DUBAI: The international community must devise ways to help nations in the developing world out of the global debt crisis and safeguard societies from the long-term effects of economic stagnation.
This was the message from a panel of experts during a discussion at the World Economic Forum Annual Meeting in Davos on Tuesday. Amid global transformations and ongoing uncertainty, they called for shifts in domestic and global monetary policies to provide relief for countries with debt burdens, and for governments and lenders to take shared actions to help build strong and resilient economies.
An International Monetary Fund report published in October stated that global pubic debt was expected to exceed $100 trillion during 2024, representing about 93 percent of global gross domestic product. Developing countries have accrued twice as much debt since 2010 compared with those in the developed world, according to UN figures..
The COVID-19 pandemic, climate change and unprecedented hikes in interest rates have compounded this debt crisis in some countries, potentially jeopardizing the futures of generations to come and slowing global progress.
Rebeca Grynspan, the secretary-general of UN Trade and Development, called for change at a systemic level to help countries take proactive steps to avoid debt problems in an ever-changing world.
“The developing world has half the debt that developed world has, the problem is paying for it,” she said.
“Firstly, we should avoid a liquidity problem becoming a debt problem. We have instruments that we don’t use in the international system, like special drawing rights.
“Secondly, the developing countries need long-term loans. If you go for infrastructure, you really want to grow, you need long-term money.”
For a monumental shift to take place, multilateral development banks need to scale up, take risks and crowd in private investment, Grynspan added.
About 3.3 billion people live in countries that spend more servicing debt than they do on education or health, according to a report published by the UN in July 2023.
“Markets are not in crisis but people are,” said Grynspan. “We don’t have a debt fault, but we have a development fault and that in turn will come to hunt us because if you cannot have growth in these countries, then we will not be able to get onto a sustainable path.”
Andre Esteves, chairperson and senior partner of Brazilian financial company Banco BTG Pactual, warned that a trade war between US and China during Donald Trump’s second term as president might affect other countries. However, he also highlighted positive indicators among the policies of the new administration in Washington.
“The whole idea of more fiscal discipline, ranging from deregulation and private-sector growth,” he said by way of examples. “But there needs to be the core of regulatory framework, otherwise it would be a bad move.”
As the debt crisis fuels power imbalances, dominance is expected to skew toward China, said Simon Freakley, the chairperson and CEO at global consulting firm AlixPartners.
“In today’s world, where developing countries are struggling to pay back their debt, they need to borrow more,” he noted, adding that China is able to exert significant influence as its capital markets are wide open to commodity-rich countries unwilling to borrow more money or service a debt.
Rania Al-Mashat, Egypt’s minister of planning, economic development and international cooperation, said macroeconomic stability needs to be coupled with structural reforms that improve the business environment to attract investment, reduce burdens and support the green transition.
Amid escalating conflicts in the Middle East and North Africa region, policies must be adopted to help mitigate the effects of various types of shocks, she added. For example, an IMF-supported Egyptian program was approved in December 2022 with the aim of achieving macroeconomic stability and encouraging private-sector-led growth.
“The manufacturing sector could benefit from inflows there,” Al-Mashat said. “We are also trying to put stringent ceilings on public investment so that the private sector can come in. All of these are drivers for growth financing for development.”
She called for a rethinking of global financial architecture to help more middle-income, emerging economies find alternative financing, such as debt swaps, for climate action or development.
Mohammed Aurangzeb, Pakistan’s minister of finance and revenue, warned of the long-term effects of economic stagnation. He said his country this month entered into a 10-year partnership with World Bank Group to address the issues of climate change and population.
“Population means child stunting, learning poverty and girls out of school,” he says. “There’s also climate resiliency and decarbonization. Unless we address this, the medium-to-long-term growth is not going to be sustainable.”
