The post-COVID wave of sovereign defaults, which has affected countries like Ghana, Sri Lanka, and Zambia, has finally subsided, following years of tough debt restructuring. However, the International Monetary Fund (IMF) and others are concerned that many emerging economies now face a dangerous liquidity shortage. This shortage threatens to stall development, hinder climate change efforts, and increase distrust in governments and Western institutions.
At the IMF-World Bank autumn meetings in Washington, D.C., this week, the issue of liquidity shortfalls is a central topic, especially as Western countries grow more reluctant to provide financial support abroad. “It’s a challenge in the sense that for many, debt service has grown, borrowing has become more expensive, and external sources (have become) less certain,” said Christian Libralato, portfolio manager with RBC BlueBay.
The U.S. Treasury’s top economic diplomat has stressed the need for new ways to offer short-term liquidity support to low- and middle-income countries to prevent debt crises. The Global Sovereign Debt Roundtable, which includes countries, private lenders, the World Bank, and the G20, is also addressing the issue, with a meeting scheduled in Washington on Wednesday.
Vera Songwe, chair of the Liquidity and Sustainability Facility, which aims to reduce debt costs for Africa, said the current solutions lack the necessary scale and speed. “Countries are avoiding… education, health, and infrastructure expenditures to service their debt,” she said, adding, “Even in the advanced economies… there are stresses in the system.”
Data from the ONE Campaign, a non-profit advocacy group, revealed that in 2022, 26 countries, including Angola, Brazil, Nigeria, and Pakistan, paid more to service external debts than they received in new external finance. Many of these countries had gained access to bond borrowing a decade ago, leading to large payments just as global interest rates surged, making refinancing unaffordable.
“The IMF-led global financial safety net is simply not deep enough anymore,” said Ishak Diwan, research director at the Finance for Development Lab. He predicted that net negative transfers for 2023 and 2024 would be worse than previously anticipated, as fresh funding from the IMF and World Bank hasn’t offset rising costs.
While the World Bank plans to increase its lending capacity by $30 billion over 10 years, and the IMF has reduced surcharges to save the most overstretched borrowers $1.2 billion annually, concerns remain. However, some bankers believe countries are regaining access to markets, alleviating cash flow concerns. “I don’t think there’s a limitation on access,” said Stefan Weiler, head of CEEMEA debt at JPMorgan, noting that bond issuance in Europe, the Middle East, and Africa could hit a record $275-$300 billion this year.
Still, borrowing costs remain high. Kenya recently borrowed at an unsustainable rate of over 10% to repay a maturing dollar bond. “Kenyans keep on complaining about ‘we don’t have money in our pockets.’ That in a sense is just saying that we have challenges with liquidity in the economy,” Finance Minister John Mbadi explained.
China’s reduced lending has also worsened the situation for emerging countries, turning what was once a major cash inflow into a net negative flow for those repaying old debts.
Development banks are trying to maximize lending, with the Inter-American Development Bank and the Africa Development Bank campaigning for countries to donate their IMF reserve assets, known as “special drawing rights.” They claim every $1 donated could generate $8 in lending. However, the World Bank is still pushing Western countries to increase contributions, despite cuts in foreign aid by France and the U.K. and financial pressures on key donors like Japan.
“The mix is toxic for developing nations,” warned Diwan. “We see protests from Kenya to Nigeria to elsewhere. It’s a very dangerous situation. We’re losing the whole global south at this stage.”
