The Washington Post
Many countries facing ‘debt tsunami’
Virus leads even stable nations to weigh drastic measures to stay afloat
san jose, costa rica — Costa Rica built Latin America’s model society, enacting universal health care and spending its way to one of the Western Hemisphere’s highest literacy rates. Now, it is reeling from the financially crushing side effects of the coronavirus, as cratering revenue and crisis spending force a reckoning over a massive pile of government debt.
The pandemic is hurtling heavily leveraged nations into an economic danger zone, threatening to bankrupt the worst affected. Costa Rica, a country known for ziplining tourists and American retirees, is scrambling to stave off a full-blown debt crisis, imposing emergency cuts and proposing harsher measures that touched off rare violent protests in the fall. To keep the lights on, a progressive, eco-friendly nation is weighing desperate solutions — including open-pit gold mining, even oceanic fracking.
“Costa Rica is facing a social crisis,” said Ana Rosa Ruiz, an economist at the Costa Rican Technological Institute.
Around the globe, the pandemic is racking up a mind-blowing bill: trillions of dollars in lost
tax revenue, ramped-up spending and new borrowing set to burden the next generation with record levels of debt. In the direst cases — low- and middle-income countries, mostly in Africa and Latin America, that are already saddled with backbreaking debt — covering the rising costs is transforming into a high-stakes test of national solvency.
Analysts call it a “debt tsunami”: National accounts are sinking into the red at a record pace.
“I consider the risk to be very high of an emerging-market debt crisis where a lot of countries run into problems at once,” said Harvard economist Kenneth Rogoff, former chief economist at the International Monetary Fund. “This is going to be a rocky road.”
‘A big crack in the ice’
By the end of 2020, total government debt worldwide was projected to soar by $9 trillion and top 103 percent of global GDP, according to the Institute of International Finance — a historic jump of more than 10 percentage points in just one year. Countries have maxed out their figurative credit cards to buy medical equipment, set up field hospitals, deploy health-care workers and source vaccines even as pandemic-related recessions have caused tax revenue to plunge and aid for the unemployed to spike. Countries that rely on tourism, which has ground to a virtual halt, or commodities such as oil that have sunk in price have felt the sting most keenly.
The United States has run up debt at a pace not seen since World War II. But the world’s wealthy nations are better able to cope with growing debt than their poorer counterparts.
By contrast, Angola, effectively shut out of global markets, is racing to strike a deal with the Chinese, but even that might not be enough to prevent a painful debt crisis. Sri Lanka, locked in recession, needs to make $4 billion in debt payments this year with only $6 billion in the bank. Brazil’s debt, worsened by a yawning budget deficit, has surged to a crippling 95 percent of GDP — raising alarm over the medium-term ability of the Latin American giant to stay afloat.
The IMF and the World Bank have sought to aid the most vulnerable states, and the world’s wealthiest nations endorsed a plan in October to extend a suspension of debt payments owed to them by the poorest. In November, those nations additionally agreed to work toward some form of debt relief for the poorest nations that seek it from them while encouraging private lenders to follow suit.
But analysts say that may not be enough.
Thirty-eight low-income countries are either in debt distress, according to the IMF, or are at high risk of falling into it. Unless private creditors and wealthy nations step up and agree to concessions or outright debt forgiveness, the pandemic’s fiscal shock could hurl some of those, as well as highly leveraged middle-income countries such as Costa Rica, toward catastrophic national bankruptcies.
Analysts say that the need for stimulus to keep economies running during this historically challenging period still outweighs the need to balance budgets. Even the IMF, the global guardian of fiscal rectitude, is telling countries that now is not the time to scrimp, lest they jeopardize still fragile economic recoveries.
Yet even if a repeat of the cascading financial crises seen in Latin America and Asia in the 1980 and 1990s is avoided, the debt surge threatens to linger as a millstone around the necks of nations for years. It will compromise their ability to fight the first global increase in extreme poverty since the 1990s and to invest in infrastructure projects, education and innovation down the line.
“You could think of it as a big crack in the ice,” said Sonja Gibbs, managing director of global policy issues at the Institute of International Finance. “Suddenly you’re in danger of a number of countries falling off the edge.”
‘ There is no part of my life not affected’
Zambia, once a shining example of Africa’s economic renaissance, is now the Ghost of Crises Future for debt-burdened countries slammed by the pandemic.
The sub-saharan nation fell into default in November, a result of its high reliance on foreign debt; a pandemic blow to the price of copper, its main commodity; and one of its worst droughts in 40 years. The country is printing money to survive, forcing a devaluation of the kwacha and creating spiraling inflation that is spreading misery at the worst possible time.
At the government’s Cancer Diseases Hospital in Lusaka, the capital, doctors say the price of imported drug treatments has doubled. A third of the country’s workers have lost wages, according to a household survey in July; 39 percent were skipping a meal, and 67 percent were worried about not having enough food.
Sakala Zulu, a 26-year-old teacher from eastern Zambia, said staples such as eggs and sugar cost 60 percent more than just three months ago, making it harder to feed his six children. The cost of transport for the 12-mile commute to and from work has risen by 20 percent.
“Right now, I feel there is no part of my life not affected,” Zulu said.
Zambia is seeking to restructure its debt, but private creditors have shown little willingness to budge. A move to renegotiate substantial loans from China has been cloaked in secrecy.
As things stand, more than half of government spending this year is earmarked for servicing debt alone — leaving little for social programs, health or education.
“What you see now on the ground is reduced spending on key social sectors,” said Ishmael Zulu of the advocacy group CUTS International. “With the high levels of poverty in Zambia, there are many people that are heavily reliant on government programs. These programs are suffering at the cost of increased debt levels. Hospitals that are in small districts and the far-flung areas of the country are suffering at the cost of increased debt servicing.”
Hard decisions in Costa Rica
Half a world away, Costa Rica is scrambling to avoid a similar fate.
When the pandemic hit, tourism, the country’s economic lifeblood, dried up, and unemployment skyrocketed to more than 24 percent, draining state coffers of health-care contributions just as the government was struggling to respond to the coronavirus. A tax break for hard-hit businesses and financial aid for out-of-work Costa Ricans dug the fiscal hole deeper.
The ensuing cash crunch forced hard decisions, including emergency cuts.
At El Jardín elementary school in northern Costa Rica, Principal Elizabeth Mejía says the operating budget was slashed in half. Teachers are buying their own printers, ink cartridges and paper to distribute assignments to students. Mejía said she has been told by the government to hold fundraisers to cover maintenance: “They tell us if we need to fix something, that we should go sell tamales.”
In the years after the Great Recession of 2008, Costa Rica ran up deficits and debt to sustain expansive state payrolls and progressive policies. Two years ago, the government attempted what economists describe as a fiscal Band-aid: a new valueadded tax and limits on salary increases for state workers.
Those measures paled in comparison with the proposal last year, when the government of President Carlos Alvarado Quesada, seeking to boost its bid for a $1.75 billion IMF bailout, sought broad tax increases in the middle of the pandemic.
Protesters hit the streets, blocking intersections nationwide, clashing with police and slowing commerce in a country that only recently had come out of lockdown.
“People don’t have money to pay their debts,” said Gerardo Zúñiga, an activist who joined the protests with a mask on his face and a rosary around his neck. “Businesses don’t have money to pay for supplies, their employees, their permits and all the social contributions.
“We understand that there has to be some agreement with the IMF, but what we don’t agree with are items where the most vulnerable people are harmed.”
The government backed off that proposal and is in talks with the opposition, unions, civic activists and industrial groups to find a more palatable solution. But to avoid a painful default such as the one the country suffered in 1981, when runaway inflation and spikes in poverty sparked a lost decade, something’s got to give.
With tourism not expected to recover fully for years, politicians and businesses are pushing sources of revenue that run afoul of Costa Rica’s renowned environmentalism. They include open-pit gold mining — effectively an ecological trade-off for what supporters estimate would be 6,500 direct and indirect jobs and a $9.52 billion jolt for the economy.
In August, lawmakers pushed another controversial option: opening Costa Rican lands and shorelines to fracking and oil drilling.
“Our marine territory is 10 times larger than our landmass, and we know little about its riches,” lawmaker Patricia Villegas said during a congressional debate. “We have sources of energy that we exploit like hydroelectric, wind, geothermal and solar, but we haven’t wanted to discuss the possibility of taking advantage of gas and oil. Costa Rica is sitting on a gold mine.”
In a country that pledged to rely entirely on renewable energy by 2030, the debt debate is pitting the nation’s economic future against cherished environmental ideals. Activists and the government say any boost in oil and natural gas exploration runs counter to everything the country has worked for. The nation, they say, must find other ways.
“We’ve launched a decarbonization plan to the world, and those things are fundamental to us as a nation, not just cosmetic,” said Elián Villegas, Costa Rica’s finance minister. “I find those solutions to be very distant from the essence of being Costa Rican.”