EDITORIAL: A report by the Boston University Global Development Policy Centre about the extreme debt burden on emerging markets and low-income countries ought to seriously jolt an international community consumed by hot and cold wars and corporate diplomacy. It warns of “cascading defaults” if about half-a-trillion dollars in debt to distressed countries is not written off immediately.
The combined effects of the Covid aftermath and freezing of food and fuel lines in the wake of the Russia-Ukraine war seems to have pushed about 61 nations “in or at most risk of debt distress” right to the edge.
And if the recent close shave with a possible large-scale bank run gave American and European policymakers sleepless nights, the possibility of poor countries, just like Pakistan, defaulting like dominos, and what that would mean for financial markets, should send proper shivers down their spines.
It also turns out that there is a close correlation between debt distress and climate vulnerability. Several debt-distressed countries, including Pakistan, know only too well of the related burdens of extreme weather events and the subsequent, inevitable squeeze on public finances.
The report also warned that as financial markets increasingly factor climate-related risks into their assessments, it will become more expensive for those nations to borrow money – putting essential projects to cut emissions and bolster climate resilience out of reach. This is a very vicious cycle that cannot be survived under a debt bomb that could go off whenever the next round of negotiations with the lender goes wrong.
The proposed solutions include a guarantee facility that would provide enhancements – or forms of guarantees – for newly-issued Brady bonds focused on green and inclusive recovery, which private and commercial creditors can swap with a significant haircut against the old debt. This is an interesting idea, no doubt.
But since it is basically a modern-day version of the Brady Plan and the Highly Indebted Poor Countries (HIPC) Initiative of the 1990s rolled into one, and those smart ideas got nowhere as far as debt write-off was concerned, there’s little to suggest that rich countries and institutions will actually cut debt of poor countries just to help keep them on their feet.
But this thinking needs to change. A lot has changed since the 1990s. Ratings agency Fitch, for example, says there are currently a record number of sovereign debt defaults, while the IMF (International Monetary Fund) is warning that 25 percent of emerging markets and 60pc of low-income countries are in or near debt distress. And to make matters worse, this disaster is coinciding with a pending “environmental catastrophe” that experts have been warning of for quite a while.
Rich countries need to understand that if poor countries start going under, the resulting uncertainty and financial market bloodbath is likely to burn a lot more of their reserve dollars – not to mention loss of trade earnings – than simply writing off some of the debt.
This argument goes back to the pre-Covid days, when many Third World countries started to struggle to meet debt repayment deadlines. The pandemic lockdowns made a bad situation much worse, of course, and if a few G20 countries hadn’t announced a temporary freeze on debt payments, some countries might not have survived the scare.
Pakistan is front and centre among countries that desperately need help. Even if a part of the country’s debt is written off, there will be enough fiscal space to get it out of its many problems; provided, of course, that it can show that it has learned its lesson.
Because it would be a sheer waste of everybody’s time and dollars if poor countries court considerable controversy to have their debt cancelled and then go right back to their old reckless ways that got them buried under borrowed money in the first place.
Copyright Business Recorder, 2023
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