In one of its recent reports, the United Nations highlighted an elephant in the room – poor countries in Africa, Latin America, and Asia are facing significant debts, a huge share of which is attributable to foreign lenders. According to the “A World of Debt” report, released last month, today, 3.3 billion people live in countries that spend more on interest payments than on education or health. Global public debt reached a record US$92 trillion last year of which around 30% percent was within developing countries. After COVID-19 and the war in Ukraine, some say that a new major cataclysm will dominate the world –- a debt crisis that is almost impossible to relieve. Why will it be hard to avoid?
According to the UN report, 40% of all developing nations are on the brink of financial crisis.
“Half of humanity lives in countries that are forced to spend more on servicing their debt than on health and education, which is nothing less than a development disaster”, UN Secretary-General António Guterres said last month.
Developing countries hold almost 30% of the global public debt, of which 70% are represented by China, India and Brazil. Fifty-nine developing countries face a level of debt as a percentage of GDP above 60% – a threshold that indicates a high level of debt.
Globally, internal and external debt has risen more than five times in the last two decades, outpacing economic growth, with GDP only tripling since 2002, according to the report published before the G20 finance ministers’ meeting which took place in India on July 14-18.
The UN chief also highlighted that the increasing reliance on private creditors, such as bondholders and banks, account for 62% of the total external public debt of developing countries. By offering more expensive debt and shorter maturities, the situation has become even more complicated for the poor nations that are borrowing.
Economists agree that should developing nations have borrowed from richer Western nations, debt restructuring would have been an option and a possible solution. The debt restructuring concept has previously been applied and brought relief to economies. However, this time, the debt crisis is different with many developing countries having borrowed from one of the toughest lenders – China.
The fact that China is not a Paris Club member, an organization that strives to find solutions to the problems faced by debtor nations, makes the situation even more difficult. The UN considers that creditors should adopt various joint measures to temporarily suspend some penalties and increase access to financing for countries facing a debt crisis. However, China is known for its “reluctance to forgive debt”.
Such an initiative to ‘forgive’ some of the debts could be taken at the next G20 reunion, which is scheduled for September 2023. The previous reunion of the largest 20 economies in July made little progress as the bloc was unable to overcome key differences and low attendance due to domestic issues added to the obstacles, as reported by Reuters.
However, since China has launched its own development program through the Silk Road Initiative, it is still in doubt if it will cooperate and follow the IMF and World Bank’s approaches to debt restructuring. At the moment, China is one of the world’s largest lenders, particularly in Africa. A debt rescheduling mechanism is also needed “to address slow progress in the G20 joint framework,” the report said, without providing details on how this mechanism would work. Some examples in this regard refer to Zambia which benefited in 2020 from a debt relief program that decreased the country’s debt at interest rates of 1% until the country’s economic growth recovers.
Economists and debt experts warn that lender countries should agree on rescheduling or restructuring the debts. Otherwise, the world could face a crisis similar to that in 1980 which severely impacted developing countries for a long period of time.
