Developing Nations Grapple with Historic Debt Crisis

A recent study highlights an unprecedented debt crisis in developing countries, where nearly half of government budgets are being allocated to debt repayments. The analysis, conducted by Debt Relief International for Norwegian Church Aid, indicates that over 100 countries are facing severe debt servicing challenges, leading to significant cutbacks in crucial areas such as healthcare, education, social protection, and climate change initiatives.

On average, debt servicing is consuming 41.5% of budget revenues, 41.6% of government spending, and 8.4% of GDP across 144 developing nations, the report reveals. The study warns that without immediate intervention, these debt issues will persist into the 2030s, surpassing the pressures experienced during both the Latin American debt crisis of 1982 and the 1990s debt crisis, which led to relief measures under the Heavily Indebted Poor Country Initiative (HIPC).

In response to the 2020 crisis, the G20 introduced a common framework, aiming to expedite and streamline the debt relief process. However, progress has been sluggish, primarily because much of the debt is now owed to China and private bondholders.

The report criticizes the common framework for falling short in terms of timeliness, creditor participation, and the scale of relief. It points out that even after relief, countries would still be dedicating an average of 48% of their budget revenues to debt servicing, discouraging many from joining the process.

The report proposes several recommendations for debt relief:

• • Making relief available to countries of all income levels and regions, tailored to their specific needs.
  • Ensuring that debt service is reduced to less than 15% of budget revenues.
  • Providing rapid relief with immediate payment standstills upon application.
  • Involving all creditors in the relief process.
  • Offering legal protections for debtors against holdouts and lawsuits in major financial centers.

Matthew Martin, one of the report’s authors, urged the new UK government to enact legislation preventing vulture funds from using UK courts to sue impoverished countries. He emphasized the urgent need for the government to:

• • Pass a vulture fund law to compel commercial creditors to provide debt relief.
  • Advocate for an independent review of the Common Framework by the G20 to cancel debt service, allowing governments to invest in combating climate change and inequality.
  • Cancel debt service immediately for Caribbean islands affected by Hurricane Beryl.

Dagfinn Høybråten, Secretary General of Norwegian Church Aid, stressed that high debt burdens significantly strain economies and disproportionately affect poorer populations through welfare, education, and health expenditure cuts. He highlighted that a debt crisis undermines all developmental efforts, drawing parallels to the prolonged suffering during the 1982 crisis, which took over 20 years to resolve. Høybråten emphasized that swift action is necessary to address the current crisis, as the world cannot afford to wait a generation for a resolution.

Have you read?
Countries Most in Debt to the International Monetary Fund (IMF).
Most Successful Unicorn Startups.
$100 Billion Club: Richest People With The 12-Figure Fortunes.
Largest electricity consumers in the world, by country (in terawatt-hours).
Countries that Export the Most Goods and Services.