Challenges of developing and poor countries on facing the international debt crisis (especially taking into account the COVID-19 effect)

 Hi, everyone!

The causes of the current debt crisis (despite the COVID-19 effect) ar complex, and can be traced back to the 1970s and 1980s, when commercial banks, seeking investments for funds acquired from nations members of the Organization of Petroleum Exporting Countries (OPEC), made loans to non - OPEC developing countries, injecting money that in many cases were spent in programs that didn't benefit the poor, or development projects failed or wrongly dimensioned, and private projects benefiting corrupt officials and elites. Meanwhile, the US government adopted monetary policies in order to fight inflation, which conduced to a rise of interest rates and a worldwide recession, which in turn, in conjunction with irresponsible lending and poor management of debtors, contributed to the debt crisis in the 1980s, and again in 2008. During this process, developing countries experienced serious problems in repaying their debts, beyond their ability to repay them, despite rescheduling and limited relief by commercial banks and bilateral creditors, with a serious effect on poverty and the environment (Weintraub, 1994; United States Conference of Catholic Bishops, 2011).


Of course, if developing countries were not fully recovered from the effects of the global financial crisis of 2008, they were much more impacted by the current COVID-19 crisis, certainly, the worst recession faced since the 1930s Great Depression, at the point of being considered the pandemic as a catastrophic event for many developing and the poorest countries (The Economic Times, 2020).


A picture of the situation: Global total debt has risen from $152 trillion in 2008 to $255 trillion in 2019. Developing countries and emerging economies reached $55 trillion of debt in 2018. In 63 impoverished countries, the average external debt payments rose from 5.5% (2011) up to 12.4% in 2019. In this context, the financial needs of these countries will be excruciating as the COVID-19 evolves (Murawski, 2020, The World Bank, 2020).


Obviously, rescheduling doesn't solve the problem: it simply buys time for debtors. No approach to the international debt crisis can be successful if it doesn't address substantial reductions in the trade and current accounts deficits of debtor nations, becoming essential, among other strategies, to avoid inflationary policies in achieving debtor countries recovery and substantial growth (Weintraub, 1994, UNCTAD, 2019).


Countries with high debt, or that are unlikely to service new debt, have three options to improve their economic position: (i) to increase their ability to pay the debt (highly unlikely for most countries, even more at this particular moment); (ii) to reduce their debt burden; (iii) to inflate away the debt. Avoiding the trap of hyperinflation, a possible solution is a moratorium of repayment, both at the bilateral and multilateral levels. Another pointed out by Adler & Arauz, is to convince some of IMF wealthiest countries, to give a certain amount of their Special Drawing Rights (SDR), designed as a supplementary international reserve to support countries with liquidity and foreign currency shortages, donating them to the developing countries in need to liquidity (Murawski, 2020).



Sources:


Weintraub, R. (1984) International debt: Crisis and challenge. Cato Journal, 4 (1) (Spring / Summer 1984), 21 - 61. Retrieved from: https://www.cato.org/sites/cato.org/files/serials/files/cato-journal/1984/5/cj4n1-2.pdf 


(2011) What is the international debt crisis? In the United States Conference of Catholic Bishops. Retrieved from: https://www.usccb.org/resources/what-international-debt-crisis


UNCTAD (2019, May) Current challenges to developing country debt sustainability. Retrieved from: https://unctad.org/system/files/official-document/gds2018d2_en.pdf


Murawski, S. (2020, April 17) Time to resolve debt issues in the Global South. In Transnational Institute. Retrieved from: https://www.tni.org/en/article/time-to-resolve-debt-issues-in-the-global-south


The World Bank (2020, October 12) Debt Burden of Least Developed Countries continues to climb to a record of $744 billion in 2019. Retrieved from: https://www.worldbank.org/en/news/press-release/2020/10/12/debt-burden-of-least-developed-countries-continues-to-climb-to-a-record-744-billion-in-2019


(2020, October 15). World experiencing one of the deepest recessions since the Great Depression due to Covid: World Bank. In The Economic Times. Retrieved from: https://economictimes.indiatimes.com/news/international/business/world-experiencing-one-of-the-deepest-recessions-since-great-depression-due-to-covid-world-bank/articleshow/78672780.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst