UN warns over global fallout from debt crisis in poor countries

A United Nations report has stressed the vulnerability of poor states to falling commodity prices and higher interest rates, sparking fears of a fresh debt crisis in developing countries that would send shockwaves through the global financial system.

The annual report from the UN conference on trade and development (Unctad) said the benefits of the debt relief provided to some of the world’s poorest countries as a result of the mass public campaigns of the late-90s and early 2000s were “fast evaporating”.

According to the report, a number of countries, mainly in sub-Saharan Africa, had been forced to seek help from the International Monetary Fund (IMF) and the World Bank. It added that the international community needed to be better prepared to manage a new crisis.

According to the IMF, 36 countries had received financial assistance worth $76 billion under the Heavily Indebted Poor Country initiative, but Unctad said rushed attempts to integrate poorer countries into international financial markets after the 2008 global recession had left them vulnerable.

“Easy access to cheap credit in boom times has led to growing debt levels across the developing world. Developing country external debt stocks alone rose from $2.1tn in 2000 to $6.8tn in 2015, while overall debt levels rose by over $31tn between 2000 and 2014, with total debt-to-GDP ratios in many developing countries reaching over 120% and in some emerging economies over 200%.”

Many developing countries borrowed heavily when commodity prices were booming in the years after the 2008 financial crisis, the Guardian reported. Unctad said that the falling cost of oil, metals and food has made it harder for them to repay their debts.

“Only a couple of years ago, the amount of debt that low-income developing countries could have sold to eager investors seemed almost limitless. International sovereign bond issuance in these economies rose from a mere $2 billion in 2009 to almost $18 billion in 2014,” Unctad said.

“But a prolonged commodity price shock, steep currency depreciations and worsening growth prospects in a deteriorating global economic environment have quickly driven up borrowing costs and debt-to-GDP ratios.”

The risk of a new debt crisis will be discussed when the IMF and the Bank hold their annual meetings in Washington next month. Unctad expects growth in Africa this year to be 2.8%, less than half the 6.7% recorded in 2010. Over the same period, growth in the world economy had eased from 4.1% to a predicted 2.3% this year.