Committee for the Abolition of Illegitimate Debt

• Countries with high debt payments all hit with tariffs
• No benefit from falling price of dollar
• Borrowing costs increasing
• Largest impact will be global downturn hitting export revenues

***Updated data on 7 April***

The US’s planned imposition of tariffs on imports from across the world has hit financial markets. The move, and any retaliation to it by major economies, is likely to exacerbate the debt crisis affecting many lower-income countries.

Of the 20 lower-income countries with the highest external debt payments, all are being hit with tariffs of at least 10%, with some facing much more. Laos (48%), Sri Lanka (44%) and Angola (32%) face the highest tariffs, with the average tariff across these 20 countries 18%.

Paying external debts – those owed to people elsewhere in the world – requires earning money from the rest of the world, usually through exports. Tariffs on exports to the largest economy in the world will directly hit countries already suffering from high debt burdens, leading to further contractions of government spending and investment in the economy, as foreign currency earnings fall.

One ameliorating factor could be the fall in the value of the US dollar as most external debts are owed in dollars. It has been widely reported that the dollar has been falling in value against other major currencies, which would lower the relative cost of external debt payments. However, for the 20 countries with the highest external debt payments, on average their currencies have barely changed against the dollar. The falling dollar is being matched by falls in debtor country currencies.

In fact, the detail is more worrying than this. Several African countries have currencies effectively tied to the Euro, so have seen the relative size of any dollar-owed debts fall in value. But these countries tend to owe many of their debts in Euros. Some countries maintain some kind of peg against the dollar, using up foreign exchange reserves to prevent their currencies falling in value, and others may have been doing this to protect their currencies in recent days. Some currencies have fallen in value against the dollar by around 2%, such as the Kenyan schilling and Egyptian pound, despite the dollar also falling in value.

The direct trade shock and changes in currencies are not the only impact on countries with high external debts. Another is on the 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 on future borrowing. The yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. on a type of debt owed to private lenders called a bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. indicates the interest rate such lenders would charge if a government were to borrow more from them now. For the 20 countries yields have increased by 2 percentage points in the last week, to an average of 12%. Borrowing costs were already high and are going higher – whether through bonds or less transparent forms of loans from banks.

This is the exact opposite of what is happening in rich countries, where yields on government bonds are falling. But this is a pattern that often happens. When negative global financial events happen, speculators move money into what they perceive as safe assets – debts of rich country governments – and away from what they perceive as risky – debts of lower-income country governments.

Many of the countries with the highest debts were already effectively unable to borrow more from private lenders anyway. Instead, lenders such as 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 and 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.

are lending more money, enabling the high interest to private lenders to keep being paid. The IMF have justified this by saying the debt crisis is a ‘liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. ’ problem. Their expectation is if they can keep debts being paid now, 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. will fall, and debtors will be more able to pay in the future. Instead, interest rates are increasing, and the IMF and World Bank are conducting a mass bailout of private lender profits, while enabling the debt crisis to continue.

But the largest impact of rising tariffs might not be directly on exports, or changes in currencies, or bond yields, but the wider global economic impact. Many of the countries with the highest debt payments are dependent on commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. – raw materials – for their exports. The prices for commodities are notoriously volatile, rising in periods of global economic boom, then falling rapidly during downturns. The change in commodity prices often triggers intensified debt problems.

The oil price is down 14 in the last week. Oil is a key export for many of the countries with high external debts, including Angola, Senegal, Republic of Congo, Cameroon and Nigeria. There are no daily global prices for many key exports of countries with high debts (from textiles to tea, phosphates to flowers). The copper price – often interpreted as a guide to other metal prices and general demand for raw materials – is down 13%.

If tariffs are imposed, and a global economic downturn ensues, countries dependent on commodity exports will feel the impact the most. For those with already high external debt payments the response to the fall in foreign exchange will be to either further contract government spending, or stop paying and seek debt relief. As Indermit Gill, Chief Economist of the World Bank said in December 2024 before any of the events of this week were known:

“It’s time to face the reality: the poorest countries facing debt distress need debt relief if they are to have a shot at lasting prosperity… Sovereign borrowers deserve at least some of the protections that are routinely afforded to debt-strapped businesses and individuals under national bankruptcy laws. Private creditors that make risky, high-interest loans to poor countries ought to bear a fair 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 the cost when the bet goes bad.”

More than ever, we need a functioning system to rapidly and fairly cancel debts of countries down to a sustainable level. Join our campaign to do so.

For external debt payments by country see Debt Justice’s Debt Data Portal: https://data.debtjustice.org.uk/