A Call for Debt Justice: Confronting the Sovereign Debt Crisis in the Global South

The pandemic, Ukraine war fallout, inflation, and central bank interest rate hikes in industrialized nations have sparked a fresh debt crisis across developing countries. This potential “debt tsunami” lurking beneath threatens to fuel the next global financial crisis if left unchartered.

According to the most recent World Bank report released on December 13, 2023, it was discovered that developing countries collectively spent a staggering US$443.5 billion in 2022 to service their external public debt. Additionally, the 75 low-income nations that qualify for loans from the International Development Association (IDA), a branch of the World Bank dedicated to providing assistance to the world’s poorest countries, paid a total of US$88.9 billion to their creditors in the same year.

Countries with the lowest incomes are increasingly struggling with mounting debt issues. The International Monetary Fund (IMF) noted in the fall that over half of developing nations with low incomes are either currently facing or at high risk of experiencing financial difficulties due to debt. Additionally, roughly one-fifth of emerging economies are currently facing challenges with their sovereign bonds, trading at distressed levels. At the same time, in numerous countries with lower-middle-income status, rising debt risks and multiple crises—including the Covid-19 pandemic, the conflict in Ukraine, and the rise in global interest rates and risk-aversion—are compelling a growing number of nations to look for debt restructuring solutions from external lenders.

The rising debt crisis traces its origins back almost three decades. Initiated in 1996 by the World Bank and the International Monetary Fund, the Heavily Indebted Poor Countries (HIPC) program marked a significant step towards alleviating the heavy debt loads of the poorest nations globally. This program managed to lower debts in several countries by the mid-2000s. The HIPC program aimed to deliver total debt relief to support the reduction of poverty, enabling more investment in health, education, and various initiatives aimed at alleviating poverty.

The successful implementation of the HIPC initiative relied heavily on the involvement of the Paris Club, an informal association of creditor nations. The primary objective of the Paris Club was to collaborate with the IMF, other multilateral organizations, and creditors to identify and implement coordinated and sustainable solutions for debtor countries facing payment difficulties. By working together, the Paris Club ensured that debt restructuring and relief efforts under the HIPC framework were harmonized and effective in reducing the burden of debt.

Concerns arise regarding the sustainability of increasing debt levels in developing nations. According to the United Nations, 44 percent of low-income and least developed countries (LDCs) are either already in debt distress or at a high risk of external debt distress. The ability of developing countries to repay this debt has been called into question in recent months, as evidenced by the debt restructuring in Zambia, Argentina, and Lebanon.

When a country fails to service its debt, it can have severe consequences for its fiscal health, leading to debt distress and potential default, which then necessitates debt restructuring. Furthermore, defaulting countries often face restricted access to financial markets and encounter higher borrowing costs in the future.

Hence, the World Bank is issuing a warning: a fresh debt crisis has commenced. Instead of addressing the growing needs of millions of individuals who urgently require assistance, substantial amounts of money are being utilized to repay debts. As per a Financial Times article citing another World Bank report, between 2019 and 2022, an additional 95 million people have plunged into extreme poverty. The World Bank acknowledges that in 2022, private lenders began reducing credit to developing nations while maximizing repayments.

In fact, according to the World Bank, new loans granted by private lenders to public authorities in developing countries dropped by 23% to $371 billion, the lowest level in a decade. Conversely, these same private creditors received $556 billion in repayments. This indicates that they collected $185 billion more in loan repayments in 2022 than they disbursed.

The World Bank refrains from offering an explanation for this matter as it would necessitate questioning the economic model and system it endorses and considers to be the sole feasible option. Additionally, it would unmistakably assign responsibility to the central banks of Western Europe and North America, and consequently to the leaders of the primary Western powers who govern the World Bank and the IMF.

A fresh debt crisis has emerged across all countries in the South due to a combination of factors including the pandemic, the consequences of the war in Ukraine, inflation, and interest rate hikes by major industrialized nations’ central banks. Since 2020, and particularly in 2022, we find ourselves in a new and monumental debt crisis triggered by four external shocks to the global capitalist system.

Firstly, the COVID-19 pandemic, leading to widespread fatalities, lockdown measures, and disruption of supply chains. Secondly, the economic crisis worsened by the pandemic has adversely impacted developing economies in Latin America, Asia, and Africa. The suspension of air travel, in particular, has had significant negative effects on countries like Cuba and Sri Lanka, which heavily rely on tourism.

In February 2022, Russia’s invasion of Ukraine marked the third shock. This event immediately led to significant speculative increases in the prices of cereals, particularly wheat. Despite the fact that grain stocks in Russia and Ukraine did not decrease in the early stages of the conflict, it is reasonable to attribute the rise in prices to speculation. The cost of grains skyrocketed as a result. Subsequently, exports were prohibited, further reducing supply and driving prices even higher until an agreement was reached to resume shipments.

The fourth shock, which was undeniably the most significant, occurred when the US Federal Reserve, the European Central Bank, and the Bank of England independently decided to increase interest rates. In the United States, the Fed raised rates from nearly 0% to above 5%, and the Bank of England and the Bank of Canada followed suit. Meanwhile, the European Central Bank raised rates to 4.5%.

The World Bank advises against indebted governments safeguarding themselves by collectively halting debt payments. Nevertheless, according to international law, they possess the full authority to take such action. Specifically, they can invoke the significant alteration in circumstances resulting from external shocks originating from the North, particularly the unilateral decision made by the central banks of North America and Western Europe to substantially increase interest rates. In the event of a substantial change in circumstances and external shocks, there is no requirement to uphold a borrowing agreement and continue repaying the debt.

It is important to acknowledge the impact of structural adjustment policies on the privatization of healthcare systems in the Global South, as well as the increased reliance on imported cereals, inputs, and other products. These policies, which have been enforced for over four decades, have left the countries in the Global South vulnerable to external shocks like the Covid-19 pandemic and rising interest rates.

This vulnerability is exacerbated by the current ecological crisis, which poses immediate and short-term threats to humanity. Additionally, the International Monetary Fund (IMF) has estimated that it would take developing countries approximately 130 years to reduce the income gap between themselves and developed countries by half.

In order to effectively address any country’s debt crisis, it is crucial to tackle the issue at both the domestic and international levels. The resolution of upcoming debt crises will require not only changes to the current international financial architecture, which now involves a diverse group of creditors, but also a focus on the domestic political dynamics of stressed countries.

These dynamics vary across countries and over time, making it clear that there is no one-size-fits-all solution to the end of the era of easy money. Instead, creditors and international organizations must collaborate with debtor countries’ governments to find viable solutions to the complex game of sovereign debt.

Rameen Siddiqui

A thought leader and youth activist with main focus areas being Sustainable Development, Political Economy, Development Justice and Advocacy. A member of the United Nations Major Group for Children and Youth (MGCY). Also a Youth Member of United Nations Association of Pakistan (UNAP).