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UNCTAD urges reforms on global debt architecture

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Kampala, Uganda | THE INDEPENDENT | The UN Trade and Development organ-(UNCTD) has called for urgent reforms to the global debt architecture to avert a widespread debt crisis among developing countries.

In a report released this week, United Nations Conference on Trade and Development (UNCTAD) outlines a set of recommendations to realign the global debt architecture with developing countries’ needs.

The report comes amidst concerns about souring external sovereign debt or funds borrowed in foreign currency. According to the report, the external debt increased by 15.7% to $11.4 trillion by the end of 2022. It said the mounting debt levels are further complicated by the diversity of lenders and financial instruments.

Leaders from the G77 and China in a meeting held in Kampala among other issues raised concerns about the lending rates from the IMF and the World Bank. They called for reforms at the IMF and World Bank particularly about lending rates to countries like Uganda.

“Equally alarming is the surge in debt servicing costs. Low-income and lower-middle-income countries – also referred to as frontier markets – that borrowed when interest rates were low and investors keen are now spending around 23% and 13% of their export revenues, respectively, to repay their external debt,” the report said.

Anastasia Nesvetailova, head of UNCTAD’s macroeconomic and development policies branch said “To put this in perspective, after World War II, the share of export revenue going into debt servicing for Germany was capped at 5% to aid West Germany’s recovery,”

The rising debt costs are draining vital public resources needed for development. About 3.3 billion people – almost half of humanity – now live in countries that spend more money paying interest on their debts than on education or health.

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The UN’s “A World of Debt Dashboard” provides data and in-depth insight on key public debt and development spending indicators for 188 countries.

“This situation is clearly unsustainable,” Ms. Nesvetailova says. “While a systemic debt crisis, in which a growing number of developing countries move from distress to default, looms on the horizon, a development crisis is already underway.”

The latest figures from the Bank of Uganda indicate that Uganda’s external debt has risen by 16% this fiscal year. The external debt service for this year is estimated at $990 million, compared with the previous fiscal year’s $857 million.

UCTAD is suggesting what it described as a development-centered approach to debt for countries to meet their obligations.

“A development-centred approach to debt is needed,” said Nesvetailova as she highlighted what she described as overlooked factors contributing to unsustainable sovereign debt, such as climate change.

Nesvetailova underscores that the mounting debt crisis stems not only from the wave of debt after the Global Financial Crisis of 2008, the cascading crises since the COVID-19 pandemic and the aggressive monetary tightening in developed countries.

She points out that the main roots lie in the structural flaws of the global sovereign debt architecture, “which offers inadequate and delayed support to countries in debt distress.” The Trade and Development Report unpacks the current inequalities, inflexibilities, and problems of the global sovereign debt architecture, outlining a strategy to address them.

The report advocates for a thorough re-evaluation of these factors, which encompass demographics, public health, global economic shifts, rising interest rates, geopolitical realignments, political instability, as well as the implications of sovereign debt on industrial policies in debtor states.

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It proposes a five-stage life cycle for sovereign debt as a conceptual framework to analyse and improve the global debt architecture. The stages include incurring debt, issuing debt instruments, such as bonds and loans, managing debt, tracking debt sustainability and, if necessary, restructuring or renegotiating the terms of debt.

“We’re urging new creative thinking in all stages of the debt cycle, as well as new approaches to bridge the persistent divide between statutory and contractual solutions,” says Penelope Hawkins, head of UNCTAD’s debt and development finance branch.

Recommendations and policy actions 

The UNCTAD report outlines a comprehensive set of recommendations to recalibrate the global debt architecture in line with developing countries’ needs.

A key recommendation is to boost concessional loans – characterized by lower interest rates and longer repayment terms – and grants. This could be done by increasing the base capital of multilateral and regional banks to expand their lending capacity.

Another way to raise concessional finance involves issuing special drawing rights (SDRs), a type of international currency the IMF created for member countries to boost their monetary reserves by exchanging them for official currencies as needed.

Also important is more transparency in financing terms and conditions. The report says that reducing resource and information asymmetry between borrowers and lenders, coupled with legislative measures in lender countries, can discourage predatory lending practices.

Further recommendations include expanding developing countries’ access to foreign currencies through central bank swaps and enhancing their resilience during external crises through standstill rules on debtors’ obligations, such as climate-resilient debt clauses.

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This would allow a halt in debt repayments, providing some breathing space for crisis management. The report also says that the global debt architecture requires well-developed rules for automatic restructurings and a better global financial safety net. Finally, it underscores the urgent need to begin work on establishing a global debt authority to coordinate and guide sovereign debt restructurings.

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2 Comments
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