In a press conference, David Malpass, President of the World Bank, stated that there is a “huge buildup in debt, particularly in the poorest countries.” “As interest rates rise the debt pressures on developing countries are increasing and we must urgently find solutions.”
Malpass stated that the “debt crises”‘ was a topic of intense discussion at the World Bank’s Spring Meetings. This week’s meetings were already dominated with other difficult issues such as the war in Ukraine, coronavirus pandemic, and a slowing global economic.
Kristalina Georgieva, IMF managing director, stated Wednesday to reporters that 60% of low income countries were in or close to “debt distress” — an alarming threshold at which their debt payments equal half of their national economies. Paying creditors is a sign that countries will struggle to provide assistance for their most vulnerable citizens, especially as the Ukraine conflict disrupts food supply and pushes food prices higher.
To protect their economies against the effects of the coronavirus and the lockdowns that were meant to stop it, countries around the globe piled on debt. According to the IMF, government debts in low income countries will rise to 50% of gross domestic product (the broadest measure of economic output) this year. This is a significant increase from the 44% that was recorded in the year before the pandemic.
The massive economic assistance in the global economy has been a success, resulting in a surprisingly rapid recovery from the pandemic recession of 2020.
Businesses were taken by surprise when the rebound occurred. They had to scramble to meet the surge in customer demand which overwhelmed factories and freight yards. Prices rose and deliveries slowed. According to the IMF, consumer prices are expected to rise 8.7% in developing and emerging countries this year and 5.7% in advanced economies. This is the highest increase in consumer prices since 1984.
The Federal Reserve of the United States is leading the global central banks in raising interest rates to counter rising prices. Higher interest rates will lead to an increase in debt burden, most notably in the poorest countries.
They will rise, and U.S. rates will attract investment from poor countries to the United States. This will push down currencies and force them to pay more to import food and other goods.
Georgieva advised central banks to be careful, to explain their actions to avoid financial market overreactions and to remain “aware of the spillover risk to vulnerable emerging and developed economies.”
Malpass and she also called for a coordinated global effort in aiding countries with high debt. Similar efforts were launched when COVID-19 was implemented two years ago but have since failed to deliver “meaningful relief to countries that require it,” Marcello Estevao (the global director for macroeconomics, trade, and investment at the World Bank) wrote last month in a blog.
Already, the trouble is already here. Sri Lanka announced last week that it would suspend its repayments of foreign debt in the interim. This was to allow the IMF to complete a loan restructuring program for the island nation.
Estevao stated that as many as a dozen countries in the developing world may not be able to pay their debts within the next year. He said that although it is not the same as the emerging market debt crises from the 1980s or 1990s, “would still be significant — a large spate of debt crises within developing economies in the next generation.”
