22 February 2022 by Eric Toussaint
The Financial Times notes that “poorest countries face $11 bn surge in debt repayments” in 2022 while the World Bank
World Bank
WB
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.
warns against “disorderly defaults.” [1].
Poorest countries face $11 bn surge in debt repayments in 2022
Some 74 low- and middle-income countries “will have to repay an estimated $35 bn to official bilateral and private-sector lenders in 2022”, which is a 45% increase compared with 2020, “with Sri Lanka seen as one of most vulnerable.” [2] Ghana, Salvador and Tunisia could also be in jeopardy. Zambia defaulted in 2020 on an amount of $3 billion and the situation has not improved. [3] The Zambian government is negotiating a new loan from the 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.
http://imf.org
, which, if granted, will demand more austerity measures.
74 low and middle-income countries will have to repay an estimated $35 bn to official bilateral and private-sector lenders in 2022, which is a 45% increase compared with 2020
Poorest countries face $11 bn surge in debt repayments this year after many had turned down the 2020 IMF and WB relief proposal that came with new conditionalities and thus with a further loss in their sovereignty. They applied to the capital markets to finance measures against the coronavirus pandemic.
David Malpass, President of the World Bank, warned that the creditors’ insistence on being paid will increase the risk of disorderly defaults. “Countries are facing a resumption of debt payments at precisely the time when they don’t have the resources to be making them,” he said.
As explained in the Financial Times, this surge is a consequence of developing countries contracting ever more debt to face the impact of coronavirus, but also of the rising cost of refinancing existing loans and the resumption of debt repayments that had been suspended during the pandemic.
The President of the World Bank warned of an increased risk of disorderly defaulting.
The World Bank observes that about 60% of low-income countries have to restructure their debts (or are dangerously close), which makes new sovereign debt Sovereign debt Government debts or debts guaranteed by the government. crises likely. The Institute of International Finance, an association of major banks and private financial companies, has established that bonds issued by governments and companies in low- and middle-income countries amounted to $300 bn a year in 2020 and in 2021, i.e. three times more than before the pandemic.
DCs issued so many sovereign bonds that they are facing difficulties repaying in spite of a global initiative devised by the G20
G20
The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank).
, the IMF, the World Bank and the Paris Club
Paris Club
This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.
that aimed at relieving their debt burden but eventually fizzled out. [4]
About 60% of low-income countries have to restructure their debts
The aim of the Debt Service Debt service The sum of the interests and the amortization of the capital borrowed. Suspension Initiative, launched by large economies in April 2020, was to defer about $20bn owed by 73 countries to bilateral lenders between May and December 2020. In October 2020 the CADTM had denounced the G20 measures in no uncertain terms. [5] But despite being extended to the end of 2021, only 46 countries requested to benefit from this initiative. This is acknowledged by the Paris Club itself. [6] It has to be noted that in 2020 and 2021 these countries still had to pay their debt service to private creditors and to a number of multilateral lenders. In 2022 they must resume repayment of their full debt service, i.e. to private, multilateral and bilateral creditors.
The pandemic also deepened fiscal deficits. More than half of the poor countries are now over-indebted or close to it, compared with 30% in 2015. The new profile of creditors will make debt restructuring more difficult. Within ten years, the private sector has indeed become the first lender to low- and middle-income countries. In 2019 it held 40% of Africa’s total external debt, compared with 17% twenty years earlier.
In the first two years of the pandemic, the cuts in 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 decided by central banks made it rather cheap for governments to borrow since lenders were looking for better returns in the Global South than those they achieved in the North. But as investors expect global monetary conditions to tighten, the cost of refinancing existing debts is rising. The US Federal Reserve
FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.
FED – decentralized central bank : http://www.federalreserve.gov/
has started to raise rates in order to fight inflation
Inflation
The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down.
at home, which is likely to lead to the repatriation of capital to the North, and particularly to the US.
In many countries, 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.
remain below the pace of price growth, and cross-border capital is leaving emerging market stocks and bonds. Foreign investment funds
Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
have started to move away from emerging markets. “Market access is a wonderful thing to have when there is cheap money out there, but there might be a different view as conditions tighten,” said Ayhan Kose, head of the World Bank’s economic forecasting unit.
The problems of debt are mounting . . . We really are at risk of another lost decade for developing countries,” said Rebeca Grynspan, secretary-general of the United Nations Conference on Trade and Development
UNCTAD
United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.
.