The world needs new strategies to bridge the gap between development aspirations and reality. The goal of mobilizing trillions of dollars for climate-friendly development will remain a pipe dream in the absence of programs to help struggling countries consolidate their fiscal health for the challenges ahead.
CAMBRIDGE – Low-income countries are on the brink of liquidity shortages, which not only undermines economic development but also deepens the global climate crisis. In 2020 and 2021, pure financial transfer Despite record remittances from multilateral development banks (MDBs), remittances to Africa are close to zero, the lowest level in a decade. This decline was due to a decline in lending from the private sector and China, and the situation has now worsened, with all low- and middle-income countries (LMICs) losing access to bond markets. Meanwhile, rising food and fuel costs and declining export revenues are making the situation worse.
Indeed, only a handful of small and medium-sized capital enterprises have been unable to meet their external debts, and many others are still hoping to weather this storm and re-enter the market once it reopens. However, debt service obligations have grown far beyond the available public support, squeezing fiscal space and leading to a silent development crisis.
At the same time, global development and climate financing needs are estimated to be increasing. 1 trillion dollars per year. The gap between the international community’s aspirations for a poorer economy and the sad realities of its finances has never been greater, and never been more eroding the legitimacy of the global financial system.
A series of international gatherings – culminating in a recent meeting G20 declaration – We have aimed to reform the global financial and development architecture, with a particular focus on expanding MDB support. However, if MDB funding increases before the current debt crisis is resolved, much of that additional capital will not be directed to investing in small and medium-sized enterprises, but rather to other creditors, as is the current case. It will be redirected.
During the pandemic, many observers predicted that large-scale bankruptcies were on the horizon.While promising suggestion The policy aimed at massive debt relief, but world leaders were unable to agree on an ambitious solution. Since then, the severe difficulties of selectively entering into debt agreements have undermined the morale of the international community.
Much of the opposition to debt relief comes from China; largest bilateral donor. It claims that the external debt of small and medium-sized enterprises is still relatively low. On average, only 40% of GDPCompared to 100% just before the launch of the Highly Indebted Poor Countries (HIPC) initiative in 1996, China is pushing ahead with debt rescheduling, as it achieved the long-awaited debt rescheduling earlier this year. zambia agreement.
Private lenders have also resisted significant debt relief, although they have been reluctant to provide liquidity. In the Latin American debt crisis of the 1980s, the issue was liquidity rather than insolvency, but the few banks involved were at least able to agree on coordinated rescheduling. But the current large-scale shutdown of bond markets reflects the collective action problems that are all too characteristic of fragmented bond holdings.
It is no surprise that debt reduction is a harrowing process, but for countries with low liquidity it should be much easier to build a bridge to a more financially sustainable future. The good news here is that only a handful of countries are currently bankrupt.Recent Estimate According to the study, 17 of the 25 LMICs are in Africa, still below the International Monetary Fund’s bankruptcy threshold but above the liquidity threshold (with debt servicing costs ranging from 12% to 15% of revenue). ).
But the situation will worsen if these countries are unable to refinance the principal of their maturing outstanding debt. Consider Kenya. With massive support, it embarked on an ambitious program of stabilization and reform. Initiatives for financial stabilization It represents 4% of GDP and receives generous support from the IMF and MDBs. However, it has $2 billion in bonds due in 2024. If global capital markets do not allow refinancing by then, repayments would require additional government spending equivalent to 1.8% of GDP, increasing the risk of public anxiety. as happened recently In response to increased taxes and rising costs of living.
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The alternative, default, is equally unattractive given Kenya’s modest external debt. 38% of gross national income. To overcome this dilemma, the African Union Nairobi Declaration on Climate Change It proposes allowing countries to change their debt repayment schedules to use funds from MDBs to create fiscal space for new “green growth” policies and reforms.
our own suggestion “Bridging Compact” realizes this idea. It will be jointly led by the United Nations, the World Bank and the IMF, and will support failed countries in need of debt haircuts, as well as illiquid countries in need of rescheduling. Countries with negative net transfers with important creditors may choose to participate in adjustment programs that defer debt in exchange for reform efforts. The goal is to create value through collaboration. Estimation Countries can emerge from debt if they are provided with liquidity and pursue policies to achieve sustainable growth.
To be effective, this bridging agreement must be anchored in a national recovery program that includes measures to rein in budgets and reforms to move us onto a new growth trajectory. This will require further funding from both the IMF and the World Bank, and terms will be extended beyond the normal three-year IMF program. Countries that take advantage of this option should be the first to benefit from increased funding from the IMF and MDBs, which in turn will help prevent a systemic debt crisis that would harm everyone.
Some debts will need to be rescheduled during the program period to avoid leakage to other creditors. The interest rate used should not exceed the growth rate assumed in the renewal program to avoid worsening the debt situation. This approach should be accepted in advance by all creditor groups, but the obligation to reschedule loans that cannot be refinanced would need to be enforced by the IMF’s threat to put the loans into arrears.
Finally, if at the end of the program, external debt appears unsustainable, a debt reduction program will need to be devised. HIPC Initiative. This possibility reduces the need to provide ex-ante debt relief to countries on the brink of insolvency during times of high global economic uncertainty.
The world desperately needs to move towards a more sustainable future. The approach we propose will help bridge the wide gap between our aspirations and reality by positioning the world’s many illiquid countries to meet the challenges that lie ahead. Without such efforts, the goal of mobilizing trillions of dollars for climate-friendly development will remain a pipe dream.
