A perspective from Gabrielle Beran, ILP’s Governance and Programme Manager
Thanks to the famous musical ‘Hamilton,’ America’s favourite administrator has had a renaissance in the past few years. While I am a fan of the show’s songs, it is a true quote from Alexander Hamilton that I’ve had stuck in my head these past weeks:
“A national debt, if it is not excessive, will be a national blessing.”
Global consumer spending might be down, but there is a remarkable increase in discussions about debt - that is, sovereign debt. The fiscal governance community has seemingly become obsessed with the global dive into the pool of borrowing that this pandemic has triggered for some countries and the unmasking of the extent of sovereign debt for others. And with good reason. Whether it’s with cuts to the public services (which are vital to any health emergency) now, or tax increases later, these large balances do not go away on their own.
We have been invited to learn from many webinars on this topic over the past few weeks from academic institutions and think tanks like the Institute of Public Finance Kenya, Monash University’s Centre for Sustainable Development, the Centre for Economic Policy Research, and the London School of Economics, who have all optimised remote working to bring together experts from all over the world to speak to you right at your home-working destination of choice (whether that’s a desk, sofa or garden chair).
Since the Global Financial Crisis, low interest rates and greater access to different forms of finance for developing economies have contributed to record levels of global debt in the year before the pandemic - median public debt in developing countries grew from 35% of GDP in 2012 to an impressive 51% by 2019. But what this means is that all of those debts still require their interest and, in certain circumstances, principal to be paid when those countries need money more than ever to pay for an adequate response to the Covid-19 pandemic.
The Covid and debt “jab and cross” then strike twice, because a halted local economy means a reduction in domestic revenue mobilisation, and a recessive global economy means remittances from offshore workers and foreign direct investment are both down too. This is before we even start looking at foreign currency effects!
The G20, the World Bank and the International Monetary Fund as large creditors have all initiated various levels of debt standstill and relief to the world’s poorest countries. However, for private creditors, it is up to them how they wish to treat their national debtors at this unprecedented time, despite strong encouragement to voluntarily support relief options. So while the fates of International Development Assistance (IDA) countries’ debt hinges on the goodwill of all their different creditors, some of ILP’s civil society partners have been examining how it got to this point and what, if anything, they can do about it.
How come countries can take on large debts? While bilateral and multilateral creditors make conditional loans which tend to require stringent due diligence and attach development goals (World Bank) or means of addressing imbalances of payment (IMF), private sector financial institutions offer their loans on commercial terms. Therefore, any limitations or safeguards must come from within a state’s Constitution or legislation on borrowing. ILP has been working with civil society in Zambia to examine whether the current sovereign debt levels are indeed legal and where improvements can be made to legislation to limit exposing the country to such risks in the future. After all, it is very unlikely that those who make the decisions to borrow will ever experience the negative effects of a debt crisis in the same negative way as their citizens.
In addition to checking the legality of borrowing decisions, we have seen civil society hold those in power to account for the choices they make and the subsequent effects by educating citizens on the role of debt in their society and its impacts. However, it is very difficult for CSOs to then demand checks and balances on their governments’ borrowing if there are limited legal rights or practical access to information and complex financial instruments in the way. This opacity can be deliberate for reasons of corruption, such as was seen in the Mozambique Hidden Debt scandal of 2016; or it can be that the executive does not think that they need to share this information with the public. The World Bank is trying to track debt transparency with its Debt Reporting Heatmap but their April 2020 update found that in 36% of IDA countries, “debt disclosure standards are still very poor.”
Sovereign borrowing, with transparency, accountability and sound financial management can be a useful and even transformative economic tool. The Covid-19 pandemic has shed light on various failings in many areas of public governance including healthcare, social welfare and information. The precarious position of sovereign debt in many developing economies is another item to add to the list. For those CSOs who have been working on these issues for many years, hopefully, they have a new opportunity to be heard and the world who listens to the songs from ‘Hamilton’ will listen to his words too.