Finance leaders warn rising rates are squeezing low-income countries

The leaders of several global financial institutions have warned that rising interest rates are increasing pressure on low-income developing countries, about 60% of which are currently at or at high risk of debt distress.

In recent years, successive global crises have exacerbated public debt burdens in developing countries, Russia invaded Ukraine in the wake of the Covid-19 pandemic, and many heavily indebted countries are dealing with idiosyncratic pressures from different countries. climate events or conflicts.

Over the past year, major central banks around the world have aggressively tightened monetary policy to curb soaring inflation. However, a large amount of debt accumulated by low-income countries will come due in the next few years, and rising interest rates mean that it will become increasingly difficult for these countries to repay their debts.

The IMF and World Bank have developed a series of rescue measures in recent years, including the IMF-World Bank Debt Sustainability Framework, which aims to guide low-income countries’ borrowing in ways that ensure public financial stability.

Meanwhile, the G-20 Common Framework, an initiative endorsed by the Paris Club—a group of officials from leading lender countries tasked with finding solutions for debtor countries—was established in late 2020 in the form of grants. Provide additional support debt to unsustainable countries.

Ghana becomes fourth country in January With Chad, Ethiopia and Zambia, seek a common framework for debt management.

However, the actual implementation has not been smooth. Zambia becomes first African country to default in 2020 after pandemic hits, complaint earlier this month It was “punished” in the debt restructuring process after two of its main creditors, international bondholders and China, failed to reach an agreement.

The International Monetary Fund said earlier this month that the disbursement of the next tranche of Zambia’s $1.3 billion rescue loan was contingent on reaching a debt restructuring agreement.

While the rules are in place, World Bank senior managing director Axel van der Rosenberg told CNBC last week that with interest rates still rising and global growth slowing, more collaborative efforts are needed between international institutions and advanced economies.

“I think we should be worried. The world economy is growing relatively weakly, and that has its implications, and higher interest rates mean a lot of capital outflows from developing countries — which is badly needed for investment, so many developing countries are under pressure,” he said in Washington. told CNBC’s Joumanna Bercetche at the IMF’s spring meeting in D.C.

High interest rates in developed countries such as the United States have caused many investors to flock back to dollar-denominated assets, limiting their overseas investments.

“The poorest countries in particular bear the brunt because they have a hard time attracting capital in the first place, and they also have to deal with other crises, from conflict to climate, so it’s a tough time,” van Trotsenburg said.

As such, van Trotsenburg called on international institutions and major economies to “renew their solidarity with developing countries”, not only in rhetoric but with increased resources.

Makhtar Diop, managing director of the International Finance Corporation (IFC), a member of the World Bank Group and the largest global development institution dedicated to the private sector in developing countries, agrees.

Referring to concerns about the impact of rate hikes on financial stability and debt sustainability in developing countries, Diop said debt distress was “one of the main risks” facing the global economy in the near term, especially in many at-risk countries . Debts are coming due.

“This is actually a question we asked a decade ago, when we saw debt levels rising rapidly in low-income countries. We warned them that the conditions for repaying and refinancing these debts could be worse in the future, and we would affecting the sustainability of its economy,” Diop explained.

“A lot of the bullet payments that we’re talking about are happening eight years after the loan was disbursed, and we need to address that situation.”

A lump sum payment means that the entire outstanding loan amount is usually paid in one lump sum when it is due.

Diop said establishing a solid economic growth path for developing economies would allow them to generate investment and be more likely to meet future loan obligations.

He also suggested that institutions such as the Paris Club should include some of the problematic borrowers, not just the world’s largest lenders, in order to bring debtors and creditors into the same conversation and reach more workable solutions.

A third issue that must be addressed to bring troubled countries back to debt sustainability is “currency mismatches,” he added.

“When countries generate income in their own currency, a lot of debt is denominated in dollars, so deepening capital markets is important for countries to be able to offset some of the long-term risk,” Diop said.

The International Monetary Fund last week forecast global growth of around 3% five years from now – its lowest medium-term forecast in more than 30 years in its World Economic Outlook.

In the short term, the fund expects the global economy to grow 2.8% this year and 3% in 2024, slightly lower than forecasts published in January.

South Africa’s finance minister, Enoch Godonwana, also told CNBC that even as Africa’s most industrialized, technologically advanced and diversified economy, South Africa’s excessive exposure to global business cycles is a potential concern.

“For example, if we look at the global financial crisis of 2007/2008, we were one of the most affected countries on the African continent, with one to two million jobs lost,” Godunwana said.

“We are deeply connected to the global economy, so any change in the global economy could be huge.”