Serious debt overhang facing developing countries – Opinion
Many developing countries are net importers of oil, the price of which has been rising steadily, recently reaching a seven-year high above $90 a barrel. A February 4 Bloomberg article “Oil market continues to strengthen as prices explode to $92” adds to already high inflation concerns for developing countries, especially when the outlook for higher prices does not show no signs of slowing down. The article pointed out that “oil has climbed to a new seven-year high above $92 a barrel, and almost all indicators point to an extension of the rally.”
Additionally, regarding some of the reasons for the continuation of this rally, the article pointed out: “”The rally in crude prices shows no signs of abating as the supply and demand drivers remain very bullish,” said Ed Moya, Oanda’s chief market analyst for the Americas.
“Geopolitical risks, including Russian-Ukrainian tensions and Iranian nuclear talks, are also wildcards for oil prices, as they seem more likely to lead to market tightening in the near term. This all comes as OPEC+ strives to increase production of the 400,000 barrels per day it has promised each month.
In addition, global oil demand has already fueled a lot, as highlighted by the options market, and which gives strong credibility to oil prices above the 100 dollar mark per barrel, about which the same Bloomberg indicated: ” The rally means a return of $100.” oil is probably increasing day by day.
For months, options markets have been abuzz with contracts trading above this level. There is the equivalent of nearly 112 million barrels of $100 calls for the global benchmark Brent over the next 12 months. Call options written by banks in the 1990s are also likely contributing to the rise in oil.
These are alarming signs for developing countries, including Pakistan in particular. These countries are already under immense pressure to reduce import bills. These are testing the limits of macroeconomic policy instruments to deal with the impact of the high component of imported inflation on the overall rate of price increases from which they have been suffering for some time now. In addition, the tightening of monetary policy stance globally will further aggravate the already precarious debt sustainability situation.
A number of developing countries appear to be on the brink of default, as highlighted, for example, in a recent Financial Times (FT) article titled “Argentina’s IMF deal offers warning on emerging market debt by Gillian Tett. According to her: “David Malpass, President of the World Bank, warned last month that the world is now headed for a swathe of ‘disorderly defaults’ among the poorest nations.
Meanwhile, the IMF estimates that 60% of low-income countries are now facing debt distress. This is double from 2015. Investors are bracing for possible defaults from low-income countries like Sri Lanka, Ghana, Tunisia and El Salvador, as well as middle-income countries like Lebanon, Turkey and Ukraine. Rising US interest rates will add pressure on these countries.
In the case of Sri Lanka, for example, a default seems very imminent, as highlighted in a recent FT article “Sri Lanka on the brink of sovereign debt default, warning investors” in which it indicates what follows: “Sri Lanka owes $15 billion in bonds, mostly denominated in dollars, out of a total of $45 billion in long-term debt, according to the World Bank.
It has to pay about $7 billion this year in interest and debt repayments, but its foreign exchange reserves have shrunk to less than $3 billion. The government’s next big challenge is a $1 billion bond repayment due in July. If it doesn’t pay, it will join countries like Suriname, Belize, Zambia and Ecuador in defaulting on its debt as a result of the pandemic.
Moreover, rising interest rates globally not only add to the current pressures on debt servicing, but also represent a significant cost for debt rollover and reserve building, through floating bonds. Countries like Pakistan, which have high debt servicing needs but are now entering bond markets more aggressively, are therefore already behind the times – the era of cheap credit is already behind them.
And resorting to International Monetary Fund (IMF) programs for mainly much cheaper loans nevertheless has fundamentally harmful consequences for the economy, as these pro-cyclical programs significantly diminish a recipient country’s ability to achieve the necessary growth rates. to deal with a recessionary environment causing a pandemic, and in turn, to increase tax revenues and exports that come from countercyclical policies, and not at the cost of stifling growth and use.
This over-indebtedness calls on the main sovereign creditors to undertake a major debt relief effort. But the framework for doing so has already crumbled due to the changed underlying composition of debt over the years, and requires a deep and significant reform effort. The same FT article by Gillian Tett stated in this regard the following: “During the second half of the 20th century, the Western world organized debt restructurings of poor countries using the framework of the “Paris Club”. .
This allowed creditor countries to enter into agreements supported by institutions such as the IMF and the “London Club” of commercial lenders. … ten years ago, low-income countries had about $80 billion in bilateral public external debt (excluding multilateral and private loans) . Two-thirds came from Paris Club lenders. Today, these debts exceed 200 billion dollars, and less than a third are lent by the Paris Club. The rest is mainly due to China… This radical change makes the Paris Club mechanism less relevant…”
A recent Bretton Woods Committee report titled “Debt Transparency: The Essential Starting Point for Successful Reform” outlined some ways to reform the debt relief/restructuring process and, as the same article from the FT, as follows: “The Bretton Woods report argues that a A crucial step would be for governments to create a unified and transparent database of their debts. It calls on rating agencies, multilateral banks and investors with environmental and social governance mandates to push for this. He also argues that the old Paris Club framework should be revised to give China a proper place at the table. Finally, he calls on the lenders of the private sector are brought into the negotiations at a much earlier stage.
Overall, there is an urgent need for the IMF to move away from its pro-cyclical policy mindset and, as is usually reflected in its program requirements/conditionalities, for example in the case of Pakistan, but not as in the very rare from Argentina.
In addition, central banks need a more balanced policy, both in rich and advanced countries and in developing countries, as pointed out, for example, in a recent article by the Roosevelt Institute entitled “A response balanced against inflation” by Nobel laureate in economics, Joseph Stiglitz.
According to the article, “While no one guesses what will happen next with inflation, the data shows there is no reason to react rashly with large, broad-based interest rate hikes.” … Although some supply shortages were anticipated as the global economy reopened after the COVID-19 lockdowns, they have proven to be more widespread and less transitory than expected. …Nevertheless, my biggest concern is that central banks are overreacting, raising interest rates excessively and hampering the nascent recovery. In addition, rising interest rates will add to already high pressures on global debt sustainability, particularly in relation to the debt problems facing developing countries in general.
(The author holds a doctorate in economics from the University of Barcelona; he previously worked at the International Monetary Fund)
He [email protected]
Copyright Business Recorder, 2022