Rising Level of debt in Developing Countries
-by Shivansh Thadhani
Introduction
Developing countries have experienced rapid economic growth over the past two
decades, driven by increased investment, urbanization, and globalization. However,
this growth has been accompanied by a significant increase in debt levels. The debt
burden in developing countries has risen from $1.1 trillion in 2000 to over $3.5
trillion in 2022.The debt burden in developing countries has reached alarming
levels, threatening economic stability, sustainable development, and the well-being
of millions of people. The rising debt levels are driven by a combination of factors,
including increasing borrowing costs, depreciating currencies, and declining
commodity prices.
Key Findings: -
Increasing Debt-to-GDP Ratio: The average debt-to-GDP ratio in
developing countries has risen from 30% in 2010 to over 50% in 2022. This
increase is driven by a combination of factors, including increasing borrowing
costs, depreciating currencies, and declining commodity prices.
Rising External Debt: External debt in developing countries has increased
by over 50% since 2010, reaching $2.5 trillion in 2022. This increase is driven
by a growing reliance on non-concessional borrowing, including commercial
loans and bonds.
Growing Debt Servicing Costs: Debt servicing costs have increased
significantly, with many developing countries spending over 10% of their
revenue on debt servicing. This has reduced the fiscal space available for
essential public expenditures, including education, healthcare, and
infrastructure.
Dependence on Non-Concessional Borrowing: Many developing
countries have shifted from concessional borrowing to non-concessional
borrowing, leading to higher interest rates and stricter repayment terms. This
has increased the vulnerability of developing countries to debt distress.
Causes of Rising Debt Levels
Fiscal Deficits: Large fiscal deficits have been a major driver of rising debt
levels in developing countries. Many countries have struggled to reduce their
fiscal deficits, despite efforts to implement fiscal consolidation measures.
Currency Depreciation: Currency depreciation has increased the cost of
debt servicing for many developing countries. This has reduced the fiscal
space available for essential public expenditures.
Declining Commodity Prices: Declining commodity prices have reduced
the revenue available to many developing countries, making it more
challenging to manage their debt burdens.
Increasing Borrowing Costs: Increasing borrowing costs have made it
more expensive for developing countries to borrow. This has increased the
cost of debt servicing and reduced the fiscal space available for essential
public expenditures.
Consequences of Rising Debt Levels
Debt Distress: Rising debt levels have increased the risk of debt distress in
many developing countries. This has reduced the fiscal space available for
essential public expenditures.
Reduced Fiscal Space: Rising debt servicing costs have reduced the fiscal
space available for essential public expenditures, including education,
healthcare, and infrastructure.
Increased Vulnerability: Rising debt levels have increased the vulnerability
of developing countries to external shocks, including changes in global
interest rates and commodity prices.
Reduced Economic Growth: Rising debt levels have reduced economic
growth in many developing countries, as a larger share of government
revenue is devoted to debt servicing.
Managing Debt Through Restructuring
Various countries, such as Zambia and Ghana, have opted for debt restructuring as
a solution for managing the growing public debt. During the COVID-19 pandemic,
Zambia was the first country to default on its sovereign debt which was estimated
at around $17.3 billion. After lengthy negotiations, Zambia struck an agreement
with the official creditor committee for debt treatment in 2023 to restructure $6.3
billion in debt owed to governments abroad including to China, its biggest creditor,
and to members of the Paris Club of creditor nations under the Group of 20
Common Framework. In another instance, Ghana, debt reached unsustainable levels
due to excessive spending during the COVID-19 outbreak, the impact of the
Ukraine-Russia conflict coupled with low domestic revenue mobilization. According
to Ghana’s Finance Minister, by the end of 2022 debt servicing was absorbing more
than half of the government's total revenue and up to 70 percent of tax revenues.
IMF’s Debt Sustainability Analysis stated that during the pandemic Ghana’s public
debt increased from 63 percent of GDP in 2019 to 88.1 percent of GDP at end-2022
In both cases, delay in concluding the debt restructuring deal and low domestic
revenue mobilization had pushed the debt to unsustainable levels and threatened
debt recovery. Further, it remains to be seen whether both countries are able to
attain enough economic growth to repay the debt within the duration of
restructuring offered or they will seek more debt relief from the creditors and
bondholders.
Managing Debt Vulnerabilities
The case study of Zambia and Ghana indicate that debt is manageable to a certain
extent and can be restructured but it requires a comprehensive approach
combining debt restructuring, fiscal consolidation, and policies to support economic
growth with long-lasting impact on reducing debt ratios. In addition, there is a need
to reform the Multilateral Development Banks (MDBs) and International Monetary
Fund (IMF) in order to adjust them to the present realities and build capabilities to
address new challenges such as the COVID-19 pandemic, emerging conflicts
disrupting energy supply chains and the resultant fluctuating inflation rates.
it is also indicative that in order to address public debt, both domestic and
international efforts are required, as many developing nations will keep turning to
global financial markets to help them fulfil their enormous funding demands, which
include funding for the SDGs. In this regard, India displayed its commitment to
playing a constructive role in supporting Sri Lanka’s efforts for recovery from the
debt crisis by becoming the first country in January 2023 to hand over its letter of
support for financing and debt restructuring of Sri Lanka to the International
Monetary Fund (IMF). On the other hand, China responded to Sri Lanka's requests
for restructuring in 2014 and 2019 by offering new loans. Even during the recent
economic crisis, China responded initially by ignoring Sri Lanka’s request for $4
billion in assistance. After other countries, such as India, agreed to debt
restructuring, China offered a mere two-year moratorium for Sri Lanka along with
refusing to participate in collective debt-restructuring negotiations. In another
instance, in August 2023 Gabon became the first country in continental Africa to
agree to a “debt-for-nature swap” worth $500 million underwritten by the US
Government’s Development Finance Corporation (DFC). Through the swap, money
for marine conservation will be locked in and a small portion of the debt will be
refinanced, thereby aiding a move towards debt restructuring for a sustainable
future.
Recommendations
Debt Restructuring: Developing countries should explore debt
restructuring options, including debt forgiveness and debt-for-equity swaps.
Fiscal Discipline: Governments should implement fiscal discipline
measures, including reducing budget deficits and increasing revenue
mobilization.
Concessional Financing: International financial institutions should provide
more concessional financing options to support developing countries in
managing their debt burdens.
Debt Transparency: Governments should improve debt transparency,
including regular publication of debt data and enhanced disclosure of debt
contracts.
Debt Management Capacity: Developing countries should strengthen their
debt management capacity, including improving debt recording and reporting
systems.
Conclusion
Thus, the concerns of the developing countries with regard to the public debt
crisis stem from traditional challenges such as rising borrowing costs,
currency devaluations, sluggish growth, and the present geopolitical
uncertainties disrupting energy supply chains, affecting economic growth and
businesses. Further, unequal international financial architecture, inadequate
financial access for developing countries, and increasing financial needs due
to emerging pandemics such as COVID-19 and climate change have pushed
public debt to an unprecedented level. Under this scenario, delayed debt
restructuring, countries opting for emergency loans, and slow and uneven
global economic recovery with weakening medium-term growth prospects are
detrimental to the achievement of development objectives.
Amidst the pressing challenges, India strove to build consensus at the G20
Summit and recognized that addressing these debt vulnerabilities is crucial,
especially for nations in the Global South. The G20 New Delhi Declaration
reemphasized the importance of addressing debt vulnerabilities in low and
middle-income countries in an effective, comprehensive, and systematic
manner. It is now up to the incoming Chair of G20- Brazil, which is also a
country of the Global South, to take this agenda forward and in which it will
have the full support of India.
The cases mentioned above indicate that tackling public debt requires both
domestic efforts as well as international support. Thus, a swift rebound
requires a comprehensive approach combining debt restructuring, fiscal
consolidation, and policies supporting economic growth with a long-term
impact on reducing debt ratios.
