The prevailing state of uncertainty due to the Covid-19 pandemic, threats of war, and the worsening climate crisis appears to be leading many people to think about disaster containment and crisis management. 

Medical efforts and the mass distribution of vaccines have inspired hopesof curtailing the spread of Covid-19 and its variants and bringing this infectious disease under control. There are also hopes, albeit dwindling, that the sabre-rattling and war drums that are reverberating ever louder at the time of writing will eventually subside and that geopolitical tensions will abate before they spin out of control. 

Ambitious goals have been set in order to protect the world from climate change, promote sustainable development, and end extreme poverty, despite obstaclessuch as the Covid-19 pandemic and political conflicts that hamper progress towards such goals. 

As the world continues to struggle to recover from the humanitarian and socio-economic impacts of the Covid-19 pandemic, it would be wrong to ignore their temporary and lasting impacts on domestic and world debt. The pandemic struck at a time when the world was already facing mounting debt, with the sharp drop in interest rates following the 2008 world financial crisis encouraging all and sundry to take out loans, regardless of their ability to repay them. 

As a result, governments, companies, and individuals went more and more into accumulation of loans  in what has become known as the fourth global wave of debt. None of the first three waves ended without a crisis, the first occurring in Latin America in the 1980s, the second in Southeast Asia in the 1990s, and the third, resulting from the US mortgage crisis, being global.

Last week, the World Bank Group released its 2022 World Development Report (WDR) entitled Finance for an Equitable Recovery. Its analysis delivers several important messages regarding post-pandemic risks and spillovers: 

- The increase in non-performing loans (NPLs) necessitates more transparency, reporting, and efforts to reduce the share of these NPLs in bank portfolios and to ensure the sustainability of the banks and their ability to perform their function of extending credit;

- Putting off remedying the NPLs has economic, financial, and social consequences, as doing so can hamper access to project financing, undermine financial-inclusion efforts, and extend the time needed for economic recovery;

- Constraints on access to credit can be overcome through innovation and the development of financial technology and digital solutions that help to manage credit risks efficiently. Credit-facilitation and risk-management measures in the framework of an integrated growth and development policy can help to support personal and household consumption and stimulate investment, production, and exports with favourable impact on employment;

- The presently unprecedentedly high levels of sovereign debt necessitate proactive management in order to free up the resources needed for recovery. The WDR warns of the adverse effects of delaying the proper management of sovereign debt, such as the declining performance of the economy, stagnation, mounting inflation, and the need to reduce essential public spending on education, healthcare, and social safety nets. 

It should be stressed that the financial risks mentioned in the report are strongly interrelated. At times of crisis, private-sector debt may become a public-sector burden if it is owed to foreign creditors. A sovereign debt crisis prevents governments from fulfilling their obligations because the costs of the crisis consume their economic resources and sap political capacities. 

Obviously, therefore, governments must avert a crisis of this sort and reduce the possibility of its occurrence. But this requires close coordination between monetary and fiscal policies, as well as international cooperation between creditors,  donors and borrowers.

To forestall such debt crises, the world’s economies have to recover and return to their pre-pandemic levels of GDP. Forty per cent of the world’s high-income economies have now surpassed their average levels in 2019 (i.e. before the Covid-19 pandemic) because they were able to mobilise inexpensive relief-financing and speedily inoculate more than 70 per cent of their populations. 

However, as per the WDR only 27 per cent of the middle-income countries and 21 per cent of the developing countries have managed to bring their GDPs up to pre-pandemic levels. The developing countries’ declining economic performance will not only dampen their prospects of closing the gap with the developed and higher-income countries, but it will also hamper their ability to meet their international debt-servicing obligations. 

This is all the more the case given current world inflation rates, current and anticipated hikes in global interest rates, and the impacts of these on taking out new loans and financial flows to the developing countries.

Sad to say, there is still no dependable, fast, and efficient international framework within which sovereign debt can be restructured. The facilities that were provided after the pandemic cannot be considered a comprehensive system. The debt-servicing suspension initiative that the G20 group of countries introduced in 2020 did help the low-income countries in their efforts to mobilise the necessary responses to the pandemic. However, the initiative expired at the end of 2021, which means that these countries are now required to pay both their current and previous debt-servicee.

Moreover, the G20’s Common Framework for Debt Treatment, meant to deal with liquidity and debt distress problems caused by the pandemic, cannot be described as comprehensive. It does not include debt owed by middle-income countries, and there is nothing to oblige private-sector creditors to contribute to any settlements. In addition, the process is very slow, as experienced by the three African countries, Chad, Ethiopia and Zambia, which applied to  make use of the framework.  

Unfortunately, the present international political situation is not conducive to making significant progress towards an international financial system that is better able to cope with debt or introduce more effective and equitable debt-management mechanisms. Efforts towards these ends require cooperation and political will, and the failure here was not due to a lack of technical or legal solutions, even when we take into account the ways in which world debt has grown more complex and intertwined than it was during the three previous waves. 

Financial-sector institutions now play a more critical role, especially given the higher share of non-traditional lenders among creditors, includingbondholders, and official creditors who are not members of the Paris Club, which complicates negotiations for debt restructuring. 

It would be wrong to imagine that it is possible to develop an effective debt architecture or comprehensive system for debt resolution and restructuring in the absence of a more effective and fairer international monetary and financial system. Whenever a crisis hits, we hear talk of the need for reform. But once the crisis passes, we find no discernible change to the existing rules and arrangements, which are connected with the political and economic order that emerged after World War II and evolved in certain ways after the end of the Cold War.  

In a world in an intense state of flux, as exemplified by the rapid shift in the economic balance between the established powers and the emergent ones, it would be best to prepare for developments that will ultimately shape a new world order in the future. It is to be hoped that this will be one that is more peaceful than those we have seen thus far. As for the principles on how to deal with these developments, we will turn to those in the next article. 

---

* An Arabic version of this article appeared on Wednesday in Asharq Al-Awsat. 

*A version of this article appears in print in the 24 February, 2022 edition of Al-Ahram Weekly.