Options lacking to help developing countries tackle debt crises
Participants at a recent seminar at the UN lamented the absence of a sovereign debt restructuring mechanism amid the growing threat of debt crisis facing many developing countries.
by Tharanga Yakupitiyage and Lyndal Rowlands
NEW YORK: Despite many developing countries facing a very real risk of falling into debt crisis, the current options available to assist countries to manage their debts are surprisingly lacking.
This scenario formed the basis of discussions on 31 October at a Group of 77 (G77) seminar on “Sovereign Debt Vulnerabilities and the Opportunity for a New Debt Workout Mechanism building on the UN General Assembly process.”
The G77 is the largest intergovernmental organization of developing countries in the UN and is concerned with economic issues.
“The challenging fact is that many countries ... remain vulnerable to debt crises,” said Thai Ambassador and G77 Chair Virachai Plasai in his opening address at the seminar.
Other speakers at the event echoed Plasai’s sentiments, during discussions moderated by Ambassador Ruben Zamora, Permanent Representative of El Salvador to the UN.
“The dramatic fall in commodity export prices and historically low interest rates have been key ingredients for a scenario which shows disturbing similarities to the buildup phase of the Third World debt crisis of the 1980s which cost in many countries a ‘lost decade of development’,” said Ambassador Sacha Llorenti, Permanent Representative of Bolivia to the UN.
Llorenti was also the chair of a UN General Assembly ad hoc committee that formulated nine principles for sovereign debt restructuring processes. These principles were subsequently adopted by the General Assembly in 2015.
Speakers at the G77 seminar also noted that underlying issues which contributed to previous debt crises have not been adequately addressed.
“The root of the debt problem has not been tackled or solved, therefore the debt crisis should be on the top of the policy agenda,” said Bettina Luise Rurup, Executive Director of the Friedrich-Ebert-Stiftung’s New York Office.
The Executive Director of Jubilee USA, Eric LeCompte, echoed these sentiments, noting the importance of preventive measures. “Financial crisis is a recurring problem. Unless we have something in place that actually is a preventive measure for crises, we are going to see crises become worse and we’re going to see no particular ways to protect vulnerable populations,” he said.
Dessima Williams, Special Advisor for Implementation of the Sustainable Development Goals in the Office of the President of the General Assembly, noted that despite debt forgiveness efforts for the world’s poorest countries in the 1980s and 1990s, debt has again begun to increase since the global economic crisis.
Williams also noted that debt is not only owed to other governments and development banks, but that “a large share of debt is owed to the private sector.”
Marilou Uy, Director of the Secretariat of the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development (G-24), said that increasing private sector debt could be a potential cause for concern. “A particular worry expressed in the recent International Monetary Fund fiscal monitor ... is that while government debt has remained moderate, the debt of the corporate sector across major emerging markets has risen sharply in the past few years.”
Absence of debt workout system
However, despite the serious threats debt crises pose to sustainable development, currently the international mechanisms that exist to address the problem are remarkably lacking.
In his keynote address, US economist Joseph Stiglitz told delegates at the G77 event that these issues stem from the lack of a sound financial structure. “The current non-system is flawed and doesn’t work,” he stated as he called for a new debt restructuring process.
Existing “gaps” in the international financial and legal systems have created opportunities for entities such as vulture funds to take advantage of distressed developing nations, undermining any progress towards a new debt structure, Stiglitz noted.
Meanwhile, as LeCompte pointed out, governments which fall into debt crisis are unable to declare bankruptcy, since bankruptcy is a measure which is available only at the domestic level.
Previous rounds of debt forgiveness have also proved to be only temporary fixes.
Raphael Otieno, Director of the Debt Management Programme at the Macroeconomic and Financial Management Institute of Eastern and Southern Africa, said that many African countries “started accumulating debt very aggressively” after previous rounds of debt forgiveness. Debt increases in countries like Angola and Ethiopia are “very worrying”, he said.
Meanwhile, the measures imposed on countries to manage their debts can also be financially crippling, as Isidro Lopez Hernandez, Deputy and Spokesman on the Audit of Public Debt, Assembly of Madrid, Spain, explained. “We are tied in a sort of metal cage,” he said, noting that when the government in Spain has even a minor surplus, this must be directed back into debt repayment rather than investing in Spain’s future.
Plasai called for the creation of a “fair, speedy and efficient debt workout” that involves close collaboration between debtors and creditors to resolve unsustainable debt levels.
In order to restore debt sustainability, Stiglitz called for the implementation of a “soft law regime” based on the UN General Assembly’s principles on debt restructuring adopted in 2015. These international principles of law will help encourage cooperation and a “healthier environment” for debtors and creditors, said Stiglitz.
LeCompte voiced similar sentiments, highlighting the importance of laws around responsible and sustainable lending and borrowing.
“We need to figure out, at the United Nations, how do we start to move [debt restructuring] into soft law, how do we start to create a framework and structure that allows ... for problems to be worked out in a more responsible way,” he told Inter Press Service (IPS).
While debt crises can have significant negative impacts on development, speakers at the event also acknowledged that sustainably managed debt levels can be beneficial for governments seeking to achieve the Sustainable Development Goals.
“Borrowing is an important tool to finance sustainable development investments. Debt financing can support growth and smoothen the business cycle,” said Nabeel Munir, Deputy Permanent Representative of Pakistan to the UN and Vice-President of the UN Economic and Social Council. “At the same time, debt needs to be managed prudently.”
These sentiments were echoed by Dian Triansyah Djani, Permanent Representative of Indonesia to the UN and Chair of the Second Committee at the 71st session of the UN General Assembly.
“I think most people in this room agree that sovereign borrowing is crucial in supporting government to finance investment, particularly in this time, to achieve sustainable development.”
“At the same time, however, it is also equally important to manage the sovereign debts,” said Djani. “We have witnessed one too many instances in which the debt default of one country could put the growth of the global economy into a halt, and hamper efforts to attain its development course.”
However, as Llorenti noted in his closing remarks: “[Although] the current scenario makes the effort of working towards a statutory framework for debt crisis resolution very relevant, [it is] not feasible in the short term.”
Nevertheless, he said, the current General Assembly process is a “step in the right direction.” (IPS)
Third World Economics, Issue No. 628, 1-15 November 2016, pp11-12, 16