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Info Service on Finance and Development (Feb24/04) Penang, 9 Feb (Kanaga Raja) — Urgent reforms are needed to the global debt architecture to avert a widespread debt crisis among developing countries, according to the United Nations Conference on Trade and Development (UNCTAD). In a post on its website on 7 February, UNCTAD said that in the wake of the COVID-19 pandemic, developing countries’ external sovereign debt – funds borrowed in foreign currency – increased by 15.7% to $11.4 trillion by the end of 2022. The mounting debt levels are further complicated by the diversity of lenders and financial instruments, it noted. It said equally alarming is the surge in debt servicing costs. “Low-income and lower-middle-income countries – also referred to as frontier markets – that borrowed when interest rates were low and investors keen are now spending around 23% and 13% of their export revenues, respectively, to repay their external debt.” “To put this in perspective, after World War II, the share of export revenue going into debt servicing for Germany was capped at 5% to aid West Germany’s recovery,” said Anastasia Nesvetailova, head of UNCTAD’s macroeconomic and development policies branch. According to UNCTAD, the rising debt costs are draining vital public resources needed for development. About 3.3 billion people – almost half of humanity – now live in countries that spend more money paying interest on their debts than on education or health. “This situation is clearly unsustainable,” said Ms. Nesvetailova. “While a systemic debt crisis, in which a growing number of developing countries move from distress to default, looms on the horizon, a development crisis is already underway.” According to a UN report released in July 2023, global public debt – comprising general government domestic and external debt – reached a record USD 92 trillion in 2022, with developing countries owing almost 30% of the total. The report, titled “A world of debt. A growing burden to global prosperity”, was jointly prepared by the United Nations Global Crisis Response Group established in March 2022 by UN Secretary-General Antonio Guterres, the UN Conference on Trade and Development (UNCTAD), and five UN Regional Economic Commissions: the Economic Commission for Africa, the Economic Commission for Europe, the Economic Commission for Latin America and the Caribbean, the Economic and Social Commission for Asia and the Pacific, and the Economic and Social Commission for Western Asia. According to the report, developing countries also pay much more for their borrowing. “Countries in Africa borrow on average at rates that are four times higher than those of the United States and even eight times higher than those of Germany.” Developing countries are dealing with an international financial architecture that exacerbates the negative impact of cascading crises on sustainable development, said the report. “The burden of debt on development is intensified by a system that constrains developing countries’ access to development finance and pushes them to borrow from more expensive sources, increasing their vulnerabilities and making it even harder to resolve debt crises,” it added. (See SUNS #9823 dated 17 July 2023) DEVELOPMENT-CENTRED APPROACH In the post on the UNCTAD website, Ms. Nesvetailova said that the mounting debt crisis stems not only from the wave of debt after the Global Financial Crisis (GFC) of 2008, the cascading crises since the pandemic and the aggressive monetary tightening in developed countries. She pointed out that the main roots lie in the structural flaws of the global sovereign debt architecture, “which offers inadequate and delayed support to countries in debt distress.” UNCTAD’s latest Trade and Development Report 2023 unpacks the current inequalities, inflexibilities and problems of the global sovereign debt architecture, outlining a strategy to address them. “A development-centred approach to debt is needed,” Ms. Nesvetailova emphasized. She highlighted overlooked factors contributing to unsustainable sovereign debt, such as climate change. According to the post on the UNCTAD website, the Trade and Development Report (TDR) 2023 advocates for a thorough re-evaluation of these factors, which encompass demographics, public health, global economic shifts, rising interest rates, geopolitical realignments, political instability, as well as the implications of sovereign debt on industrial policies in debtor states. It proposes a five-stage life cycle for sovereign debt as a conceptual framework to analyse and improve the global debt architecture. These include incurring debt, issuing debt instruments, such as bonds and loans, managing debt, tracking debt sustainability and, if necessary, restructuring or renegotiating the terms of debt. “We’re urging new creative thinking in all stages of the debt cycle, as well as new approaches to bridge the persistent divide between statutory and contractual solutions,” said Penelope Hawkins, head of UNCTAD’s debt and development finance branch. According to the UNCTAD post, the TDR outlines a comprehensive set of recommendations to re-calibrate the global debt architecture in line with developing countries’ needs. It said a key recommendation is to boost concessional loans – characterized by lower interest rates and longer repayment terms – and grants. This could be done by increasing the base capital of multilateral and regional banks to expand their lending capacity. Another way to raise concessional finance involves issuing special drawing rights (SDRs), a type of international currency the IMF created for member countries to boost their monetary reserves by exchanging them for official currencies as needed. Also important is more transparency in financing terms and conditions. The TDR said that reducing resource and information asymmetry between borrowers and lenders, coupled with legislative measures in lender countries, can discourage predatory lending practices. “But transparency goes beyond data disclosure,” Ms. Hawkins said. “It signifies a commitment to constructing a global financial architecture that is fair and accountable to all.” According to the UNCTAD post, further recommendations include expanding developing countries’ access to foreign currencies through central bank swaps and enhancing their resilience during external crises through standstill rules on debtors’ obligations, such as climate-resilient debt clauses. This would allow a halt in debt repayments, providing some breathing space for crisis management. “Greater use of contingent clauses in contracts is necessary for countries experiencing climate and other external shocks,” said Ms. Hawkins. The TDR also said that the global debt architecture requires well-developed rules for automatic restructuring and a better global financial safety net. It also highlighted the urgent need to begin work on establishing a global debt authority to coordinate and guide sovereign debt restructurings. “The time to act is now,” Ms. Hawkins said. “The costs of inaction are too high.” MIDDLE-INCOME COUNTRIES Meanwhile, in a speech at a high-level conference in Rabat, Morocco on 6 February, Deputy Secretary-General of UNCTAD, Pedro Manuel Moreno, highlighted the challenges and potential of middle-income countries. According to a post on the UNCTAD website on 8 February, Mr. Moreno said that these nations lack the global support they need, despite being home to about 75% of the global population and 62% of the world’s poor and facing mounting debt and worsening climate vulnerabilities. “If we are committed to a world of shared prosperity, these countries need our support,” Mr. Moreno said. Mr Moreno said few middle-income countries have managed to catch up with advanced economies over the decades. Some have even seen their per capita income decline. This “daunting journey” to catch-up is hindered by the complexities of structural changes and growth, especially as the initial benefits of moving labour from agriculture to manufacturing wane. As these economies expand, the availability of under-employed rural labour decreases. To continue moving up the ladder and avoid the so-called “middle-income trap”, they need to build the capacities to develop new products. According to the UNCTAD post, Mr. Moreno highlighted the essential role of industrial policies in helping some nations avoid the trap, pointing to East Asian success stories like the Republic of Korea. He said that these countries leveraged their existing industrial skills to develop and expand new production and export sectors, moving into more complex and high-value areas like steel and electronics. “At the heart of these success stories were targeted industrial policies,” Mr. Moreno said. “While such policies became out of fashion a few years ago, there is renewed interest in them, and for good reasons.” However, Mr Moreno said that such strategies require fiscal space, which is currently constrained in middle- income countries by growing debt burdens and limited access to finance. Today, 3.3 billion people live in countries that spend more on debt than on either health or education. “And most of them live in middle-income countries, which are ineligible for debt relief through the G20’s Common Framework.” According to the UNCTAD post, Mr. Moreno reiterated UNCTAD’s call for an effective debt-relief mechanism that supports payment suspensions, longer lending terms and lower rates. He also advocated for urgent action to provide affordable, long-term finance for investment in these countries, saying re-capitalizing multilateral development banks offers a good avenue.+
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