By Ramesh Jaura
BERLIN. 21 July 2023 (IDN) — African countries pay four times more for borrowing than the United States and eight times more than the wealthiest European economies, a new United Nations report has found.
It is not surprising, therefore, that colossal debt is having a grave impact on countries where 3.3 billion people live, says a new report by the United Nations. Their debt interest payments are greater than their expenditure on health or education.
A total of 52 countries—almost 40 percent of the developing world—are in serious debt trouble. They were forced to borrow to finance steps to fend off the impact of “cascading crises” such as COVID-19 pandemic, the cost-of-living crisis, and climate change.
Presenting a new report, “A world of debt. A growing burden to global prosperity” on 12 July, UN Secretary-General António Guterres issued a grave warning that global public debt reached an all-time high of $92 trillion in 2022. This five-fold surge in public debt levels since 2000, demands immediate action to tackle the escalating crisis affecting developing countries, he said.
The report—prepared by the UN Global Crisis Response Group and the five UN Regional Commissions, ECA, ECE, ECLAC, ESCAP and ESCWA—points out that disparity in interest rates highlights the inherent inequality in the international financial system, burdening developing countries disproportionately. Today, half of all developing nations spend a minimum of 7.4% of their export revenues on servicing external public debt.
The report is particularly concerned about the rapid growth of interest payments, surpassing other public expenditures. It is alarming that some governments are compelled to spend more on servicing debt than on critical sectors like health and education, states the report. It shows that at least 19 developing nations allocate more money to interest payments than education, and 45 allocate more to interest than health expenditure.
The developing countries have had to rely on private creditors, who offer more expensive debt and shorter maturities than official sources. This has also complicated debt restructuring for developing countries.
Currently, private creditors hold 62% of external public debt, up from 47% a decade ago. There is, however, no mechanism to address how to restructure debt across different creditor classes.
Call for reform of the International Financial architecture
The UN Global Crisis Response Group is calling for a comprehensive reform of the International Financial Architecture, including the debt architecture, to foster a more inclusive system that empowers developing countries to actively participate in the governance of the international financial system.
It considers addressing the high cost of debt and the mounting risk of debt distress of utmost importance. Establishing a debt workout mechanism is crucial to expedite progress under the G20 Common Framework for Debt Treatment, which has faced challenges due to creditor coordination issues and the absence of automatic debt service suspension clauses.
Developing countries, especially those with high debt burdens, require increased liquidity during times of crisis. Otherwise, a liquidity crisis risks turning into a debt crisis. This can be achieved by expanding contingency finance. The global safety net must work.
Measures such as enhancing the use of Special Drawing Rights, temporarily suspending IMF surcharges, and broadening access to emergency financing through increased quotas must be pursued.
The report stresses the need for a substantial increase in affordable long-term financing. “To get there, we will need to transform and expand Multilateral Development Banks to support sustainable long-term development and mobilize more private resources on more equitable terms.”
Furthermore, there is an urgent need for more concessional finance to fulfil aid and climate finance commitments. [IDN-InDepthNews]
Image source: UN World of Debt report
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