Debt and huge profit margins will have a crushing effect on developing countries

The United Nations Conference on Trade and Development (UNCTAD) warns that developing countries face years of hardship as the global economy slows amid increased financial turmoil.

in his last Trade and Development Report Update, published this Wednesday, points out that the annual growth in a large part of the world economy will fall below the performance registered before the pandemic and well below the decade of strong growth before the global financial crisis.

“Rises in interest rates will cost developing countries more than 800,000 million dollars in lost income in the coming years,” says that organization, which expects global growth in 2023 to fall to 2.1%, compared to with 2.2% projected in September 2022, and this assuming that the financial consequences of higher interest rates are contained with the bank bailouts in the first quarter.

Given this scenario, the Conference predicts that the increase in debt, interest rate hikes, food prices and the lack of sufficient liquidity “will have a crushing effect” on developing countries.

In fact, many of these nations “face a deepening development crisis as skyrocketing debt levels and higher service costs constrain productive investment in both the public and private sectors. The shortage of international liquidity has already turned unforeseen shocks into a financial vicious circle in some countries”.

The cost of debt

According to the data compiled in the document, 81 developing countries (excluding China) lost 241,000 million in international reserves in 2022, an average decrease of 7%, and more than 20 countries experienced a fall of more than 10%, in many cases depleting its recent addition of Special Drawing Rights.

Meanwhile, borrowing costsmeasured through sovereign bond yields, increased from 5.3% to 8.5% for 68 emerging markets. In general, pressure on developing countries from external creditors to reduce fiscal deficits is expected to increase.

“Indebtedness will result in a development crisis and greater inequalities with 39 countries paying their external public creditors more money than they received in new loans, resulting in an adverse impact on public investment and social protection”, conclude the UNCTAD experts.

In addition, over the past decade, debt service costs have risen steadily relative to public spending on essential services, and the number of countries spending more on external public debt service than on health care increased from 34 to 62 during this period.

Exceptional profit margins

However, UNCTAD believes that even if financial conditions stabilize, slowing economic growth in many developing countries, combined with the end of the era of cheap money, points to future rounds of over-indebtedness.

Record profits for agricultural commodity traders have been driven by economic uncertainty and market volatility over the past four years, according to the latest Update.

“Exceptionally large profit margins have driven higher prices, highlighting the concentration of market power in key industries. In developing countries, food inflation remains high, while the impact of energy costs varies depending on local regulations.

The financialization of commodity trading, that is, the conversion into financial instruments of any product of labor or service, “has made financial markets the dominant influence on the profitability of food merchants”, says UNCTAD.

The Update emphasizes that, as of early 2023, food inflation remains high, despite a decline in headline inflation, with 25% to 62% of the headline being driven by food inflation.

A bold economic agenda

Faced with all this situation, the UN Conference calls for a bold agenda to support developing countries, which includes:

• a review of the global debt architecture
• greater liquidity
• stronger financial regulation.

“Both the banking crisis and the cost of living crisis have shed light on the opacity and increased concentration of market power in key industries. UNCTAD calls for closing the loopholes in the financial reform initiated as a result of the 2007-2009 crisis, to expand the scope of supervision systemic and tighter regulation of shadow banking institutions.

According to the UN organization, to adequately support the needs of developing countries, the multilateral financial agenda needs to be strengthened, with an urgent focus on the reform of the debt architecture.

Therefore, it urges:

• establish a multilateral debt renegotiation mechanism,
• create a validated data record on debt transactions from both lenders and borrowers
• conduct enhanced debt sustainability analyzes that incorporate development and climate finance needs

“The upcoming meetings of the International Monetary Fund and the world Bank they provide a valuable opportunity to strengthen development financing and address the constraints faced by countries that need greater liquidity,” the experts say.

IMF/Henrik Gschwindt of Gyor

A first step: Special Drawing Rights

For example, issuing new Special Drawing Rights (SDRs)* worth at least $650 billion would be a positive first step to help alleviate heavy debt burden that hinders prospects for development.

In addition, it also calls for G20 nations to honor their commitment to recycle at least $100 billion of their unused Special Drawing Rights to support global economic recovery.

The combined impact of higher interest rates and higher energy and food prices in the context of declining fiscal support is expected to further weaken household spending, even in housing. Business investment, hit by the financial turmoil, is also expected to slow further or contract.

Greater inequality

Annual growth in much of the world economy will fall below its pre-pandemic performance and well below the decade of strong growth before the global financial crisis, with a potentially devastating effect on the economies of developing countries. .

This will further deepen the cost of living crisis that its citizens are currently facing and will magnify inequalities around the world.

*Special Drawing Rights are an international reserve asset created by the International Monetary Fund in 1969 to complement other reserve assets of its member countries. These Rights contribute to making the global economic system more liquid to promote a sustainable and resilient global recovery.