High debt bur­dens leave low-in­come coun­tries vul­ner­a­ble to crises

The East African - - BUSINESS - Christine La­garde is the IMF manag­ing di­rec­tor. This is an abridged ver­sion of the speech she gave at the Sov­er­eign Debt Con­fer­ence in Washington on Septem­ber 13.

WE KNOW THAT BOR­ROW­ING makes sense for all coun­tries — rich and poor — if it fi­nances schools, hos­pi­tals, and phys­i­cal and dig­i­tal in­fra­struc­ture. Th­ese are smart in­vest­ments that can boost growth and im­prove the eco­nomic well­be­ing of in­di­vid­u­als and com­mu­ni­ties.

This is es­pe­cially true for low-in­come coun­tries and emerg­ing economies that tend to have a lower cap­i­tal base to start with, and where global cap­i­tal is likely to be the most pro­duc­tive. But we also know that, over the past decade, gov­ern­ment debt as a pro­por­tion of GDP has reached new highs. In ad­vanced economies, pub­lic debt is at lev­els not seen since the Sec­ond World War. Emerg­ing mar­kets’ pub­lic debt is at lev­els last seen dur­ing the 1980s debt cri­sis. And if re­cent trends con­tinue, many low-in­come coun­tries will face un­sus­tain­able debt bur­dens.

In emerg­ing mar­kets and low-in­come coun­tries, the buildup shows the im­pact of rapid spend­ing, only partly used for pub­lic in­vest­ment. And let us not for­get the im­pact of var­i­ous shocks — from low ex­port prices for com­mod­ity pro­duc­ers to nat­u­ral dis­as­ters, con­flicts, and epi­demics, which hit low-in­come coun­tries hard.

The bot­tom line is that high debt bur­dens have left many gov­ern­ments more vul­ner­a­ble to a sud­den tight­en­ing of global fi­nan­cial con­di­tions and higher in­ter­est costs. For emerg­ing mar­ket and fron­tier economies, con­cerns about debt lev­els in this en­vi­ron­ment could con­trib­ute to mar­ket cor­rec­tions, sharp ex­change rate move­ments, and fur­ther weak­en­ing of cap­i­tal flows. How fast should pub­lic debt be re­duced? What are the best con­ven­tional and un­con­ven­tional tools for debt re­duc­tion? And how can we en­cour­age more ef­fec­tive debt re­struc­tur­ing pro­cesses?

De­vel­op­ing new poli­cies and shar­ing fresh ideas can help move the sov­er­eign debt nee­dle in the right di­rec­tion.

But rapidly grow­ing debt bur­dens could jeop­ar­dise their development goals, as gov-

ern­ments spend more on debt ser­vice and less on in­fra­struc­ture, health and ed­u­ca­tion. High debt can also cre­ate un­cer­tainty, which de­ters in­vest­ment and in­no­va­tion. We es­ti­mate that the me­dian debt level among low-in­come coun­tries in­creased from 33 per cent of GDP in 2013 to 47 per cent. Low-in­come coun­tries of­ten have a more lim­ited ca­pac­ity to raise pub­lic rev­enue and carry debt.

Again, this buildup of debt re­flects a range of fac­tors — from low com­mod­ity prices, to nat­u­ral dis­as­ters and civil con­flict, to high in­vest­ment spend­ing on projects that were not pro­duc­tive. Of course, am­ple global liq­uid­ity made it eas­ier for gov­ern­ments to bor­row more — which brings me to the lenders.

His­tor­i­cally, low-in­come coun­tries re­lied on in­ter­na­tional in­sti­tu­tions and tra­di­tional bi­lat­eral cred­i­tor coun­tries, which can use the Paris Club to co-or­di­nate their ac­tions on debt is­sues. To­day, low-in­come coun­tries rely more heav­ily on non-tra­di­tional lenders — from bond in­vestors to for­eign com­mer­cial banks, to com­mod­ity traders, to cred­i­tor coun­tries out­side the Paris Club. The shift to­wards new bor­row­ing sources gen­er­ally means higher in­ter­est rates and shorter ma­tu­ri­ties. Bor­row­ing from non-paris Club lenders also means that cred­i­tor co-or­di­na­tion will likely be­come more com­pli­cated.

Manag­ing th­ese debt vul­ner­a­bil­i­ties is crit­i­cal. We es­ti­mate that 40 per cent of low-in­come coun­tries al­ready face sig­nif­i­cant debt chal­lenges. A key chal­lenge is pre­vent­ing “debt sur­prises,” which can be driven by poor gov­er­nance, off-bal­ance sheet bor­row­ing, and weak debt recording and re­port­ing.

So, what can gov­ern­ments do? It is worth re­mem­ber­ing that the word “credit” comes from the Latin word for “trust”— which un­der­pins the fi­nan­cial sys­tem. Let me high­light three pol­icy pri­or­i­ties that can help make a dif­fer­ence in low-in­come coun­tries. First, greater effo=rts are needed to make bor­row­ing more sus­tain­able. This means pro­ceed­ing pru­dently in tak­ing on new debt, fo­cus­ing more on at­tract­ing for­eign direct in­vest­ment, and boost­ing tax rev­enues at home. It means fo­cus­ing on in­vest­ment projects with cred­i­bly high rates of re­turn. It also means in­creas­ing the re­spon­si­bil­ity of lenders, who need to as­sess the im­pact on the bor­rower’s debt po­si­tion be­fore pro­vid­ing the new loans.

Sec­ond, we need to en­sure that all coun­tries ad­here to rigour and trans­parency in their bor­row­ing and lend­ing. For ex­am­ple, there is room to sig­nif­i­cantly strengthen the in­sti­tu­tions that record, mon­i­tor, and re­port debt in in­di­vid­ual coun­tries.

One-third of low-in­come coun­tries do not re­port debt guar­an­tees for state-owned en­ter­prises; and fewer than one in 10 re­port debt of pub­lic en­ter­prises. Greater trans­parency can help pre­vent th­ese con­tin­gent li­a­bil­i­ties from turn­ing into mas­sive gov­ern­ment obli­ga­tions.

The IMF is us­ing its debt sus­tain­abil­ity anal­y­sis to shine a light on po­ten­tial risks. Last year, we con­ducted as­sess­ments in 55 low-in­come coun­tries, and we are now rolling out our new en­hanced debt sus­tain­abil­ity frame­work for th­ese economies.

Third, we need to en­cour­age stronger col­lab­o­ra­tion be­tween bor­rower coun­tries and lenders. For ex­am­ple, we have seen a sharp rise in the num­ber of cases where debt con­tracts are not pub­licly dis­closed by ei­ther the bor­rower or the lender. By work­ing to­gether, both par­ties can en­sure bet­ter dis­clo­sure, which re­duces risk and in­creases ac­count­abil­ity. We also need bet­ter col­lab­o­ra­tion to pre­pare for debt re­struc­tur­ing cases that in­volve non-tra­di­tional lenders. With sub­stan­tial non-paris Club debt, we need to think about new ways in which of­fi­cial cred­i­tor co-or­di­na­tion — of­ten so crit­i­cal to debt cri­sis res­o­lu­tion — can take place.

If ob­sta­cles that in­hibit smooth debt re­struc­tur­ing can be ad­dressed, the IMF would more eas­ily play its tra­di­tional role in pro­vid­ing fi­nan­cial sup­port and act­ing as a cat­a­lyst for ad­di­tional flows, in­clud­ing from the World Bank and other ma­jor lenders.

We are deeply en­gaged in this re­form process by pro­vid­ing ad­vice and a plat­form for di­a­logue.

Let me con­clude with the adage that trust ar­rives on foot, but leaves on horse­back. Build­ing trust in sov­er­eign bor­row­ers is now more im­por­tant than ever, es­pe­cially for low-in­come coun­tries.

We need to en­sure that all coun­tries ad­here to rigour and trans­parency in their bor­row­ing.”

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