Another pandemic is sweeping the world: The ballooning debt of developing economies.
The Covid-19 pandemic means most governments have to spend extra for the health and survival needs of their citizenry, especially the most vulnerable in society. And then they have to spend more to breathe life to an economy flattened by forced lockdowns, social distancing rules and failing markets. On top of all these, they have to service existing debts while securing new ones or rolling over old loans.
One does not need any scientific research paper to conclude that most countries in the world are now swimming in debt. Our own Department of Finance reported that the total national debt increased by P1.9 trillion in the first seven months alone of 2020. The total borrowings for the whole year are expected to reach P3 trillion; hence, the debt-to-GDP ratio of 39.6 percent registered end of 2019 would now swell to 53.9 percent by the end of 2020 and to 59.9 percent in 2022. Decades of downsizing the debt-to-GDP ratio to less than 40 percent gone!
The mass media are flooded with stories on the debt situation in the developed OECD countries. And yet, the debt crisis of developing countries is rarely reported even if there are signs that the crisis in a number of developing economies is spiralling out of control.
The international financial institutions such as the IMF and World Bank are not blind to the deepening debt crisis of developing countries. The IMF set up in April a Rapid Credit Facility (RCF) and a Rapid Financing Instrument (RFI) supposedly in response to the demand for emergency financing by over 100 countries. It also sought debt relief for the poorest member-countries under the so-called Catastrophe Containment and Relief Trust (CCRT) program.
However, the total financing needs of developing economies are estimated to be over $1 trillion. The IMF’s RCF and RFI received a fighting fund of only $50 billion. As to the CCRT, the IMF allocation is a paltry $500 million (to increase to $1 billion) for distribution to 29 countries.
Moreover, the biggest problem of the poor African, Asian and Latin American members of the IMF are the plunging prices of their export commodities, mostly in raw or semi-processed form. Clearly, fair and balanced trade, free from the sanctimonious “trade sanctions” from the United States, should be part of a comprehensive debt and economic relief program for these countries.
According to UNCTAD, the total debt of developing countries in the pre-Covid period had been rising rapidly after the global financial crisis of 2008-2010, reaching an aggregate amount equal to 191 percent of their combined GDP. Most of the loans, ironically, came from private financial speculators, facilitated, again ironically, by the policy of financial and trade liberalization in the poor developing economies. Ironic because the global financial crisis in America and Europe in 2008-2010 was blamed on the predatory activities of these financial vultures, mostly incorporated as private equity companies. The latter took advantage of the efforts of Bill Clinton and company to liberalize the financial markets by doing away with the strict banking regulations provided by the Glass-Seagall law, which was enacted during Franklin Delano Roosevelt’s presidency to tame the economic crisis of the 1930s.
In a major research paper, Joseph Stiglitz and Hamid Rashid (“Averting Catastrophic Debt Crises in Developing Countries,” Columbia University, July 2020) gave the following observations on the character of the looming debt crisis of the developing countries:
- Total external debt of governments (public and government-guaranteed private debt) increased from $600 billion in 2008 to $1.3 trillion in 2018;
- Debt owed to private creditors increased three-fold, from $186 billion to $535 billion in 2008-2018; and
- Many borrowing countries avoided a full-blown debt crisis happening by rolling over existing debt and taking on new debt.
With the Covid-19 pandemic and the plunging export earnings and remittances (from migrant workers), the debt situation in many developing economies is simply unsustainable. Among the corrective solutions proposed by Stiglitz and Rashid are debt “standstill” (on debt servicing), debt restructuring, long “grace period” for debt payments, and, if needed, capital controls such as those imposed by Mahathir in 1997-1998 during the Asian financial crisis.
However, the proposals of the civil society movements such as the Asian People’s Movement on Debt and Development (APMDD) are bolder. They see the debt crisis of developing economies as a reflection of the unequal and unsustainable global economic order. Lidy Nakpil observed that private finance capital has been lording over the global financial system, which explains why the system of lending to various countries (governments and private sector) has become more and more profitable to the big international banks, with help from the IFIs and their home governments. Under the scheme of things, the biggest slice of government spending in Covid times goes to these corporations in the form of debt service.
Hence, APMDD and other CSO formations such as Oxfam and Global Justice Now are seeking a cancellation of debt for the poorest countries and cancellation of public external debt payments by all lenders (bilateral, multilateral and private) for all countries in need for at least four years. In turn, they want the resources freed from back-breaking debt service arrangements be used to address immediate needs of the people for vital health care, essential services, and economic and livelihood assistance.
They also want the United Nations, now on its 75th year, to seriously address the challenge of building an inclusive, resilient and debt-free global community.