The writer is an economist who serves as the Secretary-General of the United Nations Conference on Trade and Development
The international community is noticing a worrying tendency to view debt in the developing world as sustainable because it can be paid off with donations.
But this is like saying that a poor family will survive because they will always repay their loans. To take this approach is to overlook the missed meals, missed investments in education, and lack of health spending that force room for interest payments. This kind of debt trap is a social disaster. After ten years, the debt may be repaid, but the family will be destroyed.
Many developing countries, both large and small, face this dilemma. The pandemic, the cost-of-living crisis and rising interest rates have pushed them to the point where they can only pay off their debts through austerity measures or abandoning investments in the Sustainable Development Goals (SDGs). Their debts are sustainable in that they can be repaid, but unsustainable in every other way.
Moreover, this full-blown development crisis, with the debt problem at its core, also threatens a new lost decade for much of the world economy.
A repeat of the debt crisis of the 1980s, which in turn could threaten global financial stability, is believed to be unlikely. However, the public debt of developing countries, with the exception of China, in 2021 reached 11.5 billion .
However, the situation is rapidly deteriorating. During the pandemic, the government debt of more than 100 developing countries (excluding China) increased by almost 2 billion. Now central banks are raising interest rates, exacerbating the problem. Rising interest rates have meant capital flight and currency depreciation in developing countries, as well as increasing borrowing costs. These factors have pushed countries like Ghana or Sri Lanka into debt trouble.
in 2021 developing countries paid 400 billion for debt service. Meanwhile, their international reserves fell by more than $600 billion last year.
As a result, foreign debt eats up an ever-increasing slice of the ever-shrinking national resource pie. As inflation increases, natural disasters become more frequent, and food and energy imports become more expensive, countries need more, not less, help with contingency planning.
A much bolder approach is needed. Recent efforts by the international community to agree on large-scale emergency debt relief have fizzled. This is despite significant efforts by the G20 to implement the now-defunct debt service freeze initiative and the overall debt treatment framework, which is in need of major improvements, such as suspending payments during negotiations and expanding middle-income countries with debt. suffering
The failure of these efforts revealed the complexity of the existing procedures, which are characterized by creditors who refuse to undertake restructuring, with special powers of sabotage. Crisis solutions are often too little, too late. The world lacks an effective system to deal with debt.
There is an urgent need for an independent public debt institution that would address both the institutional and private interests of creditors and debtors. At a minimum, such a body should provide consistent guidance on how to suspend debt payments in the event of a disaster, ensure that sustainable development goals are factored into debt sustainability assessments, and provide expert advice to governments in need.
In addition, a public debt registry for developing countries would allow both lenders and borrowers to access debt data. This would go a long way in increasing debt transparency, strengthening debt management, reducing the risk of debt problems and improving access to financing. Progress on both fronts could start with an independent review of the G20’s debt agenda: India’s chairmanship could provide a historic opportunity to succeed where others have faltered.
Overcoming the current global debt crisis is not only a moral imperative. With climate and geopolitical disasters on the rise, it is one of the biggest threats to global peace, security and financial stability. Without supporting countries to become sustainable, their debts will never really be repaid.