Why poor nations now face a pandemic debt crisis


Some of the world’s poorest countries are in serious financial trouble. Indebted governments from Latin America to Africa have spent money they didn’t have to bolster shaky health systems against the coronavirus pandemic and provide a safety net for citizens. Then Russia’s war in Ukraine drove up grain and fuel prices, and central banks began raising interest rates to stifle inflation. The soaring cost of living has triggered episodes of social and political instability and the chances of a wave of defaults are growing.

1. Which countries are most at risk?

Dollar-denominated bonds from 21 countries tracked by Bloomberg Economics, the most recorded, were trading at yields at least 10 percentage points higher than US Treasuries in mid-July – a sign of distress. El Salvador, Ghana, Egypt, Tunisia and Pakistan were among the countries considered most vulnerable. Others on the list include Argentina, Ukraine, Kenya and Ecuador. Those under the most stress tend to be smaller countries with a shorter track record in international capital markets. Sri Lanka, which has been ravaged by months of protests over soaring inflation, became the first country to default on its sovereign debt in 2022 when it stopped paying foreign bondholders in May . The following month, Russia reneged on repayment commitments after it got caught up in a web of sanctions imposed in response to its invasion of Ukraine, and its close ally Belarus followed suit in July.

2. Who tried to help?

Led by the United States, the wealthiest countries made an effort at the height of the pandemic to create trillions of dollars in new money through bond-buying programs and funnel a small portion of it to the poorest countries through multilateral institutions. The Group of 20 major economies has waived payments on official government-to-government borrowing three times for the world’s poorest countries, while the International Monetary Fund has approved emergency funding for more than 80 countries. He offered the biggest injection of resources in IMF history – $650 billion in so-called special drawing rights, reserve assets that operate like an overdraft and come with no strings attached, unlike the most of the fund’s other programs. Although the funding envelopes provided a temporary reprieve, recipients have been left with hefty bills that will need to be paid off even though their savings are still struggling.

3. Are we heading towards a debt explosion?

Governments trying to pull their finances out of a deep hole must maintain a delicate balance. They may be faced with the choice of supporting their struggling populations or paying their creditors. While failure to meet their obligations can close access to capital markets and make return even more difficult, the risk of unrest hangs over countries seeking to cut spending or cut fuel subsidies, such as in witness the outbreak of demonstrations from Panama to Mozambique. . Rising interest rates in the United States made their challenge even greater, boosting the dollar, weakening their currencies and increasing the cost of servicing dollar-denominated debt. The cost of insuring emerging market debt against default jumped in mid-July to its highest level since the pandemic hit in 2020, and the World Bank’s chief economist, Carmen Reinhart, warned that “debt risks and debt crises are not hypothetical”.

4. What are the chances of further debt relief?

Relatively thin. At the end of July, the IMF was considering a range of options, including new allocations of SDRs as governments that have taken on additional debt over the past two years grapple with rising borrowing costs, but it does not did not specify the details. The United Nations has also called for the relaunch of a debt relief program specifically for poor countries in Africa. World Bank President David Malpass warned in July that debt reduction efforts had stalled for some years and there was no process in place to address the issue. He had previously estimated that the world’s poorest countries will have to pay about $35 billion to official bilateral and private sector lenders this year, “far beyond” what they can afford.

Reaching debt relief deals will increasingly depend on China, which the World Bank says accounts for almost 40% of bilateral debt and private creditors that the world’s poorest countries have to repay. This year. In May, China agreed to co-chair a creditors’ committee that plans to restructure Zambia’s external debt after it defaulted in 2020. The South African nation’s public external debts topped $17.3 billion, with about a third of the total owed to Chinese lenders. The outcome of these ongoing negotiations should give an indication of how the Asian nation will handle its other troubled creditors.

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