Many of these countries accumulated mountains of debt over the past decade, while inflation and interest rates were low and in the past two years when costs related to COVID-19 were rising.
Then Russia’s invasion of its neighbor and sanctions from the West pushed up food, energy and other prices at a time when many major central banks are raising interest rates to stave off inflation.
Now, from Islamabad to Cairo to Buenos Aires, government officials are grappling with rising import prices and loan bills on top of the growing pandemic.
On Tuesday, Sri Lanka said it would suspend foreign debt payments and requested emergency financial assistance from the International Monetary Fund. Its finance ministry said the Ukraine war and the pandemic, which had damaged tourism revenue, made it unable to pay.
“There are going to be defaults. Crisis is coming. When we are hit by this kind of shock, anything is possible,” Harvard University economist Kenneth Rogoff said during a recent IMF panel discussion. That is, interest rates are low globally… but this is low and true for emerging markets and developing economies.”
While the IMF is not predicting a global debt crisis at this time, “it is a very high risk that we are very concerned about,” said Seyla Pazarbascioglu, IMF director of strategy, policy and review.
Figuring out how to expand and accelerate the framework for debt resolution for troubled developing countries will be a priority for the Group of 20 major economies, whose finance ministers and central bankers are expected to meet with the IMF and World Bank starting Monday in Washington. Will attend spring meetings. Ms Pazarbasioglu said.
He said combined global borrowing by governments, corporations and households rose 28 percentage points to 256% of GDP in 2020. This is a level not seen since the two world wars during the first half of the 20th century.
While rich countries still have no problem dealing with their rising debt due to low interest rates and solid economic growth, many developing economies are feeling more pressure. About 60% of low-income countries—defined as the roughly 70 nations that qualified for the global debt-payment suspension program during the pandemic—were at high risk of a debt crisis or already in 2020. were in crisis, more than 30% in 2015, according to the IMF. Debt is considered distressed when a country is unable to meet its financial obligations and debt restructuring is required.
Efforts to help troubled debtor countries have been complicated in recent years by the entry of new and less experienced creditors into the debt of developing countries. Investors, including pension and private-equity funds and state-owned financial institutions, piled into high-yield government debt, looking for juice returns in a low-interest-rate market.
According to the IMF, the share of China’s foreign debt to 73 highly indebted poor countries increased from 2% in 2006 to 18% in 2020, while private sector debt increased from 3% to 11%. Meanwhile, the combined share of traditional lenders – multilateral institutions such as the IMF and the World Bank and the “Paris Club” lenders of mostly wealthy Western governments – fell from 83% to 58%.
“If you don’t have a good understanding of who owns the debt, it’s very hard to do an efficient restructuring to bring everyone together,” said Sonja Gibbs, managing director of global policy initiatives at the institute. International Finance, a group representing global banks.
The two most obvious examples of the risks that vulnerable developing countries face are Sri Lanka and Pakistan. Both have been embroiled in widespread political crises following the invasion of Ukraine.
According to central bank data, analysts and the IMF, the foreign exchange reserves of both the countries have depleted to the point where they can only pay for a month or two of imports.
Sri Lanka’s economic slowdown has sparked massive protests over record inflation, rolling blackouts and significant shortages in basic goods such as medicines and cooking gas. According to data provider CEIC, the country’s annual inflation reached 17.5 percent in February. Public debt associated with infrastructure projects has increased over the past decade. A total of $7 billion of debt payments are coming this year, with the $1 billion bond maturing in July. Yet the country’s foreign exchange reserves are only $2.3 billion.
Pakistan’s IMF aid program has been halted after former prime minister Imran Khan announced plans to subsidize $1.5 billion in fuel and electricity without the institute’s approval in late February. Mr Khan was ousted on 9 April because the rising cost of living encouraged his political opponents. According to CEIC, consumer prices in Pakistan increased by 12.7% in March compared to the same month a year ago.
Egypt’s economy is also battered by the pandemic in its tourism sector and is now fleeing high inflation and foreign investment since Russia’s invasion. Egypt’s central bank devalued its currency by 14% in March to pave the way for potential IMF support. The government was earlier keeping a tight grip on the currency to make its debt more attractive to foreign investors.
“The war in Ukraine was the tipping point,” says James Swanston, an emerging-market analyst at Capital Economics in London. “They really needed to devalue the currency to gain some external competition and be able to export more.”
Egypt faces long-standing economic challenges, including rising poverty and declining labor-force participation. The country has borrowed about $20 billion from the IMF since 2016, second only to Argentina in aid from the institution since 1980. In 2020 and 2021, the Egyptian government spent more than 40% of its revenue servicing its debt, and is projected to do so in 2022.
Soon after Egypt’s currency devaluation, the Persian Gulf states pledged to inject $22 billion into the country, while the European Union expanded 100 million euros in aid to counter rising food prices caused by the war in Ukraine. was to compete. Economists say that Egypt can also seek more support from the IMF.
Tunisia is another economy seeking aid, with grocery shelves recently emptied of sugar, flour and other vital food supplies and the government delaying wage payments to civil servants. The government received $400 million in funding from the World Bank last month and is expected to secure a lifeline from the IMF.
“Each sovereign now has more debt than it did in 2008,” said Roberto Siphon-Arevalo, chief analytical officer for sovereign ratings at S&P Global Ratings, during the financial crisis that year. “Do we have a debit crisis around the corner? I wouldn’t say that. But there are some sovereigns who are in a really tough position.”
—Philip Wayne contributed to this article.