Developing debt disaster

20 June by Michael Roberts

Next week 300 international organisations and 100 heads of state meet in Paris to discuss how “to build a more responsive, fairer and more inclusive international financial system to fight inequalities, finance the climate transition, and bring us closer to achieving the Sustainable Development Goals.” This meeting is in Paris because it is the so-called Paris Club that for over the last 60 years has monitored and managed loans and credit by governments and government-guaranteed private banks to the so-called developing countries – loosely called the Global South these days.

The meeting takes place when the situation for large sections of the Global South in the post-pandemic period is dire. There is much talk in the Global North of 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.
causing banking crises and threatening bankruptcies for so-called ‘zombie companies’ overloaded with debt. But this is nothing to the economic and social damage that low-income, high debt countries in Africa, Asia and Latin America are suffering.

It is more than a year since I wrote a post entitled The submerging debt crisis, in which I described the economic stress being placed on small, low-income economies around the world from food and energy 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. , rising 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. rates and a strong dollar. Then I identified Ghana, Sri Lanka, Egypt and Argentina. Indeed, back as far as the middle of pandemic in 2020, I highlighted the growing debt disaster for over 30 ‘emerging’ economies, with many of the poorest people on the planet.

In the pandemic, 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.
and the 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.

agreed a limited moratorium on these countries servicing and repaying their debts. But this was not a cancellation and the moratorium is now over. And there was nothing done by the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

debts or about the huge debts owed to private banks and other financial institutions, which continued to demand their pound of flesh. And since the end of the pandemic, the sharp rise in interest rates on global debt and a strong US dollar (much of global debt is in dollars) have forced yet more countries to the brink of default on payments and into further poverty.

Most poor countries depend on selling raw materials and agricultural products or assembling manufacturing parts for the North. That means export revenues are vital to national income. But world trade growth has fallen away, particularly since the Great Recession of 2008-9 and even more since the pandemic. The volume of world trade grew at an average rate of 5.8% a year between 1970 to 2008, while GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
growth averaged 3.3%. But in the Long Depression of 2011 to 2023, average growth of world trade was a mere 3.4% a year, while global GDP growth averaged just 2.7%. Indeed, real GDP per head for the Global South, excluding China, has stagnated relative to advanced capitalist economies.

The reduction in world trade growth is particularly hard on ‘emerging’ economies. Export growth in the Global South economies has fallen by more than half the rate achieved prior to the Great Recession. And this measure includes China, the world’s largest exporting economy.

Source: CPD, MR calculations

World trade growth in the first quarter of 2023 now stands at -0.9%, following a decline of 2.0% in the final quarter of last year. Most regions showed a decline in merchandise trade during the most recent two quarters, signaling a further drop in goods trade, according to CPD. And now there is a global manufacturing recession.

Global manufacturing PMI (anything below 50 is recession).

Source: Trading Market activities
Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit.

The World Bank’s latest Global Economic Prospects paints a dire situation for many poorer economies. It says that the UN’s 2030 anti-poverty development goals are now “well off course”. The world’s poorest countries are expected to pay 35% more in debt interest bills this year to cover the extra cost of the Covid-19 pandemic and a dramatic rise in the price of food imports. More than an extra $100bn will be spent by the poorest 75 countries, many of them in sub-Saharan Africa, to cover loans taken out mostly over the past decade.

Debt payments are consuming more of government spending in poor countries when they were already struggling to provide education and health services. Wars and extreme weather events linked to the climate crisis are more likely to cause distress in low-income countries than elsewhere because of scanty social safety nets. On average, the poorest countries spend just 3% of GDP on their most vulnerable citizens – compared with an average of 26% for other economies.

Economic growth in developing economies other than China will fall from 4.1% in 2022 to 2.9% in 2023. World Bank chief economist Gill said: “By the end of 2024, per-capita income growth in about a third of EMDEs will be lower than it was on the eve of the pandemic. In low-income countries – especially the poorest – the damage is even larger: in about one-third of these countries, per capita incomes in 2024 will remain below 2019 levels by an average of 6%.” Fourteen low-income countries are already in, or at high risk of, debt distress, up from just six in 2015. As many as 21 countries are vulnerable.

Let’s just consider a few of those debt disasters.

Ghana has long been considered a success story and a model for African development. It is a major producer of gold and cocoa and has one of the region’s highest GDP per head. But the government has now been forced into a $3bn IMF bailout when it defaulted on its debts last December. The government borrowed heavily to insulate the economy from the effects of the pandemic. As a result, public sector debt went from 62% of GDP in 2020 to more than 100% last year. Debt servicing now takes up about 70% of government revenues.

Ghana found itself shut out of international debt markets as concerns grew over its ability to repay what it owed. Now, in order to get the IMF funds, domestic lenders ie local banks, must accept a loss on their loans. But Ghana also has to get foreign lenders to take a ‘haircut’ on the $34bn in debt and that won’t be easy. Private lenders are responsible for 60% of the face value of Ghana’s external debt, but the high interest rates they charge mean they are responsible for 75% of debt payments. These lenders won’t take any haircuts without a fight. The Ghanian government has stopped borrowing any more and is imposing severe spending cuts on public services, such as they are. Taxes are being hiked – but this will only affect those in ‘formal’ employment. Most people work ‘informally’ with cash and many companies evade tax altogether. Corruption is rife.

Nearby Nigeria is also deep in trouble. Africa’s largest country is riven with internal wars, endemic corruption and waste of energy revenues. Foreign direct investment has dropped to its lowest levels in nine years: from $3bn in 2015 to $468mn. An extra 13m Nigerians are predicted to fall below the poverty line between 2019 and 2025.

Lebanon is a country that still has no government a year after national elections, with only a caretaker administration in place, and has been without a president for seven months. The former central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

governor is accused of corruption, money laundering and embezzlement. The Lebanese pound has lost more than 98% of its value against the dollar since 2019, while annual inflation climbed to 269% in April.

Over in Asia, a hugely populated country (230m), Pakistan, is in a deep political and economic crisis and is now turning to the IMF for a bailout. The country has $126bn in external debt and must repay $80bn of this over the next three years. The rupee has lost 50% of its value compared to the US dollar. FX reserves to cover payments are down to just $4.5bn. GDP is falling. The country has been hit by earthquakes and floods and is being run by the military, which sucks up much of government spending. Inflation is at an all-time of high of 38%.

Then there is Argentina, one of the better-off ‘emerging’ economies. The economy is locked into chronic hyperinflation and debt. It has been forced yet again to go to the IMF for more funds to pay back what it already owes to it. The country faces big debt repayments this month and next.

And FX reserves have run out. Argentina’s net reserves turned negative in May.

The Sri Lanka debt nightmare in 2021 culminated in mass protest and the fleeing of the then president from the country. But the debts remain. Much has been made of the debt owed to China, claiming that China is the problem by driving poor countries into a ‘debt trap’. But just 14% of Sri Lanka’s foreign debt is owed to China, while 43% is owed to private bondholders (largely Western vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
like BlackRock and banks like Britain’s HSBC and France’s Crédit Agricole). Another 16% is owed to the Asian Development Bank (over which the US has significant influence) and 10% is owed to the World Bank (dominated by the US as well). So “multilateral” debt really means debt owed to US-dominated institutions.

What is to be done? Clearly, the first immediate measure is to cancel the huge debts built up by these poor countries. The debts are the result of a weak world capitalist economy; corruption and mismanagement by local governments; and the rapacious squeeze on the resources and revenues by foreign lenders.

There is a significant concentration of holdings by a few major external creditors. Back in the 1990s the top-five external creditors accounted for 60% of total external credit to low-income countries and consisted mainly of multilateral and Paris Club creditors. As of end-2021, the concentration of the top-five external creditors had further increased, accounting for 75% of total external credit to LICs. And the share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of debt owed to the private sector has approximately doubled from 8% to 19%. So if the IMF, World Bank and just a few key creditor countries agreed, the debts of the poor countries could be removed. Will the Paris meeting do anything about this? I doubt it.

Then there is the longer-term issue: the continual exploitation by the imperialist bloc, through their multi-national companies and financial institutions, of the labour of the Global South with the connivance of domestic corporations and governments of the local elite. Without a total restructuring of the world economy towards collective ownership and planning under workers governments, the debt misery will continue.

Michael Roberts

worked in the City of London as an economist for over 40 years. He has closely observed the machinations of global capitalism from within the dragon’s den. At the same time, he was a political activist in the labour movement for decades. Since retiring, he has written several books. The Great Recession – a Marxist view (2009); The Long Depression (2016); Marx 200: a review of Marx’s economics (2018): and jointly with Guglielmo Carchedi as editors of World in Crisis (2018). He has published numerous papers in various academic economic journals and articles in leftist publications.
He blogs at

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