KUALA LUMPUR, Malaysia, Dec 13 (IPS) – With the US Fed raising interest rates, the global economy is slowing as the debt crisis spreads across the global South, pushing global poverty to pre-pandemic levels, with the poorest countries are doing the worst.
Extreme poverty remains high and is now worse than before the pandemic in low-income countries (LICs) and among those affected by vulnerability, violence and conflict. The promise to eradicate poverty worldwide by 2030 has become unattainable.
![](https://static.globalissues.org/ips/2018/09/jomo_180.jpg)
Instead of promoting cooperation to address the causes and consequences of the current catastrophe, neither the International Monetary Fund nor the World Bank presidents could agree on joint communiqués due to the greater politicization of multilateral forums.
Debt burden immobilizes governments
Indebtedness and restrictive creditor rules are preventing governments from increasing countercyclical spending to overcome the many contractionary trends of recent times, as well as preventing them from tackling looming social and environmental crises.
The G20’s 20 largest economies have urged strengthening “multilateral coordination by official bilateral and private creditors… to address the deteriorating debt situation and facilitate coordinated debt treatment for debt-challenged countries.”
But the Common Framework for Debt Restructuring has been roundly criticized by civil society, think tanks and even the World Bank on many grounds, including the meager concessional credit relief provided to some of the poorest countries.
In contrast, the G24 group of developing countries at the BWIs has emphasized the need for “sustainable debt repayment measures, while working together to resolve the structural problems that lead to such vulnerabilities.”
But all those advocating so-called solutions do not even try to guarantee the fiscal space and public spending capacity for counter-cyclical efforts, let alone achieving the Sustainable Development Goals and national development goals.
Surcharges
The IMF is currently imposing additional costs on countries that do not promptly pay off their debts to the Fund. In addition to usual fees and interest, borrowing countries paid more than $4 billion in such surcharges in 2020-2022, during the COVID-19 pandemic.
Surcharges will cost countries with debt problems about $7.9 billion over the next six years. The G24 has emphasized that surcharges are procyclical and regressive, especially in the context of monetary tightening.
Governments have implemented restrictive policies and cut imports due to a lack of foreign exchange. This deepens the problems of heavily indebted poor countries, which can only count on the Aid and Solutions Fund.
In Marrakesh, the ruling International Monetary and Financial Committee decided to “consider a review of the surcharge policy”. The G24 called for “a suspension of surcharges while the review – which we hope will lead to a substantial permanent reduction or complete elimination – is carried out.”
Rich countries are divided on benefits. With Ukraine now among the largest payers of benefits, the Biden administration’s refusal to review benefits in 2022 was heavily criticized by the US Congress, following criticism from civil society.
Deepening the cuts
The IMF’s austerity measures of the 1980s returned with a vengeance after the 2008 global financial crisis, and then again during the Covid-19 pandemic from 2020 onwards. Most of the Fund’s loans require a reduction in the public sector wage bill (PSWB), the budget line to pay employees. .
Most wage earners in many LICs, including nurses, teachers and other social workers, work directly or indirectly for the state. While this is desperately needed, these workers are more likely to be targeted by such cuts.
PSWB cuts may involve hiring or wage freezes, or limiting or even reducing wages. These inevitably undermine government capabilities and services. Fiscal consolidation has also led to the increase of more indirect consumption taxes and tax exemptions, for example on essential goods such as food.
In 38 countries with more than a billion people, lending conditions during 2020-2022, the three years of the Covid-19 pandemic, meant regressive tax reforms and cuts in public spending. PSWB and cuts in fuel or electricity subsidies are also common demands that exacerbate the economic contraction.
Austerity will certainly fail
But the IMF’s own research shows that such austerity policies are generally ineffective in reducing the debt burden, which is its ostensible goal. The IMF April 2023 World economic prospects recognized austerity programs and fiscal consolidations “do not reduce debt ratios on average.” Yet it is Fiscal monitor still requires “fiscal tightening” from most developing countries.
The new debt sustainability framework of the IMF and the World Bank sets the limit for LICs’ external debt to GDP ratio at 30% or 40%. It emphasizes that economies with debt problems should have lower ratios than ‘strong’ countries, effectively further punishing the weak and vulnerable.
Rather than consistently enabling countercyclical macroeconomic frameworks, the IMF’s current short-term approach focuses primarily on annual or worse, quarterly balances, which mimic corporate reporting practices.
Such short-term thinking further limits fiscal space, effectively preventing or deterring public sector investments that require longer-term macroeconomic frameworks to realize benefits. This discourages medium to long-term ‘patient’ investments necessary for national economic planning and transformation, essential for sustainable development.
Restrictive debt and budget targets have led to even less public investment. This is usually required as a credit condition from borrowing countries. The IMF’s annual Article IV consultations ensure that other countries also accept similar restrictions to avoid disapproval by the Fund.
While a few prosperous economies are enjoying full employment, most countries are facing further economic contraction, not least due to US Fed-led interest rate hikes and their many effects. Instead of being part of the problem, the IMF should be part of the solution.
IPS ONE office
Follow @IPSNewsUNBureau
Follow IPS News UN Bureau on Instagram
© Inter Press Service (2023) — All rights reservedOriginal source: Inter Press Service