Debt sustainability risks for emerging economies

debt sustainability
Debt sustainability is at risk since the debt-to-GDP ratio exceeded 70% in a fifth of all emerging and middle-income economies. © Nick Youngson

Debt sustainability in emerging economies is becoming increasingly challenging said, Ambassador Salim Baddoura of Lebanon, president of the UNCTAD Trade and Development Board. Baddoura’s aim was to underscore the seriousness and urgency of the trends that could potentially derail the 2030 Agenda for Sustainable Development. Baddoura made these comments at the opening of the second session of the Intergovernmental Group of Experts on Financing for Development in Geneva on 7 November.

“Debt sustainability in developing countries is deteriorating fast,” said Baddoura.

Concurring with Baddoura was UNCTAD Deputy Secretary-General Isabelle Durant, who opined that the facts were indeed worrying.

“By the end of 2017, the ratio of global debt to global GDP was almost one-third higher than it was on the eve of the world’s worst global financial crisis in 2008,” said Durant. “The world’s outstanding debt accounts for more than three times the world’s GDP, the main concern being the growth of non-financial corporate debt.”

Debt sustainability is at risk since the debt-to-GDP ratio exceeded 70% in a fifth of all emerging and middle-income economies.

“This leads to the following observation: in mid-2018, the number of low-income developing countries in over-indebtedness or at high risk of it reached 31 – as against 13 in 2013. The number has practically tripled!” said Durant.

She went on to add, “It is in this uncertain and fragile financial context and in a global macroeconomic environment whose priority does not seem to be the financing of development that we face the challenges of implementing the Addis Ababa Action Agenda”. This was in reference to a 2016 plan that outlined the means of paying for the 2030 Agenda for Sustainable Development. Therein lies the importance of debt sustainability.

“The international community is, however, aware of the urgent need for decisive and multilateral actions and investments to achieve the Sustainable Development Goals,” said Durant. “At UNCTAD, we are continually striving for consensus and action on this issue.”

Many of the systemic and central concerns of the Addis Ababa Action Agenda, includes vulnerability and debt sustainability in emerging economies, strengthening development cooperation, improving prevention and crisis preparedness, reforms of global economic governance and the consideration of environmental challenges must be priorities, said Durant.

She went on to add, “The financial context requires this – if we want to avoid a rude awakening”.

Common Thread

Underscoring the important role played by debt sustainability, Richard Kozul-Wright, UNCTAD’s director of globalization and development strategies, said “debt was the common thread that linked the decade since the financial crisis and the coming decade before the 2030 Agenda is set to be achieved”.

In reference to the detailed background paper prepared by UNCTAD, he opined, debt was the “glue” that held together the developing countries during the last three decades.

“The kinds of systemic problems that debt poses require systemic solutions,” said Wright in reference to the systemic issues stemming from debt sustainability.

The need for being more inclusive

Paul Oquist, Nicaragua’s Minister of National Policies, who incidentally, chaired the meeting, took pot shots at the “financialization” of the “treacherous” world economy which offers easy money with strings attached.

One of the probable solutions to debt sustainability would be to have a more inclusive and equitable global trading system. He called on the participants of the meeting to propose ideas and policy alternatives that could avert or be part of a solutions package for developing countries for manage their debts.

Recalling Nelson Mandela’s admiration for UNCTAD, vice-chair, Nozipho Joyce Mxakato-Diseko, South Africa’s ambassador to the United Nations in Geneva, said the platform was a key forum for exploring urgent questions surrounding emerging countries. Outlining many facets of the problem faced by developing countries vis-a-vis debt sustainability Mxakato-Diseko called on the international community to reflect and implement a balanced monetary and financial system that provides countries “policy space” and room for maneuvering.

In a video statement, Maria Fernanda Espinosa Garcés, president of the United Nations General Assembly, stated in the last decade external debt for emerging economies had risen at an average annual rate of 8.5% and had totalled to $7.6 trillion.

While debt is a method for financing sustainable development, unless there is prudent debt sustainability the method adds systemic risks and governments must be well-informed to balance such risks, she said.