By Diana Hulova
In recent years, institutions and the media have paid increased attention to the debt problems of advanced economies, yet debt remains a major concern for many developing countries, which are equally struggling to cope with growing debt levels. Recent initiatives pushing for fair and transparent debt workout mechanism and auditing of illegitimate debt offer hope of a solution.
According to IMF figures, nearly one third of low-income countries are in debt distress or at high risk of debt distress. This is even the case for some countries which have received debt relief under Heavily Indebted Poor Countries (HIPC) or Multilateral Debt Relief Initiative (MDRI). As a recent report by Eurodad member Jubilee Debt Campaign report states, “some impoverished country governments such as Ethiopia, Mozambique and Niger, could be spending as much of their government revenue on foreign debt payments in a few years as they were before debt relief.” The Review of Conditionality that was recently concluded at the IMF recognises that low-income countries (LICs) have improved their fiscal balances and increased social spending mainly due to debt relief under HIPC and MDRI. However, no further debt relief initiative is on the table to deal with probable future debt crises in LICs.
Moreover, the rising debt problems of middle-income countries are often being overlooked. Some Small Island Developing States (SIDS), particularly those in the Caribbean are facing extremely high levels of debt. For instance, St. Kitts and Nevis has public debt close to 200 per cent of GDP – a higher ratio than that of Greece. In addition to growing debts and limited access to debt relief and concessional financing, the situation in these countries is further exacerbated by their extreme vulnerability to climate change. Eurodad members Erlassjahr and Debt and Development Campaign Ireland, are working together with local groups to fight the debt crises in some of the islands in the Eastern Caribbean.
After three decades of sovereign debt crises, debt has grown more complex and we are still unable to fight back
Debt has not only become a global issue, but also a more complex one. A broadening creditor base, increasing importance of private sector and domestic debts, debts resulting from export credits or hidden debts from public-private partnerships – these are just some of the new challenges that make today’s debt structures more complex. The Finance Minister of Argentina raised the importance of the debt composition at a side event on debt workout at the World Bank and IMF Annual Meetings in Tokyo saying “It is very important to know who the holders of your debt are.”
While debt structures have changed, the responses to sovereign debt problems remain the same: refinancing old debts with new loans with harmful policy conditionality attached. However, these flawed measures did not solve the debt crisis in the 80s and 90s, and neither will they today. Bailouts do not offer any lasting solution to the debt crisis. In fact, they only delay debt cancellation, making it more costly for the borrower, and transferring the banks’ liabilities to the people - taxpayers. As we are seeing in some countries that benefited from debt relief under HIPC, the benefits from debt cancellation do not last if lending and borrowing practices remain the same. If we turn a blind eye to these dubious practices and keep on repeating the old mistakes, the public debt will continue to rise and economies shrink, only resulting in more poverty and inequality.
How do we break the trap?
Given the repeated rounds of debt crisis, it is obvious that debt cannot be handled by the mechanisms that are currently in place. The need for a lasting and comprehensive solution to the sovereign debt crisis was discussed at the event titled “Beyond HIPC – towards a fair and transparent debt workout mechanism” which took place during the IMF and World Bank Annual Meetings. “We need something more than today’s HIPC. More should be done to discuss debt increases and other issues creating debt burdens,” said Heikke Holmas, the Norwegian Minister of Development, during the event.
Civil society groups have put forward a concrete proposal. A statement issued by Eurodad and its four partners from North and South “Towards a lasting solution to sovereign debt problems” calls for the establishment of an international debt workout mechanism, which is predictable, fair and independent of creditors’ decisions. Examining creditors’ claims and writing off unjust debt is an essential part of this mechanism and should make lenders take responsibilities for reckless lending and speculation. Parallel to these strategies, and until such a debt workout mechanism is in place, several countries are seeing their debts audited. Civil society organisations and social movements in the North and South, including Eurodad members Debt and Development Campaign Ireland, Jubilee Debt Campaign UK, Re:Common and Observatorio de la Deuda en la Globalización, are engaging in citizen’s debt audit processes to raise the awareness and denounce the unjust origins of debts and the impacts of its repayment on people. On the other side, the Norwegian Government will make an assessment of the legitimacy of developing countries’ debt to Norway and will be the first government to ever carry out a creditor’s debt audit.
An even more comprehensive solution would involve a systemic change in the current global financial system in order to prevent the frequent and severe crisis from occurring in the first place. New measures need to be put in place so as to make lending and borrowing more responsible and to ensure the debt burden is shared among debtors and creditors. The Eurodad Responsible Finance Charter and UNCTAD principles for responsible sovereign lending and borrowing suggest some concrete steps in this regard. Moreover, UNCTAD has taken this forward by developing the guidelines for the implementation of these principles, which will be discussed at the Special Event of the Second Committee of the General Assembly next week. The Norwegian Minister of Development has announced that Norway will provide financial support for a 3-year project at UNCTAD to work towards the implementation of the UNCTAD guidelines, and to advance international discussions on debt workout. Norwegian NGOs including Eurodad member, the Norwegian Coalition for Debt Cancellation (SLUG) have been following this process more closely.
Fixing the global financial architecture is an essential step to prevent speculation, enhance useful investments and allow governments to make better use of their own resources, rather than relying systematically on the use of foreign loans. Without such changes, we will never be able to break the vicious circle of sovereign debt crises.