Concerns over rising debt levels in the developing world are nothing new. But the humanitarian and economic shocks of the coronavirus pandemic have worsened the situation.
International Monetary Fund managing director Kristalina Georgieva on Sunday called for significant steps to address the increasingly unsustainable debt burdens of some countries, urging creditors and debtors to start restructuring processes sooner rather than later.
Georgieva said a six-month extension of the Group of 20 major economies’ freeze in official bilateral payments would help low-income countries hammered by the pandemic, but more urgent action was needed.
For sure, Georgieva’s remarks come amid growing worries about sharp increases in debt levels, especially among low- and middle-income countries hard hit by the new coronavirus, a drop in tourism and in some cases, lower oil prices.
Emerging market countries owed more than $8.4tn in foreign currency debt, or about 30% of the developing world’s gross domestic product, as of the end of the first quarter, according to a Bloomberg report. At least $620bn may need to be refinanced this year, as many of these nations see the worst effects of the pandemic.
The fear is that weaker local currencies, lower government revenues, dwindling foreign reserves and a worldwide recession will make it more difficult to keep up on foreign debt payments.
While some nations — Argentina, Lebanon and Venezuela among them — were in trouble long before Covid-19 scared investors out of risky assets, the virus and the lockdowns to contain it have had a major impact on the balance sheets of many others.
G20 leaders have backed a temporary waiver of debt payments by some of the world’s poorest countries, mostly in Africa. The initiative offers a way for them to pause some of their external debt-service payments through at least the first half of 2021.
The Institute of International Finance, which represents the world’s biggest financial institutions, helped spearhead the voluntary initiative.
The Paris Club has recorded at least 30 bilateral agreements through the initiative, and China has pursued its own arrangements with some debtor nations.
Meanwhile, the IMF granted debt waivers to at least 29 countries.
The deeper problems in the EMs stem from the excessive financialisation of the global economy that has occurred since the 1990s. The resultant policy dilemmas – rising inequality, greater volatility, reduced room to manage the real economy – are seen continuing to preoccupy policymakers in the decades ahead.
Without a significant home-grown investor base, supported by futuristic policy initiatives and structural reforms, countries risk a return to the old boom-bust cycles of the 20th century.
And part of the challenge will be to rebuild macroeconomic buffers that have been depleted during years of fiscal and monetary stimulus.
The G20 Debt Service Suspension Initiative has helped 44 countries defer $5bn to spend on mitigating the Covid-19 crisis. But its efficacy has been limited by the absence of private creditors and China’s failure to include all state-owned institutions.
More than 100 nations have now asked the IMF for help, and there has been a co-ordinated effort to ease the pressure. Longer-term relief would need the backing of multilateral organisations, bilateral lenders and private creditors.
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