Debt servicing a growing challenge to countries – IMF

Jan 26, 2024 News

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– repayments straining budgets, curtailing spending on essential services, job creation

Kaieteur News – The International Monetary Fund (IMF) has cautioned that high debt servicing costs is a growing challenge for low-income countries, noting that financing pressures due to relatively high interest payments and the pace at which the countries need to repay debt are straining budgets.

The Government of Guyana (GoG) has set aside $44 billion in this year’s budget to service its ballooning debt. The $44B or approximate US$220M vastly exceeds the sum allocated to various government ministries. For instance, the Ministry of Amerindian Affairs and the Ministry of Culture, Youth and Sport have each received about $9 billion to finance their development agenda. In 2023, some US$177.3 million in revenue went towards debt service, up from US$150.2 million in 2022. The growing payments to service the country’s debt stems from a conscious decision of policy makers that believe Guyana’s forecast of revenue from the oil and gas sector justifies its borrowing agenda.

Meanwhile, the IMF in an article titled: “How to Ease Rising External Debt-Service Pressures in Low-Income Countries” said that the high interest payments have been preventing low-income countries from spending more on essential services or the critical investment needed to attract business, create jobs, improve prosperity, and build climate resilience. “One important metric is the share of revenues the government collects from its population through taxes and other fees that goes to pay its foreign creditors. While the scale of the burden differs greatly across countries, it’s generally about two and a half times higher than a decade earlier. This means for a typical low-income borrower the share has risen to about 14 percent, from about 6 percent, and as much as 25 percent, from about 9 percent in some economies. This is one of the key indicators used in the framework for assessing debt sustainability that signals a country might be at risk of needing financial support from the IMF or of missing a debt payment,” the IMF said in the article written by Allison Holland and Ceyla Pazarbasioglu.

The IMF said too those low-income countries also have significant debt repayments falling due in the next two years. “They need to refinance about US$60 billion of external debt each year, about three times the average in the decade through 2020. But with many competing demands for financing, including from advanced and emerging market economies that are also trying to adapt to climate change, there’s a significant risk of a liquidity crunch—failure to raise sufficient financing at an affordable cost. That could in turn lead to a destabilizing debt crisis. To address this financing challenge, we must understand why it’s happening and what affected countries and the broader international community can do to help.”

According to the IMF, one factor was higher government borrowing and deficits to mitigate the impact of the pandemic and other external economic shocks. This has increased the level of debt and consequently the cost of servicing it. The IMF said it’s encouraging that this trend is reversing as countries bring primary deficits back in line with pre-pandemic levels.

In addition, the IMF said central banks have significantly raised borrowing costs to tame inflation. “That makes it costlier for governments to raise new debt or refinance existing debt. While central banks may be done raising rates, it is not clear when they will start to cut, and this uncertainty may be reflected in volatile financial market conditions. Low-income countries have also increasingly borrowed from the private sector—with about one third of financing coming from private creditors in the last decade compared with about one fifth in the previous decade. This reflected a slowdown in financing from multilateral development banks (MDBs) in the earlier part of the decade and through official development assistance (ODA) agencies over 2020-22 compared to borrowing needs. This shift has increased both financing costs and vulnerability to global financial shocks.”

Avoiding a costly debt crisis

Building resilience in the face of these trends requires countries to act. Some countries have made progress— for instance, Angola,The Gambia,Nigeria, and Zambia have taken steps to implement significant energy subsidy reforms to create space for development spending.

But many are lagging behind, especially in efforts to increase revenues, such as broadening the tax base, reducing tax exemptions, and increasing the efficiency of tax administration. For instance, the typical Sub-Saharan African country raised only 13 percent of gross domestic product in revenues in 2022, compared with 18 percent in other emerging economies and developing countries and 27 percent in advanced economies. And those with high debt vulnerabilities can’t afford to wait. Policy reforms are needed to boost growth and capture more revenue from that growth, for instance, through tax reforms. This will directly improve countries’ key debt metrics and ensure they can avoid a costly debt crisis.

Only this week, Opposition Member of Parliament and Shadow Minister of Finance, Juretha Fernandes condemned the government’s plan to have 40 percent of the substantial $1.146 trillion budget supported by loans. Fernandes said this amounts to $458.4 billion through borrowing. Fernandes noted the impact of this decision on individual households and citizens, stating that it would effectively saddle each household with an additional $1.8 million in debt, which translates to around $588,000 per citizen. Fernandes’s remarks were part of her scathing response to what she perceives as the government’s reckless financial planning.

She said, “So in an oil rich economy, instead of creating a pathway to sustainable prosperity for Guyanese, the PPP has decided to shackle every man, woman and child with a debt burden, and there seems to be no light at the end of this tunnel.” The Shadow Minister added, “For every child that will receive the $40,000 ‘Because we care cash grant,’ they will also be receiving a ‘because we do not care’ debt burden of more than half a million-dollars, complements of the PPP administration.” Fernandes said having $458B in loans is not to be taken lightly. She recalled that in 2020, the same time the government took office, the external debt ceiling was $400 billion. “So in this one budget, the PPP is adding almost the same amount of debt to the nation as the total external debt ceiling under the coalition; a ceiling the coalition never met and never saw a need to increase,” she said.

To make matters worse, Fernandes expressed alarm that the government plans to return to the House to increase the debt ceiling for a third time as well as revise the Natural Resource Fund’s (NRF) withdrawal rules to spend more of the oil revenues. Fernandes said this does not bode well for the nation’s economic wellbeing. Sharing similar concerns was her colleague, Shadow Minister of Legal Affairs, Roysdale Forde. During his contributions, Forde questioned whether the $1.146 trillion budget represents a true cost or would government return with supplementary requests.

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• Budgets, Challenge, Countries, curtailing, Guyana

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