Concerns have for years been mounting over the surging debt levels in the developing world. The humanitarian and economic shocks of the coronavirus pandemic have aggravated the crisis.
Indebted governments from Latin America to Africa spent money they didn’t have to shore up rickety health systems and provide a safety net for citizens, pushing their finances further into the red.
Latin America accounts for more than a quarter of the world’s Covid-19 deaths, even though it’s home to just 8% of the global population. The pandemic pushed 22mn people there into poverty in 2020, bringing the total number unable to meet their basic needs to 209mn, according to a Bloomberg report.
Delayed immunisations are slowing an economic recovery in sub-Saharan Africa, threatening the livelihoods of millions. Zambia defaulted in 2020, Ethiopia and Chad are struggling to restructure their debts and investors have fled Ghana’s dollar bonds.
Led by the US, richer nations created trillions of dollars in new money through bond-buying programmes during the pandemic and funnelled a small portion of that to poorer countries through multilateral institutions.
The Group of 20 major economies waived payments three times on official government-to-government borrowing for the world’s poorest nations, mostly in Africa.
The International Monetary Fund (IMF) approved emergency financing for more than 80 countries. It offered the biggest resource injection in IMF history: $650bn in so-called special drawing rights.
The package did help avert a debt crisis, but the solution offers only a temporary reprieve. Poorer nations have been left with a hefty bill that needs to be repaid even though their economies are still struggling, with Latin America’s largest economies mired in recession.
Economists generally agree that the pandemic exacerbated inequality between countries and within them. IMF chief Kristalina Georgieva said in January that the economic upheaval could lead to greater unrest in some countries.
The 10 richest people in the world have more than doubled their wealth since the start of the pandemic, while over 160mn people have been driven into poverty, according to Oxfam’s 2022 report. The poor are four times more likely to die of Covid than the rich, the report said.
The prospect of US interest-rate increases makes the challenge even greater for poorer countries as higher rates tend to boost the dollar, weaken foreign currencies and raise the cost for nations to service dollar-denominated debt.
For sure, forging agreements on debt relief will increasingly hinge on China which, according to the World Bank, accounts for nearly 40% of the bilateral and private-creditor debt that the world’s poorest countries need to service this year.
China says it has given relief to nearly two dozen countries, but private creditors and multilateral lenders haven’t done enough.
In a wider sense, a plan forged by the G-20 in late 2020 to rework the debt of countries in danger of defaulting - known as the Common Framework - has been hampered by a lack of coordination, transparency and clarity.
Failure to make debt payments can close off access to capital markets, making a comeback even harder. About 60% of all low-income nations need to restructure their debt, while new sovereign debt crises likely, the World Bank warned last month.
Looking ahead, longer-term debt relief would also need the backing of multilateral organisations, bilateral lenders and private creditors.