A debt crisis looms over global majority countries

Illustration by Giovana Fleck.

Inflation has been a disruptor all across the world since the pandemic. Yet, recent aggressive interest rate hikes have not solved the persistent inflation that economies have been experiencing. Indeed, the actual causes of inflation, supply chain disruptions and spikes in commodity prices have currently lessened, and while speculation trading, which has exacerbated issues like global food insecurity, has waned, the global majority countries are facing the effects of the Western-led response, suffocating them with a debt crisis.

Because of the COVID-19 pandemic, the global majority has seen its debt grow 8 percent from 2020 to 2021 — from USD 8.6 trillion to over USD 9 trillion, growing more than gross national income and exports. Likewise, external short-term debt also went up, likely due to the purchase of vaccines, testing materials, and other pandemic measures. In many countries, debt grew by double-digit figures. Through sharp drops in exports, tourism, and remittances, as well as rising food and fuel prices, expenditure in many global majority countries surged as foreign exchange profits rapidly dropped as a result of the pandemic. The developing world has been plagued with capital flight — people moving their money out of the country’s banking system — that has resulted in their currencies falling in value, which made their imports cost more, and what households consume come down, since goods cost more — all of which has created an explosion of their debt burdens and even debt default in some countries.

Furthermore, in 2022, inflation was caused by “greedflation,” major corporations increasing their prices to achieve more profits, or “stagflation,” supply shortages in the global economy which caused prices to go up in the world economy. The response was to aggressively raise interest rates, primarily led by the US Federal Reserve, which has had calamitous consequences for much of the global majority. Higher interest rates make the dollar more appealing to investors and enhance its value relative to other currencies. This implies that everything the worldwide majority wants to buy in dollars is far more expensive in their own currencies.  Given that these countries are already experiencing restrictions on their domestic financial policy due to external factors such as speculation on the prices of commodities (i.e. metals, oil, agriculture, etc) and the pandemic, aggressive interest rates have subsequently been threatening economic growth in the global majority. This alarming situation means that the global majority is facing a major economic recession amid a looming debt crisis.

The United Nations Conference on Trade and Development (UNCTAD) forecasts that the aggressive interest rate pressures initiated by rich countries will cause serious debt distress in the rest of the world, assessing that the cost of paying off its debts will burden the global majority with at least USD 800 billion. As debt servicing expenditures rise at the expense of investment and public spending, these countries find themselves in what UN Deputy Secretary-General Amina Mohammed called “a trade-off between investments in debt and investments in people.” The World Bank cautions that the impending debt crisis is “intensifying,” which is in particular “devastating for many of the poorest economies, where poverty reduction has already ground to a halt.” Significantly, the International Monetary Fund’s latest assessments of debt stress indicate that 10 countries were in debt distress (meaning in debt default or on the verge of default) while 52 countries were in severe to moderate debt stress — currently totalling USD 3 trillion in debt, a doubling since 2010.

A recent paper by the Institute for New Economic Thinking (INET), an economic think tank, clarifies the gravity of the situation that the West's money-tightening policies have brought about. Beyond the previously discussed problems, central banks in these countries face the option of hiking their interest rates, but, as the paper argues, this would do considerable damage to GDP and their domestic economy as it slows economic growth and leads to significant job loss, making a soft landing impossible. Furthermore, a recession triggered by US monetary policy could result in the “scarring” of future economic growth, which would only make their debt impossible to pay off.

There is the danger of another lost decade in development, which would have severe consequences for everyday life in the global majority. Indeed, UNCTAD estimates that US interest-rate increases could shrink future incomes for the global majority (barring China) by at least USD 360 billion. In many of these debt-ridden countries, interest rate payments amount to nearly 5 percent of export revenue.

The West’s response has been derisory and farcical. Their payment pause program during the pandemic was wholly insufficient, as the initiative only deferred countries’ long-term external debt repayment briefly, opting not to cancel any debt, “which still has to be repaid in full during 2022–24, as interest payments due continued to grow,” but more importantly, their focus has been on bilateral debt — debt that has been made by agencies on behalf of one's government. However, countries are increasingly borrowing from private institutions, i.e. not other governments or international financial institutions, which comes with higher interest rates and shorter payback times. This is a main source of debt unsustainability, especially since it is considerably more challenging to restructure as private lenders consistently decline to restructure, refinance or offer relief.

Many countries like Sri Lanka, which has recently defaulted on its debt, have faced this exact issue. Two decades ago, most of Sri Lanka’s foreign debt was composed of multilateral and bilateral development agencies, i.e., the World Bank and the Japan International Cooperation Agency, with extensive payback periods (25 to 40 years) that included substantial grace periods and, more importantly, significantly lower interest rates (in certain cases, even under 1 percent). Its commercial debt composition has gone from around 2 percent in the mid-2000s to 60 percent today. To make matters worse, most of the debt repayment maturities are short-term rather than long-term. This has been the case for most of the global majority during the last two decades, aggravated by falling foreign exchange earnings and rising interest rates seen across the world.

Another approach included the IMF's Special Drawing Rights (SDRs), which are meant to supply reserves to countries in need. In August 2021, the IMF set forth a USD 650 billion injection of SDRs in response to the financial shock of the COVID-19 pandemic. Shortly thereafter, at least 80 global majority countries took this chance to purchase much-needed foreign currency for domestic fiscal expenditure. More importantly, unlike previous IMF allocations with the global majority, this did not come with neoliberal conditionalities (privatisation, cutting public spending, deregulation, financialization). However, the allocation was wholly insufficient compared to the degree of countries’ needs, as SDRs are based on IMF quotas, reflecting economic size. This meant that the countries with the smallest economies that needed the most assistance received the least. Despite commitments to channel their shares of SDRs to the global majority, major Western countries such as the United Kingdom and the United States only redirected about 20 percent of their shares, and around USD 400 billion of the newly allocated SDRs remain unused.

Since the elimination of capital controls — measures made to control the influx and outflow of foreign capital, one of the hallmarks of the Bretton Woods system that occurred during the Golden Age of Capitalism — global majority countries have had to rely on international financial markets to raise funds for imperative needs, yet they have been increasingly exposed to the unregulated financial market. The phenomenon of hot money, usually illicit speculative capital flows between countries for short-term profit, alongside global shocks such as pandemics and other unstable realities, leaves them with more and riskier debt and unsustainable debt burdens. Indeed, global majority countries have been increasingly vulnerable to repeated external shocks, such as commodity price fluctuations, affecting their ability to access foreign exchange to be able to service their debts since these countries often borrow in foreign currencies. This leaves them with less budgetary room to address these economic crises. More importantly, these entrenched high debt burdens are a direct obstacle to building climate resilience and achieving progress towards the SDGs. Indeed, climate change has been eroding around one-fourth of the global majority’s total GDP since 2010. Even worse, since loans make up around 80 percent of all public spending for climate change, nations have been borrowing to confront these severe problems.

In a recently released report, Oxfam emphasised the major crisis facing the global majority, noting that “more than half (57 percent) of the world’s poorest countries, home to 2.4 billion people, are having to cut public spending by a combined $229 billion over the next five years”. The report highlighted that the global majority “will be forced to pay nearly half a billion dollars every day in interest and debt repayments between now and 2029.”

In today’s economic background, these devastating realities are at the core of the climate crisis, which is a major threat for all. Another repeat of a lost decade must not happen, especially when real and credible options are available.

Start the conversation

Authors, please log in »


  • All comments are reviewed by a moderator. Do not submit your comment more than once or it may be identified as spam.
  • Please treat others with respect. Comments containing hate speech, obscenity, and personal attacks will not be approved.