Debt Vulnerabilities Research Articles

External debt vulnerability in developing countries: the economic and policy perspectives

PurposeThe purpose of this study is to empirically investigate how external debt vulnerability has affected the economy of emerging countries over time, with particular reference to Sub-Saharan African countries. It also deals with the policy issues associated with the economic effects.Design/methodology/approachThe techniques of dynamic ordinary least squares and fully modified ordinary least squares are used in this investigation, covering the period 1990–2022. A panel of 43 Sub-Saharan African countries is used in the study.FindingsThe estimation results reveal that external debt vulnerability impacted negatively on economic growth, thus validating the concerns raised about the debt problem in Sub-Saharan Africa. Furthermore, the results revealed that domestic credit and openness of economy played a passive role and were therefore unable to cushion the adverse effect of debt vulnerability. Capital stock, however, stands out as the only variable that played a significant positive role in facilitating economic growth. The results are considered to be highly reliable for short-term forecast of economic growth and formulation of relevant policies.Originality/valueOver the years, economic analysts and stakeholders have expressed concern about the inadequate ratio of foreign reserves to external debt in developing countries. The effect of this external debt vulnerability on the economy of these countries has yet to be given sufficient attention by researchers. In view of this perceived void, this current study is carried out to determine the economic and policy consequences of the problem.

Debt vulnerabilities and house price responses to external shocks

This paper investigates whether the responses of house prices to external shocks, including US monetary policy and global geopolitical risk shocks vary, depending on country-specific vulnerabilities. We find that the responses of emerging market economies’ housing prices to both US monetary policy shocks and geopolitical risk shocks are higher in magnitude and duration than those of advanced economies. We also demonstrate that emerging market economies’ housing price responses to both shocks are much more robust in more vulnerable economies. In contrast, advanced economies’ responses are relatively less affected by debt level.

Rethinking China’s growth

Abstract China’s outsized growth has almost continually surpassed outsiders’ expectations for four decades and may continue to do so in the future. However, a key element of the growth model, heavy reliance on real estate and infrastructure construction, may finally be running into diminishing returns. This paper summarizes new city-level data on China’s real estate and infrastructure capital from 2000 to 22 and provides evidence suggesting that the growth returns to new building may be falling in some regions. At the same time, real estate investment in particular has been a significant contributing factor to the local government debt vulnerabilities. Finally, the paper presents new findings on the combined direct and indirect impact of real estate and infrastructure construction on China’s economy, which has consistently exceeded 30% of GDP in recent years.

The Widening of the North–South Divide: Debt Sustainability in a World Weakened by COVID-19

This research compares the global debt trends in the aftermath of the COVID-19 pandemic, focusing on economies that frame the North and South divide. The research centers on debt ratios, which serve as indicators of countries’ ability to finance recovery and development projects. The study period runs from 2015 to 2022 and follows the IMF’s country classification, which divides the world into advanced economies (AE) and emerging market and developing economies (EMDE). The research employs panel data regressions to assess three key debt ratios—external debt to Gross Domestic Product (GDP), external debt to exports, and public debt to GDP—against various pandemic-related indicators and control variables. The analysis provides three major contributions. Firstly, an examination of external and public debt burdens is conducted, showing that escalated external and public debt burdens in EMDE contrast with increasing public debt in AE, primarily due to fiscal stimulus. Secondly, it is argued that the ongoing pandemic has intensified the widening economic gap between the North (AE) and the south (EMDE). Thirdly, a review is presented of both orthodox and heterodox policies identified in existing literature that are considered capable of mitigating external vulnerabilities in EMDE. Findings highlight the critical need for multifaceted measures to address debt vulnerability and promote sustainable economic recovery in a post-pandemic world.

Inflation a risk in Bolivia: in the face of natural gas and NIR deaccumulation and the vulnerability of foreign debt and fiscal deficit

El objetivo de este artículo, es ofrecer una visión general del modelo económico, social comunitario y productivo de Bolivia desde el 2006 al 2022, el modelo busca principalmente mantener los precios estables, es decir una inflación baja con un control en los precios nacionales a través del tipo de cambio fijo y en los precios internacionales con la subvención de carburantes que se ven afectadas por el precio del petróleo. Todo ello, soportado por las variables macroeconómicas que estudiaremos, como el desplome de los ingresos de divisas o dólares a través de la exportación de gas natural y los ahorros por la desacumulación del oro, divisas y derechos especiales de giro, como también del aumento de los gastos por la deuda externa, el gasto público en el aparato estatal con niveles de déficit fiscales y las subvenciones de la importaciones de carburantes de diésel y gasolina especialmente, cada una de estas variables afectaron a los ahorros del país a través de las reservas internacionales netas, tal como nos reflejan los datos históricos. Además, que Bolivia se caracteriza por no potenciar la investigación, desarrollo, tecnología y la innovación, el conocimiento con el capital humano cualificado y la productividad, lo que desemboco en un alto nivel informal laboral y desempleo, con una insuficiente sostenibilidad productiva en moneda extranjera dólares, infiriendo en temas de políticas públicas en el corto, mediano y largo plazo en el PIB.

Transitions towards green productivity in Africa: Do sovereign debt vulnerability, eco‐entrepreneurship, and institutional quality matter?

AbstractImproving green productivity (GP) is critical for achieving global sustainable green development. Yet, past efficiency studies on the African continent have ignored Africa's GP, estimation, and driving factors. Specifically, the role of sovereign debt vulnerability, environmental entrepreneurship, and institutional quality in ensuring Africa's green productivity development is lacking. Therefore, this study built a meta‐frontier biennial weighted modified data envelopment analysis (DEA) model to evaluate green productivity across resource‐intensive and non‐resource‐intensive African countries from 2010 to 2019. Further, the study adopted the global Malmquist‐Luenberger productivity index (GML) to investigate the dynamic changes in African green productivity growth. The results suggest that only a few African countries are efficient, implying more room for improvement for the other countries. The heterogeneity of green productivity across the resource's classification exhibits significant disparity. The technology gap also prevails among the two resource classifications of African countries. The GML index indicates that Africa's green productivity is mainly explained by technical change instead of efficiency change. The bootstrap truncation regression suggests an inverted U‐shaped nexus between growth and green productivity in Africa and resource‐intensive countries (RIC). Green environmental entrepreneurship positively affects green productivity in Africa. On the components of institutional quality, we observed that the rule of law positively influences green productivity in non‐resource‐intensive countries (NRIC) and the whole of Africa. In contrast, political stability, government effectiveness, voice and corruption negatively affected green productivity in NRIC. Also, foreign direct investment (FDI) and sovereign debt vulnerability negatively correlate to green productivity in Africa as a whole and NRIC, respectively. The findings of this study aid in raising awareness of green productivity in developing countries, which is crucial in boosting global green development.

Local Currency Bond Markets in Africa: Resilience and Subordination

ABSTRACTThis article examines the development and implications of local currency bond markets (LCBMs) in African countries in the context of international financial subordination (IFS). Despite the promotion of LCBMs as a solution to debt vulnerability, there is a dearth of research that offers a systematic empirical examination of their actual benefits along with conceptual explanations as to when and why such benefits may or may not materialize. This is especially true for countries at the bottom of the global economic hierarchy. To explore how the subordination in global production and financial systems shapes LCBM development, the article offers an empirical analysis of selected African countries that combines interviews with policy makers, officials and experts with statistical data. The findings suggest that while LCBMs offer some benefits, such as mitigating risks associated with foreign currency debt, their potential is limited by the structural processes created by IFS, such as their dependence on the global financial cycle, the relatively higher costs of this debt and the sustained constraint on macroeconomic policy making. However, there are also domestic factors which shape how these structural constraints are mediated in the context of LCBM development — in particular, historically developed financial structures of developing countries, the political economy of the state and the structure of production. This study thus contributes to the debate about the developmental benefits of domestic debt market development and the emerging research agenda on IFS.

Derisking Developmentalism: A Tale of Green Hydrogen

ABSTRACTIn the global race to scale up green hydrogen, a renewed appetite for the visible hand of the state once again promises to expand developmental space for low‐ and middle‐income countries. On the African continent, several countries have announced green industrialization ambitions that rely on mobilizing, through various ‘derisking’ schemes, private (institutional) capital looking for investible opportunities. To examine the transformative potential of this new derisking developmentalism, this article extends the critical macrofinance lens to include Thandika Mkandawire's theorization of post‐independence African developmental states. Using Namibia as an illustration, it argues that an assumption of ‘divine coincidence’ creates the ideological space for the state to forge derisking blocs but structurally weakens its ability to discipline private capital into pursuing green industrialization. As (foreign) capital dominates the state‒capital relationship in derisking developmentalism, the new green rules written by powerful investors and global North governments threaten to transform global South countries into consumers of green hydrogen technology and generators of yield for portfolio investors, thus reinforcing the structural drivers of their ongoing external debt vulnerabilities. Instead, countries should experiment with green public ownership and partnerships that discipline local green industries. Such strategies require replacing the Wall Street Consensus with a supportive global macrofinancial framework the authors call ‘Green Bandung Woods’.

International Law and Sustainable Development: Grounds for Cancellation of Africa Debts

Abstract As of April 2020, the IMF categorised seven African countries as being in debt distress, whilst identifying twelve more that were at high risk of becoming distress. It is no longer a secret that considered immutable and eternally binding, debt by the global south (i.e., poor developing African countries) has become a tool for imperial powers in the post-colonial world to enforce and perpetuate their dominance over the global south. This is despite serious global crises that emerge from, and/or were caused by the rich countries of the global north; specifically, the negative effects of the global financial crisis of 2008, devastating impact of Covid-19 pandemic, and impact of Russia–Ukraine war on the African economies and contribution to these debt vulnerabilities. Yet, the rich countries of the global north have insisted on these poor countries to continue financing their debts. The paper considers how African countries could legally cancel the repayment of the debts by relying on the principles of international law (such as pacta sunt servanda, limit to legal obligation to pay, force majeure, State of Necessity or rebus sic stantibus) and States’ declarations to commitment to sustainable development agenda (such as the European Union’s response to the adoption of the 2030 Agenda featured in its Commission’s 2016 Communication) could be used as justifying grounds for cancellation of Africa debts. The paper draws on international law and development in the light of dependency and postcolonial theories and employs the human rights-based approach, interdisciplinary and critical-analytical perspective and using qualitative empirical evidence from rich countries and institutions of the global north and poor developing countries of the global south for analysis.

Ghana

Large external shocks have exacerbated pre-existing fiscal and debt vulnerabilities, resulting in a loss of international market access, increasingly constrained domestic financing, and reliance on monetary financing of the government. Decreasing international reserves, Cedi depreciation, rising inflation and plummeting domestic investor confidence eventually triggered an acute crisis. The authorities have taken steps to tackle these deep challenges, including by accelerating fiscal adjustment. The government has also launched a comprehensive debt restructuring to address severe financing constraints and the unsustainable public debt.

The euro area sovereign debt crisis and the sovereign debt Laffer curve: a historic assessment for 1999–2014

This article addresses the historical evolution of sovereign debt trajectories since the beginning of the euro area up to the corresponding sovereign debt crisis, using certain key economic concepts previously proposed by the literature in connection to other historic sovereign debt events. It first recovers the concept of the sovereign debt Laffer curve, which efficiently addresses the non-linear relationship between economic output and public debt issuance. It then presents an important set of theoretic economic concepts that accurately describe the onset of debt vulnerabilities negatively impacting economic growth, therefore linking these fundamental but heterogeneous public debt-related concepts under the unifying concept of the said sovereign debt Laffer curve, which adequately encompasses these heterogeneous concepts. For example, fundamental concepts such as debt vulnerability, ‘debt overhang’, or ‘illiquidity vs. insolvency’ are adequately contextualized under the said Laffer curve. This innovative historical perspective might be useful in the analysis of subsequent sovereign debt crises, as well as in tackling future research in public debt sustainability, namely where the design and implementation of sustainable public debt policies in advanced economies is concerned.

Are We Heading for Another Debt Crisis in Low-Income Countries? Debt Vulnerabilities: Today vs the pre-HIPC Era

Are We Heading for Another Debt Crisis in Low-Income Countries? Debt Vulnerabilities: Today vs the pre-HIPC Era

Angola

Angola achieved macroeconomic stabilization amid a very difficult environment in 2020 and growth began to recover in 2021. The recovery picked up pace in 2022, aided by high oil prices. President João Lourenço was reelected in August 2022. Angola continues to face significant challenges, including debt vulnerabilities and the need to diversify the economy as oil production declines over the long term. The authorities’ reform agenda, including their upcoming 2023–27 National Development Plan, is focused on these challenges.

Guinea-Bissau

Guinea-Bissau is a fragile state with significant development challenges, including limited fiscal space, debt vulnerabilities and poor governance. After years of political turmoil and delayed reforms, in 2021 the authorities started the implementation of an ambitious fiscal consolidation program to ensure debt sustainability while creating fiscal space to address developmental needs. A Rapid Credit Facility (RCF) disbursement of SDR 14.2 million (50 percent of quota) was approved in January 2021 to provide urgent financing to support critical spending in health. A nine-month SMP with three quarterly reviews, approved in July 2021 ended with satisfactory performance building track record of policy implementation towards an Extended Credit Facility (ECF) arrangement. The August 2021 SDR 27.2 million allocation and the reforms underpinned by the SMP have helped address the adverse impact of the pandemic, while improving the transparency of government spending, and mitigating debt vulnerabilities.

Central African Economic and Monetary Community

CEMAC is broadly benefiting from the positive terms of trade shock amidst the fallout from Russia’s war in Ukraine. Post-pandemic economic recovery is taking hold, albeit slowly, supported by high oil prices and the lifting of COVID-19 containment measures. External reserves have started to build up, though still short of the desired level, owing in part to costly untargeted energy and food subsidies. Global inflation pressures have passed through to domestic prices, putting pressure on real incomes. Rebuilding buffers and sustaining a recovery that protects the most vulnerable will require stricter adherence to budget and reform plans consistent with Fund-supported programs and policy advice; this will ensure that part of the oil windfall is saved. Implementation of these policies in current favorable conditions is critical to strengthening resilience in the face of rising risks, including most notably to food security, debt vulnerabilities, and tightening of global financial conditions.

Niger

Niger’s political landscape is broadly stable, but the country continues to face daunting development challenges against a backdrop of fragility, which are exacerbated by a decade of conflict in the Sahel and exposure to climate shocks. Low rainfall in 2021, pushed an estimated 4.4 million people into acute food insecurity this year. Russia’s war in Ukraine added to food, petroleum, and fertilizer price pressures. Economic growth is projected to accelerate from 1.4 percent in 2021 to 7.1 percent this year, driven by private investment and the recovery in agriculture. While debt vulnerabilities have increased, the updated DSA deems debt as sustainable, and the risk of external and overall debt distress is still rated “moderate”.

Համաշխարհային տնտեսության հեռանկարները. ճգնաժամի խորացման ուրվականը / WORLD ECONOMIC PERSPECTIVES: THE SPECTER OF A DEEPENING CRISIS

The paper explores the modern prospects for the development of the world economy. In particular, it is noted that most countries managed to avoid deepening economic recession in the winter of 2022 due to the implementation of restraining economic policy. However, in the beginning of 2023 signs of financial system instability emerged due to the increase in the degree of vulnerability of the financial sector driven by a strict monetary policy. The current challenges facing the world economy can be categorized into three groups։ ensuring further recovery of economy, containment of inflation and maintenance of financial stability. From this point of view, governments are advised to adopt a fiscal strategy aimed at reducing the current inflationary pressure and mitigating medium-term public debt vulnerability. The implementation of such a policy will simultaneously stabilize the level of refinancing interest rates.

Arab Republic of Egypt

Egypt exhibited resilience to the COVID-19 pandemic shock following timely policy response supported by the 2020 Rapid Financing Instrument (RFI) and 2020–21 Stand-By Arrangement (SBA). While performance under the SBA was strong, the immediate health crisis delayed efforts to re-invigorate much needed structural reforms while high public debt vulnerabilities continued to expose the country to changes in global financial conditions and investor sentiments. As economic recovery gained momentum during FY2021/22, imbalances also started building amidst a stabilized exchange rate. The outbreak of Russia’s war on Ukraine crystallized pre-existing pressures, giving way to capital outflows and large reserves losses while high commodity prices led to rising inflation. Trade spillovers have also been significant given Egypt’s dependence on Russia and Ukraine for wheat and tourism. In October, the authorities took bold policy actions to unwind prior policy distortions including a shift to a flexible exchange rate while taking measures to help shield the Egyptian population from a mounting cost-of-living crisis. But global uncertainty casts a long shadow on Egypt’s recovery and the longstanding need for advancing deep structural reforms to spur sustainable, inclusive, and job-rich growth remains.

Sovereign Debt Vulnerabilities in Asia and the Pacific

Sovereign Debt Vulnerabilities in Asia and the Pacific

Towards HIPC 2.0? Lessons from Past Debt Relief Initiatives for Addressing Current Debt Problems

Abstract When the COVID-19 pandemic added to already elevated debt vulnerabilities in low-income countries, the G20 launched the Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatments beyond the DSSI, which have provided limited relief so far. For several countries, deeper and more wide-ranging debt treatments will likely be needed to secure future debt sustainability. This paper looks at the Heavily Indebted Poor Countries (HIPC) initiative, the largest and most comprehensive debt relief effort for low-income countries to date, as a potential reference point for the 2020s. While the HIPC initiative appears to have been a qualified success, its replication in the current context would be infeasible and undesirable. Creditor base heterogeneity justifies a more flexible, differentiated approach to debt restructuring. Yet, the HIPC experience holds valuable lessons. “Delay and replay” tendencies should be avoided. Involving commercial creditors is a real challenge, requiring carrots and sticks. And imposing extra conditionality on debt relief proceeds could be helpful but should not be overdone. Even if the Common Framework is unlikely to suffice in case of a systemic debt crisis, its inter-creditor dialogue could perhaps serve as the basis for a more inclusive advisory body or forum for debt restructuring.