Why ‘developing countries’ are trapped in a new debt crisis
First published at CADTM.
The World Bank report on the debts of “developing countries,” published on December 13, 2023, reveals an alarming fact: in 2022, developing countries as a whole spent a record US$443.5 billion to pay for their external public debt.
The 75 low-income nations that are eligible for loans from the International Development Association (IDA), a World Bank organization that provides loans to the world’s poorest nations, paid a record US$88.9 billion to its creditors in the same year. These 75 nations have an unprecedented total external debt of US$ 1.1 trillion, more than twice as much as in 2012. Between 2012-2022 they experienced a 134% increase in their foreign debt, which was more than the 53% increase in their gross national income (GNI).
The WB adds: “Surging interest rates have intensified debt vulnerabilities in all developing countries. In the past three years alone, there have been 18 sovereign defaults in 10 developing countries — greater than the number recorded in all of the previous two decades. Today, about 60 percent of low-income countries are at high risk of debt distress or already in it.”
A new debt crisis has begun. Vast quantities of money are being used to pay off debts, rather than addressing the increasing needs of hundreds of millions of people who desperately need support. According to another World Bank report quoted by the Financial Times, between 2019 and 2022, over 95 million more people have fallen into extreme poverty.
The World Bank acknowledges that private lenders began to turn off the tap of credit to developing countries, while squeezing the lemon to get the most repayments. New loans granted by private lenders to public authorities in developing countries fell by 23% to US$371 billion, their lowest level in ten years. On the other hand, these same private creditors collected US$556 billion in repayments. This indicates that they collected US$185 billion more in loan repayments than they disbursed. This is the first time since 2015 that private creditors have received more funds than they injected into developing countries.
The World Bank does not provide an explanation for this since doing so would require questioning the economic model and system that it supports and believes to be the only viable choice. It would also entail unmistakably placing the blame at the feet of the Western European and North American central banks, and consequently at the hands of the leaders of the main Western powers that control the World Bank and the IMF.
How can we explain how the weakest links in the global capitalist system are being affected by the current debt crisis?
We must examine the preceding 15 years in order to comprehend the current predicament.
From 2010-2012, the gradual reduction in interest rates in the North reduced the cost of debt in the South. The central banks of the most industrialized countries lowered interest rates to 0%. The aim of this policy was to keep the financial markets afloat in particular and large private companies in general. It was also intended to make public debt in the North easier to manage and refinance. This policy of very low interest rates practiced by the major capitalist powers encouraged the financing of spending through debt and led to a sharp increase in both public and private debt in the North and South of the planet. It has also reduced the cost of refinancing for developing countries.
The governments of developing countries, including the poorest, were given a dangerous sense of security by this low-cost financing. The influx of capital from the North sought better returns in the face of low interest rates in the North. Meanwhile export earnings (because the price of raw materials) remained high. Sub-Saharan African nations in poverty that had never had the chance to print and sell their sovereign debt on global financial markets were able to quickly find purchasers for their debt. Investment funds and banks in the North bought the securities of the South because they offered a better yield than US Treasury securities, or those of Japan, German, French or other European countries’ securities. All these were close to zero or no higher than two or three percent.
Without difficulty, poor countries have issued and sold their external debt on the international markets.
* Rwanda serves as a prime example. It is one of the world’s poorest nations, still scarred from the genocide of 1994, yet for the first time in its history, it was able to issue sovereign debt securities and sell them on Wall Street. This was the case in 2013, 2019, 2020 and 2021.
* Senegal was also able to issue six international bonds between 2009 and 2021, in 2009, 2011, 2014, 2017, 2018 and 2021.
* Ethiopia, also a very poor country, was able to issue an international bond in 2014.
* Benin had access more recently and issued three bonds on the international markets in 2019, 2020 and 2021.
* Côte d’Ivoire, which emerged from a civil war just a few years ago, also issued bonds every year from 2014 to 2021, even though it is also a highly indebted poor country.
* Other examples include Kenya (2014, 2018, 2019, and 2021), Zambia (2012, 2014, and 2015), Ghana (2013 to 2016, 2018 to 2021), Gabon (2007, 2013, 2015, 2017, 2020, and 2021), Nigeria (2011, 2013, 2014, 2017, 2018, 2021, and 2022), Angola (2015, 2018, 2019, and 2022) and Cameroon (2014, 2015, and 2021).
This is unprecedented over the last 60 years. This reflects a very special international situation: financial investors in the North were flush with cash, and with interest rates very low in their region, they were on the lookout for attractive returns.
Senegal, Zambia and Rwanda were promising yields of 6-8% on their securities, so they attracted financial companies looking to temporarily invest their cash, even if the risks were high.
The governments of poor countries tried to convince their populations that happiness was just around the corner. The world press reported that Afro-optimism will triumph over Afro-pessimism. African leaders boasted of their success stories, attributed to their ability to adapt to neoliberal globalization and open markets. They got plaudits from the World Bank, the IMF, and the African Development Bank (AfDB).
However, these governments have amassed up huge debt without seeking input from the people. Then the financial situation worsened when central banks decided to start raising interest rates in 2022.
From the 2020s, the downward spiral towards another major debt crisis
The combination of the pandemic, the effects of the war in Ukraine, inflation and interest rate rises by the central banks of the most industrialized countries triggered a new debt crisis in all the countries of the South. Since 2020, and especially 2022, we have been in a new situation, a new debt crisis of enormous proportions caused by four shocks to global capitalism. Yet these shocks are exogenous to the poorest countries.
First, the coronavirus pandemic caused massive deaths around the world, widespread lockdowns, and disruption of supply chains and so forth.
Second, the economic crisis, exacerbated by the pandemic, undermined the economies of developing countries, from Latin America to Asia and Africa. The suspension of air travel notably hurt nations like Cuba and Sri Lanka, whose economies relied heavily on tourism.
The present sovereign debt crisis was brought about by the combination of these two shocks. Governments had to raise public spending to combat the pandemic, but at the same time, their economies entered recessions, which reduced tax collections. Thus, sovereign debt skyrocketed.
Third, there was Russia’s invasion of Ukraine in February 2022. This immediately triggered massive speculative rises in the price of cereals such as wheat. Given that grain stocks in Russia and the Ukraine did not decline during the early months of the conflict, we may reasonably this was a speculative rise. Grain costs skyrocketed. After that, exports were banned, which reduced supply and raised prices even further. A deal was made to let shipments to start again, but terminated in July 2023.
Globally, prices have skyrocketed, especially in nations where the majority of food, fuel, and fertilizer are imported. The populations of Asian and African nations that were already severely impacted by the recession bore the brunt of inflation. A significant number of people found it difficult to keep up with the growing costs of fuel and food.
Four, and certainly most important shock, was the unilateral decision by the US Federal Reserve, the European Central Bank and the Bank of England to raise interest rates. In the United States, the Fed raised rates from close to zero percent to over 5%, the Bank of England and the Bank of Canada followed suit, while the European Central Bank raised rates to 4.5%.
These increases have had a devastating effect on the countries of the South. This is true even of countries such as Zambia and Ghana, which were considered success stories. Investment funds, which had bought sovereign bonds into these countries, realized that the rise in interest rates in the North meant that they could obtain a higher rate of return by buying such bonds in the United States, Europe and Great Britain. Thus, we witnessed financial capital repatriation from the South to the North.
Worse still, the investment funds told the countries of the South that if they wanted to refinance their debt, they would have to pay interest rates of between 9% and 15%. But in the case of Zambia and Egypt, they had to pay 26%. While the countries had no choice but to accept, many of them have no way of making their payments at such high rates. A fresh sovereign debt crisis is the outcome.
The World Bank does not recommend that the governments of indebted countries protect themselves by declaring a coordinated suspension of debt payments. Under international law, however, they have every right to do so.
In the event of a fundamental change in circumstances and external shocks, there is no obligation to continue to repay the debt.
Nor does the World Bank assume its responsibilities. It was the World Bank, along with the IMF, that encouraged the countries that are now in debt to take out as many new loans as possible. They were also encouraged to open up their economies.
If we evaluate the operations of the World Bank and the IMF, which were established in 1944 — nearly 80 years ago — we can only come to the conclusion that these two international organizations have entirely failed. A significant study that the IMF released in 2023 admits failure with devastating clarity. There is neither economic stability nor full employment, Indeed, in its April 2023 World Economic Outlook, the IMF states that it will take 130 years for developing countries to halve the gap between their per capita income and that of developed countries.
The conclusion is straightforward: in contrast to the goals set forth by the Bretton Woods institutions and the purported advantages of capitalism, the gap between developing and wealthy nations has grown even more between 2008 and 2023. Yet given the ecological crisis, humanity is facing immediate, shorter-term threats to its very existence.
We should also mention the structural adjustment policies that have led to the privatization of health systems in the South, and greater dependence of these countries on imported food. These policies, which have been bludgeoned for more than 40 years, have completely disarmed the countries of the South from coping with external shocks whether the Covid-19 pandemic, the global rise in the price of cereals or the rise in interest rates..
Two centuries ago, at the start of the capitalist industrial revolution, the difference in per capita income between what are now called developing and developed countries was very small. Today’s victorious capitalism has increased the gap between nations as never before. This does not even take into account the gap within each nation, whether in the South or the North, between the richest 1% and the bottom 50%.
It is time to dissolve the World Bank and the IMF and build another international architecture that respects human rights and nature. It’s high time we got rid of the capitalist system and embarked on an ecosocialist, internationalist, and feminist revolution.
 Read the full text here
 Martin Wolf, “The global economy holds up yet limps on,” Financial Times, October 11, 2023.
 The evolution of yields on 10-year sovereign bonds is available here. It shows that the yield on 10-year bonds in Zambia and Egypt has reached 26%, that of Turkey 25%, that of Kenya 18.5%, and that of Pakistan and Uganda 16%.
This is a slightly edited version of the article. Committee for the Abolition of the Illegitimate Debt, 18 December 2023.