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Analysts: Slow Growth Complicates Debt Reduction

FILE - Andrea Shalal moderates an IMF roundtable on tackling public debt, during IMF Spring Meetings at the International Monetary Fund Building in Washington, U.S. April 12, 2023.

WASHINGTON — Analysts say they are not surprised by global projections of slower growth and its fallout for poor countries as the annual 2023 Spring Meetings of the International Monetary Fund (IMF) and the World Bank in Washington continue this week.

IMF Managing Director Kristalina Georgieva opened the week's meetings saying despite the remarkable resiliency of consumer spending in the United States and Europe, the global economic outlook is not great for poor nations.

"We have been wrestling with one crisis after another, one shock after another and that has pushed on the back burden of the longer-term agenda of structural reforms that are paramount to uplift productivity and with productivity remaining low, prospects for growth are low,"Georgieva said Monday.

Harry Verhoeven, a senior research scholar at Columbia University told VOA that slow growth will make it harder for the world’s poorest countries to recover from the damage caused by COVID-19, climate change, and high food and energy prices from the Ukraine war.

"The reality is the debt-to-GDP-ratio had already reached historically high levels of about 60% in late 2019," Verhoeven said. He said emergencies that have happened since then "have only worsened that predicament."

Georgieva said low-income countries are struggling to repay their debt and has urged lenders to restructure or even forgive debt owed by developing countries like Zambia and Ghana, which have formally applied for debt reduction, a call reiterated by U.S. Treasury Secretary Janet Yellen.

In Africa, Ghana, Egypt, Tunisia, and Malawi are facing a debt crisis; Zambia has already defaulted on its international loans. Zambia was the first African country to default during the COVID-19 pandemic and is in continued talks for relief of $18.6 billion of debt.

Many other African countries are "gravely worried about their debt," Verhoeven says, adding that “a big blame game” has continued that mainly involves the United States and its European allies accusing China of "lavishly distributing a number of funds and a number of credits, sometimes irresponsibly so," saddling African countries with massive debt.

The G20’s Common Framework initiative, formed during the pandemic, was designed to speed up debt restructurings for mostly low-income countries. It includes the Debt Service Suspension Initiative (DSSI), a program to defer official debt service due among poor countries which was extended through the end of 2021.

Although bickering ensued about full participation among the primary official creditors and non-participation among private creditors, the DSSI provided $6 billion of relief during 2020 and another $7 billion in 2021 for the 48 countries that signed up. At the same time, the IMF extended its own debt relief program on outstanding loans due from 29 of the world’s poorest countries.

China is the largest official lender to a large number of developing countries, but has yet to re-negotiate with low-income countries, due in part to the ongoing geopolitical struggle between the U.S. and China.

Beijing has bristled at the notion of restructuring loans, even while three in five countries are struggling to pay back their debt or are at risk of default.

Verhoeven said the problem is most low-income countries are in debt to private creditors, not governments or World Bank, or the IMF, which makes restructuring debt "tricky."

According to Debt Justice — a debt campaigning organization — African governments' debt to private creditors, Western banks and oil traders is three times more than what they owe to China. Drawing from World Bank data, a 2022 Debt Justice report showed only 12% of African governments' external debt was owed to Chinese lenders compared to 35% owed to Western private lenders.

Andrew Dabalen, the World Bank’s chief economist for Africa, told VOA debt restructuring for some countries is going to be a sure option, but African governments must look at the long term, strengthening their macroeconomic stability, domestic revenue collection and debt reduction to reduce extreme poverty and boost economic growth.

"African countries really need to put all their effort into stabilizing their economies," Dabalen said, adding there is a real possibility they face an economic crisis "that is going to be related to debt."

A collaborative report by the Debt Relief for a Green and Inclusive Recovery Project, concluded $520 billion in debt needs to be forgiven for low-income developing nations — and without "haircuts," or heavy debt restructuring, these countries will default.

Project co-chair Kevin Gallagher, director of Boston University’s Global Development Center told VOA "The price tags of these investments is small relative to the cost of inaction," adding "at this moment, many developing countries just don’t even have a fighting chance to be able to mobilize that kind of finance."

Some information in this report came from Reuters. VOA's James Butty also contributed.