IMF, World Bank chiefs warn of debt squeeze in poor nations
WASHINGTON — The heads of the International Monetary Fund and the World Bank warned Wednesday that rising interest rates are squeezing the world’s poorest countries as they struggle with the coronavirus and soaring food prices. President of the World Bank David Malpass stated that there is a “huge buildup in debt, especially in poor countries.” “As interest rates rise, the debt pressures are mounting on developing countries, and we need to move urgently towards solutions.”
Malpass said the “debt crisis” is a topic of extensive discussion’ at this week’s Spring meetings of the World Bank and IMF, already dominated by other daunting issues including the war in Ukraine, the coronavirus pandemic and a slowing global economy.
IMF managing director Kristalina Georgieva told reporters Wednesday that 60% of low-income countries were in or near “debt distress” — an alarming threshold reached when their debt payments equal half the size of their national economies. Paying creditors is a sign that countries will struggle to help their most vulnerable citizens, especially as the Ukraine war disrupts food shipments and pushes food prices higher.
Countries around the world piled on debt to shield their economies from the ravages of the coronavirus pandemic and the lockdowns meant to contain it. The IMF forecasts that government debts in low-income countries will surpass 50% of gross domestic product — the broadest measure of economic output — this year, up from less than 44% in the pre-pandemic year 2019.
Globally, the massive economic assistance has worked, fueling an unexpectedly quick recovery from 2020’s pandemic recession.
But the rebound surprised businesses. They had to scramble to meet the soaring customer demand which overwhelmed factories, ports, and freight yards. Prices rose and deliveries slowed. The IMF now forecasts that consumer prices will jump 8.7% this year in emerging-market and developing countries and 5.7% in advanced economies, most since 1984.
In response to rising prices, the central banks around the world — led by the Federal Reserve of America — have raised interest rates. Higher interest rates will lead to an increase in debt burden, especially for the poorest countries.
As they rise, U.S. interest rates will also attract investment from poor countries to the United States. This will push down the currencies of developing nations and force them to pay more for imported goods and food.
Georgieva counseled central banks to move carefully, explain what they’re doing to avoid overreactions in financial markets and stay “mindful of the spillover risks to vulnerable emerging and developing economies. ”
She, Malpass and others also called for a coordinated global effort in order to assist countries struggling with debt. Similar efforts, which were started when COVID-19 hit two years ago, have since sputtered “and must be improved in time to provide meaningful relief to countries that need it,” Marcello Estevao, the World Bank’s global director of macroeconomics, trade and investment, wrote last month in a blog post. The trouble has already begun. Last week, Sri Lanka announced that it would suspend its repayments of foreign debt until the IMF completes a loan restructuring program to address the island’s worst economic crisis in decades.
Estevao stated that as many as a dozen developing countries could be unable meet their debt payments in the coming year. That’s nothing like the emerging market debt crises of the 1980s and 1990s, he wrote, but “would still be significant — the largest spate of debt crises in developing economies in a generation. ”
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