Paris summit to address world debt and impoverished nations
ALBAWABA – The Summit for a New Global Financing Pact is taking off Thursday in Paris, France, to shed light on how the escalating world debt crisis is taking a heavy toll on the poorest nations of the world.
Rising world debt is restricting these countries’ capacity to address various pressing economic challenges, notwithstanding climate change, according to Agence France-Presse (AFP).
Even before the Covid-19 pandemic, the poorest economies had considerable debt.
The pandemic exacerbated this, as countries were forced to borrow more to bolster their economies during lockdowns. Meanwhile, the war in Ukraine has further strained these nations due to the surge in global food and fuel prices.
Since then, international banks have imposed higher interest rates to counter inflation, leaving these countries struggling.
World debt at record high
The International Monetary Fund (IMF) warned in 2021 that global debt reached a record 97.3 percent of global GDP in 2020.
Debt in the United States (US) and the United Kingdom (UK) has reached the highest levels in decades. US debt is close to World War II levels, and UK debt just exceeded 100 percent of the country's GDP.
As for emerging markets and low-income developing countries, debt-to-GDP reached 68.9 and 48.8 percent, respectively, as per the IMF's Fiscal Monitor report of April 2021.
Clemence Landers, a senior policy fellow at the Center for Global Development, highlighted that these issues have resulted in the diminished ability of countries to refinance debt or obtain funding for critical projects, according to AFP.
The United Nations Development Programme alerted in March that 25 countries are now allocating over 20 percent of government revenues to service external debt.
Venezuela, Sudan, Eritrea, Lebanon, Cape Verde, Suriname, and the Maldives are among those with the highest debt as a percentage of GDP in 2021.
The World Bank’s recent international debt report reveals that the debt of developing countries has more than doubled over the past decade, amounting to $9 trillion in 2021, as noted by AFP.
The Paris Club, established in 1956, consists of 22 major creditor governments, including the United States (US), Japan, and most of Western Europe. It aims to devise solutions for highly indebted countries to evade default.
Rise of new creditors
However, in recent years, China has emerged as the predominant lender, particularly in Africa, where it introduced itself as an alternative to Western institutions like the International Monetary Fund.
According to the China Africa Research Initiative (CARI) at Johns Hopkins University, Chinese loans to Africa amounted to approximately $152 billion between 2000 and 2018, making China the largest bilateral creditor to African countries.
Other new creditor nations include India and Saudi Arabia.
Notably, the majority of the debt of the poorest nations is currently held by private banks, as reported by the World Bank in December.
Nonetheless, there have been global initiatives to alleviate this debt burden.
In 2020, the Group of 20, including China, consented to a common framework for restructuring the debt of impoverished countries affected by the pandemic. This initiative was triggered when Zambia defaulted on its foreign debt, estimated at $17.3 billion.
Initiatives and efforts
In April of the same year, the G20 also launched the Debt Service Suspension Initiative (DSSI). It allowed 73 of the world’s poorest countries to suspend debt payments to G20 members until the end of June 2021. This initiative was estimated to free up to $12 billion that could be used to tackle health and economic challenges posed by the pandemic, the World Bank reported in April 2021.
Yet, critics argue that the restructuring process has been sluggish, and China has been specifically criticized for its reluctance, AFP reported. After two years of negotiations regarding its debt, Zambia is optimistic about securing an agreement this week.
In conclusion, the world debt crisis is significantly affecting the poorest countries, limiting their ability to manage economic challenges. There is a need for a coordinated and expedited global response to ease their burden and enable these nations to work towards economic stability and development.
