THE International Monetary Fund (IMF) warned that Covid-19 pandemic, high interest rates, increasing geo-political tension and war has escalated global debt to unprecedented level, hitting record US$307 trillion in 2023.
Of the 70 high-debt countries identified, 60% of low-income developing countries are in or at high risk of debt distress, unable to pay the rising debt service cost.
This figure was 40% before the pandemic.
This is alarming as this debt bomb can detonate at any time (given USD getting stronger plus high interest rates), more countries are on the verge of defaulting with Pakistan and Egypt as the next in line after Ghana and Sri Lanka defaulted in 2022.
Governments must try to prevent this financial crisis and stop it from contagion, to avoid the repeat of the lost decade of the 1980s recession as several less-developed countries agreed to spending cuts on infrastructure, health, and education in exchange for debt restructuring, with several nations ending the decade with income levels that were even lower than in 1980.
Africa, and especially fragile countries, are vulnerable to trade linkages, and to the disruption of the trade finance accompanying a financial crisis.
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The African continent, by far, has been the worst hit by rising US interest rates. Across the region, borrowing cost has already risen to unaffordable levels. Public debt in sub-Saharan Africa has more than tripled since 2010.
Local currencies, like the Ghana cedi and Nigerian naira, have depreciated against the US dollar sharply since 2022, further increasing the cost of servicing hard-currency bonds.
Because of a low fiscal capacity and lack of formal and informal safety-nets, countries in situations of fragility, despite their limited integration into the world economy, will be the ones least able to cope with the crisis.
We may choose to ignore it, but this is a fact and representing a glimpse into world demand outlook for 2024, which is not promising.
In his speech during his visit to Tel-Aviv on October 18, United States President Joe Biden stated that he would like Congress to approve US$100 billion in security spending over the course of next year for Taiwan, Israel, and the Ukraine, as well as security along the US border with Mexico. The US (world biggest national debts at debt to-GDP ratio of 128.13%) after two failed attempts is still without House Speaker, is in a political limbo; unsure if some US government servants will even get their salary pay-check after November 17, let alone to approve Biden’s war investment as he categorises it.
What happens if the greatest economic monolith in the world cannot pay its bills? The consequences are terrifying!!”
Is the mother of all crises upon us?
- Jayaratnam is a Singaporean business leader with extensive experience working in Africa.