The following article is based on the speech made by the author as the UNCTAD Secretary-General Rebeca Grynspan at the opening of the organization’s 13th Debt Management Conference.
We meet in a context of cascading crises, cascading inequalities, and chronic instability. Covid, climate change and the cost-of-living crisis are all increasing poverty and hunger at an alarming speed.
Geopolitics, not economics, is now in the driving seat of globalization.
Funding gaps for SDG investments in developing countries are increasing, and debt burdens are becoming unbearable for many countries of the Global South.
All of these issues will be tackled in this conference, including asking ourselves if we are in a systemic debt crisis, are there enough developing countries today in that distress to allow us to say that the current situation, it is a systemic debt crisis?
Well, the answer depends on the lens you choose.
Through a traditionalist lens, the risk of a systemic debt crisis may appear to be low. Developing countries, excluding China, have a government debt stock of $11.5 trillion at the end of 2021. Countries that are currently classified under the IMF as having unsustainable or distressed debt represent roughly 13 per cent of this amount. Debt distress is therefore largely contained in several highly vulnerable countries, with relatively, until now, small amounts of debt as a share of the total. Most of these countries are low-income countries, although we know that they are middle-income countries that are also suffering debt distress.
So as a result, many may be saying that the possibility of feedback loops and therefore systemic risks remain according to these traditional lenses limited. By limited, I mean for the markets it is limited for them, but not limited for the countries that are in debt distress that are going through high suffering, suffering that has been measured in a decade of loss progress, like we know very well in my region, in Latin America, where we talk about the lost decade because of the debt distress in the eighties and it took us two decades to recover the levels of social indicators that we had before the debt distress.
And we know already that we have two decades in many countries that have been lost in progress seen before COVID-19, before the climate change burden, and before the crisis of the high cost of living. So, this traditional lens could be challenged.
We at UNCTAD prefer the developmental approach that in our research we put centre to our analysis and if you do that the answer is very different. Our key point of departure is to analyze how developing countries can achieve structural transformation together with the SDGs within the bounds of the external and public debt sustainability requirements.
Our guiding principle here is that debts are unsustainable if the only way to pay for them is to compromise sustainable development, using this approach. What we see is that the combination of rising debt levels and the tightening of global financial conditions has already caused a dramatic and systematic reduction of the policy space available for developing countries. In the current context, achieving debt sustainability under the traditional approach is inconsistent with the mobilization of resources required by the 2030 agenda and the Paris Agreement.
Thus, the issue today is not whether enough countries will cease to pay their creditors in the short run, the issue today is that almost all developing countries have been left to face an impossible tradeoff in a context marred by a pandemic, geopolitical instability, and climate distress.
Three sets of figures help to illustrate this point. First, public debt levels.
Government debt levels as a share of GDP have increased in over 100 developing countries between 2019 and 2020. Excluding China, this increase is equivalent to almost $2 trillion.
These are resources that will have to be paid back by governments in developing countries to their creditors in coming years due to two systemic shocks because we are talking about between 2019 and 2021. So, this has not happened because of the bad behavior of one country. This has happened because of systemic shocks that have hit many countries at the same time because there have been global shocks.
Second, debt servicing requirements, higher debt burdens, in combination with rising borrowing costs, are placing an enormous strain on public budget around the world. Fitch Ratings estimates that if the medium increase in rated sovereigns since 2009 were fully reflected in the interest payments governments would pay an additional $1.1 trillion on the global debt stock in 2023. To place these figures in context, $1.1 trillion represents almost four times the annual estimated investment requirements for climate adaptation and mitigation in developing countries, according to the IFCCC.
Third, the impact of the currency composition on debt, on public budgets in the context of an ever-stronger US dollar.
The IMF estimates that 70 per cent of all the debts in emerging countries and 85 per cent of the debt in low-income countries is in foreign currency.
Since governments in the global south spend in local currency and borrow in foreign currency, this structure leaves public budgets highly exposed to large and unexpected currency depreciations. This year, at least 88 countries experienced a depreciation against the US dollar as of the end of November. In 31 of these countries, the depreciation has been greater than 10 per cent. The Currency Exchange Fund estimates that for most countries in Africa such a depreciation increases debt service requirements by the equivalent of public health spending in the continent.
We have also talked about this with respect to the food insecurity crisis, because, as you know, the crisis in the global market has gone down. But because of the strength of the dollar, domestic prices are still going up, precisely because of the strength of the dollar in the food markets and also because of the depreciation that the countries are suffering because of that. So, the magnitude of these figures shows the systemic nature of the problem we are facing, and systemic problems demand systemic solutions.
At UNCTAD our focus is centered around promoting multilateral solutions in the areas of obviously, policy, capacity-building, debt transparency and debt crisis resolution and relief.
On capacity building, UNCTAD is committed to providing support to countries through our debt management and financial analysis program, what we call DMFAS, one of our most successful technical assistance initiatives. DMFAS offers countries a set of proven solutions for managing debt and producing reliable Data for policymaking purposes. Since its establishment over four decades, DMFAS has supported those 116 institutions in 75 countries. Today 61 countries are using DMFAS software to manage their public debt daily of which nearly three quarters are either low or lower-middle-income countries.
Regarding debt transparency, UNCTAD supports the establishment of a publicly accessible registry of debt data for developing countries following the UNCTAD Principles on Responsible Sovereign Borrowing and Lending. This registry would allow the integration of debt data by both lenders and borrowers at the level of specific transactions. Transparency would strengthen debt management, reduce the risk of debt distress, and improve access to financing.
Finally, UNCTAD aims to create a multilateral legal framework for debt restructuring and relief to facilitate timely and orderly debt crisis resolution with the involvement of all creditors building on the G20 common framework.
Participation in this framework should be incentivized through the provision of debt relief link to a debt sustainability assessment that incorporates long-term financing needs, including for the achievement of the SDGs and the Paris Climate Agreement.
At the same time, we are proposing to the G20 in the UN Presidency an independent review of the G20 debt agenda, which can boost the promising but stalled discussions around the Debt Service Suspension Initiative and the Common Framework for their treatment.
Your Excellencies, distinguished delegates,
We are at a systemic debt crisis that has become unsustainable because they have become too onerous and have compromised our sustainable development. Debt cannot and must not become an obstacle for achieving the 2030 agenda and the climate transition the world desperately needs.
These three days will be instrumental in providing solutions to our pressing problems, and I therefore wish you productive, engaging and above all, impactful sessions ahead.
A lot depends on these policy solutions to have a systemic intervention, to have systemic integrated policy options for these crises will be key to avoiding decades of lost progress in many developing countries.