Lingering debt danger: External debt levels dangerously high globally

During the pandemic, another contagion besides Covid-19 threatened to ravage the world: A sovereign debt crisis. Several indebted countries, including many in Africa and also one in India’s neighbourhood, seemed on the brink of a default. That immediate threat of default and destabilisation receded, and the subject of sovereign debt was quietly deprioritised in global governance. But a recent World Bank report shows that might have been a mistake. The International Debt Report (IDR) makes for a disturbing read.

 

The IDR focuses specifically on external debt and classifies countries by income level. For low- and middle-income countries in general, the IDR shows that the elevated levels of external debt reached during the initial months and years of the pandemic continue to persist even after extraordinary spending requirements have gone away. Governments borrowed during the pandemic, as was right, with many doing so from outside their borders. But they have not recovered soundly enough to be able to start paying back what they borrowed. External borrowings that have not been addressed have increased by about 8 per cent over 2020 levels. Naturally, this leads to higher interest bills — and might push some countries closer to a vicious cycle of high interest payments, low growth and extended borrowing.

 

The effect on the poorest and most vulnerable countries — the 75 or so considered poor enough to borrow from the International Development Association, a  wing of the World Bank Group — is even more stark. According to the IDR, the external debt for these countries has risen 18 per cent since the pandemic to cross $1 trillion. It is also noteworthy that although the external debt levels for all low- and middle-income countries seems high but static, there continues to be a yearly upward trend for these poorest countries. The long-term economic scarring of the pandemic has clearly not been addressed. No serious attempt has been made to assist countries in repaying pandemic-era debt. Some efforts were made in this direction in 2021 and 2022, including during India’s presidency of the G20. But it would be futile to deny that, in the absence of a rolling crisis of defaults, the energy has been sucked out of that effort.

 

This is dangerous complacency. As debt levels increase, macroeconomic stability is rendered more fragile. Any country can prove then to be the domino that would set off a renewed crisis — one which would raise costs for the broader developing world, including India, and disrupt supply chains, besides causing great social distress. The question is why efforts to address this problem have not really worked. Any answer would have to contend with the change in borrowing patterns since the 1980s, when solutions to tackle debt crises first evolved. The presence of China and Chinese state banks as large lenders has significantly muddied the picture. Clear divisions drawn between bilateral, multilateral, and commercial capital in the 1980s were designed for market economies; they struggle to adapt to China’s state-led financial sector. Geopolitical distrust has only grown since 2020, and that has played a part as well. But, whatever the reason, the IDR is another reminder of a festering problem that requires more attention from global policy makers. However, it is also critical for economies to keep borrowings in check and not leave a burden for coming generations, as highlighted by Union Finance Minister Nirmala Sitharaman on Wednesday.