A dilemma for dozens of countries: Fund your schools and hospitals or pay your debt
Nigeria is now spending 96% of its government revenues to pay off the interest on its national debt. Kenya suspended salary payments to thousands of government workers in March to avoid a default on its loans.
These aren't isolated national crises. They're consequences of a major potential debt disaster looming over dozens of low- and middle-income countries. It's already forcing many of these nations to make excruciating choices between funding schools and hospitals – or avoiding defaults. And it's driving up the cost of food to record levels.
It started with low interest rates
To understand the magnitude of this problem you need to go back to the early 2010s, when historically low interest rates made the cost of borrowing money very affordable.
This was really helpful for governments of many low- and middle-income countries. Take those in Africa. "The population of Africa has doubled over two decades. And the infrastructure needs are massive," says David McNair, head of global policy at the advocacy group the ONE Campaign. "So finance ministers did the logical thing and said, 'You know, here's cheap money. Let's borrow to fund this infrastructure.' "
They went to traditional lenders – governments and banks of wealthy countries like the U.S., and multilateral organizations like the World Bank. But McNair notes that the available financing from these sources "hasn't increased dramatically at all." So low- and middle-income countries also turned to newer lenders – including China.
China was a particularly attractive option, says McNair, because when it comes to making infrastructure projects happen, "it's incredibly quick and efficient." But, adds McNair, the terms that China sets when making loans for such projects "often are not up for negotiation" – putting the borrowing country into arrangements that can be problematically harsh down the line.
Shock after shock after shock
Moreover, says McNair, "What [these borrowing countries] weren't expecting were a series of once in a generation shocks."
It started with the COVID pandemic. The resulting economic slowdown has taken a big bite out of the tourism and other revenues low- and middle-income countries count on to pay the interest on their debt.
"Then layer on another problem," says McNair. "Putin invades Ukraine."
Because Russia and Ukraine supply so much of the world's grain and oil the war helped drive up already record high prices for food and other goods.
Which brings us to a third shock: In the United States — the federal reserve has tried to tame recent inflation by raising U.S. interest rates.
Many countries' debt is denominated in U.S. dollars — and about a third of it was loaned on variable interest rates.
So with these hikes by the U.S. Fed, says McNair, "It's almost like, if you had a mortgage or a credit card and the rates went up. Because the cost of servicing debt has gone up, countries can no longer pay it."
The upshot: One in five people on the planet now lives in a country that's at or nearing what's called "debt distress" — meaning there's a high likelihood the nation will default. This includes 60% of low-income countries. But it also involves plenty of middle-income countries: "We've already seen defaults in Sri Lanka and in Ghana," notes McNair. "Pakistan could default next month."
Tradeoffs do damage
Countries — and their citizens – pay a high price when they default. Their credit rating plummets, which means for years afterward borrowing money for vital services can become prohibitively expensive – including the cost of subsidizing food at this time of high prices.
But McNair says the tradeoffs countries make to avoid defaulting are often equally damaging. "They're having to make impossible choices about whether to pay salaries, whether to keep schools and hospitals open" – or use those funds to keep paying their debt bills.
It gets worse. Sara Menker is founder and CEO of the data company Gro Intelligence. She notes that food prices have actually inched down a bit in recent months. But the benefits of that have been washed out by the fact that those U.S. interest rate increases have also strengthened the dollar — and therefore weakened the currencies of many low- and middle- income countries.
And because food is generally imported into countries at the dollar price, says Menker, if a nation's currency loses value against the dollar, the food becomes much more expensive inside that country. As a result, for many countries right now, "the actual price of imports has gone up drastically. In places like Lebanon they're up almost 2,000%."
The impact on world hunger seems inevitable. Last year, the economic shocks from the pandemic and the war in Ukraine became the main driver of food insecurity in 27 countries – nearly tripling the number of people suffering from high levels of malnutrition to 83.9 million.
Menker says she's especially worried about a subset of countries — like Egypt and Turkey – that, on top of all of these challenges, also happen to have sizable short-term loans coming due for full repayment in the next two years.
To settle up these countries will have to draw on their reserves of U.S. dollars. Which is going to devalue their currencies even further.
"And that then ends up driving inflation even further for food," says Menker. "You end up in this very precarious situation."
Why a solution isn't happening
McNair, with the ONE Campaign, says there is a solution: The holders of all this global debt need to agree on a plan to take a loss on it.
But multiple efforts by world leaders to cobble that together haven't gotten very far.
The G-20 nations have created a "Common Framework" mechanism that, in theory, debtor nations can use to convene their creditors to restructure their loans. And last week, Ghana appeared to make progress on that front. But only three other countries have tried to use the framework – Ethiopia, Zambia and Chad – and their cases have languished for months.
Similarly, while the International Monetary Fund convened a roundtable on the debt crisis last month, "at the moment what we're seeing is that leaders turn up to those meetings and essentially admire the problem," says McNair. "They say, 'There's an issue. And we welcome progress.' " And then they schedule the next meeting.
He's worried that will be the pattern again at upcoming gatherings like a summit that French president Emmanuel Macron is planning in Paris next month and a meeting of G-20 nations hosted by India next September.
China's role as a major lender has also complicated the picture. "A lot of the politics around this get tied up in the tensions between the U.S. and China," says McNair. Western officials accuse China of having created "debt traps" for many borrowing countries by insisting on unfair lending terms. So they are leery of any deal in which Western lenders would end up forgiving a greater share of the debt than China does.
"Each of the creditors is kind of pointing to the others and saying, 'You move first,' " says McNair.
Still, McNair says the biggest holdup is simply that key leaders in the U.S. and other wealthy countries aren't really treating the situation as a genuine emergency. These officials arguably have the most power to drive a solution – but they also have the least incentive to make the issue a priority because their economies and citizens are not the ones under threat.
"If you look at this purely in economic terms, in the global economy a few relatively small economies defaulting isn't considered a systemic risk," he says.
But McNair argues that wealthy countries need to consider the larger consequences of failing to act. Spiraling food costs can often tip countries into instability. He's particularly worried, for instance, about Nigeria – which has a huge population and seeds of instability already present in the form of ethnic and religious divisions.
"If you look at the humanitarian fallout, if you look at the geopolitical implications – the risk of food riots and instability," the global debt crisis "is something that political leaders should really be taking seriously," says McNair.
"We need to step above these rivalries between countries," says McNair. Otherwise, he adds, everybody loses.
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