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When the debt crises hit, don’t simply blame the pandemic
MARCELLO ESTEVÃOSEBASTIAN ESS | https://blogs.worldbank.org/
Every debt crisis begins with unheeded warnings and ends with severe limits on hand, borrowing from China and commercial creditors nearly tripled over the investment in education, health, and infrastructure among other things. These same time: from 6 percent to 16 percent, and from 8 percent to 24 percent, recrises often spark civil unrest and government collapse, delivering a lasting set- spectively. back to the growth prospects of the affected country. So long as real economic growth remained strong, the risks were masked. In the wake of the COVID-19 pandemic, global debt has surged. Today, 58 per- Growth curbs the accumulation of public debt: according to our data, from 2011 cent of the world’s poorest countries are in debt distress or at high risk of it , and through 2019, economic growth—adjusted for inflation—reduced public debt the danger is spreading to some middle-income countries as well. High infla- by the equivalent of about 12 percent of GDP. Today, however, the dynamics are tion, rising interest rates, and slowing growth have set the stage for financial cri- in the opposite direction: developing economies are expected to grow just 3.4 ses of the type that engulfed a series of developing economies in the early 1980s. percent in 2022, barely half the rate in 2021. And as interest rates surge to tackle inflation, growth is likely to remain weak for the next couple of years. But it would be a mistake to pin the blame on the pandemic should those crises arrive. The seeds were sown long before COVID-19. Between 2011 and 2019, It’s time for policymakers to adopt the first law of holes: when you’re in one, stop public debt in a sample of 65 developing countries increased by 18 percent of digging. Adopting good policies now can still repair a lot of the damage: GDP on average--and by much more in several cases. In sub-Saharan Africa, for example, debt increased by 27 percent of GDP on average. Ramp up growth. The best way to escape a debt trap is to grow out of it. Measures to improve business conditions, better allocation of resources, and healthy market competition are essential policy actions to boost productivity growth. What drove the pre-COVID debt accumulation? Let’s be clear: it wasn’t econom- Governments should take advantage of this crisis to move faster on key strucic surprises that were beyond the government’s ability to foresee. It was simply tural reforms. bad policy. Accelerate fiscal policy reforms. Improving tax administration efficiency and Our analysis of debt sustainability in 65 developing economies suggests that closing loopholes are a good start, but governments should move to broaden tax sustained primary deficits were the single-largest driver of public debt in those bases in ways that support rather than impede long-term growth. That can be countries. Countries were simply spending beyond their means. Between 2011 accomplished by focusing on activities that are harmful to sustainable growth and 2019, the median public-debt increase attributable to primary deficits and public health—taxes on tobacco consumption and carbon emissions, for amounted to a whopping 14 percent of GDP. In sub-Saharan Africa, it was 18 example—while reducing taxes on productive activities. Tax compliance can percent. Yet, in South Asia, it was just slightly over 5 percent. be improved by making tax systems more equitable. The debt overhang can be dismantled if governments improve debt-management procedures and public In Africa, in particular, the evidence is that governments ran up primary deficits spending while strengthening the legal environment for debt contracting. not to make productive long-term investments but simply to pay current bills. They took on far more debt to pay the wages of public sector workers than they Speed up debt restructuring. Many of the countries in trouble today are set to did to build roads, schools, and factories. Among the 33 sub-Saharan countries fail if they cannot get help. The international community must help them by imin our sample, current spending outstripped capital investment by a ratio of proving global initiatives that facilitate debt restructuring. Policymakers should nearly three to one. explore every opportunity to encourage different types of creditors—bilateral, commercial, and multilateral—to come quickly to an agreement that provides relief to overindebted countries. That did nothing to strengthen their ability to repay the debt. Nor did these countries opt to borrow inexpensively—from multilateral lenders offering con- Crises also bring opportunities. Amid the overlapping crises we are seeing today, cessional financing rates. In 2010, multilateral lenders accounted for 56 percent governments have an opening to plant the seeds for a more stable and prosperof the public and publicly guaranteed debt of sub-Saharan countries; by 2019, ous future. They should not pass up the opportunity. that share was just 45 percent. In 2010, loans from Paris Club creditors accounted for 18 percent of the debt; by 2019, the share was just 8 percent. On the other
TT 159 | July 5th - July 11th| 2022
