LONDON: After years of grueling debt restructuring, countries like Ghana, Sri Lanka, and Zambia have finally emerged victorious from the devastating post-Covid wave of sovereign defaults.
However, the International Monetary Fund and others are concerned that in many emerging economies, there may be a dangerous lack of liquidity, which would impede growth, hinder efforts to mitigate climate change, and increase public mistrust of Western institutions and governments.
The problem is a major focus of this week’s IMF-World Bank autumn meetings in Washington, D.C., along with solutions to the problem as Western nations become less willing to transfer money abroad.
It’s difficult since paying off debt has become more difficult for many people.
Growing costs associated with loan servicing feed mistrust of governments and lenders
The cost of borrowing has increased, and the reliability of external sources has decreased, according to RBC BlueBay portfolio manager Christian Libralato.
In order to prevent financial crises, the top economic envoy for the US Treasury has urged for innovative approaches to give low- and middle-income nations short-term liquidity support.
The issue has also been attempted to be addressed by the Global Sovereign Debt Roundtable, an initiative that brings together representatives from nations, commercial lenders, the World Bank, and the G20. On Wednesday, they will convene in Washington, D.C., to discuss it.
Vera Songwe, chair of the Liquidity and Sustainability Facility, an organization that seeks to reduce debt costs for Africa, noted that present solutions lack the scale and speed required due to tight budgets and crises that seem to be arising every day.
According to Songwe, “countries are avoiding spending on infrastructure, health care, and education in order to service their debt.” “Stresses in the system exist even in advanced economies.”
Capital question
According to data from the nonprofit advocacy group ONE Campaign, 26 nations in 2022—Brazil, Nigeria, Pakistan, and Angola among them—paid more toward servicing their external loans than they were given in fresh foreign funding.
A decade ago or so was when many first had access to bond borrowing, thus large payments were due at the same time as interest rates increased globally, making reasonable refinancing unaffordable.
According to ONE’s estimations, which are supported by the Finance for Development Lab’s specialists, those flows become net negative for developing nations overall in 2023.
According to Ishak Diwan, research director of the Finance for Development Lab, “the IMF-led global social global financial safety net is simply not deep enough anymore,” as reported by Reuters.
Although complete official numbers are not yet available, Diwan, a 20-year World Bank veteran, stated that net negative transfers for 2023 and 2024 are probably worse. According to him, new funding from the World Bank, the IMF, and other multilaterals was insufficient to offset the growing expenses.
IMF and World Bank officials appear to concur. Over a ten-year period, the World Bank hopes to increase lending capacity by $30 billion. By removing fees, the IMF was able to reduce yearly costs for the most overextended debtors by $1.2 billion.
Turning tide?
According to bankers, cash flow concerns have been allayed since several of the countries may now access markets once more.
“I don’t believe there is a restriction on access,” stated JPMorgan’s Stefan Weiler, head of CEEMEA debt. “The market is incredibly open.” According to Weiler, bond issuance in Europe, the Middle East, and Africa is expected to hit a record $275–300 billion this year. Nigeria and Angola may even issue bonds next year.
However, the price is still rather high. Kenya, struggling to pay back a dollar bond that was borrowed at a rate higher than 10%, which is generally seen as unaffordable.
According to Kenya’s Finance Minister John Mbadi, infrastructure investments cannot be funded by the budget.
