1150 GMT August 12, 2020
COVID-19 is expected to take a heavy human and economic toll on developing countries, not only because of contagion in the face of weak health systems, but also containment measures which have precipitated recessions, destroying and diminishing the livelihoods of many.
Developing countries generally have limited fiscal capacities to finance relief and liquidity provision in the short-term while rebuilding economic life on a more sustainable basis in the longer-term.
The 2020 Financing for Sustainable Development Report shows debt vulnerability growing in many developing countries well before the pandemic. For example, public sector borrowings of commodity exporters increased substantially after prices collapsed in 2014-15. With these prices further depressed now, the pandemic will increase developing country debt.
Investors withdrew nearly $80 billion from emerging markets in the first quarter of 2020 — the largest capital outflow in history, according to the Institute of International Finance — as remittances fell at least 20 percent, i.e., by over $100 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.
According to the World Bank’s recent Global Waves of Debt, the past decade has seen the largest, fastest and most broad-based increase in emerging market and developing economies (EMDE) debt in the past half century.
Since 2010, total EMDE debt — both public and private — rose from 108.6 percent of GDP (88 percent without China) to more than 170 percent (108 percent excluding China), totaling $57 trillion in 2019.
Private corporate debt accounted for much of this ballooning EMDE debt, rising from 77 percent of GDP in 2010 to 117 percent in 2018. But public debt (without China) has also risen from 38.6 percent of GDP in 2010 to 49.4 percent in 2018.
Following a sharp decline during 2000-10, total low-income country (LIC) debt rose from 51.5 percent of GDP ($137 billion) in 2010 to 65.8 percent ($268 billion) in 2018. Public debt is far more important in LICs, rising from 36.5 percent of GDP in 2010 to 45.7 percent in 2018, borrowing more from ‘non-traditional’ sources, notably China.
When governments can borrow on reasonable terms to invest in projects needed for sustainable development, debt may be desirable, if not necessary, especially in resource-poor countries. IMF research suggested that optimal debt levels depend on many considerations.
Nevertheless, debt can have very undesirable impacts, especially when not well used. Debt composition can also be worrisome. The recent debt build-up is particularly concerning because much of it is external.
And now, developing countries’ ability to service growing debt is constrained by falling export revenues due to pandemic-induced commodity price collapses complicated by the shift to riskier debt.
The external share of EDME government debt reached 43 percent in 2018, while foreign currency denominated corporate debt rose from 19 percent of GDP in 2010 to 26 percent in 2018.
Commercial credit increased over three-fold from 2010 to 2019, rising from 5.0 percent to 17.5 percent of LICs’ external public debt, while contributing to more than half of their non-concessional government debt.
Many developing countries face sovereign debt crises, unable to pay off accumulated debt or interest. An increasing share is owed to China, especially by ‘un-creditworthy’ poor countries, but European bond markets and private lenders still account for more.
African government external debt payments doubled in two years, from 5.9 percent of government revenue in 2015 to 11.8 percent in 2017. A fifth of Africa’s external debt of about $405 billion is owed to China, 32 percent ($132 billion) to bond markets and other private lenders, and 35 percent ($144 billion) to multilateral institutions such as the World Bank.
Debt servicing accounts for the largest share of government spending, and remains the fastest growing expenditure item in sub-Saharan African budgets. As debt from private creditors is more expensive, 55 percent of interest payments go to them.
Interest payments due on private debt to African nations for the rest of 2020 are around $3 billion. Compared to very low to negative rates in Europe, America and Japan, most African governments are paying between five percent and 16 percent interest on 10-year government bonds.
African countries have been 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 eight to 11 percent for over a decade, its sovereign credit rating has not improved.
Also, transparency about contingent liabilities, e.g., due to state-owned enterprise debt and public-private partnership transactions, is limited in most developing countries, especially for debt owed to commercial and non-Paris Club creditors.
*Anis Chowdhury is adjunct professor at Western Sydney University and University of New South Wales in Australia, and Jomo Kwame Sundaram is former economics professor and former UN assistant secretary general for economic development.
The article was taken from IPS.