The Year of Debt Distress and Damaging Development Trade-Off

SYDNEY, Jan 27 2023 (IPS) – As the year 2022 drew to an end, the United Nations Conference on Trade and Development (UNCTAD) warned, “”, that spiralling debt in low and middle-income countries (LMICs) has compromised their chances of sustainable development.

Anis Chowdhury

In early December, an opinion piece in The New York Times headlined, “”. And the World Bank’s highlighted rising debt-related risks for all developing economies—low- as well as middle-income economies.

Debt on the rise
Debt build-up accelerated in the wake of the 2008-2009 global financial crisis (GFC). The World Bank’s, reveals that total (public private; domestic external) debt in emerging market and developing economies (EMDEs) reached an all-time high of around 170% of GDP ($55 trillion) – more than double the 2010 figure – by 2018, before the onset of the COVID-19 pandemic.

Total debt in low-income countries (LICs), after a steep fall from the peak of around 120% of GDP in the mid-1990s to around 48% ($137 billion) in 2010, increased to 67% of GDP ($270 billion) in 2018.

Pandemic debt
The COVID-19 pandemic greatly lengthened the list of EMDEs in debt distress as rich nations and institutions dominated by them, e.g., the World Bank, failed to provide any meaningful debt reliefs or increase financial support to adequately respond to the health and economic crises.

The World Bank’s chief economist advised, “”. The IMF’s managing director counselled, “”.

The World Bank’s reveals that the external debt stock of LMICs in 2021 rose to $9.3 trillion (an increase of 7.8% compared to 2020) – more than double a decade ago in 2010. For many countries, the increase was by double digit percentages.

Riskier debt
Over the past decade, the composition of debt has changed significantly, with the share of external debt owed to private creditors increasing sharply. At the end of 2021, LMICs owed 61% of their public and publicly guaranteed external debt to private creditors—an increase of 15 percentage points from 2010.

The private creditors charge higher interest rates, and offer little or no scope for restructuring or refinancing at favourable terms, as they maximise profit. The private creditors also usually offer credits for shorter duration, while development financing needs are for longer-terms.

Failed aid promises
Development needs of developing countries have increased many-folds, especially for meeting internationally agreed development goals, such as the Millennium Development Goals (MDGs) and now Sustainable Development Goals (SDGs). The LMICs’ estimated aggregate investment needs are—equivalent to 4.5–8.2% of annual GDP— between 2015 and 2030 to just meet infrastructure-related SDGs. But the rich nations spectacularly failed to honour their promises of finance made at the 2015 UN conference on financing for development (FfD) in Addis Ababa.

In fact, they failed all their past aid promises, e.g., to provide 0.7% of their gross national income (GNI) as aid, a promise made over half a century ago. While aid hardly reached half the promised percentage of GNI, it in fact of GNI in the early 1960s to around 0.34% in recent years. Oxfam estimated 50 years of unkept promises meant rich nations to poor countries by 2020!

At their , G7 leaders pledged to double their aid by 2010, earmarking $50 billion yearly for Africa. But actual aid delivery has been . G7 and other rich OECD countries also to give $100 billion annually in climate finance until 2020.

Promoting private finance
Meanwhile institutions dominated by rich nations – the World Bank and OECD, in particular – promoted private financing of development. The World Bank, the IMF and multilateral regional development banks, e.g. Asian Development Bank jointly released , just before the 2015 FfD conference.

The document optimistically but misleadingly advised governments to “” development projects for enticing trillions of dollars of private capital in public private partnerships (PPPs). While governments bearing financial risks, or socialise private investors’ loss, PPPs are found to have , especially poverty reduction and enhancing equity.

Meanwhile the OECD donors advocated “” (BF) to use aid money to leverage, again trillions of dollars of private capital. But as noted, BF is struggling to grow, stuck since 2014 “at about $20 billion a year…far off the goal of $100 billion set by the UN in 2015”, despite . Like PPPs, BF has effectively transferred risk from the private to the public sector. On average, the public sector has borne of BF investments, including 73% in LICs.

Collateral damage
In the wake of the GFC the rich countries followed so-called policies that kept interest rates exceptionally low – in some cases at zero – for a decade. This saw capital flowing from rich countries to EMDEs in search for higher returns, as exceptionally low interest rates enticed EMDE governments and businesses.

The opportunity to borrow at low rates also made the EMDE governments lazy in their domestic revenue mobilisation efforts. Such policy complacency was rewarded by the donor community, especially the World Bank, through its now , encouraging a harmful race to the bottom tax competition among countries to cut corporate and other direct taxations. The World Bank and IMF also advised to remove or lower easier to collect indirect taxes, e.g., excise duties in exchange for regressive and difficult to implement goods services or value-added tax in poorer countries.

Bleeding revenues
Meanwhile transnational corporations (TNCs) continue to avoid and evade paying taxes using creating accounting, aided by tax havens, mostly situated in rich nations’ territories. Developing countries in illicit financial flows from 2004 to 2013, mostly through TNCs’ transfer mispricing, or the fraudulent mis-invoicing of trade in cross-border tax-related transactions.

received $161.6 billion in 2015, primarily through loans, personal remittances and aid. But, $203 billion was extracted, mainly through TNCs repatriating profits and illegally moving money out of the continent.

International tax rules are designed by the rich nations. They continue to oppose developing countries’ demand for an inclusive international tax regime under the auspices of the UN.

Perfect storm
Global supply-demand mis-matches due to the pandemic, the Ukraine war and sanctions are a perfect recipe for a perfect storm. The advanced countries’ inflation fight is causing adverse spill-over on developing countries.

Higher interest rates have slowed the world economy, and triggered capital outflows from developing countries, depreciating their currencies, besides lowering export earnings. Together, these are causing devastating debt crises in many developing countries, similar to what happened in the 1980s.

In October 2022, a United Nations Development Programme (UNDP) report estimated that 54 countries, accounting for more than half of the world’s poorest people, to avoid even more extreme poverty and give them a chance of dealing with climate change.

Rich nations fail again
As pandemic debt distress became obvious, the G20 countries devised the so-called Debt Service Suspension Initiative (DSSI) for 75 poorest countries, supposedly to provide some modest relief between May and December 2020. DSSI does not cancel debt, but only delays re-payments, to be paid fully later with the interest cost accumulating – thus effectively “”. As the private lenders refused to join the G20’s initiative, unsurprisingly only 3 countries expressed interest in DSSI. Moreover, the G20 initiative does not address debt problems facing MICs, many of which also face debt servicing, including repayment issues.

Although the IMF acted innovatively at the start of the pandemic debt distress with debt service cancellation for 25 eligible LICs (estimated at $213.5 million), the World Bank’s Chief , let alone complement the IMF’s debt service cancellation for the most vulnerable LICs. Nonetheless, the Bank’s President hypocritically advocates debt relief as “”. He wants to have the cake and eat it too; apparently wanting to increase lending, the institution’s AAA credit rating.

China debt trap diplomacy?
Meanwhile the rich nations accuse China of “” that China is deliberately pushing loans to poorer countries for geopolitical and economic advantages. is owed to China as against more than 50% to the commercial lenders.

Most Chinese loans are concessional, and China has provided , bilaterally negotiating around $10.8 billion of relief since the onset of the pandemic.

Unsurprisingly, studies the Western accusation. And China has emerged as a major source of development finance for poorer countries. A recent IMF study concluded, “”.

Damaging trade-off
Rising debt servicing in the face of higher import costs, falling export revenues and declining remittances, are forcing developing countries to a damaging trade-off. They are forced to service external debt owed to rich nations and international financiers at the cost of development.

For many African nations, the increased cost of debt repayments is the equivalent of public health spending in the continent, . But, “”.

IPS UN Bureau