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Info Service on Finance and Development (Jul23/03) Penang, 14 Jul (Kanaga Raja) — Global public debt – comprising general government domestic and external debt – reached a record USD 92 trillion in 2022, with developing countries owing almost 30% of the total, according to a United Nations report. Today, 3.3 billion people live in countries that spend more on interest payments (on debt) than on education or health, the report said. The report further said that developing countries also pay much more for their borrowing. “Countries in Africa borrow on average at rates that are four times higher than those of the United States and even eight times higher than those of Germany.” The report, titled “A world of debt. A growing burden to global prosperity”, was jointly prepared by the United Nations Global Crisis Response Group established in March 2022 by UN Secretary-General Antonio Guterres, the UN Conference on Trade and Development (UNCTAD), and five UN Regional Economic Commissions: the Economic Commission for Africa, the Economic Commission for Europe, the Economic Commission for Latin America and the Caribbean, the Economic and Social Commission for Asia and the Pacific, and the Economic and Social Commission for Western Asia. PUBLIC DEBT AT COLOSSAL LEVELS According to the joint report, public debt can be vital for development, with governments using it to finance their expenditures, to protect and invest in their people, and to pave their way to a better future. “However, it can also be a heavy burden, when public debt grows too much or too fast,” it said. The report said this is what is happening today across the developing world, adding that public debt has reached colossal levels, largely due to two factors: * Financing needs soared with countries’ efforts to fend off the impact of cascading crises on development that include the COVID-19 pandemic, the cost-of-living crisis, and climate change. * An unequal international financial architecture makes developing countries’ access to financing inadequate and expensive. Debt has been translating into a substantial burden for developing countries due to limited access to financing, rising borrowing costs, currency devaluations and sluggish growth, said the report. “These factors compromise their ability to react to emergencies, tackle climate change and invest in their people and their future.” Public debt around the world has been on the rise over the last decades. Cascading crises in recent years triggered a sharp acceleration of this trend, the report noted. “As a result, global public debt has increased more than five-fold since the year 2000, clearly outpacing global GDP, which tripled over the same time.” In 2022, global public debt – comprising general government domestic and external debt – reached a record USD 92 trillion, said the report. “Developing countries owe almost 30% of the total, of which roughly 70% is attributable to China, India and Brazil,” it added. However, public debt has increased faster in developing countries compared to developed countries over the last decade, it further said. The report said the rise of debt in the developing world has mainly been due to growing development financing needs – exacerbated by the COVID-19 pandemic, the cost-of-living crisis, and climate change – and by limited alternative sources of financing. Consequently, the number of countries facing high levels of debt has increased sharply from only 22 countries in 2011 to 59 countries in 2022, it added. AN “UNEQUAL” INTERNATIONAL FINANCIAL ARCHITECTURE Developing countries are dealing with an international financial architecture that exacerbates the negative impact of cascading crises on sustainable development, said the report. “The burden of debt on development is intensified by a system that constrains developing countries’ access to development finance and pushes them to borrow from more expensive sources, increasing their vulnerabilities and making it even harder to resolve debt crises.” Developing countries’ total public debt increased from 35% of GDP in 2010 to 60% in 2021, the report noted. Similarly, external public debt, the part of a government’s debt owed to foreign creditors, increased from 19% of GDP (in 2010) to 29% of GDP in 2021, it said. Comparing debt levels to developing countries’ ability to generate foreign exchange through exports shows that their ability to generate sufficient revenue to service their external debt obligations has also been deteriorating, the report emphasized. “The share of external public debt to exports increased from 71% in 2010 to 112% in 2021. During the same period, external public debt service as a share of exports increased from 3.9% to 7.4%.” Developing countries face additional major challenges due to high levels of external public debt, which make them more vulnerable to external shocks, said the report. When global financial conditions change or international investors become more risk-averse, borrowing costs can shoot up suddenly, it added. “Similarly, when a country’s currency devalues, debt payments in foreign currency can skyrocket, leaving less money for development spending.” Private creditors, such as bondholders, banks, and other lenders, offer financing on commercial terms. In the past ten years, the portion of external public debt owed to private creditors has risen across all regions, accounting for 62% of developing countries’ total external public debt in 2021, said the report. It pointed out that the increasing share of public debt owed to private creditors gives rise to two challenges. First, it said, borrowing from private sources is more expensive than concessional financing from multilateral and bilateral sources. “Second, the growing complexity of the creditor base makes it more difficult to successfully complete a debt restructuring when needed. Delays and uncertainties increase the costs of resolving debt crises.” Furthermore, the report said when developing countries borrow money, they have to pay much higher interest rates compared to developed countries, even without considering the costs of exchange rate fluctuations. Countries in Africa borrow on average at rates that are four times higher than those of the United States and even eight times higher than those of Germany, it noted. “High borrowing costs make it difficult for developing countries to fund important investments, which in turn further undermines debt sustainability and progress towards sustainable development.” SERVICING DEBT OR SERVING THE PEOPLE? The joint report also said developing countries’ debt trends have caused a rapid increase in total public interest payments relative to the size of their economies and government revenues. Currently, half of developing countries devote more than 1.5% of their GDP and 6.9% of their government revenues for interest payments, a sharp increase over the last decade, it added. The rise of interest payments is a widespread problem, it said, adding that the number of countries where interest spending represents 10% or more of public revenues increased from 29 in 2010 to 55 in 2020. The report said that interest payments in developing countries have grown faster than public spending on health, education and investment over the last decade, adding that the rapid increase of interest payments is squeezing out spending in these key areas. For instance, it said in Africa, the amount spent on interest payments is higher than spending on either education or health. Developing countries in Asia and Oceania (excluding China) are allocating more funds to interest payments than to health, it added. Similarly, it said in Latin America and the Caribbean, developing countries are devoting more money to interest payments rather than to investment. “Across the world, rising debt burdens are keeping countries from investing in sustainable development.” An increasing number of countries find themselves trapped in a situation where both their development and their ability to manage debt is compromised, said the report. Currently, at least 19 developing countries are spending more on interest than on education and 45 are spending more on interest than on health, it noted. “In total, 48 countries are home to 3.3 billion people, whose lives are directly affected by under-investment in education or health due to large interest payment burdens.” ROADMAP TO ADDRESS DEBT CHALLENGES According to the report, the United Nations has a road map of multilateral actions to address the global debt burden and achieve sustainable development, including: * Make the system more inclusive, improving the real and effective participation of developing countries in the governance of the international financial architecture. * Provide greater liquidity in times of crisis expanding contingency finance, so that countries are not forced into debt as a last resort, including through the strengthened use of Special Drawing Rights, a temporary suspension of IMF surcharges, and increased quota-access windows to IMF emergency financing. * Tackling the high cost of debt and rising risk of debt distress and create a debt workout mechanism to address the slow progress of the G20 Common Framework for Debt Treatment due to creditor coordination challenges and the lack of automatic debt service suspension clauses to participating countries. * More and better finance massively scaling up affordable long-term financing. +
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