‘A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022 as risks began to materialize. Global output contracted in the second quarter of this year, owing to downturns in China and Russia, while US consumer spending undershot expectations. Several shocks have hit a world economy already weakened by the pandemic: higher-than-expected inflation worldwide– especially in the USA and major European economies– triggering tighter financial conditions; a worse-than-anticipated slowdown in China, reflecting covid-19 outbreaks and lockdowns; and further negative spillovers from the war in Ukraine. The baseline forecast is for growth to slow from 6.1 percent last year to 3.2 percent in 2022, 0.4 percentage point lower than in the April 2022 World Economic Outlook.’ – excerpt from July 2022 update of IMF’s World Economic Outlook (WEO)
The title of IMF’s July 2022 update of WEO ‘gloomy and more uncertain’ for the global economy is indeed apt, since many countries in the advanced economies are likely to enter recession in the coming months, a number of developing countries are already facing serious debt sustainability concerns, including Pakistan, while Sri Lanka and Zambia have already defaulted.
Some of the main reasons for this heightened debt default risk in many developing countries include, among other reasons, lack of meaningful debt moratoria/relief received, inadequate level of provision of IMF’s special drawing rights (SDRs) both in terms of fresh allocation after last August, and relocation of SDRs from last August that mostly went to already rich countries, and a tight monetary policy stance in developed countries leading to significant capital flight from developing countries, weakening of domestic currency and adding to already difficult debt burden in many developing countries, including Pakistan.
Moreover, global commodity supply shock significantly contributed to high imported inflation, in turn putting all the more burden on developing countries, on top of the recession-causing pandemic, along with greater health expenditure, and stimulus needs, and all contributed to fast depletion of foreign exchange reserves in many developing countries.
While many developing countries also raised interest rates to curtail inflation, economic instability during the pandemic, and lack of financial support by rich, advanced countries, and multilaterals, contributed to political instability in many developing countries, including Pakistan, which meant that even at higher interest rates, downgrading of economy outlook ratings, meant that many developing countries saw capital outflows to more secure environments like the USA.
It is, therefore, important that while developing countries take steps to improve their exports, to increase their foreign exchange reserves, in the short-term it is highly important that rich, advanced countries and multilaterals should come together, for both better financial support for developing countries, and for carrying out meaningful debt restructuring, and that this takes place to avoid scores of developing countries defaulting on their debt, which will not only be catastrophic for these developing countries, but will have strong negative economic ripple effects globally. It is important to indicate that the private sector is also included in the debt restructuring process, given the significant proportion of private debt in the portfolio of many developing countries.
A recent Economist-published article ‘The 53 fragile emerging economies’ indicated that more than 50 developing countries are already in a very vulnerable economic situation, including those that are facing challenging debt sustainability situations, and include Pakistan as one of those countries facing serious default concerns
The article pointed out in this regard ‘And Fed policy has not been this hawkish for some time. The federal-funds rate is expected to approach 3.5% by the end of this year… The emerging world has thus experienced net capital outflows every month since March, according to the Institute of International Finance, an industry group. The dollar has risen by over 12% against a basket of currencies since the start of the year, and is up by far more against many emerging-market currencies. …Among 73 low-income countries eligible for debt relief under a G20 initiative, eight carry public-debt loads which the imf has deemed to be unsustainable, and another 30 are at high risk of falling into such a situation. …Then there are the troubled middle-income economies in the mould of Sri Lanka… Overall, 15 countries are either in default or have sovereign bonds trading at distressed levels. They include Egypt, El Salvador, Pakistan and Tunisia.’
It is, therefore, important that while developing countries take steps to improve their exports, to increase their foreign exchange reserves, in the short-term it is highly important that rich, advanced countries and multilaterals should come together, for both better financial support for developing countries, and for carrying out meaningful debt restructuring, and that this takes place to avoid scores of developing countries defaulting on their debt, which will not only be catastrophic for these developing countries, but will have strong negative economic ripple effects globally. It is important to indicate that the private sector is also included in the debt restructuring process, given the significant proportion of private debt in the portfolio of many developing countries.
In a recent interview to Democracy Now media channel, renowned economist, Jayati Ghosh called for an urgent need to formulate a debt restructuring body at the global level.
She pointed out in this regard ‘Now, debt restructuring, that is reducing the debt, writing-off a part of the debt is something that happens regularly in all credit markets… this is not being done for sovereigns. …right now what you need to do is have a global system for debt restructuring, and force a debt write-off. …Enforce a significant debt relief that involves cutting down of the absolute values of debt. It was done for Germany in the 1950s. For some reason it can’t be done to developing countries today. …The most obvious solution is to have some kind of a global debt authority that will buy up distressed debt.’
The debt sustainability situation is really difficult for many developing countries, and a recent Guardian-published article by Jayati Ghosh pointed out in this regard ‘There is a global debt crisis coming – and it won’t stop at Sri Lanka’ as ‘…it is clear that Sri Lanka is not alone; if anything, it’s just a harbinger of a coming storm of debt distress in what economists call the “emerging markets”. … The half-hearted attempts at debt relief, such as the moratorium on debt servicing in the first part of the pandemic, only postponed the problem. There has been no meaningful debt restructuring at all. The IMF bewails the situation and does almost nothing, and both it and World Bank add to the problem through their own rigid insistence on repayments and the appalling system of surcharges imposed by the IMF. The G7 and “international community” have been missing in action, which is deeply irresponsible given the scale of the problem and their role in creating it. … contagion is all too likely, and it will affect not just economies that are already experiencing difficulties, but a much wider range of LMICs that will face real difficulties in servicing their debts. Lebanon, Suriname and Zambia are already in formal default; Belarus is on the brink; and Egypt, Ghana and Tunisia are in severe debt distress.’
