Drowning in debt
James David Spellman says poor nations need economic re-engineering to produce more lucrative goods and ways to pay creditors using commodities
The rapid build-up of public debt was on the minds of finance ministers gathered in Washington recently for the spring meetings of the International Monetary Fund and the World Bank. With the US Federal Reserve likely to keep interest rates higher for longer, inflation stubbornly unyielding worldwide, and the dollar’s rally, pressures are mounting for urgent relief for heavily indebted lowincome countries.
The solutions that surfaced in Washington focused on retooling current approaches while expanding replenishments of the two institutions, so more loans could be extended for energy, health and climate change mitigation. The hope is that rapid improvements in those areas would stimulate growth so countries can ease out of the debt crisis.
Compounding the difficulties is the outlook for economic growth and global trade. The IMF forecasts that both will expand more slowly than the historical average for the next few years.
The 75 poorest nations owed their creditors about US$1.1 trillion at the end of 2022, more than double the 2012 level, World Bank data shows. Over 60 per cent of low-income countries and at least 25 per cent of middle-income countries are in debt distress or at high risk.
Poor countries use about 14 per cent of their tax revenues to service debt. That share for some countries exceeds 25 per cent. The problem is exacerbated by one-third of their external debt being charged variable interest rates.
With little opportunity to offset these borrowing costs with new revenues, the pool of funds available to countries to fulfil basic humanitarian needs is shrinking.
These countries also face significant debt repayments over the next two years – refinancing about US$60 billion of external debt each year, which is about three times the average over the decade ending in 2020. Such a concentration of refinancing could lead to a liquidity crunch in which borrowing countries pay higher interest rates to attract lenders that are increasingly adverse to default risks.
Private creditors are already receiving more in principal repayments from developing countries than they are disbursing loans. The global financial structure, with inadequate resources and antiquated processes, cannot manage such risks nimbly, especially when they snowball.
Global public debt edged up to 93 per cent of gross domestic product last year, nine percentage points above pre-pandemic levels, according to the IMF. That increase was led by the two largest economies, the United States and China, where debt rose by more than 2 and 6 percentage points of GDP, respectively. About half of the world’s economies tightened their fiscal policy last year, down from 70 per cent in 2022.
These trends show that advanced countries are spending well beyond their revenues, for several reasons. The costs of recovery from the pandemic, including emergency support and medical care, linger on. Wars in the Middle East and Ukraine have led to an escalation in defence spending. Ageing demographics are pushing up social services costs.
The budgetary constraints of developed countries have limited their ability to increase commitments for replenishing multilateral banks to work out debt restructuring.
Ministers from Africa shake their heads when asked for fresh ideas on how debt vulnerabilities could be reduced. The fixes on the table are procedural, they say. They do not address fundamental inequalities in the global economy.
In supply chains, they often provide only raw ingredients. There is little margin for profit from commodities. The vagaries of nature may wipe out exports while leading to famine.
A chocolate bar, says one minister, may sell for ¤10 (HK$84) in Paris, but the cocoa used to make that chocolate is bought for very little. He asked: “How can we ever earn the money we need to earn if our capacity to generate profits is extremely limited?”
Solutions must embrace a re-engineering of debt-burdened economies to produce goods with higher profit margins while using their commodities in innovative ways to pay down debt. Transactionbased relationships must become long-term partnerships as buyers of, say, cocoa see advantages to helping their suppliers build and modernise capacity.
For example, cocoa purchases could be coupled with buying carbon credits that cocoa growers offer since their farms are carbon sinks, as another minister suggested, adding: “We need to unlock the value of our farms and forests through climate change policies.”
Roughly US$100 billion could be generated by debt-for-nature swaps, based on estimates by the International Institute for Environment and Development of debt swaps in 49 less developed countries at risk of a debt crisis.
The G20’s Common Framework is criticised for its limited use in coordinating debt restructuring among disparate lenders that include China, Saudi Arabia, private banks and Group of 20 countries. More than 70 nations are eligible, but only four had applied by last month: Chad, Zambia, Ethiopia and Ghana.
Proposed reforms, reiterated by ministers at the spring meetings, are underwhelming but essential. They include a standardised process with specific deadlines that allows talks with all the various creditors to occur simultaneously in different tracks.
Creditors are sharply divided over whether and how the loss they would incur in writing down debt would be equitably shared. Methods for calculating debt value and projecting a country’s cash flow are not standardised.
The World Bank and IMF need to do much more to underscore the necessity of implementing debt relief. Without progress, the consequence could be a global recession as prudent fiscal restraint is abandoned to stimulate growth.
James David Spellman, a graduate of Oxford University, is principal of Strategic Communications LLC, a consulting firm based in Washington, DC