As it approaches the half-way mark of its Group of 20 (G20) presidency, India is making little progress on the major challenges facing the G20 and the world economy.
Perhaps most concerning is that developing country debt distress has continued to increase to alarming levels and the cost of capital is at new highs just at the time when developing countries need to mobilise trillions of dollars annually to meet the UN 2030 Sustainable Development Goals (SDGs) and Paris Climate pledges. Time is running out—for India’s presidency and for developing countries alike.
But India still has a chance to lead. In response to the North Atlantic financial crisis of 2008 and 2009, the United States Federal Reserve embarked on unprecedented ‘easy money’ policies that were followed by the other major central banks in advanced economies. Low interest rates led to a surge in capital flows to governments and corporates in emerging market and developing countries. The surge in capital flows helped spur economic growth and appreciated exchange rates. Debtors and creditors alike thought such a state was the ‘new normal’ and continued to lend and borrow—external debt to developing countries more than doubled between 2008-2019 and was already singled out as a cause for concern.
Then came the polycrisis: the Covid-19 pandemic, Putin’s invasion of Ukraine, numerous climate shocks and now the rise of global interest rates. These shocks have triggered massive capital outflows from the Global South, exchange rate depreciation and a ballooning of the debt levels at the same time when interest rates are too high to roll over those debts.
Three actions are needed, all of which are on the table for India’s G20 presidency but few are gaining momentum. First, developing countries need more liquidity through new allocations of Special Drawing Rights (SDR) at the IMF and the re-channeling of SDRs from rich to poorer countries. Advanced economies pledged to re-channel at least $100 billion of their SDRs to developing countries but are falling short. India must compel G20 members to deliver the $100 billion in pledges to developing countries.
The World Bank and other multilateral development banks (MDBs) do not have enough capital to meet the needs of developing countries and are not using their existing balance sheets to their maximum potential. Homi Kharas and Amar Bhattacharya of the Brookings Institution estimate that the World Bank needs to up its lending to $1 trillion by 2030, which could be achieved by providing a capital increase and stretching the Bank’s balance sheet. India needs to ensure that the World Bank receives a capital increase and optimises its balance sheet to not only increase financing but also to bend down the cost of capital in these turbulent times through grants and concessional finance.
Finally, this is a 1990s-like moment when developing countries were in severe debt distress and lacked the ability to mobilize resources for the 2015 Millennium Development Goals. Indeed, the United Nations Development Programme says that the number of developing countries spending more than 20% of government revenue on external debt service now equals the number that were in that situation in the 1990s when the ambitious Highly Indebted Poor Countries (HIPC) Initiative was put in place.
However, the circumstances and profile of the heavily indebted countries this time is different. There are many middle-income countries in serious debt who should be included in relief negotiations, debtors are facing a wider multitude of creditors with more diverse interests and the costs of inaction are higher. The Vulnerable Group of 20 (V20), a coalition of 58 climate vulnerable finance ministers, and independent experts have advanced proposals that address the Common Framework’s limitations.
Read More at https://www.financialexpress.com/opinion/india-can-help-beat-global-debt-distress/3104877/
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