Appeal for debt restructuring for developing countries

A call has been made for debt restructuring to assist countries most in need, as the effects of the COVID-19 pandemic and slow economic growth continue to put them under significant financial strain and limit their investment in key areas.

It came on Tuesday as President of the World Bank David Malpass hosted a discussion on the topic Overcoming Debt, Generating Growth, as part of the ongoing World Bank Group/IMF 2023 Spring Meetings, which examined some of the challenges in sovereign debt markets and identified possible solutions.

Noting that debt sustainability was key for growth and development, Malpass said about 40 low-income countries and over a dozen middle-income countries were either at high risk of debt distress or already in debt distress.

“In addition, slowing global growth and higher interest rates globally are putting additional pressure on developing countries,” he said.

“Progress on debt has been stalled and it is urgent that we move forward properly. Countries need to achieve transparent and sustainable debt burdens in order to restart investment which has slowed to a standstill.

“The World Bank has advocated strongly for solutions to the mounting debt challenge facing developing countries and we have been providing fresh grants and highly concessional resources to countries in debt distress, often when no one else is providing financing,” Malpass added.

The World Bank official agreed that developing countries were in need of new investment in order to meet spending needs and address the climate crisis. He also pointed to the need for debt restructuring for developing countries.

“The countries are still paying so much for debts that were incurred over the last decade that it creates challenges for their spending side as well,” said Malpass.

Raghuram Rajan, Professor of Finance at the University of Chicago Booth School of Business, said most worrying for him was the enormous spending needs that many emerging markets and developing countries now have coming out of the COVID-19 pandemic.

“These months have been periods of slow recovery for large segments of the population — those that did not have regular employment and small and medium firms that did not have regular business – and in this time, what we are seeing is an interrupted recovery as we have higher interest rates [and] difficulty in borrowing,” he said.

The university professor argued that the effects of the “bad pandemic” coupled with the need to build climate resilience and, in some cases, respond to climatic shocks have slowed development in a number of developing countries.

Singling out the issue related to climate change, Rajan said: “These are increasing catastrophes around the developing world that need to be dealt with. Often, they need quick spending, not so much on mitigation but on adaptation and resilience which are important for their continued well-being.

“Where is the available capital? With industrial countries basically having big spending needs of their own, both in terms of higher government spending during the pandemic but also with the enormous new spending that a number of countries are contemplating on climate action, what is left is significantly smaller for the rest of the world.”

He said it was also critical for countries to put structures in place for accountability, transparency and good governance to ensure debt sustainability following any debt restructuring.

“How do we get countries to commit to a process by which, post the restructuring, there is sensible spending going forward? What are the institutional structures that need to be built with the country itself, keeping control over the process by which debt rises, especially given that the frequency of catastrophe will probably increase and spending will be needed? But you still need to keep buffers for future events,” Rajan said.

Sharing the experience of his country now coming out of the debt trap it had been in for many decades, Jamaica’s Minister of Finance and the Public Service Dr Nigel Clarke said one critical lesson was that the government needed the support of the private sector, labour, academia and other stakeholders during the reform process.

He said the reform required “a combination of new laws, institutions and principled decision making underpinned by higher levels of fiscal transparency”.

“You can’t just put an institution in place or enact some laws and then say ‘hey, my work is done’. What you need is active, principled decision making because the events that come your way can’t be predicted and you have to apply principled decision making to manoeuvre through those events,” Clarke explained. marlonmadden@barbadostoday.bb