The shocks of the past three years have hit low and lower-middle income developing countries hard. That was the theme of last week’s column. But the damage does not just lie in the past. It is lying in wait in the future. The world’s poorest countries, which contain a large proportion of the world’s poorest people, are threatened by a lost decade. That would be a human catastrophe and a huge moral failing. It would affect all our futures, especially those of Europeans, being so close to some of the worst hit countries. Something must be done, starting with tackling the debt crisis that is now looming.
According to Kristalina Georgieva, managing director of the IMF, “about 15 per cent of low-income countries are already in debt distress and an additional 45 per cent are at high risk of debt distress. Among emerging markets, about 25 per cent are at high risk and facing default-like borrowing spreads.” Sri Lanka, Ghana and Zambia are already in default. Many more will follow. Something must be done urgently.
Why has this happened? The answer is that low and lower-middle income countries have taken on too much of the wrong kind of debt. That mainly reflects the lack of good alternatives. The world opened up a debt trap, by making the terms of borrowing attractive but risky. Covid-19, soaring energy and food prices, higher interest rates, a strong dollar and a global slowdown have now rendered the costs prohibitive, duly closing the trap upon these vulnerable countries.