Life in debt and after debt… again – Mahmoud Mohi El-Din

The World Bank’s Global Economic Prospects report released a few days ago tried to strike a more optimistic tone about the growth situation, saying that the economy has stabilized after three consecutive years of decline and the world is approaching a soft landing. But the optimistic tone soon dissipated with a violent rhythm, reminding people that the promised recovery has gone astray. Until then. By 2027, the economic growth rate is expected to be no more than 2.7%, which is not enough to achieve development goals. These goals were difficult to achieve with a higher growth figure of 3.1% before the outbreak, but it is still not enough to achieve development goals that require greater, more comprehensive and more sustained growth.

By the end of 2024, 25% of developing countries will be poorer than before the pandemic. Half of these countries will see their average incomes widen compared with those of the most developed countries, with declines not seen since the 1990s.

As international economic cooperation is in trouble, opportunities for growth and development are reduced. International trade restrictions have tripled from pre-pandemic levels to 3,000, foreign direct investment in developing countries has fallen by about 9%, and capital flows to these countries have turned negative due to accounts receivable; the world is witnessing economic fragmentation that has nothing to do with the benefits of much-touted cooperation and is making development goals further away from being achieved.

Along with this come other global challenges, with developing countries facing livelihood pressures brought about by climate change, and some countries lacking the ability to transform digitally and the willingness to benefit from artificial BroadCast Unitedligence. Even more dangerous than this is that many of them are struggling with a debt crisis, and we know from the previous article that with declining economic growth and high interest rates, it undermines the distribution of health, education and basic services. According to UNCTAD’s latest debt report, 12 developing countries have interest costs higher than their education spending for a generation, and 34 countries have interest costs that exceed health care spending. We know that development is impossible with such a waste of human capital investment. This problem has nothing to do with the development performance that we hoped to improve in the past, nor with being troubled by obstacles that we hope to disappear now. But in the future, our children and grandchildren should have fair and equal opportunities with their peers around the world.

To understand what is happening, we need a concept that economists call the “moral hazard effect”, that is, a change in behavior that occurs according to certain incentives and controls. For example, if a car driver is sure that his insurance will cover any accident, he will speed up. I will explain how this consideration applies to today’s debts compared to yesterday’s debts. Although the scourge of international debt has been suffered in the past, the methods of dealing with it are well known. In 2000, the liability of official institutional creditors of the Paris Club was close to 40%, and the international financial institutions controlled 44%, which helped to establish measures to reduce or partially or partially remedy debts through restructuring, rescheduling or arrangement. Some debts and their services are completely forgiven. I will review some initiatives to manage debt, reschedule debt and provide debt relief one after another.

Today, official Paris Club creditors account for less than a quarter of what they did at the beginning of the century, although international financial institutions maintain their share of creditors at around 45 percent. The role of the private sector has increased, however. It has risen from no more than 9 percent to 25 percent, with emerging market bilateral lenders playing an important role. Under this new international debt structure, countries in trouble lack effective debt repayment mechanisms. The road is long and bumpy, with no end in sight, and may reduce the chances of obtaining new debt from the market, especially if credit rating agencies downgrade the country in question. Countries under debt stress and on the brink of default have moved away from the path of rescheduling and are trying to salvage their situation through sacrifices, even by spending on human or development investments so as not to discourage new borrowing.

Some may worry about palliative measures to improve the lending environment; if interest rates fall, they will seek to borrow more. But I call for something more important, not simply managing liquidity, assets and debt as a necessity that I will review, but rather reviewing the importance of methods that rely on local savings and resources to finance growth and development, and then long-term foreign investment, with strict control over reliance on external borrowing, even if it is easy, except for the necessities and considerations that I will explain in my next article.