A Debt Crisis Seems To Have Come Out Of Nowhere

Apr 20, 2018
Originally published on April 23, 2018 9:00 am

It's a problem that has come seemingly out of nowhere. Over the last five years a worrisome number of low-income countries have racked up so much debt they are now at high risk of being unable to pay it back — with potentially devastating consequences not just for their economies but for their citizens, many of whom are already living in extreme poverty.

That's the sobering finding of a report by the IMF. And it's got some prominent experts calling for urgent action. Among them is Masood Ahmed. Twenty years ago, as a top official at the International Monetary Fund, he spearheaded a historic agreement to wipe the slate clean for 36 poor countries that were being crushed by their loan interest and repayment bills. NPR spoke with Ahmed — who is now president of the Washington, D.C., think tank Center for Global Development — to find out how this latest debt debacle was set in motion, why it has him so alarmed, and what can be done to avert it. (This conversation has been edited for length and clarity.)

Just how far and how fast has this problem spread?

To get a sense, says Ahmed, consider that of the 59 countries the IMF classifies as "low-income developing countries," 24 are now either in a debt crisis or at high risk of tipping into one. "That's 40 percent of poor countries," says Ahmed, "and it's nearly double the number five years ago."

Those in most trouble include two countries that have already defaulted on some of their loans: the Republic of Congo and Mozambique. Ahmed notes that these are not loans taken out by individual citizens. "This is money borrowed by governments," he says. "So the definition of a debt crisis is that they are not able to meet their obligations. They are already unable to pay the interest on their debt or to keep to the repayment schedule they had agreed to."

Six more countries are also already considered in "debt distress" because even though they haven't outright defaulted they've reached a point where they are making only intermittent loan payments or cutting deep into their operations budget to pay off their debt. These are Chad, Eritrea, Somalia, South Sudan, Sudan and Zimbabwe. The remaining 16 are considered at high risk of falling into debt distress soon based on the IMF's analysis of the amount of debt they've taken on compared with how much income their economies can actually be expected to generate in the near future. These too are mostly countries in sub-Saharan Africa such as Ghana, Zambia and the Central African Republic. But the list also includes seven nations from other regions, such as Afghanistan, Haiti, Tajikistan and Yemen.

What happens when a country can't pay its debt? What are the consequences for ordinary citizens?

Ahmed notes that even extremely poor countries offer all sorts of services to their citizens — keeping public order, maintaining health clinics and schools, providing food to people at risk of famine, investing in new infrastructure that can help grow the economy and so on. And even before reaching the point of actual default, governments with unsustainable levels of debt must begin diverting ever more of their budget away from such services so they can meet their debt payments.

The most vulnerable citizens are often the first to suffer. "For instance, people who show up to their local [public] health clinic that is already only open once a week may now find that it also doesn't have medicines," says Ahmed. "Or that school that was going to open this year to meet the needs of a particular neighborhood, it gets postponed."

So this is very much an on-the-ground crisis. "It's easy for us to think of these as abstract financial numbers. But it's very important to recognize that behind these numbers are the lives of people who are already living in very difficult circumstances."

And what if a government does default?

It gets far worse because the entire economy can be thrown into paralysis. When a government can't meet its existing debt obligations, explains Ahmed, "that makes it very hard to access new money." Lenders that provide this type of financing aren't going to want to throw good money after bad. And to keep up daily operations, governments need continual access to credit. Ahmed adds that these operations often include not just the provision of services to citizens but business activities that generate much of a government's income — extracting and exporting natural resources like copper or oil, for instance. These kinds of operations can become impossible without day-to-day credit. "Just like for a small business, you need to be able to borrow on a day-to-day basis for your cash flow," he says.

And as the day-to-day turns into year-to-year?

The consequences can be just as debilitating, says Ahmed. Once a country has defaulted it can forget about taking out loans or floating bonds to fund investments in infrastructure or other measures that would help grow its economy long term. Pretty much every type of lender that poor countries rely on is going to balk. This includes even international financial organizations, such as the World Bank, whose mission is to provide poor countries with low-interest loans or outright grants to help them develop. The thinking of officials at the World Bank, says Ahmed, is going to be, "I don't want the money to just go to another creditor."

And so a kind of deadly feedback loop could be created: The country's debts would prevent its economy from creating the growth needed to pay off those very debts.

What about that massive debt forgiveness for 36 countries that you helped broker back in the 1990s — the "debt relief" campaign made so famous by celebrities like the rock star Bono. Wasn't that agreement supposed to end debt crises like these once and for all?

Yes, says Ahmed. And for about 10 years the agreement was, in fact, remarkably successful. All sides had recognized their sins — the governments of the borrowing countries that had taken on the excessive debt and also the lenders that had pushed what had been in many cases clearly unsustainable loans — including governments of rich countries like the U.S., commercial banks from those countries and even the IMF and World Bank. In exchange for writing off the debt everyone vowed to be more responsible.

"But after a decade, memories start to get cloudy," says Ahmed. "And these commitments are, of course, not binding. If a country wants to go out and borrow money, they're going to go out and borrow."

And in recent years a whole new class of lenders emerged to offer up easy credit — most notably the government of China and various associated Chinese banks and development agencies. "You had Chinese financial institutions and China as a country really expanding its presence and its financial role in developing countries," says Ahmed. "I find really striking [that] between 2013 and 2016 China's share of the debt of poor countries increased by more than the share of all these traditional lenders [who had made the loans back in the 1990s] put together."

Another factor: In the years since the 2008 financial crisis, interest rates in wealthier countries have been stuck at very low levels. "So people who have assets and want to invest their money all wanted to look for opportunities." These include managers of investments funds, pension funds and the like from wealthy countries. They had not historically been major sources of financing for poor countries. But in recent years they started snapping up bonds issued by African countries — whose economies at the time seemed to be growing at a healthy rate. These bonds offered much higher rates of return than bonds from wealthy nations.

Surely the borrowing nations also face some responsibility?

"Some countries quite frankly just took advantage of the availability of money," says Ahmed. He points to cases of outright fraud and corruption in Mozambique, Moldova and Gambia — in which government officials borrowed money on behalf of their nations, then apparently pocketed it for themselves.

Then there are cases of countries that derive most of their income from exporting a few commodities — for instance, Zambia, which relies on copper. In recent years, the prices for many commodities fell sharply and stayed flat — depressing their national income.

"Suddenly you find that what you thought was a level of debt you could manage is harder to maintain," Ahmed says. Adding to the problem, instead of cutting their national budgets to account for the lost revenue, these countries turned to borrowing to make up the difference.

And then there were the cases of simply less-than-ideal management. "I'm thinking of countries like Ghana and Ethiopia," says Ahmed, "where they just felt, you know, people are willing to give us the money, let's do it." And then they failed to use the money for productive investments. "In many of these countries about half the increase in borrowing was not associated with an increase in investment. It was just used to spend more on current spending, things like salaries."

So is there a fix?

Ahmed says it's clear some kind of debt restructuring and forgiveness is going to be needed. It will require getting all the creditors to the table to agree on the terms. "And that is not an easy thing to do."

Back in the 1990s it took years of grinding negotiations. This time around the process is likely to be even more complicated because so many of the creditors are new to the game. "The IMF is still a very good place from which to have this conversation," he says. But it is essential to bring in China and let it play a leadership role.

Given the challenges, this effort needs to start now, he says. Yet there seems to be a lack of urgency among world leaders. While IMF officials will be discussing the debt issue in Washington this Saturday as part of their annual spring meetings, it's just one of a host of topics on the agenda.

What's more, while the amount of debt involved may be crippling to poor countries, it's just a drop in the bucket of the global economy. This debt crisis is not going to cause a worldwide financial meltdown. So unlike the classic debtors in financial crises who benefit from being too big to fail, these nations could find themselves too poor to warrant a bailout.

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