Article by Kevin Tutani
Global debt refers to the total obligations owed by households, governments, and corporations, around the world. According to the Institute of International Finance (IIF), world debt grew by $8.3 trillion, in the first quarter of 2023, to reach a total stock of $304.9 trillion.
The value is a staggering $45 trillion higher than pre-pandemic levels. Using IMF estimates of a $105 trillion world economy (GDP), a debt-to-GDP ratio of 290% (304,9÷105) is deduced from the numbers. However, the IIF posits that world debt-to-GDP is around 335%. This means that, the level of debt in the world has grown so much, so that, a year’s worth of GDP is not enough to cover it.
Instead, it will take three full years worth of GDP to settle the current debt levels. Since debt is not practically addressed in that manner, the ratio is mostly used to deduce the nature and severity of the global debt burden. The portion of government and corporate debt has been more concerning of late, as both have grown substantively higher than household debt, which has been rather conservative.
The problem with a growing debt to GDP ratio is that, at some point, debtors will be unable to repay what they owe and this may trigger a global debt crisis. Rising interest rates, inflation, and geopolitical tensions are some of the key issues which can exacerbate the situation.
For instance, through 2022, the European Central Bank and Federal Reserve Bank, raised interest rates by an average of 3%. This average imputes the U.S. rate increases of 3.8%, with European increases of 2% and then divides by two ( (3.8% + 2%) ÷ 2).
Using a total debt stock of $304.9 trillion; If 35% ($106.7 trillion) of the world’s debt is on variable interest rates- that indicates an additional $3 trillion ($106.7 × 3%)in interest expenses, required to service debt around the world. Typically, fixed debt is refinanced.
Resultantly, due to the refinancing of the fixed debt component, it is expected that, over time, the $3 trillion in additional payments will rise to around $9 trillion.
Solutions to this problem include; reduced lending by financial institutions, restructuring poorly performing enterprises so that they grow, earning more revenue by making debt more productive, writing down (reducing or cancelling) less productive debt and less spending or deficits, on the part of governments.
To achieve this; policy makers, society, financial institutions and corporations have to synergistically work towards reprogramming how the spending and credit systems and behaviours work.
Besetting the growth in debt are challenges which include the fact that, consumers actually need more credit, now than before, in an environment of high interest rates, inflation and unemployment. Additionally, governments need to respond to climate change and create green energy solutions as the world’s oil is running out.
High global inflation is also increasing the need for governments to intervene through more welfare programs to ensure that citizens have enough food and energy to survive. Ageing populations in some advanced economies, such as Japan, are also increasing pressures on welfare expenditure.
Global public debt is reported to have reached $92 trillion, which is almost 90% of world GDP.
A look at advanced economies shows that they are a not exempt from the heavy debt burdens. Japan, U.S.A, and Greece, make up the countries with the highest government debt to GDP ratios, in the world. Nevertheless, since they have more capacity to repay, it is the middle-income and low income countries, which are in the most distress. Achim Steiner of the UNDP, states that, there are already 50 low income countries which are under the scrutiny of his’ organization, that are expected to be in debt default, imminently.
Common Framework
In this regard, a “Common Framework for Debt Treatments”, was created by the G20, in 2020. The objective of its creation, is to handle the staggering debts of low income countries, which are likely to cause default, and a debt crisis. Debtor countries participating in the initiative are also working with the IMF, to execute reform programs, targeted at creating conditions for growth, and removing inefficiencies in their economies.
The steps for low income countries to join, initiate with them communicating to all their bilateral, multilateral and private creditors, to form a committee. This means the debtor country discloses all its loan commitments, fully. When the committee is formed, negotiations begin, focused on the best way to reschedule or resolve the insurmountable debt.
Official and private creditors are then requested to offer matching or comparable relief. In this framework, creditors are encouraged to reduce some of the debt owed, provide a grace period- where repayment of principal is paused, or extend maturity timelines. However, multilateral development banks, such as the World Bank, AFDB or Asian Development Bank, are considered preferred creditors. By inference, they will get repayments ahead of other creditors and they do not have to write down any debt.
Contrastingly, private creditors are considered residual creditors, who will only have to match what bilateral creditors offer the indebted country, in terms of relief and restructuring. Ultimately, the debtor country’s loans are resolved when all members of the creditors committee agree to the terms negotiated. As a result of the segregation of creditors (multilateral, bilateral and private), and need for consensus, the Common Framework has been characterised by extreme delays for the few debtor countries which have applied to participate. These nations are; Chad, Zambia, Ethiopia and Ghana.
If it can be sped up or renovated in its design, the framework may find more success and applicants coming on board. The problem with delays in resolving debt in this program, are that, interest will continue to accrue on unresolved debt, whilst the debtor country is participating in an IMF reform program (which may cut government expenditures) and awaiting IMF funds. The funds are typically released only after all creditors agree to the terms of the debt restructuring. This can complicate and compound the debtor country’s economic problems. When debt eventually becomes impossible to repay, neither the debtor nor creditor win.
Chad was the first country to get an agreement under the Common Framework, in November 2022. This made way for access to funding from the IMF, which is aimed at bringing stability and growth to the economy. It is on an IMF Extended Credit Facility program, which aims to release funding and work on the sustainability of debt. It was also reported that the agreement did not reduce the total debt stock ($3 billion) but only restructured it. Some debt payments due in 2024, were reprofiled (extended) so that the burden would be sustainable for the Central-African nation.
A third of the country’s debt ($1 billion), is commercial and much of it, from an oil-backed loan acquired from Glencore, which also agreed to the restructuring terms, as part of the Common Framework for Debt Treatments. Concerns still arise over, whether the relief is enough for the oil producing nation, amidst volatile oil prices and a harsh global economic environment. Consensus was reached with official creditors in 2021, although private lenders, including Glencore were unwilling to join the framework, until in the later part of 2022.
In 2020, Zambia was the first African nation to default on its debt. After 2 years of negotiations, under the G20 Common Framework, its bilateral creditors agreed to restructure the country’s bilateral loans, valued at $6.3 billion. The agreement will see the nation’s debt, rescheduled to more than 20 years, with a three year grace period, during which only payments on interest will be made.
The debt to be restructured includes $1.3 billion in arrears. Private sector creditors are also expected to do the same on the $6.8 billion owed to them. No write downs were agreed on. The agreement also means that the country will be eligible to receive another $188 million in cash, from the IMF, as part of the $1.3 billion IMF package, approved in September, 2022.
The agreement paves way for the first review of the IMF’s three-year, Extended Credit Facility Agreement, with Zambia. The IMF program is purported to put the nation on a growth trajectory and poverty reduction path. However, the nation has a terrible history with IMF programs. It remains to be seen, if Zambian officials negotiated better terms with the Bretton Woods Institution. Private investment is likely to flow into the country, after the agreement and may jumpstart the economy, if large enough
Ethiopia’s creditors’ committee was formed in September 2021.
However, the civil war in the Tigray region has led to a delay of talks with the IMF.
Ghana requested to join the G20 program in January. It became the fourth country to apply for the initiative after Chad, Zambia, and Ethiopia. The country aims to reduce its external debt payments of $20 billion, by half, over the next three years. Long delays faced by other countries had resulted in the nation being hesitant to be part of the debt relief initiative.
After having reached a $3 billion, staff-level credit agreement with the IMF, the nation needed debt restructuring as a precondition, for executive board approval, of the IMF program and the disbursement of funds. Assurances from bilateral creditors and the formation of a committee made up of them, would speed up the momentum on the IMF program. Negotiations are ongoing.
Zimbabwe
Zimbabwe’s public debt stock is $17.5 billion. The figure comprises $14.04 billion owed to external creditors and $3.04 billion of domestic debt. Four structured dialogues with creditors and development partners have so far been held, from December 2022. Policy reform proposals were presented by government officials and are currently under review.
The reform proposals comprise; Bilateral Investment Protection Agreements, governance, land tenure for local farmers, and compensation of former white farmers. African Development Bank President, Akinumwi Adessina and former Mozambican president, Joachim Chissano, who are facilitators of the engagement, have also travelled to the U.S. and met with American officials, with the goal of working on the modalities required, for the removal of ZIDERA and other Western sanctions. Of the $17.5 billion debt, $8.3 billion comprises unresolved debt and arrears. The majority of the $8.3 billion, consists of arrears. If the situation is not resolved, ultimately, the debts may become impossible to repay.
Concerns have been raised by some experts, on the sustainability of seeking to urgently raise finance for compensating former white farmers, whilst there are more pressing issues domestically. It will not make much business sense if the government manages to issue a $3.5 billion bond on international markets, which repays former farmers, and then have to deal with tepid economic growth domestically. It is vital to advise that, economic reforms may be introduced after the elections, as part of a debt restructuring agreement with creditors. In that regard, the hope of many is that, the nation’s officials will manage to negotiate favourable terms with creditors, so that the welfare of locals, is not supplanted.
Kevin Tutani is a political economy analyst. He can be contacted on tutanikevin@gmail.com
