Thursday, July 25, 2024

Crisis of Debt in Developing States

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A major issue of post COVID economic recovery has been the debt crisis engulfing several developing countries

The debt crisis that developing countries face around the world is a lethal combination of high inflation stoked by the Russo-Ukraine war.

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Other factors include global tightening of interest rates by central banks to fight this inflation and increased poverty that many countries have faced.

Theoretical Idea

Debt is an integral part of capitalistic ecosystem.

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Without the flow of capital and the accumulation of debt (at sustainable levels) no country’s economy can hope to function sustainably.

Of late, developing countries have been experiencing severe debt crisis which has sparked a re-run of the Eurozone crisis of the early 2010s.

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Predatory Lending of China

China, under the garb of BRI, conducts what is known as debt trap diplomacy.

In this type of economic diplomacy-the Chinese government will invest massive amounts of money in the infrastructure and other core sectors of a country at high rates of interest.

On the surface the scheme of things will appear to be very attractive.

But the sheer scale of investment ends up overwhelming developing countries in question and puts them under debt.

If they are unable to pay back the loans at such exorbitant rates of interest it results in accumulation of debt and makes the host country dependent on China.

They start dictating their own terms and conditions, often detrimental for developing countries’ economic sovereignty.

COVID-19- Silent Killer

Apart from China’s predatory lending practices under the garb of development.

Another, albeit very recent event of astronomical proportions has exacerbated the debt crisis of developing countries- the COVID-19 pandemic.

Lack of economic activity, followed by gradual re-opening of economies which saw unusual spikes of inflation around the world causing gradual hikes in interest rates around the world by central banks.

This increased the burden on developing countries’ ability to pay back their loans to their creditors causing the possibility of global loan defaults.

Policy Prescription

To ease the debt burden on developing countries, some policy prescriptions are worth mentioning-

Firstly, reaching a global consensus on the need to ensure sustainable restructuring of debt burdens of the developing countries.

Secondly, multilateral financial institutions must synergize their strategies to urgently address the issues surrounding the sustainability of debt that the countries of Africa require in the aftermath of COVID pandemic and the continuing Russo-Ukraine war.

Lastly, if possible, accepting some haircuts to provide overall relief to developing countries’ needs by the developed world.

This is more applicable in the case of China, which single-handedly responsible for putting many of the developing countries in debt imbroglio.


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