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Global calls for debt relief reach a crescendo: The ongoing aggressive global monetary tightening cycle, led by the US Federal Reserve, has significantly increased the cost of borrowing and strained developing countries’ finances, raising calls of concern about the need for sovereign debt relief. Global debt surged to a near record high of USD 305 tn in 1Q 2023, according to the International Institute of Finance’s Global Debt Monitor. Egypt also has its own rising debt obligations to face, with Finance Minister Mohamed Maait telling the House of Representatives last month that our debt-to-GDP ratio is expected to widen to 96% of GDP in the current fiscal year, up from 87.6% in the previous year. The government is also expecting new borrowing to increase by 22% in FY 2023-2024.
REFRESHER- Successive global economic headwinds — starting with the covid-19 pandemic, and through to Russia’s war in Ukraine — have put developing countries’ finances under pressure and forced them to take on more debt. These debt levels have become increasingly unsustainable as rising inflation has pushed central banks globally to raise interest rates, causing this debt to become increasingly expensive. “The debt crisis facing developing countries has intensified,” said World Bank Group President David Malpassin December. “A comprehensive approach is needed to reduce debt … Without it, many countries and their governments face a fiscal crisis and political instability, with mns of people falling into poverty.”
Let’s talk about debt relief programs: With these rising levels of debt, and increasing uncertainty about some countries’ ability to repay, some have been calling for debt relief programs to completely write off, reduce, or restructure some countries’ sovereign debts. These programs typically involve negotiations between the debtor country and its creditors, including international financial institutions, bilateral lenders, and private creditors. One of the earliest debt relief programs is the Heavily Indebted Poor Countries (HIPC) initiative launched in 1996 by the IMF and the World Bank aimed at providing debt relief to the world’s poorest countries. Chad, Zambia, Ethiopia, and Ghana have all sought to receive debt relief under the G20 framework and “four or five” additional African nations may soon join them on the back of rising rates and a stronger greenback, a UN official said earlier this year.
The most recent debt relief initiatives: The G20 launched the Debt Service Suspension Initiative (DSSI) in 2020 to provide timely financial support to countries heavily affected by the pandemic. By February 2020, 48 countries were eligible for the program and a total of USD 12.9 bn in debt service payments were suspended, according to World Bank figures. Paris Club creditors accounted for an estimated USD 4.6 bn of the total amount suspended. A few months later, the G20 launched the Common Framework for Debt Treatments beyond the DSSI to include debt restructuring and to also involve non-Paris Club member lenders along with private creditors in an effort to ensure debt burden is fairly shared between all creditors, according to S&P Global.
No or delayed debt relief could mean sovereign defaults for many developing countries:Countries facing delays in debt relief or that are unable to access debt relief run the risk of defaulting on their sovereign debt obligations, which happens when they are unable to make good on payments of both the principal and interest of their debt, according to the Corporate Finance Institute (CFI). Defaults result in lower credit ratings and higher cost of borrowing, making it very difficult for defaulters to access the international bond market, according to CFI. Such countries usually face increased borrowing costs, limited access to funds, and diminishing investor confidence.
Lebanon, Sri Lanka, Russia and Zambia have already recently defaulted on their debt, while Belarus is on the edge. Eighteen developing countries’ debt is currently trading at “distressed” levels, Bloomberg reported in May, with Lebanon leading the pack as its debt trades at a spread 20k bps above US Treasuries. With some USD 1.4 tn of outstanding sovereign external bonds, some 15% of which has a “real possibility” of default.
