Poor countries are saddled with billions in loans from rich countries, and the coronavirus threatens to trap them in a vicious cycle of debt.

Pakistan’s Prime Minister Imran Khan has become perhaps the first leader of any developing country to ask for debt relief in the wake of the global health and economic crisis created by the coronavirus disease. 

“The world community has to think of some sort of a debt write-off for countries like us which are very vulnerable. At least that will help us in coping with it,” he said in an interview this week. 

Repayment of external debt is a major strain on Islamabad’s ability to spend money on better education and healthcare facilities. Its economy is saddled with an external debt of more than $100 billion

In 2019, around $11.6 billion was paid to external creditors as debt repayments - that’s nearly the total amount of money that the State Bank of Pakistan has in its accounts ($12.8 billion) at the moment. 

“As the coronavirus outbreak continues and the economic impacts deepen it is quite likely this will fuel further calls for debt write-offs from developing countries and emerging markets,” UK-based Oxford Economics told TRT World in a statement. 

The loose monetary policy that many developed countries pursued after the 2008 recession fuelled credit growth in the corporate sector as well as making it easy for developing countries to borrow from foreign lenders. 

A consequence of 'easy money' has been a sharp spike in debt levels for poor countries. 

According to an analysis of the UN Conference on Trade and Development, the total debt of developing countries in 2018 reached almost twice as much as their combined GDP the highest on record. 

Heavily indebted Lebanon has been beset with protests in recent months.
Heavily indebted Lebanon has been beset with protests in recent months. (AP)

To make matters worse, already wary foreign financial institutions have lent heavily to companies in developing countries.  

In just five years between 2012 and 2017, the average external debt as a percentage of the GDP of low-income developing countries (LIDC) surged to 50 percent from 30.35 percent. 

And the burden of debt servicing for LIDC, which includes states such as Bangladesh, Cameroon, Ghana, Kenya, Uganda, Vietnam and Zambia, has jumped from 0.5 percent of GDP to 1.4 percent in the same period. 

Past precedents 

It won’t be the first time rich countries decide to give debt relief to underdeveloped countries. 

In 2001, developed economies agreed to give debt service relief amounting to $34 billion to 23 Heavily Indebted Poor Countries (HIPC), 19 of which were in Africa. The initiative was meant to tackle poverty. 

Countries such as Pakistan have a lot to worry about in the present circumstances. A major chunk of its foreign exchange goes to paying off foreign debt. An ever-widening trade deficit due to its inability to make and export high-tech goods makes it vulnerable to external shocks. 

For instance, the prolonged closure of malls in Europe can hurt its key textile exports. The crash in oil prices has put the fate of millions of expatriates working in Saudi Arabia and other Middle Eastern countries in jeopardy. 

Remittances sent home by these expats help Pakistan meet its foreign currency requirements, which otherwise would have to be met with even more loans. 

The German Debt Agreement signed in 1953 eased the debt burden of West Germany and helped revive the economy after World War II.
The German Debt Agreement signed in 1953 eased the debt burden of West Germany and helped revive the economy after World War II. (AP Archive)

Venezuela, Lebanon and Zimbabwe are among the nations struggling with high debt and poverty. 

Some experts such as Turkish economist Sabri Oncu say that the developed world can repeat the concessions that were offered to Germany after World War II. 

In 1953, 20 major powers wrote off most of Germany’s debt while rescheduling the remaining to be paid over many years at a low interest rate. More significantly, Germany was supposed to make the payments only if it ran a trade surplus and the repayment didn’t exceed 3 percent of its annual export earnings.

"Then came the economic miracle of West Germany. Why can we not do something similar for poor countries under current conditons? We must," Oncu told TRT World

That was significant for Germany since otherwise it would need to borrow more to return the previous loans.

Oncu says Khan has a strong case. "All developing countries should line up behind him and ask for debt relief from their foreign creditors including official creditors such as the IMF and the World Bank." 

Even the corporate debt of such countries must be restructured, he says. 

"As Michael Hudson always says, debts that cannot be paid will not be, so we better cancel those that cannot be paid." 

A lot to consider 

Developed countries including the United States, Japan, South Korea, Germany and members of the European Union (EU) are themselves focused on fighting the pandemic. 

“Post-crisis there will also be obstacles since developed economies will themselves have expanded fiscal deficits and debt burdens as a consequence of policy responses to the pandemic,” says Oxford Economics. 

There’s also the problem related with China’s growing role as a lender to poor countries. China has loaned more than $400 billion to countries including Ecuador, Venezuela, Pakistan and Sri Lanka becoming their single largest creditor. 

Developed countries would be reluctant to act if they see that their debt right-off wouldn’t help reduce the overall burden of these countries due to increased borrowing from China, says Oxford Economics. 

“The fact that China is not a member of the Paris Club a club (of rich countries) set up to coordinate the restructuring of bilateral lending to poor countries makes such restructuring particularly complicated and thus less likely.”

Source: TRT World