EMERGING markets and developing economies, the butt of the world’s recurrent debt burlesque, are trending again, and expectedly, sub-Saharan African countries are the main characters. Muhammadu Buhari, President of Nigeria, Africa’s most populated and largest economy, may have spoken for all debt-burdened nations when he appealed for debt-cancellation in his address at the last United Nations General Assembly a few weeks ago.
The statistics are grim if not funny. Debt levels today are at an alarming 50-year high. Disturbed, World Bank President David Malpass laments that 60 percent of the world’s poorest countries were already in “debt distress” even before Russia’s President Vladimir Putin’s cold, calculated invasion of Ukraine threw the global economy into deeper turmoil.
Around the world, the deleterious effects have gone beyond low-income countries, ravaging even the once sure, developed economies with unmanageable inflation, currency depreciations, soaring food and energy prices, and unsustainably high debt and debt service burdens. The World Bank reckons that low-income countries are straining under debt burdens as crushing as 250 percent of government revenues.
What bothers international affairs watchers is that the growing debt crisis could derail global goals already in focus, such as the Sustainable Development Goals (SDGs) and curtailment of global warming. They point out that highly indebted countries struggling to stabilize their economies and polities would not be receptive to the regime of fiscal and monetary discipline required to achieve the goals. And worse, it is established that “those who suffer the most pain from unsustainable debt and carry the greatest burden at times of crisis tend to be the poor and marginalized — those least able to cope” in society, in the words of Patricia Scotland, Secretary-General, Commonwealth of Nations.
Scotland and Malpass agreed on a key part of the solution mix for the crisis: getting debtor or creditor nations to cooperate, and more importantly, share responsibility. Critics have shown many of the debt negotiations in poor countries are mired in opacity, often deliberately, by less-than-honest government functionaries in cahoots with opportunist creditor nations’/lenders’ officials.
Partly as a result of World Bank analytical work on debt transparency and the new IDA Sustainable Development Finance Policy (SDFP), the number of low-income economies providing disclosures on government debt has increased by 17 percentage points, Malpass says. The goal is to get all countries on this protocol and make debt transactions as transparent as possible to discourage underhand deals and expose inherent abuses and weaknesses. The World Bank and the International Monetary Fund (IMF) are collaborating to implement the Group of 20’s Common Framework for Debt Treatment and have jointly proposed several steps to improve the Common Framework implementation.
Debt cancellation? No. The World Bank is not going as far out as President Buhari would like. It, however, recommends that allowance should be made for a rapid debt restructuring process, including debt service standstill, for countries that have no other path.
Pierre-Olivier Gourinchas, IMF Chief Economist, admits that since many low-income countries are close to or already in debt crisis, “progress toward orderly debt restructuring, through the Group of 20’s Common Framework, is urgently needed to avert a wave of sovereign debt crisis.”
Panellists at a high-profile IMF seminar on Debt Restructuring –Why Too little and Too late, mooted options for improving the functioning of debt restructuring mechanisms from a private sector perspective. The panellists, including Elena Duggar, Chair of Moody’s Macroeconomic Board and Axel Weber, President of the Center for Financial Studies at Goethe University, Frankfurt, canvassed that the process of debt restructuring must become more coordinated and transparent if global institutions are to cope with a wave of defaults.
As part of efforts to resolve the debt crisis in developing countries, the New York State Assembly has introduced a legislation that requires private creditors to join in the debt relief initiatives. Patricia Fahy, chair of the Standing Committee on Banks at the New York State Assembly, says the legislation will provide debt relief across board.
But is debt an entirely bad thing? Malpass’ view: “Debt is a two-edged sword. For forward-moving, developing country governments, debt financing can improve infrastructure and provide better services — in ways that substantially increase growth rates and median income. Transparent, responsible increases in government debt and investment are vital to development.”
The other edge? The Bank President talks about that too: “But debt used to finance unproductive spending and investment poses serious risks to economic growth and stability”. This is the “edge” that has got everyone worried. Now that the world has more or less jaywalked into another debt crisis, it is time to take seriously the consensus of ideas various organizations have been able to hammer out for dealing with the recurring global debt incubus.