Poor countries cut public spending, debt payments trebled

17 January 2020 by Jubilee Debt Campaign

Street sellers in front of a mural in Lusaka, capital of Zambia. In 2019 Zambia’s public spending is due to be 18% lower than in 2015 with further cuts anticipated by the IMF for several years to come (CC: David Brown / Flickr).

Figures calculated by Jubilee Debt Campaign from IMF and World Bank data show that growing debt burdens are contributing to public spending cuts. For the 15 countries spending over 18% of revenue on debt payments, 14 saw public spending cuts between 2015 and 2019. Average external government debt payments for the 63 most impoverished countries (where data is available) are set to increase by between 133% and 216% by 2022

New figures released today by Jubilee Debt Campaign show that poor countries with large debt payments are suffering from public spending cuts. Jubilee Debt Campaign has used IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

data to calculate debt payments and public spending cuts for 60 countries where there is information. Of these, for the 15 countries spending over 18% of revenue on debt payments, 14 saw real public spending per person fall between 2015 and 2018. On average, these 15 countries had cuts in public spending of 13% between 2015 and 2018.

In contrast, for the 30 countries with the lowest debt payments, public spending increased by 14% between 2015 and 2018.

Furthermore, average external government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. payments are expected to increase across the board over the next three years. Using IMF data, Jubilee Debt Campaign has calculated that average external debt payments for the 63 most impoverished governments in the world (for which there is data) are predicted to increase by between 133% and 216% on 2011 levels by 2022.

Debt payments will continue to increase over the next three years in the best-case scenario – of strong economic growth and no economic shocks. But if there are widespread economic shocks – such as falls in commodity prices, rising interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
or widespread disasters due to climate change – average debt payments could continue to increase rapidly to the highest level in over 20 years.

Sarah-Jayne Clifton, Director of Jubilee Debt Campaign said: “The world must wake up to the growing debt crisis in poor countries. Ballooning debt payments and cuts in public spending are a recipe for disaster. Meeting the Sustainable Development Goals to cut poverty and inequality requires large increases in public spending, but in many countries the opposite is happening. We need the IMF and World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

to stop bailing out the reckless lenders who are contributing to runaway debts and play their part in bringing about fair and rapid debt restructurings for countries in crisis.

Republic of Congo has seen huge cuts in public spending of well over 50% between 2015 and 2018. Chad has the next highest cuts of 35% by 2018. Both these central African countries are in debt crisis following loans from oil traders. Mozambique’s public spending has been cut by 21% on 2015 levels by 2018, following the country’s debt crisis triggered by secret loans from London-based banks.

Zambia has increasing debt payments primarily due to high interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate bonds and other loans from commercial banks, while its revenue has been hit by falls in the price of copper. In 2019 Zambia’s public spending is due to be 18% lower than in 2015 with further cuts anticipated by the IMF for several years to come. Sierra Leone’s debt payments have shot up following the Ebola crisis. Almost half of the government’s external debt is owed to the IMF. Public spending in 2018 in Sierra Leone was 10% less per person than in 2015, though the cuts on 2016 levels are even greater – 17%.

Graph 1. Mean average external government debt service Debt service The sum of the interests and the amortization of the capital borrowed. , 1998-2030 (1998-2018 actual, 2019-2030 IMF baseline estimate and IMF one economic shock estimate)

Graph 2. Index of real public spending per person, grouped by the 30 countries with lowest debt payments and 30 countries with the highest debt payments, and the 15 with debt payments over 18% of government revenue. Figures for 2019 are projections.

For further details including the methodology and data sources please read our briefing ‘The increasing global South debt crisis and cuts in public spending’

We would like to thank Action Aid International for contributing to the costs of this research.

Source : https://jubileedebt.org.uk/press-release/poor-countries-cut-public-spending-in-response-to-trebling-of-debt-payments

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