When the Covid pandemic was declared by the World Health Organization (WHO) back in early 2020, a number of developing countries were already facing a difficult debt situation, which continued to accentuate during the pandemic as most of the world went into lockdowns and recession.
Vaccine inequities that many countries in the global South faced, especially in Africa, resulted in a number of dangerous coronavirus variants, and a lack of capacity to deal with them effectively meant that developing countries went into longer, stretched U-shaped economic recovery.
Moreover, lack of fiscal space meant that little stimulus could be provided. Vaccine import costs, damage to exports, and overall domestic production, on one hand, and lack of debt relief, push towards austerity and pro-cyclical policies under the International Monetary Fund (IMF) programmes or otherwise under neoliberal mindset of ‘Chicago-boys’-styled thinking of policymakers in many countries, along with a lack of debt relief effort, inadequate provision of enhanced allocation of IMF’s special drawing rights (SDRs), and sub-optimal provision of climate finance, on the other, meant dwindling foreign exchange reserves, high imported- and cost-push inflation, low domestic resource mobilization, and overall weaker economic growth, and greater debt distress.
Hence, adoption of pro-cyclical, austerity policies and lack of non-neoliberal, counter-cyclical, non-austerity reform by developing countries, including Pakistan, in general has led to greater poverty and inequality on one hand and deeper balance of payments issues and a debt crisis on the other.
Also, higher oil prices a few months after the sharp and deep drop in early 2020 at the back of reportedly artificially suppressing oil supply by OPEC+ countries overall added to import bills and financing needs of developing countries, and with it in enhancing debt distress.
Over-board monetary tightening, which meant policy rates were raised to curtail inflation primarily through suppressing aggregate demand, seems to have backfired in two ways in both developing and developed countries, given a significant aggregate supply-side determination of inflation globally in the wake to supply chain crisis due to the pandemic but also the war in Ukraine.
Firstly, in developed countries overall, for instance, in the United States, initially more than needed stimulus was provided during the pandemic that did require raising policy rate to curtail aggregate demand, yet it is being overdone, given a strong supply-sided determination of inflation as well.
Hence, higher policy rate seems to be fueling cost-push inflation, and also greater stimulus led to lower supply of labour and, in turn, both high inflation and high competition for workers meaningfully activated the wage-inflation spiral.
Yet, continuing to increase policy rate, seems to be a miscalculation on the part of US Federal Reserve, which appears to be not properly recognizing that health employment data has to also meaningfully do with competition in labour market and higher wages putting pressure from the aggregate demand side. Moreover, it is not properly taking into account the short to medium-term lag with which policy rate increase (or decrease for that matter) impacts the real economy.
Therefore, taken all together, while the US Federal Reserve has to control inflation, for which it needed to raise interest rates to curtail upward push in aggregate demand, but given significant supply-side nature, an active cost-push inflationary channel
and a meaningful lag of the monetary transmission, all call for a more cautious approach. This is not only important for avoiding a hard economic landing in US for instance, but also curtailing pressure on external debt of developing countries from the channel of higher interest rates, increasing capital flight and enhancing import bill.
Secondly, in developing countries – whether it is through IMF programme conditionalities/emphasis, and lack of economic reform on the expenditure/revenue side or that of economic institutions in terms of enhancing their allocative and productive efficiency of expenditure in terms of both output and welfare – move towards austerity policies, especially through enhancing policy rate, where inflation is even more supply-sided determined than in normal times in developing countries, has resulted in both diminishing levels of revenue and exports to effectively deal with a very difficult fiscal deficit- and balance of payments situation, and also reduced already weak debt repayments capacity of the country.
It is in this context that the upcoming and much-overdue meeting to significantly improve the debt restructuring framework needs to become a strong launching pad to meaningfully help countries in deep debt distress, like Pakistan and Zambia, among others. This meeting comes reportedly at the back of the upcoming meeting of finance ministers and central bankers of Group of 20, where the outcomes of this meeting should be built upon.
About the meetings, a recent Bloomberg published article ‘IMF to meet with China, India, Paris Club on debt relief on Friday’ indicated: ‘The International Monetary Fund, World Bank and India will host an inaugural meeting to deal with global debt issues Friday, bringing together creditors including China with borrowing countries to try to hash out solutions for nations with unsustainable debt levels.
Borrowing nations participating will include Ghana, Ethiopia and Zambia, according to people familiar with the plans for the so-called sovereign debt roundtable, who asked not to be identified discussing private talks. Creditors including France, the US, UK and Japan will participate, as well as the Institute of International Finance, the global association for the financial industry and private sector creditors, the people said.
One of them added that envoys from Sri Lanka, Ecuador, and Suriname will also be present.’ While it is heartening that a well-represented group of creditors is participating, many of debtor countries, including Pakistan, which are in serious debt distress, are apparently absent from this meeting, which is strange to say the least.
The meeting that rightly brings together not just the multilateral and bilateral creditors of developing countries but also two other significant creditors – as they assumed this position during the last decade or so – in the shape of China and private creditors, needs the same spirit of understanding and responsibility as was shown when Germany was provided debt relief.
Elaborating on that debt relief, and advocating a similar dispensation, which if anything seems to have gained all the more weight given a world of poly-crises, a February 2015 ‘Debt Justice’ published article ‘How Europe cancelled Germany’s debt in 1953’ pointed out: ‘On 27 February 1953, an agreement was signed in London which resulted in the cancellation of half of Germany’s (then West Germany’s) debt: 15 billion out of a total of 30 billion Deutschmarks.
Those cancelling the debt included the United States, the UK and France, along with Greece, Spain and Pakistan – countries which are major debtors today. The agreement also included private individuals and companies. In the years following 1953 other countries signed up to cancel German debts, including Egypt, Argentina, Belgian Congo (today the Democratic Republic of Congo), Cambodia, Cameroon, New Guinea, and the Federation of Rhodesia and Nyasaland (today Malawi, Zambia and Zimbabwe).’
Moreover, it is important that such relief is provided, like in Germany after the Second World War, and that is without attaching such relief with commitments from developing countries to follow austerity, and pro-cyclical policies when what they need given the onslaught of climate-change crisis, and the likely probability of more pandemics (not to mention the fact that the Covid pandemic is also ongoing currently), is adopting a non-neoliberal, non-austerity, counter-cyclical reform policy to build more resilient, green, and inclusive economies.
In this regard, the same article indicated: ‘If West Germany did not, or was unable, to meet debt repayments, the agreement said there would be consultations between the debtor and creditors, whilst seeking the advice of an appropriate international organisation.
This is in marked contrast to debt ‘negotiations’ over recent years where creditor governments and institutions, such as the Paris Club, IMF and European Central Bank, have dictated terms to debtor countries, and forced them to implement austerity and free market economic conditions. As it transpired, West Germany did not have further problems with the debt, so again the clause never had to be invoked.’
Hence, in the spirit of the way debt relief was provided to Germany in a manner of togetherness, it is important for China to play a meaningful part in providing debt relief to developing countries, and for China to ask multilateral institutions to also give meaningful debt relief to developing countries. The same Bloomberg article indicated in this regard ‘China – now the largest bilateral creditor to developing nations – has insisted in several debt-restructuring cases that multilateral development banks like the World Bank accept losses, something the institution and the US have rejected as unfeasible under its operating model.’
In another recent Bloomberg article ‘Yellen says G-20 to discuss China poor-nation debt revamp plan’ it was pointed out: ‘Finance ministers meeting in India this month will discuss a request by China – the world’s biggest sovereign creditor to developing nations – that multilateral development banks also offer debt relief to struggling nations, Treasury Secretary Janet Yellen said.
Fiscal and monetary chiefs from the Group of 20 largest economies — along with the International Monetary Fund and World Bank — will hold a global sovereign debt roundtable on the margins of their meeting in Bengaluru, India this month… Beijing wants multilateral development banks to take losses in restructurings, most recently making the case for this in the debt revamp now underway for Zambia.
Copyright Business Recorder, 2023
The writer holds a PhD in Economics from the University of Barcelona. He previously worked at the International Monetary Fund. He tweets @omerjaved7