The Global South faces a looming debt crisis

The war in Ukraine, like Afghanistan before it, may have pushed other crises out of the headlines for now. And economics may seem like a boring business compared to war. But make no mistake: in the wake of the conflict in Ukraine lies a looming global economic crisis.

Many poor countries face major economic disruption and possible sovereign debt default in 2022. This is an offshoot of the pandemic. COVID-19 may have started as a global health crisis, but it quickly became a global economic crisis. And it won’t be long before it turns into a global political crisis again.

Even before the pandemic, people took to the streets from Ecuador to Egypt to Eswatini to protest high prices and rising inequality. Social distancing has temporarily suppressed these protests. But they are expected to come back with a vengeance, as the source of grievances – inequality – has only worsened in the wake of the COVID-19 pandemic, especially in low-income countries. who did not have the luxury of borrowing at cheap rates to finance major fiscal stimulus packages to cushion the economic impact.

The war in Ukraine, like Afghanistan before it, may have pushed other crises out of the headlines for now. And economics may seem like a boring business compared to war. But make no mistake: in the wake of the conflict in Ukraine lies a looming global economic crisis.

Many poor countries face major economic disruption and possible sovereign debt default in 2022. This is an offshoot of the pandemic. COVID-19 may have started as a global health crisis, but it quickly became a global economic crisis. And it won’t be long before it turns into a global political crisis again.

Even before the pandemic, people took to the streets from Ecuador to Egypt to Eswatini to protest high prices and rising inequality. Social distancing has temporarily suppressed these protests. But they are expected to come back with a vengeance, as the source of grievances – inequality – has only worsened in the wake of the COVID-19 pandemic, especially in low-income countries. who did not have the luxury of borrowing at cheap rates to finance major fiscal stimulus packages to cushion the economic impact.

With little to cushion the devastating blow of COVID-19, unemployment has soared in the Global South, with millions of jobs lost, including 22 million in sub-Saharan Africa in just one year. At the same time, many low-income, heavily export-dependent economies have been particularly hard hit by broken supply chains and, for those that are not oil and gas producers, by soaring oil prices. energy. These problems are now being compounded by Russian President Vladimir Putin’s war on Ukraine, as the dispute between the world’s largest and fifth largest wheat exporters (Russia and Ukraine, respectively) is expected to lead to soaring prices and shortages. global food.

But it is the skyrocketing cost of debt that now threatens to overwhelm countries already hard hit. During the pandemic, desperate governments have turned to expensive short-term emergency loans from the International Monetary Fund, China or private lenders.

Now is the time for recovery, and many find themselves in a much worse position than before. With external debt repayments up 45% in the past two years alone, more than half of all low-income countries are now officially in debt distress or high risk. With national budgets at breaking point, governments are inevitably forced to cut spending on everything from climate change efforts to education to other health care priorities.

There is now the very real possibility that an economic crisis of this magnitude will soon turn into political insecurity. There is an urgent need for world leaders to help countries restructure their debts as part of a broader refinancing of their economic future. There are actions the G-20 can take now as part of the steady improvements in international public financial management, and then there are bolder steps that will only come when there is real political will at the highest level, especially when China and the United States are ready to sit down together and recognize our common interest in green global prosperity for all.

Meanwhile, the G-20 leaders find themselves with the option of significant tinkering. The G-20 attempted to address shortcomings in current public debt management by introducing the Common Framework, a set of principles on which they hoped that debtors and creditors could unite to restructure debts and put countries on a better path to financial stability. But so far it has proven a complete failure, taking too long and providing too little relief and too little transparency. Only three countries have defied the process, and none to good effect.

Ultimately, a new permanent mechanism is needed to restructure sovereign debt, based on principles already agreed upon by 136 UN member states. But right now, the G-20 can start moving in that direction with some urgent fixes to the Common Framework.

First, countries that enter into debt restructuring should be rewarded by being granted immediate relief through a debt freeze that prevents the growth of interest on their loans. They will also need reassurance that by doing the right thing and looking for a sustainable path to get out of debt, they won’t see their credit rating drop or be penalized when they try to get out of debt. access capital.

Second, restructuring should be guided not by political whim and creditor greed, but by broad and transparent economic analysis of the total debt relief needed for countries to not only end the pandemic, but also to achieve the United Nations Sustainable Development Goals and tackle the climate crisis.

However, the most urgent improvement is that the common framework must integrate all creditors, including China and the private sector. All should expect to take a hit and absorb some losses, as they all took risks that were clearly out of step with reality. Private creditors will resist, but their participation should be enforced by regulation, especially in the United States and the United Kingdom, for which there are many precedents.

Beyond the immediate debt crisis, we must also ensure that international financial institutions are both transformed and funded to match the scale of the global challenges facing the world. Genuine reform may have to wait for global political tensions to ease, but the agenda is already clear.

First, multilateral banks, with the support of shareholders, must significantly increase their lending capacity. Right now, they simply don’t have the firepower to meet the needs of the global economy. Current capacity is only around a quarter of a trillion dollars, but experts estimate they must be able to lend out at least $1.3 trillion a year.

Second, greater resources must be accompanied by greater accountability. International financial institutions have not evolved enough since they were created by a handful of wealthy Western countries, which today continue to take the reins as majority shareholders. Such undemocratic control undermines the credibility and ability of these banks to serve the countries that need it most. Rich countries should accept a dual-vote system to combine today’s shareholding structure with the system of a country’s one-vote more democratically governed institutions.

Third, the IMF could have a huge impact by extending its line of credit, known as special drawing rights, more regularly. Last year, in response to the pandemic, the IMF issued special drawing rights worth $650 billion. But most of that credit provision went to its majority shareholders — wealthy countries that for the most part didn’t need it. We need to see the IMF extend credit on this scale every year, but we also need to see the wealthier nations pass on their rights to claim these loans to low-income nations who desperately need cheap loans that cannot be found from private creditors. .

Fourth, international financial institutions must assume a much greater role in mobilizing private finance. The UN climate conference COP26 revealed a critical opportunity to make a radical leap forward in attracting private capital towards climate change mitigation and adaptation. We need to find ways to attract more private capital by providing public capital to make new investments less risky. Properly designed, assuming the first risk, relatively small amounts of public capital from the World Bank and other institutions can mobilize much larger amounts of private investment.

Such sweeping reforms might seem like a tall order given the dismal failure of the international community to act collectively to date. But there are reasons to be optimistic, as the main multilateralists have now taken the helm, with Germany presiding over the G-7, France assuming the presidency of the Council of the European Union and, perhaps more importantly , Indonesia chairing the G-20 – a country and an organization (respectively) that may well have the political and economic clout to push forward the sweeping reforms the Global South needs.

Ultimately, the political consequences of inaction – potential protests or riots in the streets – may now spur even less globally minded leaders to enact real short-term reform to address both the COVID-19 and its economic consequences. And, in the long run, it could force a global reset that could, perhaps, bring global multilateralism back to fight another day.

Robert P. Matthews