Developing low- and middle-income economies are taking hard hits from global economic developments outside their control. Monetary tightening in advanced economies coupled with increasing fears of a global recession have weakened currencies, sent interest rates soaring, and investors fleeing.
All of which is contributing to a rapid deterioration of an already damaging debt crisis which is, as ever, hitting the most vulnerable the hardest.
In new research released by the United Nations Development Programme (UNDP), 54 developing (low- and middle-income) economies are identified as suffering from severe debt problems, equal to 40 percent of all developing economies.
Providing this group of countries with the debt relief they need should be a manageable task for the international economy as the group only accounts for little more than 3% of the world economy. Failing to do so, however, could result in catastrophic development setbacks as the group of 54 accounts for more than 50 percent of the world’s extreme poor and 28 of the world’s top-50 most climate vulnerable countries.
Countries are stuck between a rock and a hard place. They cannot spend what is required to protect their citizens and safeguard their development prospects while continuing to also service their fast-rising debt burdens.
Time is running out. Without an urgent step-up of debt relief efforts from the international community, many more defaults will follow, and the debt crisis will turn into an entrenched development crisis as history has taught us.
Contrary to the advice given in the early stages of the COVID-19 pandemic, in the face of high interest rates, inflation, and debt levels, the International Monetary Fund is now urging countries to reign in fiscal spending while providing targeted and time-bound support to vulnerable populations.
But many developing economies cannot easily shift to effective and targeted social transfers or quickly increase tax revenues, – as the administrative capacity to do so takes years to build up.
Without a viable alternative in the form of access to orderly and comprehensive debt restructuring, and additional liquidity support from the international community, countries will have to choose between a string of messy and costly defaults and/or abrupt spending cuts with disastrous consequences for low-income and vulnerable populations and development prospects at large.
Furthermore, both options greatly increase the risk of political and social unrest threatening further setbacks and a deepening crisis.
We must also remember that these things are happening against the backdrop of an intensifying climate crisis which we can only combat together as a global community. Without a rethink on debt relief the global climate transition will be delayed, the economic costs of the transition will rise, and developing economies, who have contributed the least to the problem, will continue to bear a disproportionate size of the costs.
Developing economies must be allowed sufficient fiscal space to undertake ambitious sustainable development plans – including the undertaking of much-needed climate adaptation and mitigation investments.
Debt relief is one of several crucial components of providing it. The G20’s Common Framework for Debt Treatments, under which countries with debt distress can seek a restructuring, will have to be reformed, including a shift in focus towards comprehensive debt restructurings in return for sustainable development objectives.
This will require a change in attitude and sense of urgency, especially among major official creditors, as well as full debt transparency from both debtors and creditors. In our latest paper we discuss possible ways forward for the Common Framework focusing on country eligibility, debt sustainability analyses, official creditor coordination, private creditor participation, policy conditionalities and the use of debt clauses that target future economic and fiscal resilience.
Decisions on debt relief can no longer wait.
Nineteen developing economies – more than one-third of developing economies issuing dollar debt in international markets – have now lost markets access on account of skyrocketing interest rates, more than doubling from 9 countries at the beginning of 2022.
Similarly, credit ratings have been sliding with 27 countries – close to one-third of credit-rated developing economies – rated either ‘substantial risk, extremely speculative, or default’, up from 10 countries at the beginning of 2020.
Hard-won development gains achieved in the global south over decades are now being eroded by the intertwined cost-of-living and debt crises. Not only will a deepening development crisis result in great human suffering, but the cost of regaining whatever development gains are lost will increase substantially the longer we wait.
It is inconceivable, both morally and economically, that we would allow a development crisis to escalate when the international community has the resources needed to stop it now.
Lars Jensen is Economist at UNDP Strategic Policy Engagement Unit.; George Gray Molina is Head of Strategic Engagement and Chief Economist at UNDP.
