Debt crisis

As the number of developing countries likely to default on external debt service commitments increases, the effort to resolve debt crises in countries that have defaulted many months back remains unsuccessful.

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.

Developing-country defaults on their external debt repayments are a function of both their 'willingness to pay' as well as their 'ability to pay'. While the ability to repay can be captured by economic factors like the growth rate of the economy and external shocks, willingness to repay is more difficult to measure. In this paper, it is emphasised that political factors are important determinants of the willingness to repay and should be treated as an explanatory variable explicitly. A multivariate probit model is estimated that tests the hypothesis that the probability of default is inversely related to the level of democracy in the debtor country. It is shown that the evidence doesn't support the hypothesis.