Developing country debt is once again high on the agenda of policymakers and the international financial institutions. The global financial crisis has hit developing countries hard: a sharp contraction in global demand, volatile commodity prices, lower levels of migrant remittances, uncertain levels of official development assistance, increased spreads on sovereign bonds and lower levels of affordable capital have all combined to significantly worsen the budgetary position of many governments. In 2009 alone, the shortfall in external financing is estimated at between US$350 and US$635 billion.
Billions of dollars in new loans are being thrown at the problem and the G20 has given the international financial institutions a central role in delivering this money. An additional US$500 billion in resources has been funnelled to the IMF. Since the outbreak of the crisis, the institution has provided US$170 billion in new loans to 32 countries. The World Bank has also increased its lending activities by 54% over the previous year. To justify its stepped-up official lending programme, rich country governments have pressed the World Bank and IMF to re-write their rules on debt sustainability. The Bank and Fund have re-cast the debt sustainability framework for low-income countries to allow countries to take-on more debt without them being considered in debt ‘distress’. The new rules overlook certain state liabilities and rely on migrant remittances as an additional way to pay back sovereign debt.
This policy response will store-up significant debt problems for countries in the future. Already there are concerns that some impoverished countries are at moderate or high risk of debt distress mainly due to export and income shortfalls, as well as the impact of currency devaluations. The debt-to-GDP ratios of 28 low-income countries already exceed 60%. This is more than double the number in this situation before the outbreak of the global recession. UNCTAD points to serious concerns over the debt burden in 49 least developed countries.
Developing countries were not responsible for the current global economic downturn. And yet, they are being forced to indebt themselves further to meet rising demand for social spending. A moratorium on external debt service payments would be a more just and effective way to release extra funds for critical investments in poverty reduction and economic growth. EURODAD has calculated that a two year moratorium on external debt service payments for 64 of the world’s poorest countries would release over US$30.5 billion in extra finance.
Providing new loans to countries to help them meet temporary shortfalls in external finance only addresses the symptoms, not the cause, of why many countries retain a chronic dependence on foreign credit. One reason is the massive illicit capital outflows from developing countries, estimated at around US$1 trillion every year. In addition, an estimated US$105-180 billion in so-called ‘stolen assets’ from developing countries are hidden away in rich country banks. Recognition of the problem is growing but international efforts to crack down on tax evasion, curb capital flight and repatriate stolen wealth need to be dramatically scaled-up.
With or without a debt sustainability framework, there will always be cases when countries run into sovereign debt difficulties or have serious allegations of illegitimate debt. A fair and transparent debt arbitration procedure, as advocated in EURODAD’s Charter on Responsible Finance, must be introduced to deal with these cases. In the last year policymakers have found several new ways to address corporate debt. It is now time to propose new approaches for sovereign debt.
EURODAD welcomes comments on the proposals tabled in this discussion paper until end-October 2009. EURODAD will then organise a discussion among members on the basis of inputs received and will publish a final version in November 2009. Please send your views to ghurley[at]eurodad.org