Against the backdrop of growing debt problems and following up on the IMF/WB Annual Meetings in Marrakech the week before, expert voices including Joseph Stiglitz, Martin Guzman, Kemi Adeosun and Ishac Diwan met at our conference in Paris on 16th October to shed light on the pressing issues facing governments in emerging countries. Here are some key takeaways from the discussions.
“The problem is that we have no framework for debt restructuring across sovereigns”
“Why would we expect a dysfunctional private financial market, which is short sighted and doesn't know how to assess risk well, to do a good job in financing a global public good like climate change?”
“We have had unprecedented levels of capital flowing into Africa, but you haven't seen the growth. Is it the quality of the borrowing? Is it where the money went into? Is it the speed of the debt? Why have high levels of debt-financed investment in Africa not led to growth”
“These crises are of enormous importance for the lives of the people that go through them. They can mark generations”
“Africa is the only country without a regional type of IMF. It definitely needs a facility where it can swap and stabilizes its debt” Ishac Diwan
THE BUILD-UP TO THE CRISIS: IS HISTORY REPEATING ITSELF?
Drawing parallels with the Latin American debt crises in the 1980s, the speakers reminded the audience that Africa had experienced a significant influx of money during the last two decades, primarily driven by a period of excess liquidity in advanced economies, resulting in capital flowing into emerging economies in search of higher returns. Adding this to high revenues from natural resources and broader access to financing from China and multilateral institutions, African countries became more exposed to sudden stops in the face of adverse shocks. This became clear when a series of negative shocks hit after 2019 (Covid-19, the Russia-Ukraine war, the tightening of monetary policy in advanced economies), eroding the enthusiasm and the perception of African nations as attractive for investment and leaving many of these countries in a debt crisis.
Speakers also highlighted the resemblance between the two crises in that, for both: 1) emerging countries borrowed substantial sums of money, leading to significant debt accumulation, and 2) they were marked by contractionary monetary policies in advanced economies that had negative consequences for the Global South.
Nonetheless, they emphasized a notable distinction in the universe of creditors, where more fragmented markets and diverse forms of exposure prevail. The shift from loans to bonds may have reinforced the resilience of the US banking system, but it proves to be less advantageous for debtor countries. This is because the North is less concerned, given the absence of significant systematic repercussions. Consequently, finding a solution under these circumstances has become even more challenging.
DEBT RESTRUCTURINGS: TOO LITTLE, TOO LATE
The discussion delved into the pressing issues of addressing the current debt crisis and the absence of a global framework for sovereign debt restructuring, as articulated by Joseph Stiglitz. He underscored the lack of a coordinated international approach to debt restructuring, which results in prolonged economic suffering and halted growth in highly indebted countries.
Guzman highlighted the complexities and political nature of debt dispute resolution, occurring at two levels: one involving debtors and creditors collectively negotiating how much debt should be written off, and the other among creditors themselves deciding how to distribute these write-offs. He questioned the effectiveness of forums like the IMF Global Sovereign Debt Roundtable in low-income countries and raised concerns about the absence of similar mechanisms for middle-income countries.
In contrast, Ishac Diwan acknowledged the arguments for complete debt elimination but recognized that each country’s situation varies widely. Some nations employed borrowed funds effectively, while others grappled with corruption and mismanagement. Therefore, a one-size-fits-all approach of blanket debt reduction might not be suitable. He proposed a more refined strategy, the “bridging initiative” tailored to address the diverse challenges faced by developing countries. This approach aims to maintain open access to global markets while providing essential liquidity relief for navigating the ongoing crisis. It would assist these countries in transitioning towards a future focused on investments in climate adaptation and environmental sustainability, without enduring extended adjustment periods.
NAVIGATING DEBT CRISES: ECONOMIC REALITIES, SOCIETY & CLIMATE
The speakers underscored that resolving the debt crisis is imperative, not only for the welfare of affected populations but also for tackling pressing global issues, especially climate change. They highlighted the challenging nature of international cooperation when debt issues persist, making a coordinated approach to debt restructuring and relief more pressing.
Kemi Adeosun shed light on the difficulty of scaling back social programs financed by borrowed funds, particularly in democratic contexts. This reluctance to adjust or curtail such initiatives could exacerbate the crisis, complicating its swift resolution. Martin Guzman, drawing from his personal experience in Argentina, conveyed the lasting impact of debt crises on nations and their people. He emphasized that these crises can affect entire generations.
Adeosun drew a parallel between the response to the COVID-19 pandemic and the need for coordinated global action on climate change. She expressed hope for a similar approach, with countries setting aside conventional rules, such as debt ceilings, to address the climate crisis.
DIVERGENT VIEWS ON CLIMATE FINANCING & DEVELOPMENT FUNDING
Joseph Stiglitz discussed the pressing need for funding, especially for green initiatives and climate change. He emphasized the role of the World Bank in recognizing the significance of climate change and the discussions in Marrakech about increasing the World Bank's leverage. Stiglitz expressed skepticism about the necessity of involving the private sector in climate financing given their historical issues with risk assessment and shortsightedness. Additionally, he stressed out that climate is a global public goods, which private financial markets may not be well-suited to provide.
Contrastingly, Kemi Adeosun expressed reservations about multilateral lenders, as they tend to come with checklists of requirements that might not align with the immediate priorities of developing countries. She proposed a middle-ground approach, combining the strengths of private sector financing and multilateral institutions. This approach could involve issuing green financial instruments with multilateral institutions providing guarantees to de-risk transactions for the private sector.
Martin Guzman highlighted the importance of stable financing for development, which can be achieved through local currency or financing from public institutions. He stressed the role of regional multilateral institutions in providing stable financing and increased representation for borrowing countries. Guzman also expressed reservations about foreign private sector financing due to its inherent instability in sovereign debt markets and suggested that countries should consider regional institutions as lenders of last resort.
CONCLUSION: ANGER AND FRUSTRATION
A key concern raised by Adeosun was that, despite the significant increase in debt, Africa hasn't experienced the expected economic growth. She stressed the importance of understanding why the debt hasn't translated into economic prosperity and raised questions about the quality of borrowing, the utilization of borrowed funds, and whether the debt had been effectively structured to promote growth.
On the other hand, Ishac Diwan highlighted the deep frustration and anger experienced by developing countries due to the rapidly changing global economic landscape. These nations feel let down by the world, especially as they struggle to access vaccines and provide basic necessities to their people while the global focus is on climate change and environmental initiatives.