Pandemic, debt and development


Anis Chowdhury   | Published: July 27, 2020 21:11:23 | Updated: August 04, 2020 21:45:24


Pandemic, debt and development

Covid-19 will take a heavy humanitarian and economic toll on developing countries with large informal sectors and very weak health systems, threatening to undo progress towards Sustainable Development Goals (SDGs). Even before the current pandemic, many developing countries were unlikely to achieve the SDGs, which emphasises as a core principle "leaving no one behind", including the most marginalised countries.

According to the United Nations 2020 SDGs Report, the pandemic is expected to push back an estimated 71.0 million people into extreme poverty in 2020, recording the first rise in global poverty since 1998. Some 1.60 billion already vulnerable workers in the informal economy, accounting for half the global workforce, are likely to be significantly affected, suffering an estimated 60.0 per cent fall in their incomes in the first month of the crisis.

The UN report warns that lost incomes, limited social protection and rising prices mean even those who were previously secure could find themselves at risk of poverty and hunger. It also highlights the precarious condition of more than one billion slum dwellers worldwide, acutely at risk of Covid-19 infections due to a lack of adequate housing and running water at home, shared toilets, little or no waste management systems, overcrowded public transport and limited access to formal health care facilities.

A recent joint report of the World Food Programme (WFP) and the Food and Agriculture Organisation (FAO) warns that in twenty-five countries, which include Bangladesh, hunger will rise to famine levels. In April, WFP Director David Beasley warned that the situation of hunger risked 'a famine of biblical proportions'. On 17 July, Beasley said that 'the world's very poorest families have been forced even closer to the abyss'.

LIMITED FISCAL SPACE: Developing countries have very limited fiscal capacity to respond to the pandemic - both for immediate relief measures and long-term reconstruction of their economies. As highlighted in the 2020 Financing for Sustainable Development Report, vulnerability to debt had been building in many developing countries prior to the pandemic. Public sector debt increased substantially among commodity exporters, following the 2014-15 commodity price plunge. As these economies respond to the pandemic, their debt will only increase.

Investors withdrew nearly US$80.0 billion from emerging markets during the first quarter of 2020, the largest capital outflow in history, according to the Institute of International Finance. Furthermore, remittances have fallen by at least 20.0 per cent, amounting to more than US$100.0 billion.

Most other developing countries do not have strong enough credit ratings to secure low-cost foreign sovereign debt despite low interest rates in the North.

BALLOONING DEBT: According to the World Bank's recently published Global Waves of Debt, the past decade has seen the largest, fastest, and most broad-based increase in debt in emerging market and developing economies (EMDEs) in the past half a century. Since 2010, their total debt - public and private - rose from around 108.60 per cent of Gross Domestic Product (GDP) to a historic peak of more than 170.0 per cent (around US$57 trillion) in 2019. Excluding China, total debt of EMDEs rose from around 88.0 per cent of GDP to 108.0 per cent in 2019.

Following a steep fall during 2000-2010, total debt also rose in low-income countries (LICs) from 51.5% of GDP (around US$137 bill.) in 2010 to 65.8% of GDP (or US$268 bill.) in 2018. LICs are increasingly borrowing from creditors outside the traditional Paris Club lenders, notably from China.

Private sector or corporate debts are largely responsible for the ballooning of debt in EMDEs, rising from 77.0 per cent of GDP in 2010 to 117.0 per cent in 2018. But public debt too has risen from around 37.0 per cent (38.60 per cent excluding China) of GDP in 2010 to around 49.0 per cent (49.4 per cent excluding China). However, in the case of LICs, public debt play a larger role, rising from 36.5 per cent of GDP in 2010 to 45.7 per cent in 2018.

DANGEROUS DEBT: Of course, not all government debt is bad. When governments borrow on reasonable terms to invest in necessary or desirable projects, debt may be necessary for equitable and sustainable development in resource-poor countries. Research at the IMF suggests that the optimal level of debt depends on a wide range of factors.

However, regardless of debt optimality, debt can cause undesirable impacts if not properly used. Debt composition can also be worrisome. The recent debt build-up is particularly concerning because a large component of it is external. 

Developing countries' ability to service growing debt is constrained by continued commodity price falls and falling export revenues, accelerated due to pandemic induced supply and demand shocks. It is further complicated by other weaknesses, such as a shift toward riskier debt. The share of external government debt reached 43.0 per cent in 2018, and foreign-currency-denominated corporate debt rose from 19.0 per cent of GDP in 2010 to 26.0 per cent of GDP in 2018. More than half of government debt in low-income countries is on non-concessional terms. Commercial credit increased more than three-fold from 2010 through to 2019, rising from 5.0 per cent to 17.5 per cent of public debt in low-income countries.

HEAVIER DEBT BURDENS: Many developing countries face sovereign debt crises, unable to pay off accumulated debt. An increasing share is owed to China, especially by 'un-creditworthy' poor countries, but European bond markets and private lenders are still significant.

African government external debt payments have doubled in two years, from an average of 5.90 per cent of government revenue in 2015 to 11.8 per cent in 2017. A fifth of Africa's external debt is owed to China, 32.0 per cent to bond markets and other private lenders, and 35.0 per cent to multilateral institutions such as the World Bank.

African countries are often accused of borrowing too much, but the problem is that they are paying far too much interest, mainly due to rating agencies' and bond issuers' prejudices and practices. Thus, although Ethiopia has grown at 8~11.0 per cent for over a decade, its sovereign credit rating has not improved.

African governments are paying interest of 5.0 to 16.0 per cent on 10-year government bonds, compared to near zero to negative rates in Europe and America. Debt servicing is the highest share of government spending and remains the fastest growing share of expenditure in sub-Saharan Africa's fiscal budgets.

Interest payments on private debt to African nations for the remainder of 2020 are in the range of US$3 billion. As debt to private creditors is the most expensive, 55.0 per cent of all interest payments go to them.

Transparency about contingent liabilities, such as those stemming from state-owned enterprise debt and public-private partnership transactions is also limited in developing countries. These data limitations are especially acute for debt owed to commercial and non-Paris Club creditors.

Contingent liabilities may also arise during this pandemic when governments will be forced to take over private sector debts to prevent a total economic collapse.

DEBT WORSENS INEQUALITY: Debt tends to increase inequality in at least four ways. First, debt enriches creditors, who are mostly among the most well to do in society, including domestic or foreign investors lending to governments. The income share from capital gains greatly increases their income and thus, their capital.

Second, government debt often enriches the wealthy elites. As new infusions of aid come from foreign donors, ostensibly to finance projects, politically well-connected elites typically get 'cuts', further increasing inequality. A leaked World Bank study estimated that 5.0 per cent of all new Bank finance to poor countries ended up in tax havens, not unlike how higher oil prices are followed by much more deposits held in financial havens. Bank loans to 22 countries relying on aid during 1990-2010 were followed by more deposits in foreign financial havens.

Third, fiscal arrangements involving debt often deepen inequality. To service debt, governments often increase taxation and cut spending. Today, creditors do not need to impose their own finance minister to ensure debt repayment. Instead, the IMF still insists on austerity, as a recent study has shown.

While taxes on the wealthy can be increased, the dominant trend in the last four decades has been otherwise. The IMF tends to try to raise revenue as quickly as possible, usually by raising value added tax (VAT) rates, or by reducing exemptions. 

This has led to widespread protests in Kenya, Ecuador, Lebanon and other countries. Many governments have had to cut expenditure to increase revenue to service debt. Social spending cuts, including education and health, tend to worsen inequality. 

DEBT RELIEF URGENTLY NEEDED: These developments accompanied a decade of repeated growth disappointments. The exceptional severity of the current global recession, affecting almost all countries, and poorer prospects for a robust rebound due to possible repeat outbreaks and mounting backlash against globalisation is likely to tip many low-income countries into widespread debt distress.

Thus, the United Nations Conference on Trade and Development (UNCTAD) warned in April of a "looming debt disaster" in developing countries and called for steps including US$1.0 trillion of debt write-off.

On April 15, 2020, the G20 finance ministers agreed to a "time-bound suspension of debt service payments" to 76 low-income developing countries eligible to the World Bank's International Development Association (IDA) and the IMF offered debt service relief to 25 of the poorest countries.

While the G-20 debt decision may provide some temporary respite, it does not address longer-term problems. Instead of cancelling repayments outright, it merely pushes the can down the road; countries will just owe the money later, and will continue to pay interest. Moreover, it only applies to a limited number of countries.

Thus, the UN believes that these actions will not suffice to avoid defaults. The G20's move does not impact private lenders. For example, despite Zambia being eligible for relief under the G20 initiative, ten of its international bondholders have formed a creditor group on 23 June in anticipation of Zambia's default. Zambia asked the Paris Club of creditor nations for suspension of principal and interest payments on all its 'official sector' debt from May until the end of December.

An Oxfam report shows that all of the countries that are eligible for the G20 initiative are still required to pay a minimum of US$33.7 billion to service their debts this year. The amount that is being required of them is US$2.8 billion per month, which is 'double the amount Uganda, Malawi, and Zambia combined spent on their annual health budget'.

Dr Anis Chowdhury is Adjunct Professor at Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.

anis.z.chowdhury@gmail.com

 

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