Developing Economies Face Mounting Debt Challenges
High interest rates, growing investor risk aversion, and excessive borrowing have left several developing economies grappling with debt crises. The International Monetary Fund (IMF) and World Bank will address these challenges at their upcoming annual meetings in Marrakech, Morocco. Here is a closer look at some of the countries facing significant debt troubles:
Egypt, North Africa’s largest economy, is set to repay around $100 billion of hard-currency debt over the next five years. With over 40% of its revenue allocated to interest payments, Egypt’s financing needs for fiscal 2023/204 stand at $24 billion. Although the country has a $3 billion IMF program and has devalued its currency by approximately 50% since February 2022, it has struggled with slow progress in its $2 billion privatisation plan and the removal of electricity subsidies. The upcoming elections in December may further hinder the implementation of necessary reforms, making financial support from wealthy Gulf nations critical.
Ethiopia has been severely impacted by the COVID-19 pandemic, and the two-year civil war that began in November 2020 has worsened the economic situation. Ethiopia, therefore, sought debt restructuring under the G20 Common Framework in early 2021. In August, China allowed a partial debt payment suspension, and last month, ratings agency Moody’s changed Ethiopia’s outlook to stable from negative based on expectations of progress through the Common Framework.
Ghana defaulted on most external debt in late 2022, marking its worst economic crisis in a generation. However, the country has made swift progress in restructuring both domestic and external debt, securing a $3 billion IMF bailout in May. Ghana’s finance minister is optimistic about reaching a deal with international bondholders by year-end. Nevertheless, rising living costs, unemployment, and economic hardship have triggered protests in the capital city of Accra.
Kenya, with a public debt equivalent to 67.4% of its GDP at the end of 2022, faces a high risk of debt distress, as classified by the World Bank. President William Ruto’s government has implemented spending moderation and proposed tax hikes to address concerns over imminent default. However, surging oil prices and a devalued currency have hindered progress, raising doubts about the government’s ability to implement further reforms. Kenya is currently in talks with the African Development Bank and the World Bank to secure budgetary support as it prepares to repay a $2 billion eurobond next year.
Lebanon has been in default since 2020, and its economic meltdown shows no signs of resolution. The IMF has noted some positive changes, such as the phasing out of a controversial exchange platform and the curbing of monetary financing of the government. However, deeper reforms are required to stabilize the country’s outlook, which the IMF describes as “difficult and unstable.” If the current situation persists, Lebanon’s public debt could reach a staggering 547% of GDP by 2027.
Pakistan is in urgent need of over $22 billion to service external debt and cover fiscal year 2024 expenses. With elections scheduled for January and inflation and interest rates at historic highs, the country is facing significant challenges. In June, Pakistan reached a last-minute agreement for a $3 billion IMF bridge loan, followed by cash infusions totaling $3 billion from Saudi Arabia and the UAE. While the country’s reserves are sufficient to sustain it until the elections, observers question how long Pakistan can avoid default without extensive support.
Sri Lanka defaulted on international debt in May 2022 due to the pandemic’s devastating impact on its tourism-dependent economy. The country has announced a debt overhaul plan, which has made some progress. However, disputes persist over the extent to which domestic banks and investors in state-owned enterprises should bear the burden. This disagreement may delay the disbursement of the next tranche of a $2.9 billion IMF bailout package due to a potential government revenue shortfall.
Tunisia, plagued by multiple shocks since the 2011 revolution, is facing a full-blown economic crisis. While most of its debt is internal, a eurobond worth $500 million matures this month, increasing the risk of default. President Kais Saied has criticized the conditions attached to a $1.9 billion IMF loan as “diktats” and rejected a €127 million offer from the European Union as insufficient. The recent tourist season has narrowed the current account deficit, and Saudi Arabia has pledged $500 million in support. However, citizens continue to face shortages of food and medicine.
Ukraine suspended debt payments after Russia’s invasion in 2022 and is expected to decide early next year whether to extend the debt agreement or explore alternative options. Top institutions estimate that the cost of post-war rebuilding will exceed 1 trillion euros, and Ukraine requires $3-$4 billion per month to keep the country operational. While the economy has shown signs of recovery, with inflation slowing and business sentiment improving, political shifts in the United States and elsewhere cast doubt on the sustainability of international support.
More detail via Reuters here… ( Image via Reuters )