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UNCTAD urges urgent reform to prevent economic collapse



UNCTAD urges urgent reform to prevent economic collapse

UNCTAD urges urgent reform to prevent economic collapse

The United Nations Conference on Trade and Development (UNCTAD) has issued a stark warning about the burgeoning public debt crisis facing developing countries. In a recent report, UNCTAD called for urgent reforms to the global debt architecture to prevent widespread economic collapse. This call to action comes as the COVID-19 pandemic has exacerbated existing debt issues, pushing external sovereign debt in developing countries to unprecedented levels.

A Surge in Sovereign Debt

In the wake of the pandemic, developing countries have seen their external sovereign debt – funds borrowed in foreign currencies – swell by 15.7% to $11.4 trillion by the end of 2022. This surge is attributed to a combination of factors, including the necessity to finance pandemic response measures and economic recovery efforts. However, the diversity of lenders and financial instruments involved has complicated debt management and repayment strategies.

Escalating Debt Servicing Costs

The costs associated with servicing this debt have also skyrocketed, creating an additional burden on these nations. Low-income and lower-middle-income countries, often referred to as frontier markets, that borrowed during periods of low interest rates and high investor enthusiasm, are now grappling with exorbitant repayment costs. These countries are currently spending around 23% and 13% of their export revenues, respectively, on debt repayment.

To put this into historical context, after World War II, Germany’s debt servicing costs were capped at 5% of its export revenue to facilitate recovery. This comparison highlights the severity of the current situation, as pointed out by Anastasia Nesvetailova, Head of UNCTAD’s Macro-economic and Development Policies Branch.

Impact on Development

The rising debt servicing costs are diverting vital public resources away from development needs. Approximately 3.3 billion people – nearly half of the global population – now live in countries that allocate more financial resources to debt interest payments than to education or health. This dire situation underscores the unsustainable nature of the current debt levels and their impact on development.

UNCTAD’s “A World of Debt Dashboard” offers a detailed overview of key public debt and development spending indicators for 188 countries, illustrating the scale of the crisis. Nesvetailova emphasized, “This situation is clearly unsustainable. While a systemic debt crisis, in which a growing number of developing countries move from distress to default, looms on the horizon, a development crisis is already underway.”

Structural Flaws in Global Debt Architecture

Nesvetailova identified multiple factors contributing to the mounting debt crisis, including the wave of debt following the 2008 Global Financial Crisis, the cascading effects of the pandemic, and aggressive monetary tightening in developed countries. However, she argued that the primary cause lies in the structural flaws of the global sovereign debt architecture, which provides inadequate and delayed support to countries in debt distress.

UNCTAD’s latest Trade and Development Report delves into the inequalities, inflexibilities, and problems inherent in the global sovereign debt system, proposing a comprehensive strategy to address these issues. The report advocates for a development-centered approach to debt, taking into account often overlooked factors such as climate change, demographics, public health, global economic shifts, rising interest rates, geopolitical realignments, and political instability.

A New Approach to Debt Management

The report proposes a five-stage life cycle for sovereign debt as a framework to analyze and improve the global debt architecture. These stages include incurring debt, issuing debt instruments such as bonds and loans, managing debt, tracking debt sustainability, and, if necessary, restructuring or renegotiating debt terms.

“We’re urging new creative thinking in all stages of the debt cycle, as well as new approaches to bridge the persistent divide between statutory and contractual solutions,” said Penelope Hawkins, head of UNCTAD’s debt and development finance branch.

Recommendations for Reform

UNCTAD’s report offers a comprehensive set of recommendations aimed at recalibrating the global debt architecture to better align with the needs of developing countries. A key recommendation is to increase the availability of concessional loans, characterized by lower interest rates and longer repayment terms, and grants. This could be achieved by boosting the base capital of multilateral and regional banks, thereby expanding their lending capacity.

Another proposal involves issuing special drawing rights (SDRs) – a type of international currency created by the International Monetary Fund (IMF) for member countries. SDRs can bolster monetary reserves by allowing countries to exchange them for official currencies as needed, providing a critical financial buffer.

A Call for Global Solidarity

UNCTAD’s call for action highlights the need for global solidarity and cooperation to address the debt crisis. The report stresses that addressing the structural flaws in the global debt system is essential for preventing a widespread economic collapse in developing nations. By adopting a development-centered approach and implementing the recommended reforms, the international community can help create a more sustainable and equitable financial system.

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