As governments converge on Washington for the International Monetary Fund (IMF)-World Bank spring meeting, they are confronted with the daunting prospect that 2023 might be the year that the world will be hit by a developing country debt crisis much like that which took place in the early 1980’s that led to the infamous lost decade in Latin America and Africa. A number of defaults on debt repayments over the last three years have served as the alarm bells for a possibly even bigger implosion.
A striking similarity is how in both the 1970’s and the last few years, a period of easy money or reckless lending was followed by the reign of tight money as the United States’ Federal Reserve sought to combat inflation by raising interest rates, leading to the formal or informal default of countries ensnared with insupportably greater debt repayments.
There is, however, a thread of continuity between that earlier crisis and the present one: the indebted countries never really got out of the debt trap not only because their ratios of debt to GDP remained high but also because the structural adjustment programs they were forced to submit to to get a modicum of debt relief for the first crisis weakened their economies and made them vulnerable when the second crisis unfolded.
Despite advance warnings, there is no plan in place to avert the impending implosion. The so-called Common Framework devised by the G 20, the World Bank, and the IMF is grossly inadequate. Instead, the western financial powers have indulged in a blame game, that is, identifying China as the problem. This charge has little basis since the record shows that China has, in fact, been quite generous in forgiving the debt of poor countries, especially in Africa. The real agenda of the “Blame China” lobby is to corral China into a common front that would impose stringent conditionalities on the indebted countries as the price for debt relief, an approach that China has rightfully pointed out has not worked because it does not address the structural roots of the developing country debt problem.
Yet the current crisis can, in fact, be turned into an opportunity. Nothing short of a bold, just, and effective approach is needed that would abandon the haphazard, conservative, anti-development programs of debt relief that were devised to meet the 1970’s-1980’s crisis and situate a program of massive debt cancellation within a transformative paradigm supportive of sustainable development, the radical reduction of poverty and inequality, and climate justice.
Carrying a debt load of $324 billion that came to 90 per cent of its gross domestic product, Argentina defaulted on a scheduled payment in May 2020. Zambia followed suit in November 2020, missing a $42.5 million payment on a Eurobond loan. It was followed by defaults by Sri Lanka, Surinam, and Lebanon. it was Sri Lanka’s default in April 2022 that drew the attention of the word to the potential explosiveness of the emerging debt crisis in the global South, perhaps owing to the downfall of a political dynasty, the Rajapaksa family, amidst blackouts, long queues for food and other basic commodities, and massive street protests.
A terse summary of the current debt situation of the global South is provided by a Brookings report:
In 2023, developing countries owe an estimated $381 billion in debt service on medium- and long-term external debt according to the World Bank International Debt Statistics. 53 countries have credit rating classifications estimated to be “highly speculative” or worse. This subset of developing countries owes $166 billion in debt service in 2023. The top 10 debtors alone owe almost 60 percent of this debt service, or a quarter of total debt service due by developing countries. The current debt resolution system would struggle to handle more countries. Only three countries are currently renegotiating their debt under the G-20-led Common Framework, and most large debtors are ineligible to participate.[i]
To many observers, there are some disturbing similarities between the lead-up to the 1980s’s debt debacle and the current crisis. To some, a replay of the eighties is at hand, though on a bigger scale.
Revisiting the “Third World Debt Crisis”
The 1970’s was a time of relatively easy money, as the big western banks sought to dispose of the billions of dollars deposited in them by the OPEC oil producers by lending them to developing countries, many of which were perceived as good credit risks owing to the seeming solidity of the dictatorships that ruled them. But there was a hitch. Loans were made on variable, not fixed interest rates. The 1970’s were an inflationary era, and when Paul Volcker, then head of the Federal Reserve, drastically raised the prime rate in the US in order to whip inflation, the interest rates on private bank loans to developing countries also rose, driving many of them, like Brazil, Argentina, and Mexico to formal or informal default.
Desperate for cash to pay off interest coming due, cover their mounting import bills, and keep the government running, the countries contracted massive loans from the IMF and World Bank. Multi Billion dollar loans were granted by the Bank and the IMF, but on condition that these loans be mainly recycled to the big banks like Chase and Citibank to shore up their balance sheets so they would not go under and bring down the whole global financial system. Moreover, to be eligible for loans, the governments in crisis had to commit to undergo programs of wholesale privatization, deregulation, and trade liberalization–in a word, “structural adjustment.”
Following the eruption of successive defaults, there were some initiatives to provide some debt relief to the more advanced indebted countries, but this had to be ‘market-based.’ The-so-called Brady bonds played a central role in reducing the debt of the bigger and richer developing countries. The process involved exchanging a banks’ claims on a developing country debt for bonds backed by the US Treasury that were issued by an indebted country. That is, the indebted country “bought” its debt at a steep discount by issuing bonds to a creditor bank. This allowed the bank to take the defaulted debt from its balance sheet while gaining a tradable instrument that could gain value over time. This so-called market based arrangement at the same time provided the indebted government with a measure of debt relief. It was this process that provided some stability, though short-term, to the finances of the so-called emerging economies, including Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Ecuador, Mexico, Morocco, Nigeria, Philippines, Poland, Uruguay, and Venezuela. The hitch was that to participate in this process, countries had to agree to ÏMF and World Bank supervised structural adjustment.
For the indebted least developed countries, most of them from Africa, relief came in the form of the so-called “Highly Indebted Poor Countries Initiative” (HIPC) that was agreed by the finance ministers of the G 7 in London in 2005. This was outright debt cancellation of the debt owed to the International Monetary Fund, the World Bank, and the African Development Bank. The 36 countries which had their debts canceled under the scheme were Afghanistan, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoros, Republic of Congo, Democratic Republic of Congo, Cote d’Ivoire, Ethiopia, the Gambia, Ghana, Guinea, Guinea Bissau, Guyana, Haiti, Honduras, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Tanzania, Togo, Uganda, and Zambia.[ii]
As in the case of the Brady Bonds, cancellation of debt came with a price: the governments involved had to undergo trade liberalization, deregulation, and privatization—a cure that turned out to be worse than the disease.
In the first two decades of the 21st century, the international focus when it came to financial instability shifted to the “emerging economies” of East Asia that were the victims of the 1997-98 Asian financial crisis and to the United States and Europe, which were the main actors in the Global Financial Crisis from 2008 to 2016. However, the finances of developing economies that had been granted debt relief under the Brady bonds scheme and the 2005 debt write-off never underwent significant improvement.
Among the bigger, more advanced developing countries, Mexico was hit by a second wave sovereign debt crisis in the early 1990’s and Argentina defaulted in 2001 and again in 2020. Loans to the most impoverished governments, including the 36 countries that were included in the 2005 London write-off deal more than tripled between 2005 and 2013.[iii] Lending to ‘low income countries’ increased to $17.3 billion in 2013, up from $12.2 billion in 2012 and $5.1 billion in 2005.[iv] Extrapolating borrowing trends, in 2015, the Jubilee Debt Campaign projected “that debt payments for low income countries are set to increase from 4% of government revenue today to up to 13% by the early 2020s. Many countries could see debt payments increase by even more, with Ethiopia, Ghana, Rwanda, Senegal, Tanzania, Uganda and Zambia all among the countries which could be spending over 20% of government revenue on foreign debt payments by the early 2020s.”[v] This projection sounded alarmist then, when developing countries were growing and had relatively less restrictive access to credit. In fact, it greatly underestimated the crisis of debt repayment, as we shall see.
Why could developing countries not get off the debt treadmill? The short answer is that the structural adjustment policies they were forced to adopt to get a modicum of debt relief, in fact, created conditions that guaranteed they would remain on the treadmill. Austerity killed effective demand, resulting in stagnation, while bringing down tariffs and eliminating quotas brought in a flood of imports that eroded local industry and agriculture, creating trade deficits that needed to be plugged by getting into more debt. Most countries under structural adjustment stagnated and saw their trade deficits widen.
The Philippines, which was one of the countries included in the Brady bonds scheme, is a case in point. Structural adjustment, one of the conditions for eligibility in the program, had a depressive effect on Philippine growth, with the economy growing at a minuscule 1.5 per cent per annum between 1990 and 2010, the second lowest growth rate in Southeast Asia. Trade liberalization resulted in the destruction of the country’s manufacturing base and massive import penetration in all key agricultural commodities. The country’s trade deficit mounted and to cover it, the country’s borrowings escalated. Thus, the country’s debt burden grew from $26 billion in 1986 to $113 billion by the end of 2022.
The Changing Composition of Debt
Not only the volume of debt but its changing composition had implications for debt repayment. In 2010, multilateral lenders accounted for 56 percent of the public and publicly guaranteed debt of sub-Saharan countries. By 2019, however, that share had gone down to 45 percent. In 2010, loans from Paris Club creditors, that is bilateral or multilateral donors, accounted for 18 percent of the debt; by 2019, the share was just 8 percent. In contrast, borrowing from China and commercial creditors nearly tripled over the same time: from 6 percent to 16 percent, and from 8 percent to 24 percent, respectively.[vi]
The rising share of Chinese credit in the debt portfolio reflected Beijing’s desire for accessing natural resources and gaining allies in the global South. This was welcomed by many governments that needed to build infrastructure but were hesitant to go to the multilateral and bilateral donors owing to the conditionalities attached to their loans. China, as Kevin Gallagher notes wryly, is now “the world’s largest development bank.”[vii] Two of its agencies, the China Development Bank and the Export-Import Bank of China, have provided nearly a trillion dollars’ worth of financing to foreign countries since the early
2000’s. Additionally, it has negotiated or pledged some $230 billion in bilateral and regional development funds across the world.[viii] Including loans and direct investment, China’s cumulative investment in Africa totaled $40 billion in 2012. From 2005 to 2014, China has provided more than $100 billion in loan financing to Latin American countries and firms, principally through the China Development Bank and China Eximbank.
China’s lending has drawn criticism from western sources, especially from the multilateral agencies dominated by the United States and the West. The western criticism is that China is lending too much or that it is non-transparent in its lending or it does not join collective restructuring arrangements. Typical of this is former IMF official Anne Krueger’s assertion that,
China’s emergence as a leading creditor has created problems, not least because it has refused an invitation to join the Paris Club. While Paris Club members share information about the sums owed to them, China does not. Nor has it been willing to participate meaningfully in multilateral debt-restructuring arrangements. Instead, it has operated as a black box, attaching nondisclosure agreements to many of its loans, and funneling credit through a wide range of agencies.[ix]
Krueger’s statement, however, appears mainly to reflect the resentment of western financial bureaucrats at their loss of monopoly over development lending, which has lessened their power to dictate economic policy to developing countries. They are frustrated that they can’t get China to be part of a common front to impose stringent conditions that would reduce the development space of the indebted poor countries as a condition for getting debt relief. In the lead-up to the 2023 World Bank-IMF spring meetings, this conflict has intensified, as we shall see.
What has become really problematic, however, has not been Chinese lending but the bigger role played by foreign private creditors, especially investors that bought sovereign, that is, government bonds. The share of publicly guaranteed external debt of developing governments owed to private creditors reached 61.6 per cent of the total in 2020, compared to 43.1 per cent in 2000. Its most volatile component, public bond finance, is clearly on the increase relative to financing through commercial bank loans and other private creditors. As an UNCTAD analysis sees it, this trend “reflects the growing reliance of developing country governments on refinancing their external debt obligations in international financial markets with strong speculative features rather than borrowing from official bilateral and multilateral creditors, which is generally more stable and on more favorable terms.”[x]
The New Debt Crisis Cycle Begins
The bigger role of private finance recalls the boom in lending leading up to the Third World debt crisis in the 1980’s that we analyzed earlier.
Owing to the recession provoked by the 2008 global financial crisis, the United States (US) Federal Reserve brought the prime rate down to zero in order to revive the US economy by encouraging firms to borrow and invest. Seeking better opportunities elsewhere, banks tried to attract sovereign borrowers with low interest rates. Also seeking to make a profit were private investors who bought developing country bonds, whose yields were higher than US Treasury bonds, though they carried a higher risk. While the number of bond issuances slumped owing to market volatility at the peace of the global financial crisis, starting “in 2010, as risk appetite improved and global interest rates further declined, international investors, inclined to diversify their asset portfolio, resumed their search for yield in a low-interest rate environment and sovereigns took advantage of low global interest rates to finance themselves in international markets. As a result, bond issuances picked up considerably.”[xi]
Discouraged by stagnation in the US and recession in Europe, reckless lenders trekked to the global South. And though their debt to GDP ratios remained quite high, developing country governments succumbed to their seemingly attractive terms because they had the illusion that continued economic growth would take care of debt servicing.
That illusion came apart with the coming of Covid 19 in 2020, when world trade went into a downspin, health systems collapsed and demanded massive government rescues, and food crises broke out, and brought economic growth to a screeching halt. With their financial resources dwindling even as their payments on interest to their creditors continued, developing countries were in a tight fix. By 2021, a new developing crisis was gathering momentum. The response of the multilateral system was the so-called Debt Service Suspension Initiative (DSSI), which suspended debt servicing for participating countries from May 2020 to December 2021. Forty-eight out of 73 eligible countries participated in the initiative before it expired. According to the World Bank, the initiative suspended $12.9 billion in debt-service payments owed by participating countries to their creditors. However, only one private creditor participated.[xii]
Along with the DSSI, the G20, the IMF, and the World Bank drew up the so-called “Common Framework” that was supposed to provide a blueprint for future debt relief. However, the Common Framework was a dud. Only four countries—Zambia, Chad, Ethiopia, and Ghana—have agreed to participate, and only Chad was able to complete the process. Three factors were identified as making it a non-starter. First was what was described as “a grinding process, involving creditor committees, the International Monetary Fund, and the World Bank, all of which must negotiate and agree upon how to restructure loans that the countries owe.”[xiii] The second was the reluctance or unwillingness of private banks and bondholders to participate. The third was that eligible countries simply could not face the political consequences of imposing more IMF austerity measures on populations already suffering from the consequences of Covid 19.
It was in these already painful circumstances that the US Federal Reserve and other western central banks began an aggressive campaign to raise interest rates in 2022 in order to contain inflation in their economies, strengthening the dollar and resulting in a flight of western capital back to the developed countries. In June 2022 alone, some $4 billion flowed out of emerging-markets bonds and stocks. With the interest rate hikes, the number of emerging markets with bonds trading at “distressed levels”—that is, with yields more than 10 percentage points above that of similar-maturity Treasury bills—more than doubled in just six months.[xiv] Developing country-issued bonds collapsed in value, leading investors to dump them at a loss, with deep discounts ranging from 40 to 60 cents to the dollar.[xv]
Drastic action was called for, since it was clear that there was no way such massive debt payments coming due could be met, as even a brief survey of some of the most indebted countries quickly showed. Egypt had some $7 billion due in debt service payments in the period November 2022 to February 2023. Pakistan owed at least $41 billion from mid-2022 to mid-2023. With trade declining owing to the continuing economic impact of Covid 19 and thus fewer dollars coming in, 25 developing countries saw their external debt payments come to more than 20 percent of their total government revenues, a situation exactly like that projected by the Jubilee Debt Campaign in 2015![xvi]
The Blame Game
Instead of energetically pushing for collective action, however, US and other western debt specialists played the blame game, accusing China of setting a “debt trap” for developing countries to which it had extended loans. For instance, seconding Anne Krueger, Mark Sobel, a former Treasury Department official and the US chairman of the Official Monetary and Financial Institutions Forum claimed that failure to arrive at a debt restructuring agreement stemmed from “China being unwilling to admit its lending has been unsustainable and China dragging its feet in getting to deals.”[xvii]
China’s reply was to hotly claim that instead of being debt traps, China’s loans were, in the words of Wang Yi, the former foreign minister, “monuments of cooperation.” A recent response from the Ministry of Foreign Affairs adds that China,
signed agreements or reached consensuses with 19 African countries on debt relief and suspended the most debt service payments among G20 members. China has also been actively engaged in the case-by-case debt treatment for Chad, Ethiopia and Zambia under the G20 Common Framework. President Xi Jinping announced at the Eighth Ministerial Conference of the Forum on China-Africa Cooperation that China would channel to African countries 10 billion U.S. dollars from its share of the International Monetary Fund’s new allocation of Special Drawing Rights…Relevant reports from the World Bank have shown that multilateral financial institutions and commercial creditors hold nearly three-quarters of Africa’s total external debt. They take a larger share of Africa’s debt, and they can and should take more robust actions to relieve the debt burden on African countries. China calls upon all parties concerned to contribute to alleviating Africa’s debt burden in line with the principle of common actions and fair burden-sharing.[xviii]
A brief fact-check shows that the Chinese claims are neither bogus, nor are they exaggerated. The record shows that China wrote off $72 million owed by Cameroon in 2019, $72 million owed by Botswana and $10.6 million owed by Lesotho in 2018, and $160 million owed by Sudan in 2017. The Rhodium research group found 40 instances of renegotiations of debts to China amounting to $50 billion across 24 countries since 2000. In 2010 United Nations Millennium Challenge speech, then Prime Minister Wen Jiabao revealed that China cancelled debt owed by 50 heavily indebted poor countries (HIPCs) and least developed countries (LDCs) worth 25.6 billion yuan ($3.8 billion) as of 2009.[xix]
What appears to be operating in this exchange between western and Chinese officials was a fundamental difference: the western view was that debt relief should be conditioned on the acceptance of short-term stabilization programs with IMF-type conditionalities, whereas the Chinese, as evidenced by the Ministry of Foreign Affairs statement, favored a more strategic approach, taking into consideration the developing countries’ need for capital for infrastructure to enable them to grow and thus better service their debts in the long term:
Africa’s debt problem is essentially an issue of development. The solution to the problem requires addressing not only the symptoms but also the root causes by means of debt treatment, among others, so as to enhance Africa’s independent and sustainable development capacity. China’s financing cooperation with Africa is mainly in fields such as infrastructure development and production capacity, with a view to enhancing Africa’s capacity for independent and sustainable development.[xx]
This conflict in approaches to the developing country debt problem has now been further complicated by the increasingly aggressive efforts by the United States to contain China militarily, technologically, economically, and politically.
With the Common Framework having been shown to be an unworkable solution, what is an alternative approach to dealing with a problem that threatens to run out of control in the next few months?
What is to be Done?
What is needed is a bold, just, and effective program to address the crisis of the severely indebted developing countries.
The first and most urgent step is clear. It is to extend the moratorium on debt payments from the end of 2021 as governments work out a solution, a process that will take months to achieve a modicum of consensus.
Second, neither the IMF-World Bank dominated multilateral meetings, nor the G 20 any longer provide a viable setting for settling the debt issue. A more representative, more democratic setting is needed, one that will allow equitable participation by the indebted countries and where diverse views can be expressed beyond the still dominant Washington Consensus. It is time to create and hold an international conference to come up with a progressive resolution to the developing countries’ debt, perhaps under the auspices of the United Nations General Assembly.
Third, the magnitude of the problem is such that it demands a fairly drastic solution, one that acknowledges that not only debtors must take the responsibility for the state of default but also the creditors for reckless lending, a principle that is now accepted in debt restructuring. The UN Development Program calls for a 30 per cent haircut, or reduction, in outstanding payments for the 52 most indebted countries from 2021 to 2029.[xxi] This can certainly serve as the starting point for initial discussions, though negotiators must be open to bigger magnitudes. In a paper prepared for the OECD publication Development Matters, economists Rachid Bouhia and Patrick Kacmarczyk assert that a “vast debt cancellation campaign for Low Income Countries and Middle Income Countries “is…not only doable , fair and desirable, but would also give many distressed economies a fresh start.”
Fourth, a debt relief program must make as a central consideration the fact that the highly indebted poor countries are also often the ones that are most at risk when it comes to climate change and that they are owed an ecological debt by the global north, which has contributed by far the greatest amount of carbon emissions historically. If this dimension is taken into consideration, and also given that their original debt has already been repaid many times over, then the cancellation of the least developed countries’ debt should be on the agenda.
Fifth, austerity and structural adjustment must be abandoned as a framework for debt restructuring for they have created structures that have increased the vulnerability of developing country economies to debt crises. What is needed is a framework that assists countries to develop comprehensively and sustainably and allows them to create buffers to the negative impacts of a global economy that is increasingly unstable and volatile.
Finally, governments must cease using the debt negotiations as a forum for advancing their geopolitical agendas.
The developing country debt problem is indeed a crisis of massive proportions. But it can also be the opportunity for the creation of a more equitable and just global order.
*Walden Bello is Co-Chair of the Board of Focus on the Global South, International Adjunct Professor of Sociology at the State University of New York at Binghamton, and Visiting Researcher at the Center for Southeast Asian Studies at Kyoto University.
[i] Homi Kharas and Charlotte Rivard, “30 Developing Countries to Watch in 2023,” Commentary, Brookings, Jan 20, 2023.
[ii] “Ten Years Since Historic Debt Cancellation Agreement, New Crises Threaten Africa,” Debt Justice, Jan 10, 2015, https://debtjustice.org.uk/press-release/ten-years-since-historic-debt-cancellation-agreement-new-crises-threaten-africa
[vi] Marcello Estevao and Sebastian Essl, “When the Debt Crises Hit, Don’t Simply Blame the Pandemic,” Voices, June 28, 2022, https://blogs.worldbank.org/voices/when-debt-crises-hit-dont-simply-blame-pandemic
[vii] Kevin Gallagher, “China’s Role as the World’s Development Bank Cannot be Ignored,” National Public Radio, O ct 11, 2018, https://www.npr.org/2018/10/11/64621776/opinion-chinas-role-as-the-world-s-development-bank-cannot-be-ignored.
[ix] Anne Krueger, “China and the Sovereign Debt Bomb,”Project Syndicate,”Jan 13, 2023.
[xi] Andreas Presibitero et al. , “Sovereign Bonds in Developing Countries: Drives of Issuance and Spreads,” Review of Development Finance, Vol 6, Issue 1, https://www.sciencedirect.com/science/article/pii/S1879933716300483
[xii] World Bank, “Debt Service Suspension Initiative,” World Bank, March 10, 2022.
[xiii] Alan Rappeport, “Defaults Loom as Poor Countries Face an Economic Storm,” New York Times, Dec 3, 2022.
[xiv] Sydney Maki, “Historic Cascade of Defaults in Coming for Emerging Markets,” Bloomberg, July 8, 2022.
[xv] “UN Development Programme Calls for Debt Relief now for 54 Countries,” UN News, Oct 11, 2022.
[xvi] Euractive, “New $150 Bn Relief Scheme Needed to Avoid Debt Crisis, Warns UN,” Euractiv, March 10, 2023.
[xviii] Ministry of Foreign Affairs of the People’s Republic of China, “Qin Gang: So-called China’s “Debt Trap” in Africa Is a Narrative Trap Imposed on China and Africa,” January 12, 2023, https://www.fmprc.gov.cn/mfa_eng/zxxx_662805/202301/t20230112_11006510.html
[xix] Agatha Kratz, Allen Feng, and Logan Wright, “New Data on the ‘Debt Trap’ Question,” April 29, 2019, Rhodium Group, https://rhg.com/research/new-data-on-the-debt-trap-question/
[xx] Ministry of Foreign Affairs of the People’s Republic of China.