Half the world’s population is in debt crisis

Almost half the world’s population now lives in countries that spend more on debt servicing than on basic social welfare, a situation being described as “the worst debt crisis since global records began”. Meanwhile, wealthy elites continue to amass their fortunes off the back of crisis ridden economies.

According to the Debt Service Watch database, published by Development Finance International, a research organisation, debt servicing payments in low-income countries are more than double education spending and four times the amount spent on health.

The World Bank reported in December that, in the last three years, eighteen sovereign defaults (when a government fails to make a due debt payment) occurred in ten countries—more than the combined figure for the previous two decades. Yet this is being touted in some quarters as a kind of victory because the expectation several years ago was for a tsunami of defaults.

For example, the International Monetary Fund (IMF) 2022 annual report noted that about 60 percent of low-income countries were “already at high risk of or in debt distress” (that is, unable to make their payments) and that conditions were likely to deteriorate further with rising interest rates. The fund’s latest figures indicate that the proportion has dropped to 50 percent, or 34 of 68 countries, with 9 in distress and 25 at high risk of distress.

While this would appear to be an improvement (at least in the eyes of creditors), these figures don’t capture the full picture. Debt servicing in the global south—the collective noun often used to refer to low- and middle-income countries in Latin America, Asia, Africa and the Pacific islands—is running at nearly half a trillion dollars annually. The IMF says that at least 100 countries will have to further reduce spending on health, education and other social programs to meet their obligations to creditors.

Those creditors are already swimming in cash. Lawrence Summers and NK Singh, members of the G20 Independent Expert Group, note in an April Project Syndicate opinion piece that the outflows of money from poorer countries to private creditors are “completely dwarfing” the financial inflows to such countries. “‘Billions to trillions’, the catchphrase for the World Bank’s plan to mobilize private-sector money for development, has become ‘millions in, billions out’”, they write.

If the debt payments can be managed, those international financiers will no doubt heap praise on the respective debtor county governments and claim victories for prudent economic management—what they like to call “good governance”. But there won’t be dancing in the streets of Colombo, Karachi or Cairo if food and fuel subsidies are reduced, schools and medical centres are closed, and public service jobs and salaries are cut. The result will be increasing misery for an increasing number of people.

This, argues Development Finance International, is the real meaning of “crisis”: not the view from the creditors’ offices, but the view from the homes and streets of the world.

At any rate, managing the liabilities is a big “if”. The re-acceleration of inflation in the US in the first quarter has dashed hopes of imminent interest rate relief. Higher borrowing costs will continue for longer. For lower-income countries, those costs are much more onerous than for high-income countries. For example, on average, African states pay four times more in interest than the United States, despite the latter country’s ballooning government deficits, and eight times more than Western European economies.

Many countries have to refinance—“roll over” their debts—in the next two to three years. And many are finding it impossible, in part because of the high interest rates, in part because many creditors are refusing to lend. In fact, lower-income countries face a double burden: they not only pay higher rates, but also must borrow in euros or US dollars, which have strengthened in value against many local currencies, making the weight of existing debts even greater.

United Nations Trade and Development (UNCTAD) estimates that low-income countries on average are spending 23 percent of their export revenues on debt servicing. “To put this in perspective, after World War II, the share of export revenue going into debt servicing for Germany was capped at 5 percent to aid West Germany’s recovery”, a February media release noted.

The burden is made greater by a reduced capacity to generate foreign currency reserves. UNCTAD also notes an increasing ratio of public debt to export income over time, from 71 percent in 2010 to 112 percent in 2021—prior to the recent crisis.

If debts continue to accumulate faster than the growth of economies, which has been the trend of the 21st century, the threat will grow of a vicious economic spiral: countries spending more and more of their export earnings on debt servicing while slashing social services spending and trying to access emergency loans to cover shortfalls.

All the while, the creditors’ focus will be on making sure that the countries remain indebted so that a revenue stream for wealthy clients is generated in perpetuity.

Perversely, there is a net transfer of financial wealth from poorer to richer states, totalling at least US$10 trillion over the last twenty years, going by published UN estimates. One need not think too hard about the possible poverty alleviation and public infrastructure outcomes if such a vast sum were retained in the debtor countries.

For all the talk about “development goals” and the purported philanthropy of rich states and capitalists, half of the world is stuck in debt bondage. The liabilities ought to be cancelled immediately. International financiers don’t need another half a trillion dollars a year from already impoverished populations.

“If the world can’t even get food to starving children, how can it come together to defeat climate change and reorient the global economy?”, Summers and Singh ask in the Project Syndicate article. “And how can the poorest countries trust the international system not to leave them behind if that system can’t address the most basic challenges?”

But that’s exactly the point—capitalism is founded on an unequal distribution of resources and operates to enrich the already rich and to keep most workers in poverty. No-one should trust that this vulture of an international system can address the basic challenges facing the poorest people on Earth.