Daily Management Review

The Developing Economies That Are Going Through A Debt Crisis


The Developing Economies That Are Going Through A Debt Crisis
When central bankers, finance ministers, and political leaders gather next week for the World Bank Group and International Monetary Fund (IMF) spring meetings, the record number of developing countries at risk of debt crisis will be high on the agenda.
Inflationary pressures, rising borrowing costs, and a strong dollar have made repaying debts and obtaining funds much more difficult for dozens of developing countries, forcing many to default last year.
The countries listed below are either in debt or have already defaulted on international loans.
The one-two punch of COVID-19 and surging food and energy costs rocked Egypt's tourism-dependent economy, leaving it short of cash and unable to pay rising debts.
In December, Cairo received a new $3 billion IMF package by agreeing to a flexible currency, a larger role for the private sector, and a slew of monetary and fiscal reforms.
Import and currency restrictions have dragged on economic activity, and a foreign currency shortage persists despite three significant devaluations since March 2022 that have reduced the pound's worth by half. Inflation is presently at a more than five-year high of more than 30%.
In January, El Salvador surmounted a $600 million bond payment hurdle. The Central American country has around $6.4 billion in Eurobonds outstanding. While the next payment isn't due until 2025, worries over El Salvador's high debt service expenses, as well as its financing plans and macroeconomic policies, have pushed the country's bonds into seriously troubled territory.
The country's decision to make bitcoin official tender in September 2021 effectively ended IMF assistance. However, the IMF admitted that the risks associated with El Salvador's embrace of bitcoin "have not materialized."
Ghana is experiencing its greatest economic crisis in a generation, with debt payments accounting for more than 40% of government revenues last year. It became the fourth country to seek a rethink under the Common Framework in January.
In December, the West African country won a $3 billion accord with the IMF, though it still needs finance assurances from bilateral lenders to finalize the deal. The cocoa, gold, and oil producer has already agreed to write down domestic debt and began formal debt talks with international bondholders last week.
Lebanon's financial system began to crumble in 2019 as a result of decades of mismanagement and corruption, and it defaulted in early 2020. Since Oct. 31, Lebanon has been without a head of state or a fully functioning government.
It signed a preliminary $3 billion IMF agreement in April 2022, but the fund recently cautioned Lebanon that it was "in a very dangerous situation" due to delays in a variety of reforms, including banking and exchange rate reforms. In February, Beirut lowered the official currency rate for the first time in 25 years. Last month, the central bank said that it will begin selling unlimited amounts of US dollars in order to stem the country's spiraling depreciation.
Malawi is dealing with currency shortages and a budget deficit of approximately 1.32 trillion kwacha ($1.30 billion), or 8.7% of GDP.
The donor-dependent southern African country is attempting to restructure its debt in order to get additional IMF money, which was authorized in November.
Months of political and economic uncertainty, exacerbated by severe floods last year and unprecedented inflation, have placed Pakistan in jeopardy.
China agreed to refinance $1.8 billion already credited to Pakistan's central bank and rolled over a $2 billion loan that had matured earlier in March, easing Pakistan's critical balance of payments issue.
However, negotiations with the IMF for a $1.1 billion loan tranche, part of a $6.5 billion rescue approved in 2019, have dragged on, and foreign exchange reserves have plummeted to fewer than four weeks of imports.
The tourism-dependent North African economy is suffering from a painful crisis that has resulted in a scarcity of essential food goods.
A $1.9 billion IMF loan has been blocked for months due to Tunisia's president's lack of progress on critical reforms. The majority of debt is local, but repayments on international loans are due later this year. Tunisia may default, according to credit rating firms.
Sri Lanka defaulted on its foreign debt last year after economic mismanagement, aggravated by the COVID-19 outbreak, triggered a political crisis and left the country without even basic imports.
The IMF's ratification of a $3 billion rescue package last month may have helped the South Asian island government get roughly $4 billion in further backing from the World Bank, Asian Development Bank, and other lenders.
Government officials hope to conclude debt restructuring negotiations by September. Sri Lanka is also renegotiating a portion of its domestic debt, which it hopes to complete by May.
Ukraine has just received the first $2.7 billion installment of a $15.6 billion IMF credit program over four years. This is part of a larger $115 billion worldwide assistance program.
Following Russia's invasion, the nation froze all debt payments last year, and will need to restructure its borrowings if and when the situation stabilizes.
According to the IMF, Ukraine need $3-$4 billion every month to keep the government running. According to a recent assessment by the World Bank and others, rebuilding Ukraine's economy will now cost $411 billion.
Zambia is expected to be the first African country to default during the COVID-19 era in 2020, serving as a litmus test for the G20's Common Framework program, which was established during the epidemic to streamline debt restructurings. However, negotiations have been painfully delayed, and external debt has risen to $18.6 billion.
Western officials have blamed China, its largest bilateral lender, for the stalemate, which China denies. There is widespread dispute on how much debt the country can afford in the future.
Zambia's currency, the kwacha, has plummeted more than 10% versus the US dollar this year, contributing to inflation, according to the central bank. It attributed the reduction in part to debt restructuring delays.