote more resources to meeting the basic needs of their populations”.
“The funny thing is that looking at the “debt-to-GDP ratio”, which is the classic metric comparing a country’s public debt to its gross domestic product (GDP), the highest debtor is Japan (257%). It must be borne in mind that Japan’s debt is mainly internal borrowing. It is necessary to distinguish between internal and external debt. With regards to the EU, the top three debtors are Greece (207%), Italy (159%) and Portugal (131%) (WB study, 2021, data taken from here). For European countries, it is external debt. However, the international community is coping with the problem by buying out their respective bonds at increasing interest rates. Speaking about developing countries’ debts, I think that the debt will be either partly written off, restructured or bought out by international financial institutions and governments of wealthier countries including China, the country that continues to pursue its international expansion and has sufficient funding for that.”
“Launch a program similar to one of the 90s, based on the Heavily Indebted Poor Countries Initiative, which was initiated by the International Monetary Fund and the World Bank following extensive lobbying by NGOs and other bodies. It provides debt relief and low-interest loans to cancel or reduce external debt repayments to sustainable levels, meaning countries can repay debts in a timely fashion in the future.”
See also: How does the future look for low-income countries with record-high debt levels? | Experts’ Opinions
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