IMF warns of indebtedness of poor international locations as a result of inflation and curiosity
25% of emerging countries and more than 60% of low-income countries face difficulties with their sovereign debt. Some are already in default.
Under pressure during the pandemic, public finances are under pressure across the world, amid a general rise in prices and rising interest rates, a scenario that raises fears of a debt crisis in the most fragile economies.
“Financial vulnerability is high for governments,” the International Monetary Fund (IMF) said in its report on global financial stability.
The reason: the combined effect of a high debt ratio and an increase in interest rates by central banks to try to stave off inflation.
Last Thursday, the director general of the IMF, Kristalina Georgieva, went so far as to point out that 25% of emerging countries and more than 60% of low-income countries face difficulties with their sovereign debt. Some are already in default.
A sign of these growing difficulties, the IMF has approved 16 aid programs since the beginning of the Russian invasion of Ukraine, totaling US$90 billion. And it analyzes 21 more requests.
“We are increasingly seeing private investors distinguishing emerging countries based on their economic situation. It is an evolution from previous crises”, where a problem in one emerging country spread to others, said the director general of Moody’s Credit and Strategy department, Atsi Sheth, in conversation with AFP.
The pandemic has deteriorated public finances in most countries, despite spending levels that are too uneven to tackle it: the poorest nations have used the equivalent of a 3% cap on their Gross Domestic Product (GDP) to deal with the situation, while developed economies spent 15% to 20%, calculated the World Bank.
When the world economy was expected to return to the positive path in 2022, the war in Ukraine added an element of tension by causing a significant increase in energy and food prices. This situation plunged the poorest countries into a real cost-of-living crisis.
World Bank President David Malpass even spoke of the risk of a “fifth wave of debt crises”.
“We are facing an unprecedented situation. States that have a high level of indebtedness and are importers of energy and food will have difficulties, even more so if they borrow in dollars”, said Sheth.
The IMF has available credit of up to US$ 1 trillion “and could even use its gold reserves as collateral, if it had more resources”, said the president of the Center for World Development (CGD), Masood Ahmed, in interview with AFP.
However, the IMF and the World Bank have limits to their mandate: they cannot lend to countries facing the risk of default unless they restructure their debt. And that requires the agreement of creditors.