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Many developing and low-income countries are under debt distress, and a few of which are also facing food crisis as well. This is an extremely grave situation, and it is perhaps the greatest crisis the world has faced since World War II.
This started with a Covid-related economic stimulus generated by the developed world through unprecedented fiscal and monetary easing to support their public, and later the unraveling of those stimuli has exported inflation to the developing countries. This also coincided with the Russia-Ukraine war which has resulted in a commodity super-cycle where many major commodities from energy to food reached historic peaks at the same time.
There are 41 countries at the risk of debt distress. The stagflation environment is dragging tens of millions into poverty. It is causing immense human misery for the majority of low-income and developing countries.
Many economies need debt relief and restructuring with a cautious effort to lower the pain of the inhabitants of these countries. The world urgently needs global debt relief efforts.
Having said that, debt distress countries are partially themselves to be blamed for shying away from economic reforms while the sun was shining. Back then, the ruling and controlling elite kept on seeking rent at the cost of masses.
In case of Pakistan, reforms were never adopted in a true sense even though they were part of numerous IMF programmes. Moreover, the slack caused over the last 12-18 months due to political wrangling cannot be blamed on any outside force. A similar path of mistakes and corrupt elements can be traced in the Sri Lanka. Yet, the world needs to think of common people’s misery in these two and many other countries.
The rich world can no longer turn a blind eye. It is their response to Covid and its unravelling which has largely caused inflation in countries that lack social protection mechanisms and resources.
This is very much similar to how greenhouse gas emissions from the rich countries have caused climate change, the effects of which are more visible in the developing world as they feel ill-equipped to deal with such challenges, and rightly so.
The debt and economic complexities increase with the emergence of new global lenders.
In the past, the Paris Club (dominated by the US, rich European countries, and Japan) and the London Club (West-dominated commercial lenders) were the main lenders along with multilaterals (IMF and World Bank). Now other players have emerged which include China, India, South Africa, GCC countries and commercial lenders. Of these China is the primary creditor.
The economic ‘cold war’ between large countries (mainly the US and China) has caused an extreme externality for the poor of the world. Ever since the World War II, debt easing and economic revivals were led by the US and multilateral agencies – mainly the IMF and WB. Examples such as the Marshall Plan launched for postwar Europe was built purely on the US support.
Later, the Brady Plan was designed to address the so-called LDC crisis of the 1980s when a number of countries, primarily in Latin America, announced that they cannot service their commercial bank loans.
The US treasury-backed bonds were exchanged for their commercial bank loans and other debts. Later in the 1990s, East Asian countries were supported by the US during an economic crisis.
Now there are many economies in South Asia, Africa, and other places where there is a dire need for similar plans. However, there are delays in debt restructuring and easing.
There are unusually long delays in IMF’s bailout deals. According to Reuters, for example, it took 271 days for the IMF to reach a consensus with Zambia over Staff Level Agreement (SLA) and the Fund’s executive board signing off leading to final disbursement.
Similarly, Sri Lanka has been waiting for over 193 days for the $2.9 billion bailout to finalize. Ghana’s wait is of 92 days and counting.
The delays between the SLAs and board approvals are ostensibly caused by the goal of arranging financial assurances from bilateral partner countries to allow buildup of forex reserves which meets the requirements of IMF debt sustainability framework.
The countries are negotiating with the Fund and other lenders on reworking the debt. Here the IMF is dealing with new set of lenders, which in turn is causing further delay.
The IMF, World Bank and China all need to step up and rise to the challenge. The delay in negotiation and rifts cannot change the fact that the social impact of climate change, debt stress, and food security constitute serious challenges for the developing world. Poor countries are at the receiving end.
Whatever the new world economic order is, the human cost is too high and can no longer be ignored.
In the past crises, including East Asian economic crisis, the role of the IMF was crucial. Now the poor countries of the world are looking at the multilaterals. These are becoming collateral damage to cold war between the economic giants. This should be relooked and rethought.
During Covid, the G-20 debt framework was designed with China as a crucial partner which led to debt servicing for developing economies being suspended for a year. Perhaps that framework needs to be expanded both in its breadth and length. A coordinated effort of debt relief and debt restructuring is required sooner than later.
Copyright Business Recorder, 2023
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