Recent aggressive interest rate hikes have not solved the persistent inflation the economy is experiencing.In fact, the real cause of inflation – the supply chain confusion Although the soaring commodity prices have now subsided, speculative trading is on the decline. It got worse As issues such as global food insecurity fade, the Global South faces the effects of a Western-led response and is suffocated by a debt crisis.
The COVID-19 pandemic is increasing debt in the Global South 8% From 2020 to 2021, it increased from $8.6 trillion to more than $9 trillion, exceeding gross national income and exports. Similarly, short-term external debt increased, likely due to purchases of vaccines, testing materials, and other pandemic relief measures. Debt has increased by double digits in many countries. Plunging exports, tourism and remittances, and rising food and fuel prices have led to a sharp rise in spending in much of the Global South as foreign exchange earnings plummet due to the pandemic.Developing countries suffered from capital flight, resulting in currency collapses. depreciationincreased import costs, and shrinkage in the home consumption—all of which is causing the implosion of developing countries’ debt burdens and even debt. Default In some countries.
Furthermore, in 2022, “Greedflation” or “Stagflation” This caused a spike in inflation across the global economy, which was subsequently addressed by aggressive interest rate hikes around the world, primarily led by the US Federal Reserve. This has had dire costs for many developing countries. Given what developing countries are already experiencing; Domestic restrictions Macroeconomic policies due to recent external shocks such as speculative policies Product price And because of the pandemic, aggressive interest rates were subsequently introduced. threaten economic growth In developing countries. This alarming situation means that developing countries are facing a major economic recession amid an impending debt crisis.
These entrenched high debt burdens, known as the ‘vicious circle’, are a direct obstacle to building resilience to climate change and achieving progress towards the Sustainable Development Goals.
The United Nations Conference on Trade and Development (UNCTAD) predicts that aggressive interest rate pressures initiated by rich countries will cause a severe debt crisis in the Global South, and assesses that the cost of servicing that debt will be at least burdensome for developing countries. There is. $800 billion Debt servicing spending increases at the expense of investment and public spending, widening what UN Deputy Secretary-General Amina Mohammed calls “trade-offs.” between investments It’s an investment in debt and people. ” The World Bank says the impending Global South debt crisis is “intensifying” and that, in particular, “have a devastating impact on the economies of many of the poorest countriesPoverty reduction is already at a standstill there. ” Importantly, the International Monetary Fund’s latest evaluation Debt stress rates show that 10 countries are in default (meaning default or in danger of default), while 52 countries are in severe to moderate debt stress .
Recent papers from INET To clarify The seriousness of the situation brought about by the monetary tightening policies of Western countries. Developing countries face severe collateral damage and are likely to incur further debt and defaults, increasing unemployment and poverty rates, creating economic instability and hurting economic growth. . Central banks in these countries are faced with the option of raising interest rates, which, as the paper argues, would do significant damage to their gross domestic product and domestic economies. Therefore, a soft landing is “impossible” What is important is that this situationfinancial US monetary tightening in 2022-2023 will cause a global recession more severe than the one that occurred in the early 1980s, hurting the growth potential of developing countries and putting permanent pressure on economic development in these countries. The damage will be great. ” This includes a “scar” of future economic growth, which will only make debt repayment impossible.
There is also another danger lost decade The ripple effects could have a profound impact on the global economy and, more importantly, on daily life in the Global South. In fact, UNCTAD estimates that future income for the Global South (excluding China) will be reduced by US interest rate hikes. Even if only slightly 360 billion dollars.In many of these debt-ridden countries, interest payments are approximately Five% of export earnings.
The Western reaction was cynical and farcical.Payment suspension program has been permanently suspended during the pandemic insufficientThis is because the initiative only temporarily postpones repayments of countries’ long-term external debts, choosing not to cancel any debts. debt “I still have it The interest payments continued to increase, and are due to be repaid in full between 2022 and 2024.”But more importantly, this initiative reduces the amount of bilateral debt, that is, debt created by a government agency on behalf of a national government. The focus is on debt. This does not include commercial financial institutions whose proportion of external debt has increased over the past 10 years.
This change in debt structure results in riskier commercial borrowing. It is attached Rising interest rates and shorter maturities are the main causes of debt becoming unsustainable, especially since it is much more difficult to restructure. Many countries, such as Sri Lanka, which recently defaulted on its debts, are facing this very problem. Twenty years ago, most of the external debt was held by multilateral and bilateral development institutions, namely the World Bank and the Japan International Cooperation Agency, and its repayment terms were long (25 to 40 years) with significant grace periods. And, more importantly, interest rates are significantly lower (in some cases less than 1%). However, Sri Lanka’s recent external debt crisis takes on a different picture. Today, its commercial debt composition has risen from about 2% in the mid-2000s to 60% today. Even worse, long term Debt maturity will be zero.
This has been the case in most developing countries for the past two decades. The Global South is Significantly They increased borrowing from the market under tougher conditions, including shorter maturities, higher interest rates, and reduced prospects for refinancing and restructuring. This situation is further exacerbated by the decline in foreign exchange earnings and rising interest rates observed around the world.
Another pandemic relief approach included the International Monetary Fund’s (IMF) Special Drawing Rights (SDR), which was intended to provide reserves to countries in need. In August 2021, the IMF announced a $650 billion SDR injection in response to the financial shock caused by the COVID-19 pandemic. Soon after, at least 80 developing countries used the opportunity to purchase much-needed foreign currency and finance domestic fiscal spending. More importantly, unlike previous IMF allocations to the Global South, this did not come with neoliberal conditions.However, the assignment is completely insufficient The SDR is based on IMF allocations that reflect the size of each country’s economy, so it can be compared to the extent of each country’s needs. This means that the countries that needed the most aid received the least. Despite promises by Western countries to shift their share of SDR to the Global South, major Western countries such as the UK and the US have only shifted a small amount. 20% their stocks and their surroundings. $400 billion The newly allocated SDRs remain unused.
Since the abolition of capital controls, one of the hallmarks of the Bretton Woods system that occurred during the Golden Age of Capitalism, developing countries have had to rely on international financial markets to raise funds for urgent needs. However, the opportunities for exposure to this danger continue to increase. Towards an unregulated financial market. This exposes them to “hot money” and flow of capitalleaving them with higher-risk debt exposures and unsustainable debt burdens, alongside global shocks such as pandemics and other volatile realities.
Indeed, countries in the Global South borrow heavily in foreign currencies, making them increasingly vulnerable to repeated external shocks, such as fluctuations in commodity prices, which affect their ability to earn foreign exchange to repay their debts. ing. This results in a lack of fiscal space to deal with the economic crisis. More importantly, these entrenched and high debt burdens, known as the ‘vicious circle’, have a direct impact on building resilience to climate change and achieving progress towards the Sustainable Development Goals. That means it’s an obstacle.Climate change is encroaching About a quarter Share of total GDP of the Global South over the past 10 years. Even worse, loan makes About 80% of public spending on climate change is spent, and countries are borrowing money to deal with these serious problems.
Undoubtedly, this current situation is remember the dawn Criticism of neoliberalism increased when the United States ushered in neoliberalism through interest rate hikes, with ripple effects being felt throughout the developing world. During this period, major international institutions such as the World Bank and IMF, along with Western countries, imposed conditions on much-needed aid, such as financial liberalization, deregulation, and privatization, resulting in significant increases in inequality and poverty, and It has led to decades of history. under development.
In a recently published report, Oxfam highlighted the grave crisis facing the Global South. noticed that “More than half (57%) of the world’s poorest countries, home to 2.4 billion people, will have to cut public spending by a combined $229 billion over the next five years.” “Until 2029, we will have to pay close to $500 million a day in interest and debt repayments.” In today’s economic context, these devastating realities are at the heart of the climate crisis, which poses a major threat to everyone. A repeat of the lost decade must not happen, especially in real life. reliable option teeth Available.