Viewpoint by Alexander Kozul-Wright*
The United Nations Conference on Trade and Development (UNCTAD) hosted its biennial debt management conference on December 5-7. The forum brought together governments, international organizations and academia to share views on the current debt landscape in developing countries.
LONDON (IDN) — Covid-19 shuddered the world economy to a halt, and the impact on developing countries was particularly severe. A combination of informal working conditions, underfunded healthcare systems and limited fiscal space constrained policy responses to the virus. By the end of 2020, sharp falls in export earnings and remittance inflows had pushed tens of low-income countries to the economic brink.
While 2021 showed signs of a tentative recovery (led to by a rapid turnaround in China), the performance of emerging market (EM) stocks and bonds still lagged behind those in developed economies. At the start of last year, investors began to fret that monetary policy tightening in advanced economies would trigger a flight away from risky EM assets. In February 2022, their prophecies were fulfilled following Russia’s invasion of Ukraine.
The war led to a spike in global commodities prices, and in response to accelerating inflation, the U.S. Federal Reserve (as well as other major central banks) started hiking interest rates. Between March and October, the Fed raised rates by three percentage points, boosting the value of the dollar against EM currencies. Between January and end-September, meanwhile, market actors pulled a record US$70bn out of EM country debt.
The financial exodus piled pressure across the developing world. In addition to making dollar-denominated debt more expensive, currency depreciations increased import costs, which are typically denominated in USD. Soaring food and fuel prices are especially hazardous for consumers in developing countries, where staples make up a bigger share of household spending than in advanced economies.
Earlier this year (2022), the International Monetary Fund’s (IMF’s) lending to economically troubled countries hit an all-time high. A September Financial Times analysis of IMF data showed that, by the end of August 2022, the volume of loans disbursed by the Fund totalled US$140bn in 44 separate programmes. This was greater than the credit outstanding at the end of 2021, which was a historical annual peak.
The IMF has also made several new additions to its lending capacity. On top of its general resources account and the poverty relief and growth trust, the Fund recently established a resilience and sustainability trust (currently standing at US$40bn) and a new food shock window to help countries crippled by soaring food prices. In November, Malawi became the first country to receive a disbursement, of US$88.3 million, from this new mechanism.
Still, these capital injections are unlikely to stave off sovereign defaults (the IMF has already hinted as much for Malawi) for a growing number of indebted countries. What’s more, neither of the G20’s fiscal relief efforts – the debt service suspension initiative (DSSI) and the common framework for debt treatment—seem to have matched the scale of the crisis.
In the wake of Covid-19 and ongoing monetary tightening in advanced economies, commentators are once again calling for an overhaul of the sovereign debt restructuring architecture. Against this backdrop, the United Nations Conference on Trade and Development (UNCTAD) hosted its 13th debt management conference on December 5-7 in Geneva.
Since the 1980s, UNCTAD has advocated for the creation of an independent debt authority which could preside over sovereign restructurings in a transparent way. Based on a standardized set of legal principles, a global bankruptcy court would provide enhanced creditor-debtor coordination compared to the current market-based approach, UNCTAD argues. This would be particularly true for participants across different legal jurisdictions.
Some of UNCTAD’s critics point out that international financial institutions would balk at assigning comparable status to private creditors in an independent debt forum. Meanwhile, it is unlikely that the U.S. would cede the sovereignty of its courts to a supranational body. But as Martin Guzman, Argentina’s Minister of Finance from 2019 to 2022, points out, “the system we have in place now leaves debtor countries with too little and too late.”
“Together with climate change, unsustainable debt burdens are pushing more developing countries into perpetual vulnerability,” he added. To reverse these trends, UNCTAD has argued that financial relief should be linked to new and alternative debt sustainability assessments (DSAs). In addition to incorporating climate financing needs into DSAs (which will require more debt), the UN body also argues for greater multilateral ‘green’ financing.
With advanced economies focused squarely on the possibility of stagflation at home and the Russia-Ukraine conflict abroad, sovereign debt overhang in developing countries risks being overlooked as we enter the new year. UNCTAD’s conference was a salutary reminder that governments need to better equip themselves with the necessary tools to meet fast-moving crises and that multilateral responses should be bolder and more innovative.
The upshot is that participants at the December (2022) meetings sounded an alarm for the international community. Either we take seriously the need to rethink debt sustainability in a post-Covid and climate-constrained world, or we will bear witness to permanent scarring across the developing world. To date, the common framework has fallen short of expectations. Much more needs to be done.
*Alex joined the Finance and Development team of the Third World Network (TWN) as a researcher in 2021. Prior to joining TWN, Alex was an Associate at Newstate Partners, a sovereign financial advisory firm. At Newstate, he advised numerous developing country governments on debt management issues related to domestic and international funding strategies. Alex also worked as a commodities analyst at Capital Economics—a macroeconomic forecasting company—in which he produced timely research on precious metals and energy products. [IDN-InDepthNews – 10 December 2022]
Image credit: UNCTAD
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