Escalating debt challenges are inhibiting achievement of the SDGs

An increasing number of developing countries are on the brink or already in debt distress as they face cascading and overlapping crises – the COVID-19COVID-19 is an infectious disease caused by the strain of coronavirus SARS-CoV-2 discovered in December 2019. Coronaviruses are a large family of viruses which may cause illness in animals or humans. In humans, several coronaviruses are known to cause respiratory infections ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes coronavirus disease COVID-19 -—
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—-. pandemicCommonly described by the WHO as ‘the worldwide spread of a new disease’, no strict definition is provided. In 2009, they set out the basic requirements for a pandemic: • New virus emerges in humans
• Minimal or no population immunity
• Causes serious illness; high morbidity/mortality
• Spreads easily from person to person
• Global outbreak of disease.
The US Centre for Disease Control uses a similar approach, but with a reduced set of criteria. It is very difficult to gauge whether the spread of a disease should be termed an outbreak, epidemic or pandemic. In other words, when to declare a pandemic isn’t a black and white decision -—
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—-., the war in Ukraine, a deepening climate crisis, and a cost-of-living crisis -—
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—-. Added to this, the daunting global macroeconomic environment including higher interest rates and banking stress in developed countries, tightening global financial conditions, US dollar appreciation, growth slowdown and falling commodity prices, have also taken their toll.

Keeping debt default at bay to prevent a systemic debt crisis has come at a cost, with debt servicing draining resources away from SDGSustainable Development Goal priorities and the Paris Climate AgreementThe Paris Agreement is an agreement within the UNFCCC aiming is to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase even further, to 1.5°C. It aims to strengthen countries’ ability to deal with the impacts of climate change. To reach these ambitious goals, appropriate financial flows, a new technology framework and an enhanced capacity building framework are intended to support developing countries, in line with their national objectives -—
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—-.. The high increase evidenced by debt statistics indicate that we are living a development crisis.

An ambitious and comprehensive multilateral response is paramount to avoiding a possible systemic debt crisis which would deepen the existing development crisis.

As the UNCTAD Bridgetown Covenant -—
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—- stresses further efforts needed to implement initiatives that contribute to debt sustainabilityA country’s capacity to finance its policy objectives through debt instruments and service the ensuing debt -—
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—-. in developing countries, it also invites efforts to advance the discussion on debt treatment, debt transparency, data quality, debt management capacity-building and the rules of engagement, including with the private sector.

External debt stocks of developing countries more than doubled in a decade to reach US$11.4 trillion

The external debtExternal debt is understood as outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy -—
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—-. stocks of developing countries reached US$11.4 trillion in 2022, more than double that recorded a decade ago (Figure 1). Compared to the pre-pandemic level (2019), the total external debt of developing countries in 2022 grew by 15.4 per cent. Since 2009, external debt stock has increased on average by 8.3 per cent per annum, compared to an average annual growth rate of 7.5 per cent in the decade before the Global Financial Crisis (2000-2008).

Meanwhile, the risk profile worsened. During 2009-2022, short-term debtDebt liabilities having a maturity of one year or less; maturity can be defined on an original or reminaing basis -—
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—-. Interests in arrears on long-term debt are included within short-term debt. rose at an average annual growth rate of 9.5 per cent compared to 7.8 per cent for long-term external debt. Consequently, although long-term external debt continues to account for most of the external debt stock of developing countries (68.4 per cent in 2022), the share of short-term debt in total external debt stock increased from 24.2 per cent in 2009 to 27.7 per cent in 2022. Regarding the long-term debt, the Public and PPGPublicly guaranteed debt (PPG) is an external obligation of the private sector, the servicing of which is contractually guaranteed by a public unit resident in the same economy as the debtor -—
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—-. Unless otherwise indicated, only long-term debt (maturity of more than one year) is included. accounted for 51.7 per cent of the total and the PNGPublicly Non-Guaranteed debt (PNG) is an external debt of the private sector that is not contractually guaranteed by a public sector unit resident in the same economy -—
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—-. Unless otherwise indicated, only long-term debt (maturity of more than one year) is included. for 48.3 per cent in 2022, a slight change compared to 2009 (52.6 per cent and 47.4 per cent of the total, respectively).

Low-income developing countries face highest and worsening debt servicing ratios

Rising external debt burdens, along with increased risk profiles, translate into higher servicing costs. Debt servicePayments made to satisfy a debt obligation, including principal, interest and any late payment fees -—
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—-. as a proportion of exports of goods and services (SDG indicator 17.4.1) measures a government’s ability to meet external creditor claims on the public sector through export revenues. Thus, it is an important indicator of debt sustainability. A fall (increase) in this ratio can result from increased (reduced) export earnings, a reduction (increase) in debt servicing costs, or a combination of both. A persistent deterioration of this ratio signals an inability to generate enough foreign-exchange income to meet external creditor obligations on a country’s PPG debt, and, thus, potential debt distress without multilateral support or effective sovereign debt restructuring.

As Figure 2 shows, only high-income developing countries have maintained a stable ratio of external long-term PPG debt service to export revenues of around two to four per cent in the last decade. In contrast, a marked increase in debt service ratios was registered across all other income categories. In particular, the ratio for LICsLow-income developing countries increased dramatically from 4.1 per cent in 2012 to 17.7 per cent in 2022. The temporary fall in 2020 and 2021 was due to the G20Group of Twenty DSSIDebt Service Suspension Initiative -—
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—-. A similar trend was observed for the group of LDCs, with the ratio of debt service on external long-term PPG to export increased significantly in the past decade from 4.8 per cent in 2012 to 11.3 per cent in 2022. For middle-income developing countries, although less pronounced, the increase was also significant: this ratio more than doubled, from 2.9 per cent in 2012 to 6.4 per cent in 2022.

Similarly, the share of government revenues dedicated to servicing long-term external PPG debt also rose sharply in recent years, particularly in the poorest developing economies (Figure 3). Whereas in 2012, LICs spent 4.7 per cent of their government revenues to meet external public debt obligations, this figure rose to 19.2 per cent in 2022, along the same lines as those observed for indicator 17.4.1. For the group of LDCs, this nearly tripled, with the ratio rising from 6.3 per cent in 2012 to 17.0 per cent in 2022. In the case of middle-income developing countries, this ratio more than doubled, from 3.9 per cent to 9.5 per cent in this period. These statistics underline the substantial diversion of domestic resources into servicing external debt.

The worsening of these two external debt sustainability indicators for LICs is of concern. As LICs cut expenditures to free up resources to meet debt payments, pressure on essential public expenditure categories will continue to increase. Simultaneously, the capacity to generate export revenues to pay the external debt service will shrink even more in 2023 as global growth is estimated to slow down from 3.1 per cent in 2022 to 2.1 per cent in 2023, according to -—
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Debt overhang becoming a major obstacle to development and reaching the SDGs

Despite multilateral efforts, the debt problem in low-income and also many middle-income developing countries, three years after the COVID-19 pandemic, continues to deepen. External creditors continue to be paid while the SDGsSustainable Development Goal are increasingly out of reach. This jeopardizes the delivery on existing international commitments, including the 2030 Agenda and the Paris Climate Agreement.

To achieve the SDGs, a radically different multilateral policy approach is needed, requiring a commitment by the international community to transform the global financial system by prioritizing the needs of developing countries, as put forward by the UNCTAD Bridgetown Covenant -—
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—- and the SDG Stimulus Plan -—
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References

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