A demand for justice and change in the rules of debt and the financial architecture
The Southern-Led CSO Global Meeting on Debt in Bogota, Colombia
AFRODAD, together with Latin America Network for Economic and Social Justice(LATINDADD), Asia Peoples Movement on Debt and Development (APMDD), and its partners; the European Network on Debt and Development (Eurodad), Jubilee USA Network and the CSO FFD Mechanism convened the Southern Led CSO Global meeting on Debt between the 20th and 21st of September 2023, in Bogota Colombia, bringing together over 70 experts and activists from Civil Society Organizations and debt social movements to discuss challenges, demands, and strategies towards global advocacy, from a civil society perspective, in dealing with the current debt crisis facing Global South countries.
The Debt Burden of Developing Countries in the Global South
The debt burden of Global South countries is increasingly becoming too heavy to bear, with 54 countries in debt and squarely setting them on the course of the “fourth wave of debt”, which had incidentally started a decade earlier[1]. Debt servicing is effectively crowding out spending on Sustainable Development Goals, and basic service spending. A strong recognition during the conference and the core of the debt crisis facing Global South countries was the failure of the current international financial architecture, which has unequally supported the growth of the Global North at the expense of the well-being of the people in the Global South, through its neoliberal approach of economic transformation. Today, it is a system unfit for purpose, in a world where climate change, increasing systemic risks and highly integrated markets have fixed developing countries into volatile financial markets, characterized by recurring global financial crises and sovereign debt distress due to high borrowing costs, leading to vast underinvestment in global public goods such as climate action.
At the Annual IMF/World Bank Spring meetings earlier this year, the IMF openly stated that there was no debt crisis[2]. Not surprising then, was the exasperation expressed during the conference for the International Monetary Fund (IMF) and other Multilateral Development Banks (MDBs), as drivers of the debt problem in Global South countries. During the Covid-19 pandemic, for example, IMF made rapid emergency loans to several countries in the Global South that were desperate for liquidity, many of which contained commitments to new or renewed austerity programs after the pandemic, with “conditions” framed as commitments by governments, to reduce or freeze public sector wages and constrain public spending, while pushing for an increase in taxes effectively fixing countries deeper into debt. A recent report published by Human Rights Watch (HRW), which reviewed 38 loan programs by the IMF between March 2020 and March 2023, showed that 56% of the countries that had IMF loan programs approved in this period were African countries, and the programs directly impacted one in eight people’s economic, social and cultural rights leading to rising inequality, demonstrating the utter skewness of the international financial architecture.
Domestic debt in the Global South was noted as the new monster to contend with, witnessed by the overwhelming increase in its volume. Of particular concern, is the increasing role of securities in the composition of domestic debt (bonds) which are more difficult to track in terms of who is holding the debt and what was the money used for, more so in Latin America and Asia. Further, the increasing prominence of China in lending loans for infrastructure development has contributed to the region’s soaring debt levels. According to the World Bank, China makes almost half of the total IDA official bilateral totaling about $100 Billion. During the conference, it was pointed out that Chinese loans are often marred with opacity, have widely varying clauses and modalities, have low standards of engagement, and pose a great challenge during debt negotiations, in cases of default, evidenced by countries such as Zambia and Sri Lanka.
[1] https://afrodad.org/wp-content/uploads/2023/07/Southern-Debt-Report-Characteristics-and-Challenges.pdf
[2] https://afrodad.org/dont-blame-the-cook-blame-the-recipe-international-tax-convention-duplication-or-duplicity/
Debt Restructuring Mechanisms
In the 1980s, several Latin American countries were granted relief under the Brady Plan, after almost four years of negotiations, a delay that led to a “lost decade of growth” which negatively impacted already vulnerable populations[1]. Similarly, in the same period and after years of calling for debt cancellation by governments and Civil Society Organizations[2], countries in Sub-Sahara who were in a debt crisis and channelling a huge chunk of their resources towards debt servicing with little left to be spent towards development with social development, received debt relief through the Heavily Indebted Poor Countries (HIPC) and the Multilateral Debt Relief Initiatives (MDRI) of the IMF and World Bank in the late 1990s and early 2000s. However, despite providing significant relief, these initiatives came in a little too late and did not necessarily prevent a resurgence in debt burdens[3]
The Debt Suspension Service Initiative (DSSI), launched by G20 countries and other international financial institutions during the COVID-19 outbreak, and like HIPC and MDRI, offered a moratorium on bilateral payments owed to G20 members and their policy banks to allow low and middle-income countries the fiscal space to combat the pandemic. Out of the 73 eligible countries, only 48 applied to the scheme where $10.3 billion was suspended and $0.6 billion was cancelled while $36.4 billion continued to be paid. However, neither multilateral development banks nor private lenders were obligated to participate in DSSI despite being the largest lenders in many Global-South Countries. Thus, there were huge variations in the proportion of debts suspended, which only accounted for 12% of the participating countries’ public and publicly guaranteed debts, which was a significantly limited amount in real terms[4]. Further, even though G-20 countries continually called for private creditors to participate in the suspension, they did not take any significant steps to compel them and instead private creditors continued to receive payments, enriching banks, and hedge funds at the expense of governments reducing funding in public services in lower-income countries where the money would have been most beneficial and helped Global-South economies during the pandemic.
The G-20 Common Framework for Debt Treatments, perhaps to remedy failures of the DSSI by reflecting changes in the creditor landscape, and task member lenders such as China India, and Saudi Arabia, and private creditors, to provide similar levels of debt relief as Paris club debtor countries was launched in October 2020. Together with Ethiopia and Zambia, Chad, applied for debt treatment under the framework and reached an agreement with its official and private creditors two years after joining. The success of the agreement came after Chad entered IMF’s Extended Credit Facility Program in December 2022, where it was approved to receive SDR392.56 million (about US$570.75 million) to help meet its large balance-of-payments and budgetary needs and catalyse financial support from official donors.[5] Zambia reached an agreement with its official creditors after a protracted process to restructure its $6.3 billion debt and unlock a $188 million disbursement from the IMF. The agreement, however, was only with bilateral creditors and excluded private and multilateral creditors. Unless private creditors are compelled to participate in these debt restructuring initiatives, countries like Chad and Zambia will be forced to continue to spend more on debt rather than social sector spending to promote development.
A debt restructuring mechanism, anchored in the UN for a fair, independent, transparent, and binding process for debt negotiations between debtors and creditors was proposed and discussed therefore, a better mechanism and cure to the geopolitical dynamics and imbalances of power that affect debt restructuring for global south countries and a counter to the threat of losing access to capital markets through rating downgrades, a concern for debtor countries when considering debt restructuring proposals/mechanisms. Daniell Prates, Senior Economic Affairs Officer at the Debt and Development Finance Branch, Division of Globalization and Development Strategies, outlined the appropriateness of UNCTAD’s proposal towards the establishment of a multilateral legal framework for sovereign debt restructuring process and urged political support and momentum from Global South Countries, backed by Civil Society Organizations.
Besides a global framework of debt restructuring, legislation both in borrowing and creditor countries to ensure democratic and transparent governance and management of sovereign debt and fair debt resolution was deliberated as a strategy for promoting binding responsible lending and borrowing principles and consideration including, debt contracts with state-contingent or climate clauses that support debt suspension in the event of external shocks. On the other hand, a coordinated collective action calling for unconditional debt cancellation of all unsustainable and illegitimate debts from all the creditors, especially in the case of odious or illegitimate debts, was proposed as an alternative towards debt relief for Global South countries, to free up resources for development and expand their fiscal space.
[1] Arias, M. A., & Echavarria, P. R. (2021, December 9). Sovereign Debt Crisis in Europe Recalls the Lost Decade in Latin America. https://www.stlouisfed.org/publications/regional-economist/january-2015/sovereign-debt-crisis
[2] Baillot, Hélène. “A Well-Adjusted Debt: How the International Anti-Debt Movement Failed to Delink Debt Relief and Structural Adjustment.” International Review of Social History 66, no. S29 (2021): 215–38. doi:10.1017/S0020859021000146
[3] Lars Jensen, “Avoiding ‘Too Little Too Late’ on International Debt Relief,” United Nations Development Programme. October, 2022, https://www.undp.org/publications/dfs-avoiding-too-little-too-late-international-debt-relief (accessed October 2, 2023)
[4] https://oxfordbusinessgroup.com/articles-interviews/who-are-the-biggest-winners-in-the-g20s-debt-relief-programmeq
[5] https://www.imf.org/en/News/Articles/2021/12/10/pr21375-imf-executive-board-approves-new-extended-credit-facility-ecf-arrangement-for-chad
A Global-South Spin to Debt Relief
As they say, a goal without a plan is just a wish! As a demand and strategy, CSOs committed to engaging, empowering, and creating awareness amongst the citizens around the causes, origins, and impacts of debt, and building stronger alliances with other movements. The conference ended with CSOs present, defining clear national, regional, and global strategies that were outlined in an outcome document, to continue the efforts started years ago, towards a debt-free Global South, with a stronger resolve of pushing for the dismantlement of a global financial system, that favors market-based solutions and have only exacerbated the debt problem, over two decades later. The launch of the Southern Debt Platform was a great culmination of the conference, a sign of solidarity by Global South CSOs, in demanding fair access to finance that is debt-free.