The fallout from a mix of external shocks and mounting financial troubles are washing over low- and middle-income countries, creating perhaps the biggest confluence of challenges since the 1990s, when a series of rolling crises sank economies and toppled governments.
Before the Covid-19, the world’s poorer countries had a debt problem. The pandemic made it worse.
By the end of 2021, more than 70 low-income nations faced a collective debt burden of $326bn. Their debt service burden had more than doubled since 2010 as a percentage of gross national income, according to the World Bank.
In 2022, their annual debt payments totalled about $62bn, about 35% more than the year before. By early 2023, more than half of those were already in or near debt distress.
Along with Ethiopia and Ghana, which are renegotiating their loans, other countries in debt distress include Lebanon, Pakistan and Argentina. Meanwhile, Zambia and Sri Lanka have defaulted.
China began large-scale lending to developing and emerging nations after launching its Belt and Road infrastructure construction initiative in 2013. That programme was designed to improve its trading prospects while creating a broad sphere of Chinese influence — as well as contracts for Chinese construction companies.
Nearly two-thirds of the Chinese banks’ financing was targeted at mineral extraction, pipelines, transport and power projects. Poor-country debt held by China jumped to $104bn in 2021 from $13.8bn in 2010, according to a Bloomberg report.
The world’s richer countries, meeting in the Group of 20 forum in 2020, created a co-ordinated plan for debt relief called the Common Framework.
The Common Framework was designed to co-ordinate debt relief offered by both public and private lenders and to set debt treatment standards across both traditional Western lenders and major new creditors like China.
An idea has emerged that the multilaterals need to protect their capital base and credit ratings to fulfil their development roles at the lowest costs. But China initially argued multilateral lenders should share losses like any other creditor.
Its position later shifted toward expecting the World Bank to increase lending instead — that is, multilaterals would share the burden by ponying up more money, rather than taking losses.
Also, there’s a broader source of friction in the background.
China still has a limited role in the International Monetary Fund and the World Bank, where Europe and the US have long been dominant, despite its rising economic clout this century.
The global economy surpassed $100tn for the first time in 2022; but government debt levels as a share of GDP increased in over 100 developing countries between 2019 and 2021, said UNCTAD.
With progress but no resolution of the differences between China and other G20 members by June, countries in debt distress seemed likely to remain locked out of international capital markets and without access to funds for economic development.
That prospect led former World Bank chief economist Carmen Reinhart to warn of a “lost decade” of the sort suffered by much of Latin America after a debt crisis in the 1980s.
Others worry about new waves of migration if such fragile economies are hit by new humanitarian emergencies. An alternative would be to strike deals outside the Framework, but those are unlikely to come on favourable terms.
Indeed, the Framework had yet to produce any meaningful relief as of mid-year, after negotiations stalled over China’s demands for a break from the old Paris Club ways, a conflict reflecting the rising geopolitical tensions between Beijing and Washington.
Economists worry that a failure to resolve the stalemate could lead to or deepen economic stagnation for large swaths of the globe.