Developing economies are always much more susceptible to economic uncertainty. Now, more and more developing nations are facing a massive debt crisis in the months to come. This crisis has been fuelled by the usual suspects: rapid inflation, slow growth, rising interest rates, and a strong dollar. With their powers combined, this supergroup will almost definitely set off a strong wave of defaults in developing nations, meaning the world’s most vulnerable people will suffer. According to estimates by the New York Times, poor countries owe as much as 200 billion USD to wealthy nations, international banks, and private creditors. Because interest rates have risen so rapidly, borrowers with US debt – which is a large proportion of developing nations – struggle to repay their loans as the dollar strengthens.
If these defaults occur, perhaps it is more of a question of when these defaults occur, borrowing costs for these nations will increase. Nearly 100 million people have already been pushed into poverty this year by the combined effects of the pandemic, inflation, and Russia’s war in Ukraine. The danger poses another headwind for a world economy that has been heading directly toward a recession. The leaders of the world’s advanced economies have been grappling privately in recent weeks with how to avert financial crises in emerging markets such as Zambia, Sri Lanka, and Ghana, but they have struggled to develop a plan to accelerate debt relief as they confront their own economic woes.
As rich countries brace for a global recession and try to cope with high food and energy prices, investment flows to the developing world have been abating and big creditors, particularly China, have been slow to restructure loans. Mass defaults in low-income countries are unlikely to spur a global financial crisis given the relatively small size of their economies. But the potential is causing policymakers to rethink debt sustainability in an era of rising interest rates and increasingly opaque loan transactions. In part, that’s because defaults can make it harder for countries like the United States to export goods to indebted nations, further slowing the world economy and possibly leading to widespread hunger and social unrest. As Sri Lanka drew closer to its default this year, its central bank was forced to arrange a barter agreement to pay for Iranian oil with tea leaves.
The urgency follows lockdowns to contain the coronavirus in China and Russia’s war in Ukraine, which have stunted global output and sent food and energy prices soaring. The Federal Reserve has been rapidly raising interest rates in the United States, bolstering the strength of the dollar and making it more expensive for developing countries to import necessities for populations already struggling with rising prices.
Economists and global financial institutions such as the World Bank and the International Monetary Fund have been raising alarm about the gravity of the crisis. The World Bank projected this year that about a dozen countries could face default in the next year, and the I.M.F. calculated that 60 percent of low-income developing countries were in debt distress or at high risk of it.