In July 2023, the United Nations report “A world of debt. A growing burden to global prosperity” issued a grave warning regarding the global public debt reaching an all-time high of $92 trillion in 2022, a five-fold increase from $17 trillion since the year 2000.[i] This indicates the rising trend of public debt around the world over the last decade. In developing countries, public debt has increased at a faster rate than in developed countries with almost 30 percent of global public debt owned by the former.[ii] This growing public debt has been a point of discussion at various multilateral forums including the G20. In this context, this viewpoint focuses on the concerns of developing countries with regard to the rising global public debt.
Growing Public Debt in Developing Countries
When taxation methods are not able to generate the required revenue for funding or investing in developmental programmes, developing countries rely on international borrowing to finance developmental projects and programmes. Governments borrow money from private capital markets, international financial institutions and other countries to finance their expenditure, including investing in the welfare of their people. However, large amount of public debt along with increasing borrowing costs, sluggish growth and currency devaluations, drags down development and compromises the ability of policymakers to invest in the welfare and developmental needs for a sustainable future. It also decreases the capability of governments to respond to new challenges, for instance, tackling pandemics and natural disasters.
Further, developing countries end up paying much higher interest rates compared to developed countries. For instance, it is estimated that on an average, African countries borrow at rates that are four times higher than the United States and even eight times higher than Germany.[iii] Thus, as underscored by UN Secretary-General Antonio Guterres “some of the poorest countries in the world are forced into a choice between servicing their debt or serving their people”.[iv]
According to the UN, around 3.3 billion people settled in countries that spend more on interest payments than on education or health. Also, public debt in developing countries has increased at a faster rate than in developed countries with almost 30 percent of the debt being owned by the developing countries.[v] It is estimated that the number of countries facing high levels of debt escalated from only 22 in 2011 to 59 in 2022, which majorly included low-income and emerging economies from Africa, Asia, and Latin America.[vi] Increasing financial needs due to COVID-19, the cost of living, and climate change have pushed public debt to an extreme level. Besides, access to finances by the developing country becomes inadequate and expensive due to an unequal international financial architecture.
Traditionally, the developing countries have looked at the Multilateral Development Banks (MDB), International Monetary Fund (IMF), and the US as the lenders of last resort. In the present geopolitical uncertainties, some developing countries have opted for emergency loans offered by China to fund expensive infrastructure projects.[vii] Over a period of time, China has started providing more emergency loans to countries with geopolitical significance, strategic locations, or natural resources such as Zambia and Sri Lanka. These developing countries have started defaulting as they are unable to deliver the interest payments on loans financing the construction of ports, mines, and power plants.[viii]
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.[ix] 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.[x]
In both cases, delay in concluding the debt restructuring deal and low domestic revenue mobilisation 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.[xi] 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).[xii] 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.[xiii] 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.[xiv]
India’s G20 Presidency brought to focus the urgent need to effectively address debt vulnerabilities in developing countries. The G20 New Delhi Declaration reiterated the need for well-calibrated monetary, fiscal, financial, and structural policies to promote growth, reduce inequalities, and maintain macroeconomic and financial stability. The Declaration also referred to the debt treatment in respect of Zambia, Ghana, Ethiopia, and Sri Lanka in the context of managing global vulnerabilities. It called for stepping up the implementation of the G20 Common Framework for Debt Treatments, an initiative of the G20 and Paris Club countries to coordinate and cooperate on debt treatment of low-income countries. The New Delhi Declaration also calls for the reform of the MDBs to mobilise finances and to focus on the developmental needs of low and middle-income countries.[xv]
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 recognised that addressing these debt vulnerabilities is crucial, especially for nations in the Global South. The G20 New Delhi Declaration reemphasised the importance of addressing debt vulnerabilities in low and middle-income countries in an effective, comprehensive, and systematic manner. It is now upto 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.
*Avni Sablok, Research Associate, Indian Council of World Affairs, New Delhi.
Disclaimer: Views expressed are personal.
[i] “A world of debt A growing burden to global prosperity”, United Nations, July 2023. Available at: https://unctad.org/system/files/official-document/osgmisc_2023d4_en.pdf (Accessed on September 27, 2023)
[iv] “G20 Summit in India opportunity to act on reforming global financial system amid crushing debt crisis: U.N. chief Guterres”, The Hindu, July 13, 2023. Available at: https://www.thehindu.com/news/national/g20-summit-in-india-opportunity-to-reform-global-financial-system-amid-crushing-debt-crisis-un-chief-guterres/article67075146.ece (Accessed on September 27, 2023)
[v]“A world of debt A growing burden to global prosperity”, United Nations, July 2023. Available at: https://unctad.org/system/files/official-document/osgmisc_2023d4_en.pdf (Accessed on September 25, 2023)
[vii] Keith Bradsher, “After Doling Out Huge Loans, China Is Now Bailing Out Countries”, The New York Times, March 27, 2023. Available at: https://www.nytimes.com/2023/03/27/business/china-loans-bailouts-debt.html (Accessed on November 7, 2023)
[viii] Rachel Savage, Clare Baldwin, “China lent $1.34 trln in 2000-2021, focus shifts from Belt and Road to rescue finance-report”, Reuters, November 7, 2023. Available at: https://www.reuters.com/world/china/china-lent-134-trln-2000-2021-focus-shifts-belt-road-rescue-finance-report-2023-11-06/ (Accessed on November 7, 2023)
[ix] “Ghana’s Economic Development Updates”, United Nations Development Programme, May, 2023. Available at: https://www.undp.org/sites/g/files/zskgke326/files/2023-05/undp_ghana_policy_brief_on_economic_updates_2_ghanas_debt_and_sdgs.pdf (Accessed on November 7, 2023)
[x] “Ghana: Request for an Arrangement Under the Extended Credit Facility—Debt Sustainability Analysis”, International Monetary Fund. African Dept., May 17, 2023. Available at: https://www.elibrary.imf.org/view/journals/002/2023/168/article-A002-en.xml (Accessed on November 7, 2023)
[xi] “World Economic Outlook A Rocky Recovery”, International Monetary Fund, April 2023. Available at: https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023 (Accessed on: September 26, 2023)
[xii] “India says it will continue to support Sri Lanka in overcoming its financial crisis”, The Hindu, July 09, 2023. Available at: https://www.thehindu.com/news/national/india-says-it-will-continue-to-support-sri-lanka-in-overcoming-its-financial-crisis/article67059997.ece (Accessed on: September 27, 2023)
[xiii] Harsh V. Pant, Aditya Gowdara Shivamurthy, “Lanka No More Game”, The Economic Times, October 17, 2023. Available at: https://economictimes.indiatimes.com/opinion/et-commentary/view-china-can-no-longer-take-sri-lanka-for-granted/articleshow/104476545.cms (Accessed on: November 13, 2023)
[xiv] “COP28: Gabon wraps up $500 million debt-for-nature swap”, The Times of India, August 19, 2023. Available at: http://timesofindia.indiatimes.com/articleshow/102851427.cms?from=mdr&utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst” (Accessed on: November 8, 2023)
[xv] G20, “G20 New Delhi Leaders’ Declaration”, September 9-10, 2023. Available at: https://www.g20.org/content/dam/gtwenty/gtwenty_new/document/G20-New-Delhi-Leaders-Declaration.pdf (Accessed on: November 13, 2023)