In a new report, UN Trade and Development has sounded the alarm about the growing burden of global public debt. Under the title A World of Debt: A Growing Burden on Global Prosperity, the report highlights the unprecedented increase in public debt, which includes both internal and external debt of public administrations, reaching an all-time high of 97 trillion dollars in 2023, with a notable increase of 5.6 trillion compared to the previous year.
Faced with this situation, UN Trade and Development has called for urgent reforms of the global debt architecture to avoid a widespread debt crisis in developing countries.
As a result of the COVID-19 pandemic, the external sovereign debt of these countries, in foreign currency credits, increased by 15.7% to reach $11.4 trillion at the end of 2022. The growing debt levels are become even more complex due to the diversity of lenders and financial instruments.
Equally alarming is the rise in debt service costs.. Low- and lower-middle-income countries, also known as frontier markets, which borrowed when interest rates were low and there was investor appetite, now devote around 23% to 13% of their income from exports, respectively, to pay their external debt.
“To put it in perspective, after World War II, the share of export revenues allocated to servicing Germany’s debt was limited to 5% to contribute to West Germany’s recovery,” says Anastasia Nesvetailova, head of the Macroeconomic and Development Policies Branch of that UN agency.
Public resources are drained
The rising cost of debt is draining vital public resources needed for development. Some 3.3 billion people, almost half of humanity, currently live in countries that spend more money on paying interest on their debts than on education or healthcare.
“This situation is clearly unsustainable,” says Nesvetailova. “As a systemic debt crisis looms on the horizonin which a growing number of developing countries move from distress to default, a development crisis is already underway.”
Focusing debt on development
Nesvetailova emphasizes that the growing debt crisis not only stems from the wave of debt after the global financial crisis of 2008, the cascading crises since the pandemic and the aggressive tightening of monetary policy in developed countries, but that the roots main ones are in the structural problems of the global sovereign debt architecture, “which offers inadequate and late support to countries with debt problems.” The latest Trade and Development Report from UN Trade and Development analyzes the current inequalities, rigidities and problems of the global sovereign debt architecture, outlining a strategy to resolve them.
“A development-focused approach to debt is needed,” says Nesvetailova, highlighting factors that contribute to the unsustainability of sovereign debt, such as climate change.
The report advocates a thorough reassessment of these factors, covering demographics, public health, global economic changes, rising interest rates, geopolitical realignments, political instability, as well as the implications of sovereign debt on the industrial policies of debtor states .
It also proposes a five-stage sovereign debt life cycle as a conceptual framework to analyze and improve the global debt architecture.
The stages include taking on debt, issuing debt instruments such as bonds and loans, managing the debt, monitoring the sustainability of the debt and, if necessary, restructuring or renegotiating the terms of the debt.
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