The dependence of low-income countries on loans from foreign governments and international organizations is increasing day by day. Along with this, the interest and principal repayment pressure is increasing. In particular, the half-dozen countries affected by climate change are facing double debt repayments than in pre-pandemic times. Experts have warned that the situation will worsen if action is not taken now. News The Guardian.
Debt Justice, a UK-based research and consulting firm, said a large part of the government revenue of the countries most at risk of global warming is spent on foreign debt repayments. Currently, this rate is 15.5 percent, which was 8 percent less before Covid-19. Besides, in 2010 only 4 percent of government revenue was spent on foreign debt repayment.
Debt Justice presented the aforementioned analysis using data from the World Bank and the International Monetary Fund (IMF). The agency says there is an urgent need for debt relief for countries. Such assistance would enable poor countries to invest more in tackling the climate crisis. Developed countries can play a major role in this regard.
Heidi Chow, executive director of Debt Justice, said: ‘The record debt of the most vulnerable countries is undermining their ability to deal with climate emergencies. Quick and effective help is needed to eliminate debt and bring it to sustainable levels. The UK can play a role by legislating to ensure private lenders participate in international debt relief agreements.’
According to the report, 38 percent of the loans are taken from foreign private lenders. 35 percent of the loans came from multilateral institutions such as the World Bank or the IMF. China accounts for 14 percent of the remaining debt. 13 percent was given by the government of other countries.
Stepping away from the complexity of debt repayment is nothing new. Earlier, debt-ridden low-income countries received two rounds of aid in the late 1990s and the middle of the following decade. As a result, the debt burden of poor countries decreased sharply at that time. Since then, the continuous pace has been maintained since the decade of 2010, but in the current decade, its debt has increased greatly.
Debt Justice has shown several reasons behind this new debt crisis. One is that lenders agreed to defer installment payments during the pandemic. But post-epidemic that facility was cancelled. Now the deferred loan has to be repaid. But post-pandemic economic recovery is not yet fully possible. In addition, high inflation has created economic stagnation in countries.
Global interest rates were at an all-time low in the 2010s. But now rising interest rates have become a global problem. On the other hand, the exchange rate of most currencies against the US dollar has weakened, making foreign debt repayment difficult. Most foreign loans are accepted and paid in dollars.
The issues have featured prominently in international forums recently. Yesterday Monday, a 10-day conference started in the forest of Germany. There is increasing importance of climate finance and the capacity of countries to finance climate programmes, including sustainable debt levels. On this occasion, the report has been published by Det Justice. The organization has brought forward the troubled Zambia as an example for such steps.
After three and a half years of negotiations, the Zambian government recently reached a restructuring agreement with creditors. According to the agreement, if the country’s economy does better than expected, the loan amount can be increased. That is, the loan will be repaid at a faster rate. But there is no equivalent provision for reduction of installments in case of shock like drought. Under the terms of the loan agreement, Zambia must pay bondholders $450 million this year.
In this regard, Debt Justice’s head of policy, Tim Jones, said, ‘The terms of the agreement with Zambia’s creditors are outrageous. They demanded a deal where debt repayments would increase if the economy grew as expected. But if Zambia suffers a calamity such as drought, the lender will not bear any losses. However, the country can use this 45 million dollars to deal with national disasters.