She said The Wall Street Journal The war on Ukraine has “exacerbated” debt problems across the developing world, as many indebted governments struggle to make payments to foreign creditors amid rising inflation and interest rates.
The newspaper said that these risks “feed fears of potential crises that might shake markets and weaken the global economic recovery.”
Many of these countries were already saddled with “mountains” of debt during the past decade when inflation and interest rates were low, and in the past two years when the costs associated with the coronavirus pandemic were rising.
Then the Russian invasion and Western sanctions drove up food and energy prices, at a time when many major central banks were raising interest rates to curb inflation.
And now, from Islamabad to Cairo to Buenos Aires, government officials are struggling with rising import prices and debt bills, in addition to the ongoing pandemic.
“everything is possible”
“There will be defaults. There will be crises. When we experience shocks like this, anything is possible,” Harvard economist Kenneth Rogoff said during a recent IMF panel.
While the IMF does not anticipate a global debt crisis at this point, “They are very significant risks that we are very concerned regarding,” said Sila Pazarbasioglu, director of strategy, policy and review at the fund.
It reported that combined global borrowing by governments, businesses and households jumped 28 percentage points to reach 256 percent of GDP in 2020.
This is a level “not seen since the two world wars” during the first half of the twentieth century, according to the official.
While rich countries have little trouble dealing with their rising debt thanks to low interest rates and strong economic growth, many developing economies are feeling more pressure.
About 60 percent of low-income countries have debt repayment problems, up from 30 percent in 2015, according to the International Monetary Fund.
China’s share of external debt owed by 73 heavily indebted poor countries reached 18 percent in 2020 from 2 percent in 2006, while the private sector’s contribution to lending rose to 11 percent from 3 percent.
The international monetary official said that the finance ministers and central bank governors of the “G20”, who will attend the spring meetings of the International Monetary Fund, on Monday, will discuss figuring out how to expand and speed up the framework for eliminating the debt of developing countries.
Egypt and Tunisia are two examples
The report says that the clearest examples of the risks facing weaker developing countries are Sri Lanka and Pakistan, both of which have been mired in political and economic crises since the invasion of Ukraine.
The foreign exchange reserves of both countries have dwindled to the point where they are sufficient for only one or two months’ worth of imports, according to data from the Central Bank, analysts and the International Monetary Fund.
The Egyptian economy is also suffering from the consequences of the impact of the epidemic on the tourism sector, and now the high inflation and the exit of foreign investment following the Russian invasion.
“The war in Ukraine was the tipping point,” says James Swanston, emerging markets analyst at Capital Economics in London. “They needed devaluation to gain some external competitiveness and the ability to export more.”
Egypt has borrowed regarding $20 billion from the International Monetary Fund since 2016, making it second only to Argentina in receiving aid from the IMF since the 1980s.
In 2020 and 2021, the Egyptian government spent more than 40 percent of its revenue on debt service, and it is expected to continue to do so in 2022.
After the aid it received from Gulf countries and Europe shortly following the currency devaluation, economic experts believe that Egypt will seek more support from the International Monetary Fund.
Tunisia is also seeking assistance following “grocery shelves have recently emptied sugar, flour and other necessary food supplies and the government has postponed the payment of civil servants’ salaries,” according to the newspaper.
The government secured $400 million in financing last month from the World Bank and hopes to get much-needed help from the International Monetary Fund.
“Almost every country has more debt now than it did in 2008,” said Roberto Sifon-Arrivalo, chief sovereign analyst at Standard & Poor’s. He explains that some countries are “in a very difficult situation.”
The Director-General of the International Monetary Fund, Kristalina Georgieva, warned last Thursday that the war in Ukraine negatively affected the economic recovery and led to a slowdown in expected growth in most countries of the world.
“We are facing one crisis on top of another… The economic repercussions of the war are spreading quickly and far, to neighbors and further afield, striking especially the most vulnerable people,” Georgieva said in a speech ahead of the Spring Meetings of the International Monetary Fund and the World Bank.
Russia is heading towards default Its foreign debt, for the first time since the Bolshevik revolution more than a century ago, as a result of sanctions that froze regarding half of its foreign exchange reserves amounting to $640 billion.
And last Saturday, financial rating agency S&P Global Ratings cut Russia’s rating for foreign currency payments to the level of “selective default”, following Moscow repaid its dollar debt in rubles earlier this week.
The agency’s rating for payments in foreign currencies such as the dollar fell to “SD”, while the rating remained at “CC” for payments in rubles, according to a press release issued by the agency, which also announced the suspension of its ratings for Russia immediately, in accordance with European Union requirements.
There is only one score below “SD” on the agency scale, which is “D” for default.
