At the verge – how many countries will fall over the edge into the crater of debt?
The IMF predicts that a number of countries may soon be facing external public debt levels that reach 100 percent of their GDP. This leaves no space for anything but debt servicing - an extremely concerning scenario. Normally we would say that debt is not in itself necessarily bad or problematic. However, when a country is forced to take on so much debt that it is unable to service its debt while providing the necessary goods and services to its people, the debt becomes unsurmountable (and in technical terms unsustainable) and the country will find itself in debt crisis. This is bound to have huge costs to the people of the country.
Rising global debt-levels and increasing inequality
Unsustainable external public debt burdens impact the standard of living negatively, especially for those who are most dependent on public services – such as health, social safety nets, education etc. This impacts women, who tend to be assigned unpaid carework, more negatively than men. Furthermore, high levels of debt lead to increased poverty and inequality within countries and between countries. According to the World Bank, extreme poverty levels are likely to increase for the first time in 20 years and thus progress on the sustainable development goals is in risk of being reversed.
Debt crises are not new. Around the turn of the millennium, many developing countries had their debts forgiven through the HIPC initiative. But the debt burden of the world's poorest countries is once again rising at scary speed. As a matter of fact, one in four of the world's countries is facing a debt crisis, and 46 countries spend on average four times more money on debt payments than on their public health systems. These are debt burdens that many countries have acquired even before Covid-19, but the coronavirus crisis has exacerbated existing debt vulnerabilities in developing countries.
Insufficient answers by international community and rich countries
Earlier this year, the G20 decided to give 73 countries the opportunity to ask for a break in their debt service payments under the so-called Debt Service Suspension Initiative (DSSI). This provided limited relief and only to some; but it failed to address the root causes of the problem and the underlying structures that keep countries in the downward spiral of debt. One of the huge challenges is that private and multilateral creditors were not part of the initiative, and therefore the DSSI effectively risked bailing out private creditors.
Last week, the G20 reunited for their annual meetings. Here, the so-called Common Framework was presented. This is, supposedly, a unifying creditor approach to debt management. The initiative is a step in the right direction as more large creditor countries have agreed to it, but it still fails to apply to multilateral and private loans. There is still no requirement for private creditors to agree to the debt relief requested by debtors, and therefore the G20 is effectively letting the private creditors off the hook again. In addition, the Common Framework talks about suspension of debts and not more radical debt relief such as cancellation of debt and debt payments – which is what many indebted countries are actually calling for. Furthermore, the Common Framework works on a case by case approach, which is unlikely to be a speedy process. It is thus highly questionable whether the framework will deliver the required debt relief governments are calling for in order to rebuild their economies in time or even at all.
Zambia: the canary in the (debt crises) mine?
Zambia is the first country in what may well be a whole string of countries to default on their debts. Zambia already spends more than four times as much on debt servicing as it does on health. The World Bank has estimated that the G20 Debt Service Suspension Initiative (DSSI) would allow Zambia to suspend debt service payments of about US$ 139 million. This figure is equivalent to 0.6 per cent of Zambia’s GDP and 1.2 per cent of Zambia’s total external debt stock. So, really just a drop in the ocean! The limited effect of DSSI is due to the fact that the majority of Zambia's borrowing comes from multilateral and private creditors (73.3 percent of Zambia's external public debt) – of which neither are part of the DSSI. The question is what might the consequences for the Zambian people be?
Urgent need for institutional reform
It is clear that urgent action is required. Colleagues and partners in Zambia are underlining that fact that debt-suspension to all creditors is crucial, both because Zambia like many counties has debt to all three types of creditors, but also because there is a risk that liquidity, due to debt suspension by one type of creditors may be spent to service debt to other creditors, instead of being spent on essential needs of the country’s population. Furthermore, it is clear the DSSI is only a pause in payments, which are to be resumed at full, once the pandemic has died down.
Instead the global community should take this opportunity to support countries in restructuring their debt and bring debt down to a sustainable level, which means to a level at which it is possible for countries to service their debts while ensuring their populations are able to enjoy human rights including health care and education. A prerequisite for restructuring debt in a meaningful way is the establishment of a comprehensive multilateral mechanism or framework for renegotiating and restructuring all external sovereign debts in a forum that includes both debtor and creditor countries – for example the UN. This will require much more transparency around all loans given and taken.
Solving the existing and emerging debt crises is a life-and-death issue
There is no time to waste. Zambia and many other countries have their backs against the wall and as a result there is a huge risk of much human suffering. Meanwhile, rich creditors are making profits, and the international community is merely observing. This must stop! The global debt crisis is closely connected to rising inequality levels, and this calls for global, sustainable solutions and international solidarity.