By Cyber Era NG Special Correspondent
The United Nations Secretary-General António Guterres has presented the report “A world of debt. A growing burden to global prosperity” and issued a grave warning as global public debt reached an all-time high of US$92 trillion in 2022.
This five-fold surge in public debt levels since 2000 demands immediate action to tackle the escalating crisis affecting developing countries in particular.
The UN Secretary-General underlined: “On average, African countries pay four times more for borrowing than the United States and eight times more than the wealthiest European economies. A total of 52 countries – almost 40 percent of the developing world – are in serious debt trouble.”
Inherent inequality
This disparity in interest rates highlights the inherent inequality in the international financial system, burdening developing countries disproportionately. Today, half of all developing nations spend a minimum of 7.4 per cent of their export revenues on servicing external public debt.
Of special concern is the rapid growth of interest payments, surpassing other public expenditures. It is alarming that some governments are compelled to spend more on servicing debt than on critical sectors like health and education. Disturbingly, the report shows that at least 19 developing nations allocate more money to interest payments than education, and 45 allocate more to interest than health expenditure.
The increasing reliance on private creditors, who offer more expensive debt and shorter maturities than official sources, has also complicated debt restructuring for developing countries. Currently, private creditors hold 62 per cent of external public debt, up from 47 per cent a decade ago. There is, however, no mechanism to address how to restructure debt across different creditor classes.
Urgent reforms needed
The United Nations urgently calls for a comprehensive reform of the international financial architecture, including the debt architecture, to foster a more inclusive system that empowers developing countries to actively participate in the governance of the international financial system.
Addressing the high cost of debt and the mounting risk of debt distress is of utmost importance. Establishing a debt workout mechanism is crucial to expedite progress under the G20 Common Framework for Debt Treatment, which has faced challenges due to creditor coordination issues and the absence of automatic debt service suspension clauses.
Developing countries, especially those with high debt burdens, require increased liquidity during times of crisis. Otherwise, a liquidity crisis risks turning into a debt crisis. This can be achieved by expanding contingency finance. The global safety net must work. Measures such as enhancing the use of Special Drawing Rights, temporarily suspending IMF surcharges, and broadening access to emergency financing through increased quotas must be pursued.
A substantial increase in affordable long-term financing is also required. To get there, we will need to transform and expand multilateral development banks to support sustainable long-term development and mobilize more private resources on more equitable terms. Additionally, there is an urgent need for more concessional finance to fulfill aid and climate finance commitments.
Secretary-General of UNCTAD, Rebeca Grynspan in a statement thanked Mr. Guterres, for his insightful and passionate remarks.
She said: “So, let me go into the technical aspects and share with you the report “A world of debt: A growing burden to global prosperity” to supplement the Secretary-General’s remarks.
First, we must recognize the sheer magnitude and speed at which public debt has grown. Since 2000, global public debt has surged more than fivefold, significantly outpacing global GDP growth, which has only tripled in the same period.
Public debt can be vital for development when Governments use it to finance their expenditures, to protect and invest in their people, and to pave their way to a better future.
However, it can also be a heavy burden when public debt grows too much or too fast. This is what is happening today across the developing world. Public debt has reached colossal levels, largely due to two factors.
Financing needs soared with countries’ efforts to fend off the impact of cascading crises on development. These include the COVID-19 pandemic, the cost-of-living crisis, and climate change.
An inequal international financial architecture makes developing countries’ access to financing inadequate and expensive.
They have experienced rising borrowing costs due to interest rates increases, currency devaluations and sluggish growth. These factors compromise their ability to react to emergencies, tackle climate change and invest in their people and their future.
As a result, the number of nations facing high levels of debt has more than doubled for countries with a ratio of 60 per cent of Debt to GDP, rising from just 22 in 2011 to 59 in 2022. For reference, this is higher than at any point of the era of the Heavily Indebted Poor Country (HIPC) initiative, which is a high watermark of the multilateral community has done and could do when debt becomes a threat to development. (This ratio is the benchmark used by the IMF as one of the indicators to assess debt burdens.)
“My second point is that developing countries are dealing with an international financial architecture that exacerbates the negative impact of cascading crises on sustainable development. The burden of debt on development is intensified by a system that constrains developing countries access to development finance and pushes them to borrow from more expensive sources, increasing their vulnerabilities and making it even harder to resolve debt crises.
External public debt, the part of a government’s debt owed to foreign creditors, increased from 19 per cent of GDP to 29 per cent of GDP in 2021.
Comparing debt levels to developing countries’ ability to generate foreign exchange through exports shows that their ability to generate sufficient revenue to service their external debt obligations has also been deteriorating. The share of external public debt to exports increased from 71 per cent in 2010 to 112 per cent in 2021. During the same period, external public debt service as a share of exports increased from 3.9 per cent to 7.4 per cent.
“My third point: As the Secretary-General said, the composition of debt has changed, complicating efforts to manage and restructure it.
In 2021, private creditors held 62 per cent of developing countries’ external public debt, up from 47 per cent a decade ago.
While these private sources can provide essential liquidity, their terms are often far less favourable than those offered by multilateral and bilateral sources. Furthermore, when it’s time to restructure, the process becomes increasingly complex and costly due to the diverse array of creditors involved.
We have seen this repeatedly, despite efforts at the G20 and elsewhere, to provide mechanisms for debt restructuring, such as the G20 Common Framework, and the more recent IMF Global Sovereign Debt Roundtable.
This composition of debt also means that developing countries also face greater vulnerability to external shocks. Abrupt changes in global financial conditions or sudden currency devaluations can dramatically increase the cost of servicing debt, reducing available funds for critical development spending. This is exactly what we have seen in the last couple of years, as we have highlighted in previous UN GCRG reports.
“My fourth point is to emphasize what the Secretary-General said – that it is people who pay the price for this unsustainable debt burden.
Interest payments in developing countries have grown faster than public spending on health, education and investment over the last decade. The rapid increase of interest payments is squeezing out spending in these key areas.
“In Africa, the amount spent on interest payments is higher than spending on either education or health. Developing countries in Asia and Oceania (excluding China) are allocating more funds to interest payments than to health. Similarly, in Latin America and the Caribbean, developing countries are devoting more money to interest payments rather than to investment. This burden also constraints the flow of essential finance to small local businesses in developing countries limiting productive investments. Across the world, rising debt burdens are keeping countries from investing in sustainable development.
All this has made countries more vulnerable. We have gone from a fast-moving crisis to a slow-moving crisis that is more difficult to mobilize action for. There is complacency because for now, markets are not suffering, but people are. According to the GCRG analysis:
• 103 countries are highly vulnerable in at least one of the three pillars – food, energy or finance – up from 94 last year.
• 49 perfect storm countries, with the highest vulnerability score across all three pillars, up from 36 last year
• 30 countries have become more vulnerable since last year, while only 10 countries have become less vulnerable.
• 20 out of the 49 most vulnerable countries are in Sub-Saharan Africa. Eight are in Latin America and the Caribbean, six in the Middle East and North Africa, six in East Asia and the Pacific, five in Europe and Central Asia, and four in South Asia.
“Finally, an announcement. We have launched the “A world of debt report” in an interactive website, hosted at the UN, with an interactive dashboard where every person and every policymaker in the world can see what it is the state of debt in their own country.
So this report is not only a paper you can read, but also and quite literally a tool that you can use.
This report is the result of a collective, one UN effort, led by UNCTAD, all UN Regional Economic Commissions, UNDP and UNDESA. As a result, this report is rich with regional data, and regional stories, which are included in the report website, and which I invite all of you to read.
Lastly, let me say thanks to all the amazing teams who have been working tirelessly on this. My own technical team here at UNCTAD, and all the Regional Economic Commissions, who have really outdone themselves.”
