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Caribbean Life, April 21-27, 2022
High cost of debt is crippling developing nations:
How can we bridge the finance divide?
By Navid Hanif
UNITED NATIONS, April 18,
2022 (IPS) — As the world is rocked
by a confluence of crises, the global
economic outlook for 2022 is
becoming ever more uncertain and
fragile. Prospects for sustainable
development for all and achieving
the Sustainable Development Goals
(SDGs) by 2030 are bleak, particularly
for developing countries.
The war in Ukraine is adding
further stresses to a world economy
still reeling from the COVID-19 pandemic
and under growing strain
from climate change. These cascading
crises affect all countries, but
the impact is not equal for all.
While some, mostly developed
countries, had access to cheap
financing to cushion the socio-economic
impacts of the pandemic and
invest in recovery, many others did
not.M
assive recovery packages in
rich countries contrast sharply with
poor countries, which had to juggle
essential expenditures. For many,
education and development budgets
had to be cut to respond to COVID-
19.
The UN system’s 2022 Financing
for Sustainable Development
Report: Bridging the Finance
Divide, finds that the ‘finance divide’
between rich and poor countries
has become a sustainable development
divide.
Growth prospects are severely
constrained in the developing world
– even before taking the war in
Ukraine and its repercussions into
account, 1 in 5 developing countries
are not expected to return to pre-
COVID income levels by 2023.
This situation is likely to get
worse because the fallout from the
war is exacerbating the challenges
confronted by developing countries.
Food and fuel prices are reaching
record highs. This strains the external
and fiscal balances of importdependent
countries.
Supply chain disruptions add to
inflationary pressures, setting up a
very challenging environment for
Central Banks – rising prices combined
with deteriorating growth
prospects. Tighter financial conditions
and rising global interest rates
will make it increasingly difficult,
and no doubt impossible for some,
to roll over their existing commercial
debt.
Many vulnerable countries will
not be able to absorb the combined
shocks of a disrupted recovery,
rising inflation, and sharply
rising borrowing costs. Sri Lanka
has just defaulted, and more widespread
debt distress may well be on
the horizon – which is likely to put
the Sustainable Development Goals
out of reach.
The lack of adequate and affordable
financing for developing countries
is making timely realization
of the 2030 Agenda increasingly
difficult. Their governments often
have few avenues to raise funds
domestically, due to underdeveloped
domestic financial markets.
But borrowing from abroad is both
risky and expensive, with some African
countries paying over 8% on
their Eurobond issuances in 2021.
Op - E d
As the 2022 Financing for Sustainable
Development Report notes,
the only way to achieve a more
equitable recovery is to bridge this
finance divide. It will take determined
action, on several fronts.
First, developing countries will
need additional concessional public
financing. Bilateral providers and
the international financial institutions
have stepped up in response to
the COVID-19 pandemic, but additional
funding was not enough to
prevent this divergent recovery. The
fallout from the war in Ukraine is
widening financing gaps and countries
will need additional support.
A first key test of international
solidarity will be on Official Development
Assistance (ODA). Additional
support for refugees from the
conflict in Ukraine, while important,
must not come at the expense
of cross-border ODA flows to other
countries in need.
Development banks should make
available more long-term countercyclical
finance at affordable rates,
easing financing pressures during
crises. Donors should ensure that
multilateral development banks see
their capital increased and concessional
windows replenished generously.
One immediate step development
banks and official bilateral creditors
could take themselves is to
use state-contingent clauses more
systematically in their own lending.
This would mean automating
debt repayment standstills, providing
breathing space to countries
in crises.
Development banks and development
finance institutions at all levels
could also work to strengthen the
‘development bank system’. National
institutions tend to be smaller and
fewer in the poorest countries. They
would greatly benefit from capacity
and financial support.
Multilateral and regional development
banks can in turn benefit
from national banks’ detailed
knowledge of local markets.
Second, we must improve the
costs and other terms of borrowing
faced by developing countries
in international financial markets.
Excess returns for investors hint at
market inefficiencies. We must close
gaps in the international financial
architecture – the lack of a sovereign
debt restructuring mechanism
adds uncertainty – and improve
transparency by both debtors and
creditors.
Transparency and better information
for investors can help reduce
costs. Short-term credit ratings are
also an issue. Rating agencies assess
a country’s creditworthiness over
a very short horizon, often three
years. Meanwhile, many public
investments in sustainable development
– in infrastructure, education,
or innovation – only pay off over a
much longer period.
Credit assessments are systematically
biased against long-term investments.
Thus, they poorly serve those
investors that have long investment
horizons, such as pension funds.
Long-term sovereign ratings that
take into account such investments,
as well as long-term risks such as
climate change, should complement
existing assessments. Scenario analysis
can help overcome the inherent
difficulties of such long-term assessments.
Countries can also exploit growing
investor interest in sustainable
development and climate action.
Sovereign green bonds, which can
sometimes be issued at reduced cost
(“greenium”), are a fast-growing
market segment. A commitment
to marine conservation recently
helped Belize achieve more favorable
terms with private creditors in
debt restructuring.
Development finance institutions
could also help by providing partial
guarantees to sovereign borrowers,
lowering interest in exchange for
commitments to invest in the SDGs
and climate action.
Third, many countries will need
debt relief to avoid a protracted and
costly debt crisis. Once debt has
reached unsustainable levels, providing
additional credit, even if at
concessional rates, will only delay
the reckoning.
The current mechanisms to deal
with countries in debt distress are
clearly inadequate. The Common
Framework set up by the G20 in the
fall of 2020 was a step in the right
direction, but its shortcomings have
become all too apparent.
No restructurings have been completed
yet; there is no good answer to
treating commercial debt; and many
highly indebted developing countries
are not eligible to approach the
Common Framework at all.
The G20 must step up efforts to
implement and deliver on the Common
Framework more effectively.
But as a more widespread debt crisis
becomes a frightening possibility,
a more fundamental reform of the
sovereign debt architecture must be
on the table as well.
The United Nations can provide a
neutral venue that brings together
creditors and debtors on equal footing
to advance such discussions.
We at the UN believe that the
SDGs can still be met. But without
concerted bold action now on all
fronts, the road ahead is looking
very bumpy. Timely and bold policy
choices will get us there.
Navid Hanif is the director of the
Financing for Sustainable Development
Office of the United Nations,
Department of Economic and Social
Affairs (UNDESA).
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