Devex offices are closed this week, but financial markets are still open — and that means countries in crisis are facing endless economic pressure. Last year’s words of caution on what may come in the pandemic’s wake are now alarm bells about a food crisis and social unrest.
Debt distress means countries’ economies are starting to freeze up. Governments are struggling to import basic goods like food and medicine, and it may get worse. Political upheavals are becoming a real possibility, as we’ve already seen in Sri Lanka, and that further erodes economies and global stability.
The World Bank expects more than a dozen defaults. Meanwhile, at least seven countries, including Afghanistan, Mauritania, Somalia, Tajikistan, and Yemen, face a particular risk of overlapping food and debt crises — a double whammy without an easy remedy.
What’s clear is that the world is not ready, even after the Group of 20 leading industrial and emerging economies recognized early in the COVID-19 pandemic that countries would struggle to repay their debts. Two mechanisms were put in place by the G-20: debt payments for low-income countries were suspended, and the so-called Common Framework was created to resolve debt crises on a case-by-case basis.
The problem is that debt payments were merely deferred, and the suspension is now over — so all those bills are now coming due. Worse, the Common Framework is so ineffective that only three countries, out of dozens in trouble, have turned to it for help. Others can’t utilize it because it is only for low-income countries. But the debt crisis is hitting middle-income nations, too, and they have nowhere to turn.
If you find the discussion on debt intriguing (and we agree!), our in-depth analysis explains the who, what, where and why of it all.
The big read: How the debt crisis imperils development and why it’s getting worse (Pro)
+ A Devex Pro membership brings you essential news, data-driven insights and invite-only discussions with experts on the biggest issues shaping global development. Join the community with a free 15-day trial, and don’t miss our latest special report, The localization agenda, available for download here.
The price of help
So far, only Zambia, after almost two years of negotiations, has reached a deal under the Common Framework. Meanwhile, the country’s economy sank, and per capita income dropped so far the World Bank reclassified the country as low-income for the first time since 2011, effectively reversing a decade of development. In the meantime, creditor committee meetings on Chad and Ethiopia as part of the framework drag on.
The debt crisis is truly global. From Argentina, a perennial economic mess, to Pakistan, a nuclear power in a political upheaval, the problems are getting worse. Even countries like Ghana and Bangladesh, which have shown strong development gains, are now knocking on the door of the International Monetary Fund for help.
And that help always comes with a price — such as austerity measures. The other problem is figuring out who owns the debt. China is now a major creditor, and has often been unwilling to negotiate in multilateral forums. Private sector creditors, meanwhile, don’t want to take a “haircut” — that’s finance jargon for accepting lower returns — so they often let situations ride out, instead of seeking quick resolutions.
World Bank: China is owed 37% of poor countries' debt payments in 2022
Hurry up and wait
While the G-20 is more diverse and less centered in the high-income Western nations than some of the old clubs, its membership also makes coordination and cooperation more complicated. Ahead of the April meeting of G-20 finance ministers, Devex dug into what the forum was doing about debt, and we found much disappointment among outside experts. Iolanda Fresnillo, a policy manager at the European Network on Debt and Development, or Eurodad, told me then that advocacy groups had been warning about debt problems since at least 2019. “We are already very late,” she said.
John Lipsky, a former first deputy managing director at IMF, warned that current systems won’t work in this crisis. “The rise of new creditors, especially China, means we need to create a new mechanism that involves all of the creditors,” he said.
Read: Debt crisis worsens in poor countries, but no sign G-20 in a hurry
Extra, extra
One aspect of the bizarre world of debt we looked into was IMF surcharges — basically, extra fees distressed countries pay to the fund for being able to take out large sums over a longer period. The more in trouble they are, the more likely they are to pay these fees, and the IMF pulls in a profit. One calculation showed the fees amount to some $4 billion since the start of the pandemic.
Read: Should IMF ditch surcharges? Some economists and lawmakers think so.
Where we are
To understand the current state of play, check out our dissection of the most recent IMF World Economic Outlook update. “The world may soon be teetering on the edge of a global recession, only two years after the last one,” says IMF chief economist Pierre-Olivier Gourinchas. “Rising food and energy prices could cause widespread food insecurity and social unrest.”
Your next job?
Chief Economist
Organisation for Economic Co-operation and Development
Worldwide
Across the street at the World Bank, President David Malpass has been talking about the debt issues for months, recently focusing attention on export bans on food trade that are making that crisis worse. “I wish I had a brighter image of where the world is going,” Malpass said recently.
Recap: Last month we reported on IMF's warning of a “gloomy” economy rife with uncertainty and high inflation, and Malpass' acknowledgement that the current global GDP slowdown is the “sharpest” in 80 years.
More lending
One issue we will continue to follow is a proposal to the G-20 by a group of independent experts on how multilateral development banks can take more calculated risks and unleash more lending to countries in need. The goal is to get more money at concessional rates without sacrificing the banks’ high credit ratings: most have the coveted AAA.
However, MDB ratings are not guaranteed. The New Development Bank was recently downgraded over its high Russian ownership share. The more credit ratings drop, the more yields on bonds rise, making borrowing more expensive for countries in need.
Exclusive: G-20 report says MDBs are holding back hundreds of billions
A moment of lift
As a hopeful end to today’s newsletter, we remind readers of an uplifting profile we wrote on Eric LeCompte of the Jubilee campaign on his efforts to eradicate the debt crisis through stealthy lobbying, campaigning, and writing laws aimed at forcing private creditors to deal on debt.
Indebted to faith: How the Jubilee campaign aims to end global poverty
Sign up to Newswire for an inside look at the biggest stories in global development.
About the author
Shabtai Gold
Shabtai Gold is a Senior Reporter based in Washington. He covers multilateral development banks, with a focus on the World Bank, along with trends in development finance. Prior to Devex, he worked for the German Press Agency, dpa, for more than a decade, with stints in Africa, Europe, and the Middle East, before relocating to Washington to cover politics and business.
