United Nations — Low- and middle-income developing economies are hard hit by global economic developments beyond their control. Monetary tightening in advanced economies, coupled with growing fears of a global recession, has weakened currencies, driving up interest rates and scaring away investors.
All of this is contributing to a rapid deterioration of an already damaging debt crisis which, as always, is hitting the most vulnerable the hardest.
In a new study published by the United Nations Development Program (UNDP), 54 developing economies (low- and middle-income) are identified as suffering from serious debt problems, representing 40% of all developing economies. 1
Providing this group of countries with the debt relief they need should be a manageable task for the international economy, as this group represents just over 3% of the global economy. Failure to do so, however, could lead to catastrophic development setbacks, as the Group of 54 represents more than 50% of the world’s poorest people and 28 of the 50 countries most vulnerable to climate change.
Countries are stuck between a rock and a hard place. They cannot spend what is necessary to protect their citizens and preserve their development prospects while continuing to service their rapidly growing debt.
Hurry up. Without an urgent intensification of debt relief efforts by the international community, many more defaults will follow and the debt crisis will turn into an entrenched development crisis, as history has told us. learned.
Contrary to advice given in the early stages of the COVID-19 pandemic, in the face of high interest rates, inflation and debt levels, the International Monetary Fund is now urging countries to rein in fiscal spending while providing targeted and time-limited spending. support for vulnerable populations.
But many developing economies cannot easily shift to effective and targeted social transfers or rapidly increase tax revenue, because the administrative capacity to do so takes years to develop.
Without a viable alternative in the form of access to orderly and comprehensive debt restructuring and additional liquidity support from the international community, countries will have to choose between a series of disorderly and costly defaults. and/or drastic spending cuts with disastrous consequences for low-income countries. income and vulnerable populations and development prospects in general.
In addition, both options greatly increase the risk of political and social unrest threatening further setbacks and a deepening of the crisis.
We must also remember that these things are happening against the backdrop of an escalating climate crisis and that we can only fight together as a global community. Without rethinking debt relief, the global climate transition will be delayed, the economic costs of the transition will increase, and developing economies, which have contributed least to the problem, will continue to bear a disproportionate share of the costs.
Developing economies must have sufficient fiscal space to undertake ambitious sustainable development plans – including making much-needed investments in climate change adaptation and mitigation.
Debt relief is one of the many crucial elements of its delivery. The G20 common debt framework, under which over-indebted countries can request restructuring, will need to be reformed, including by emphasizing comprehensive debt restructurings in return for sustainable development goals.
This will require a change of attitude and a sense of urgency, especially among major official creditors, as well as full debt transparency of debtors and creditors. In our final article, we discuss possible pathways for the Common Framework focusing on country eligibility, debt sustainability analyses, official creditor coordination, private creditor participation, policy conditionalities and use of debt covenants that target future economic and fiscal resilience.
Decisions on debt relief cannot wait any longer.
Nineteen developing economies – more than a third of developing economies issuing dollar debt in international markets – have now lost market access due to soaring interest rates, which have more than doubled compared to 9 countries at the start of 2022.
Similarly, credit ratings have fallen with 27 countries – almost a third of rated developing economies – rated either “substantial risk, extremely speculative, or default”, compared to 10 countries at the start of 2020.
Hard-won development gains in the Global South over decades are now being eroded by the cost of living and debt crises. Not only will a deepening development crisis cause great human suffering, but the cost of recovering lost development gains will increase dramatically the longer we wait.
It is inconceivable, both morally and economically, that we would allow a development crisis to escalate when the international community now has the resources to end it.
Lars Jensen is an Economist in UNDP’s Strategic Engagement Unit; George Gray Molina is Head of Strategic Engagement and Chief Economist at UNDP
IPS United Nations Office