How to spare low-income countries from ‘economic collapse’

The world's economic "firefighter" recently warned of an impending blaze that just might engulf a significant portion of the global population.

More than half of all low-income countries are now nearing or already in debt distress and some face "economic collapse," according to the International Monetary Fund (IMF). That is, unless efforts are stepped up to ease their burden.

A bad situation for these countries has only gotten worse during the health crisis. Now, following a period of pandemic-related suppression, interest rates are set to rise and make their debt payments even more expensive in the process. That’s prompted louder calls to overhaul what many see as inherently unfair global financial architecture.

The 60% of low-income countries the IMF says are now near or in debt distress compares with less than 30% as recently as 2015. And while public debt has also increased in wealthy countries during the pandemic, that’s a relative bump in the road for a place like the US – which has the world’s reserve currency and a reliable lender of last resort.

US public debt has equaled 123% of GDP recently, yet the country pays less than 2% interest on a 10-year loan. Zambia, with a public debt-to-GDP ratio estimated at 115%, pays 25% on 10-year borrowing. Uganda, which has a debt ratio of about 50%, pays nearly 15%.

To alleviate pressure on low-income countries during COVID-19, the G20 established a debt-suspension initiative. But that’s slated to expire at the end of this month.

Buddhist monks recently sprinkled holy water on bullet trains that would soon be circulating between China and Vientiane, the capital of Laos, thanks to a $5.9 billion railway project. The Laotian government reportedly took on more than $1 billion in debt for the effort, raising questions about whether it can be repaid.

Late last year, Laos had its credit rating cut to a level meant to indicate to lenders that default is a real possibility, due to cited shortcomings in “institutional capacity” and controlling corruption.

The tendency of rating agencies to apply the same blanket criteria to less-wealthy countries as they do to their more comfortable peers – and raise their cost of borrowing in the process – has come under scrutiny.

Some critics have argued for a new type of ratings system that wrests influence from entrenched agencies, and places more focus on the human rights of countries in need.

Still, ratings may be only part of the issue. One study pointed to an unaccountable “investor bias” that’s forced governments in sub-Saharan African to pay about $300 million extra in interest every year, on top of what might simply be attributed to a credit rating.

The treatment of low-income countries in need of financing is just one of many deficiencies drawn in sharper detail by the pandemic.

In some of these places, governments’ past perceived failures to get a handle on their debt situation have sparked protests, and calls to stop borrowing further from the global institutions that serve as a backstop.

Others say these institutions should actually play a larger role, by making more resources available to developing countries – and that wealthier countries should provide more debt-for-nature swaps, which cancel financial obligations in exchange for firm commitments to things like preserving forests and protecting endangered species.

Proponents say efforts like these are merited by an uneven playing field. While most countries in the world have suffered economic declines during the pandemic, poorer nations generally started from already-precarious levels, and continue to endure relatively daunting circumstances.

The collective economy in sub-Saharan Africa, for example, is expected to grow at the slowest rate of any region in the world this year – due at least partly to the unequal global distribution of COVID-19 vaccines, which have been in short supply in many African countries.

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