Developing countries are buckling under high debt and exorbitant borrowing costs, hindering their economic and social progress and impeding their ability to achieve the Sustainable Development Goals (SDGs).
“Developing countries are buckling under high debt and exorbitant borrowing costs, that prevent them from reviving their economies, UN chief António Guterres said on Thursday. He said this at the Paris Summit on a New Global Financing Pact.
COVID-19 pandemic, climate emergency and rising inequality have only exacerbated these issues, making the need for urgent debt relief even more critical.
According to the UN Development Programme (UNDP), 54 countries that are home to more than half of the poorest people on the planet need urgent debt relief now, as they face multiple crises such as the COVID-19 pandemic, the climate emergency, and rising inequality
The high debt levels of developing countries are a major threat to their economies. They can lead to slower economic growth, higher poverty rates, and increased social unrest. In some cases, they can even lead to defaults on debt payments.
DEBT RELIEF MECHANISM
Guterres called for urgent action to address the challenges faced by developing countries and make progress towards the Sustainable Development Goals (SDGs). He emphasized the need for a debt relief mechanism that supports payment suspensions, longer lending terms, and lower rates to make borrowing more affordable for poorer nations. Guterres also highlighted the importance of increasing access to liquidity for developing countries through the International Monetary Fund’s Special Drawing Rights.
STEPS TO BEAT POVERTY, HUNGER
The Secretary-General reiterated his call to end fossil fuel subsidies and increase climate adaptation funding for vulnerable countries. He emphasized that these steps, along with the proposed debt relief measures, would contribute to poverty eradication, hunger reduction, and investments in health, education, and climate action. Guterres stressed that inaction is not an option, and as the world drifts further away from the SDGs, urgent action is needed.
OUTDATED, DYSFUNCTIONAL, UNJUST’
Guterres criticized the current global financial architecture, which he described as outdated, dysfunctional, and unjust. He argued that it fails to provide an adequate safety net for developing countries and exacerbates inequalities. The Secretary-General emphasized the need for serious reforms in the international financial system, acknowledging that change will require power and political will. However, he also emphasized the importance of taking immediate action to address the urgent needs of developing and emerging economies.
He proposed establishing a debt relief mechanism that supports payment suspensions, longer lending terms, and lower rates. He called for better capitalization of development and climate finance, reform of development banks, and improved coordination. The Secretary-General also criticized credit rating agencies for their biases and called for their reform. He urged participants at the summit to view it as a rallying cry for urgent action and emphasized the potential impact on millions of people in need.
NO SOLUTION WITHOUT REFORM
“There will be no serious solution to this crisis without serious reforms.”
He said change would not happen fast and was a question of power and political will.
“But as we work for the deep reforms that are needed, we can take urgent action today to meet the urgent needs of developing and emerging economies.”
He said richer nations could establish “a really effective and time effective debt relief mechanism that supports payment suspensions, longer lending terms and lower rates, including for middle income countries with particular vulnerabilities, namely in relation to climate.”
Development and climate finance can be better capitalized, and development banks reformed, allowing better coordination. He said credit rating agencies had become “deeply biased” and contributed to many of the recent financial crises, rather than helping avoid them.
He said taking immediate action towards wholesale reform could curb hunger, “uplift developing and emerging economies, and support investments in health, education and climate action.”
“We can take steps right now – and take a giant leap towards global justice.”
The UN chief said he was aware of the scale of the challenges the international community now faces.
COVID 19
The COVID-19 pandemic has had a devastating impact on economies worldwide, particularly in developing countries. Many nations have faced increased healthcare costs, reduced revenue streams, and disrupted supply chains, which have further strained their already fragile financial situations. Moreover, the pandemic has led to a significant decline in economic activity, resulting in higher unemployment rates, increased poverty, and greater inequality.
CLIMATE EMERGENCY
The climate emergency is another pressing concern for developing countries. These nations often bear the brunt of climate change impacts, including extreme weather events, sea-level rise, and agricultural disruptions. Addressing these challenges requires substantial investments in climate adaptation and mitigation measures, which can further burden countries already struggling with high debt levels.
RISING INEQUALITY
Rising inequality is also a significant issue affecting both developed and developing countries. The pandemic has exacerbated existing inequalities, with marginalized communities disproportionately affected by the health and economic impacts. High debt burdens limit the resources available for social spending, exacerbating social disparities and hindering efforts to reduce poverty and promote inclusive development.
SOME OF THE CONSEQUENCES OF THE DEBT CRISIS
Diversion of resources: High debt service payments often require developing countries to allocate a significant portion of their limited resources to debt repayment instead of investing in productive sectors and essential social services. This diversion of resources hampers economic growth, reduces opportunities for human development, and undermines poverty reduction efforts. It creates a cycle where countries struggle to escape the debt burden and invest in their own development.
Loss of policy space: High debt levels limit the policy space and fiscal flexibility of developing countries. This means they have fewer options to respond to external shocks, such as economic downturns or natural disasters. Limited fiscal flexibility restricts their ability to implement countercyclical policies, such as stimulus measures during recessions, and allocate funds to critical public goods like healthcare, education, and infrastructure. Consequently, their ability to foster sustainable development and address pressing social needs is severely constrained.
Social unrest and political instability: The burden of high debt and its negative impact on economic growth, social services, and living standards can fuel social unrest and political instability. A lack of public trust in governments’ ability to effectively manage the debt crisis and allocate resources can lead to protests, demonstrations, and social discontent. This unrest can erode governance structures, undermine democracy, and create a fertile ground for violence and conflict, further exacerbating the challenges faced by developing countries.
Vulnerability to environmental degradation and climate change: environmental degradation and climate change affects developing countries disproportionately. These challenges further compound the existing development hurdles, as they undermine economic activities, disrupt livelihoods, and increase vulnerability to natural disasters. The debt crisis limits the financial resources available for climate adaptation and mitigation efforts, making it difficult for countries to address these challenges effectively.