Debt crisis worsens in poor countries, but no sign G-20 in a hurry

Ahead of the next meeting of G-20 finance ministers, pressure is mounting to prevent messy defaults and possible contagion from the debt crisis in low- and middle-income countries, which is worsening and threatening to set back years of development and anti-poverty gains. Ministers from the group of major economies are due to meet later this month at the same time as the yearly Spring Meetings of the World Bank and International Monetary Fund. Complicating already dire affairs, however, is U.S. Treasury Secretary Janet Yellen’s threat to skip the April 20 session in Washington if Russia takes part, because of the country’s invasion of Ukraine. Without the U.S., solutions to the debt issue seem ever more distant. The problem has been building for years, even before the COVID-19 pandemic, as part of a pattern of what the World Bank describes as debt cycles of booms and busts. “These busts in debt cycles often bring with them big setbacks to development,” said Carmen Reinhart, the bank’s chief economist, during an event on debt Thursday. She and others at the bank have been particularly concerned about “hidden debts” that only become obvious after a country hits a crisis point. “They come as a nasty surprise during a crisis and are a big impediment to a timely resolution and the kinds of policy outcomes that facilitate getting out of a crisis,” Reinhart said. According to calculations cited by former IMF official Hung Tran, the external debt-service obligations of low-income countries increased from 6.8% of government revenues in 2010 to 14.3% a little over a decade later, “threatening to crowd out urgently needed public spending on health, social services, and other development needs.” Almost 100 million people were pushed into poverty by the pandemic, the World Bank said, and the current spate of rising food prices threatens to turn a crisis in development into a humanitarian crisis. “Both the World Bank and the IMF are joining civil society by alerting about the gravity of the situation,” Iolanda Fresnillo — a policy manager at the European Network on Debt and Development, or Eurodad — told Devex. Sardonically, she said advocacy groups have been warning about problems since at least 2019. “We are already very late.” Similarly, Marilou Uy, the director of the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development, which acts on behalf of lower-income countries on financial affairs, noted recently that assessments going back several years recognized the issues. “While many low-income countries invested more in infrastructure, some others, perhaps many others, were also using fiscal resources primarily for consumption purposes,” Uy said. “These busts in debt cycles often bring with them big setbacks to development.” --— Carmen Reinhart, chief economist, World Bank Group Over the next 12 months, the World Bank expects up to a dozen countries to default on their debts. The Jubilee Debt Campaign has said that at least 54 nations are already in a debt crisis. Among the world’s lowest-income countries, 60% are in debt distress or approaching it, according to IMF and the World Bank. Part of the problem stems from the shift in how debt has been accumulated over the past decade. The Western-led Paris Club of government lenders has been surpassed by private creditors and China. “The rise of new creditors, especially China, means we need to create a new mechanism that involves all of the creditors,” said John Lipsky, a former first deputy managing director at IMF, during a seminar Wednesday. So far, they have also been less willing to cut debt deals. Fresnillo said she is keeping a close eye on Egypt, Sri Lanka, Tunisia, and Zambia. Cairo has already turned to IMF for help. Sri Lanka has taken repeated lines of credit from India, worth $2.5 billion, just to stay afloat, but still social unrest mounts. “We are living in a great period of uncertainty and compounding shocks,” said Ceyla Pazarbasioglu, a director of strategy at IMF, during the seminar. “We have so far managed to avoid a systemic debt crisis, but this cannot be excluded.” One of the buffers that prevented a crisis was low interest rates. However, these are rising worldwide as central banks take steps to stem inflation. This makes experts like Kenneth Rogoff, an economist at Harvard University, believe that it is only a matter of time until the problems come cascading down. “The majority of lower-income countries are in deep debt distress,” Rogoff said during Wednesday’s seminar. “It’s really a question of when would the other shoe drop. … There are going to be defaults.” Rogoff argued that there was a missed opportunity during the pandemic. The United States should have disbursed large chunks of its stimulus spending to lower-income countries, which would have left both advanced economies and developing ones “better off.” Pazarbasioglu said the best way to get help to countries in distress now is through deeply concessional financing. “Countries need more grants, not more super senior debt,” she said. A February meeting of G-20 finance ministers failed to come up with much of anything, amid signs that the so-called Common Framework for Debt Treatments Beyond the DSSI — the grouping’s framework for resolving debt issues that was announced in November 2020 and barely utilized — is on the verge of failure. “They absolutely ignored the situation,” said Eurodad’s Fresnillo. She warned that a repeat failure this month threatens to make the G-20 “irrelevant” for the impending crisis.