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The Challenge of LDC Debt
A challenge set by the Covid-19-induced economic crisis that would be difficult to address is the external debt crisis engulfing developing countries. While the G-20 with its Debt Service Suspension Initiative appeared to recognise the problem, the evidence indicates that the international community is unwilling to do what is needed. There are enough proposals on the table, but inadequate commitment among those sitting around it.
As governments begin to vaccinate their populations against COVID-19 to win herd immunity, attention would turn to addressing the multiple crises that are the legacy of the pandemic. One such only partially recognised and half-heartedly addressed so far is the burden of debt that developing countries, especially low-income countries (LICs), have accumulated. The January 2021 issue of the World Bank’s flagship publication Global Economic Prospects (GEP) estimates that, during the pandemic year 2020, the ratio of government debt to gross domestic product (GDP) in emerging market and developing economies (EMDEs) rose by more than 8 percentage points from 52.1% to 60.8% (World Bank 2021).1 This compares with a 4 percentage point increase over the two years 2018–19. Figures on how much private debt, driven by difficult economic conditions and global monetary easing, rose from its pre-existing level of 123.1% is not yet known. But that rise is likely to be steeper if past trends are any indication. Over the five years ending 2019, while government debt as a ratio to GDP rose by 12 percentage points from 40% to 52%, private debt rose by 21 percentage points from 102% to 123%. In LICs, while the public debt to GDP ratio was stable at 59.7% over 2018–19, it is estimated to rise to 67.7% in 2020.
One problem is that a substantial and rising share of this debt is external. According to the International Monetary Fund (IMF) economists (Kose et al 2020), the proportion of government debt in EMDEs held by non-resident investors had touched 43% in 2018, and foreign-currency-denominated corporate debt had risen from 19% of GDP in 2010 to 26% of GDP in 2018. This tendency was visible even before the pandemic and even in low-income countries, which, having benefited from the debt reduction provided by the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) of 1996 and 2005, once again accumulated new debt. The stock of external debt of low-income countries rose from $80 billion in 2006 to $90 billion in 2010, $124 billion in 2015 and $160 billion in 2019. Private players have contributed to this spike. The share of private non-guaranteed debt in total external debt stocks of LICs increased from 3.2% in 2010 to 8.5% in 2015 and 10% in 2019.2 These figures are likely to have spiralled over the last year. The Institute of International Finance estimates that borrowings by all emerging market governments from international bond markets rose by $100 billion between April and August 2020 (Jack and Wheatley 2020).
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