Debt, weak multilateralism, and austerity

The number of developing countries having high debt levels, that is having public debt more than 60 percent of their gross domestic product, increased from 22 countries on January 1, 2011 to 71 countries by January 1, 2020 — more than tripled in almost a decade — only to come down slightly to 59 countries by January 1, 2022.

This is just one of many important lessons that a recently released report ‘A world of debt: a growing burden to global prosperity’ by United Nations Global Crisis Response Group, and five regional commissions of United Nations (UN) points out regarding the significant increase in debt burden, especially in developing countries, during the last decade or so.

The Report follows another recently released report ‘The sustainable development goals report 2023: special edition’ by United Nations Development Programme, and Oxford Poverty and Human Development Initiative indicating a very lacklustre performance of countries, halfway through the 2030 UN Sustainable Development Goals (SDGs), including poverty, where in fact the otherwise falling trend of absolute poverty for a number of years, saw a reversal since the heyday of the Covid pandemic.

As the debt related report highlights the increasing burden of interest payments has significantly dented public expenditures on health and education, for instance, and calls for greater inclusion of countries in the multilateral policymaking, it is no wonder that these factors, among others, have had a strong say in the serious lack of SDG-related progress; in addition to high debt levels, and weak multilateralism, and financing, including lack of greater special drawing rights (SDRs) allocation in the face of emergencies like rising climate, and pandemic related shocks, especially in the case of developing countries.

Whereas, the Report on debt indicates important lessons in terms of understanding underlying trends in terms of its compositions – some of which will be discussed in later paragraphs of the article – the burdens of high debt in terms of eating into public expenditures, and the need for more inclusive multilateralism, as far as the writer could gauge, there is no reflection on the important role of austerity in increasing debt burdens, especially in the case of developing countries.

The Report does call for greater provision of finance to enable countries to not take the route of taking on debt to deal with emergencies, whereby it indicates ‘Provide greater liquidity in times of crisis expanding contingency finance, so that countries are not forced into debt as a last resort, including through the strengthened use of Special Drawing Rights, a temporary suspension of IMF surcharges, and increased quota-access windows to IMF emergency financing.’

Given climate change crisis, and related Pandemicene phenomenon requires a more long-term nature of emergency support, especially for developing countries, the Report should emphasize a rather long-term support in terms of the measure indicated above, among possibly others.

Here, it needs to be pointed out that due to weak spirit of multilateralism, governments in developing countries had to take on a lot of debt since the pandemic, and in the wake of greater intensity of global warming, and more- frequent, and intense climate disasters.

Moreover, unjustified adoption of deep austerity policies on one hand, and imported inflation putting pressure on foreign exchange reserves, on the other hand, contributed to increasing external and domestic debt repayments needs.

Over-board monetary tightening under monetary austerity in an effort to reduce aggregate demand, in turn, to curtail inflation, has backfired due to significant supply-side determinacy of inflation, especially in developing countries.

In advanced countries as well, in the wake of the pandemic straining supply chains globally – which were already lacking efficiency due to years of neoliberal assault diminishing regulation – and causing recession virtually globally during the heyday of the pandemic, over-emphasis on controlling inflation by raising policy rate produced ripple effects in terms of interest rates being raised in a lot of developing countries, on top of the same austerity policy also pushing up policy rate, together caused a lot of ballooning of domestic and external debt interest burden on developing countries.

The Report does not invoke this line of policy thinking, which over-emphasized austerity policies in individual countries, and under policy prescription of International Monetary Fund (IMF). It is important that this is rectified, given the very important influence UN has in terms of shaping policy of countries and multilateral institutions alike. Another aspect that the report does not emphasize enough is the significant increase in debt of countries, especially developing countries with less climate resilient economies to start with, in particular highly climate vulnerable developing countries like Pakistan, due to lack of provision of climate finance by rich, advanced countries, especially those having major carbon footprint.

About the progression in debt burden over the years, and especially since the pandemic, the Report pointed out that since 2000, global public debt had increased five-fold – from $17 trillion to $92 trillion – outpacing the increase in global GDP, which in comparison increased by three times. Moreover, in terms of the source of increase, developing countries’ public debt increased faster in the case of developing countries during the last decade.

The Report pointed out in this regard: ‘In 2022, global public debt – comprising general government domestic and external debt – reached a record USD 92 trillion.

Developing countries owe almost 30% of the total, of which roughly 70% is attributable to China, India and Brazil. However, public debt has increased faster in developing countries compared to developed countries over the last decade.

The rise of debt in the developing world has mainly been due to growing development financing needs – exacerbated by the COVID-19 pandemic, the cost-of-living crisis, and climate change – and by limited alternative sources of financing.

Consequently, the number of countries facing high levels of debt has increased sharply from only 22 countries in 2011 to 59 countries in 2022.’

The Report indicated that public debt in developing countries (excluding China) increased much faster than that of developed countries, whereby in the case of former during January 1, 2010 – January 1, 2022, public debt had doubled, while for developed countries it had increased by around one-and-a-half times. Debt situation worsened even more in the case of Asia and the Pacific region, where public debt increased more than four times during the same time.

Increased debt repayments ate away public expenditures that could have been spent on, for instance, health and education, which overall meant that lack of spending into the economy contributed to weakening of countries’ capacity to repay debt, both in terms of exports earnings, and revenues.

For instance, the Report pointed out that in the case of developing countries, external debt as a percentage of exports increased from 71 percent in start-2010 to 112 percent on January 1, 2022.

Also, during the same time, total public debt as a percentage of GDP also increased significantly from 35 percent to 60 percent, where within the total public debt, external public debt increased both as a percentage of GDP, and exports, from 19 percent to 29 percent, and 3.8 percent to 7.4 percent, respectively.

Moreover, in terms of revenues spent on servicing debt in the case of developing countries, once again an increasing trend was seen, whereby while 4.2 percent of revenues were used to service debt in the beginning of 2010, by the start of 2022, this had increased to 6.9 percent.

The Report pointed out in this regard: ‘Developing countries’ debt trends have caused a rapid increase in total public interest payments relative to the size of their economies and government revenues. Currently, half of developing countries devote more than 1.5% of its GDP and 6.9% of its government revenues for interest payments, a sharp increase over the last decade.

The rise of interest payments is a widespread problem. The number of countries where interest spending represents 10% or more of public revenues increased from 29 in 2010 to 55 in 2020.’

It is important to note that the composition of debt has changed during the last decade or so, whereby the proportion of commercial debt has increased in proportion to the bilateral- and multilateral debt of developing countries; arising difficulties in terms of higher interest payments on account of more expensive commercial loans in comparison to the bilateral/multilateral sources in general, and also in terms of facing greater complexity during possible debt restructuring exercise.

The Report pointed out in this regard: ‘In the past ten years, the portion of external public debt owed to private creditors has risen across all regions, accounting for 62% of developing countries’ total external public debt in 2021.

The increasing share of public debt owed to private creditors presents two challenges. First, borrowing from private sources is more expensive than concessional financing from multilateral and bilateral sources. Second, the growing complexity of the creditor base makes it more difficult to successfully complete a debt restructuring when needed. Delays and uncertainties increase the costs of resolving debt crises.’

Hence, in order to reduce both the burden of debt, including the better rationalizing the composition of debt for developing countries it is import to first rollback on over-board austerity measures – a source of concern not highlighted as such by the Report though, and needs correction in this regard – as one of the significant determinants of increase in interest payments, both pushing countries, especially developing countries towards taking more debt, at the back of lack of public expenditure denting growth, export, and revenue potential, and also not allowing narrowing twin deficit financing needs.

Secondly, there is a need for greater spirit of multilateralism to assist developing countries in avoiding debt as far as possible.

At the same time, countries need to plan better a lot domestic resource mobilization effort in terms of tax net broadening, and progressivity, on one hand, and bring greater efficiencies in tax expenditures, both in terms of allocation and productivity, on the other hand. This in turn requires improving economic institutional quality, and adopting a non-neoliberal reform policy approach.

Copyright Business Recorder, 2023