Before the COVID-19 pandemic was announced by the World Health Organisation in March 2020, our poorer nations already struggled with seriously high – and unpayable – levels of debt. Between 2011 and 2019, the World Bank reported, “public debt in a sample of 65 developing countries increased by 18 per cent of GDP on average – and by much more in several cases. In sub-Saharan Africa, for example, debt increased by 27 per cent of GDP on average” (Marcello Estevão and Sebastian Essl, ‘When the Debt Crises Hit, Don’t Simply Blame the Pandemic’, World Bank (blog), 28 June 2022, (https://blogs.worldbank.org/…/when-debt-crises-hit-dont…).
The debt crisis did not take place because of government spending on long-term infrastructure projects, which could eventually pay for themselves by increasing growth rates and allow these countries to exit from a permanent debt crisis. Rather, these governments borrowed money upon borrowed money to pay off older debts to wealthy bondholders, as well as to pay for their current bills (such as to maintain education, health, and basic civic services). “Among the thirty-three sub-Saharan countries in our sample”, the World Bank noted, “current spending outstripped capital investment by a ratio of nearly three to one” (Estevão and Essl, ‘When the Debt Crises Hit, Don’t Simply Blame the Pandemic’).
When the pandemic struck, countries that had adopted the World Bank-International Monetary Fund policy to grow their way out of the debt crisis floundered. Growth rates shrank, which meant that debt volumes ballooned, and so these governments decided to borrow more and adopt deeper austerity policies, which dramatically increased the debt burden on their populations.
Registering, in their own way, what is universally acknowledged as an intractable debt crisis in the poorer nations, the International Monetary Fund (IMF) warned that a serious banking crisis is likely to emerge (while ignoring the factors driving this scenario). “Our updated global bank stress test shows that, in a severely adverse scenario, up to 29 per cent of emerging market banks would breach capital requirements”, the IMF wrote in October 2022.(International Monetary Fund, Global Financial Stability Report – Navigating the High-Inflation Environment (Washington, DC: IMF, October 2022),https://www.imf.org/…/global-financial-stability-report…).
This means that the context of high debt, high inflation, and low growth rates (with lowered employment expectations) could lead to the collapse of a third of the banks in the poorer nations.
Neither the IMF nor the World Bank nor indeed any of the international financial institutions (IFIs) have any credible pathway out of this crisis. Indeed, the IMF report surrenders to reality as it tells central banks across the globe to “avoid a de-anchoring of inflation expectations” and to ensure that “the tightening of financial conditions needs to be calibrated carefully, to aim at avoiding disorderly market conditions that could put financial stability unduly at risk”. (IMF, Global Financial Stability Report, ix).
The focus here is to keep ‘the market’ happy, while there is remarkably no care for the downward spiral of living conditions for the vast majority of the people on the planet. In its October 2022 Fiscal Monitor Report, subtitled ‘Helping People Bounce Back’, the IMF noted that while governments’ top priorities must be “to ensure everyone has access to affordable food and to protect low-income households from rising inflation”, they must not attempt “to limit price increases through price controls, subsidies, or tax cuts”, which would “be costly to the budget and ultimately ineffective”. (International Monetary Fund, Fiscal Monitor: Helping People Bounce Back (Washington, DC: IMF, October 2022), https://www.imf.org/…/2022/10/09/fiscal-monitor-october-22).
In January 2023, the IMF’s World Economic Outlook predicted a slightly better, albeit ‘subpar’, growth forecast but warned of continued worries of debt distress in the poorer nations, writing that “The combination of high debt levels from the pandemic, lower growth, and higher borrowing costs exacerbates the vulnerability of these economies, especially those with significant near-term dollar financing needs”. (International Monetary Fund, World Economic Outlook Update: Inflation Peaking amid Low Growth (IMF, January 2023), https://www.imf.org/…/world-economic-outlook-update…).
The antidote to debt distress, according to the IMF, is “fiscal consolidation and growth-enhancing supply-side reforms”, namely more of the same old austerity-debt trap. If the governments of the poorer nations are told not to use these basic tools (which are used routinely in the richer nations), their only choice – as far as the IMF is concerned – is to borrow in order to provide even low levels of relief to the very poorest people in their countries. Effectively, the IMF has surrendered to the prevailing reality and offers the poorer nations no viable exit from a permanent debt crisis.
Fred M’membe President of the Socialist Party