Even in the best of times, the majority of developing countries have enough difficulty servicing the foreign currency debts they accumulate. Generally viewed in credit markets as high-risk borrowers, underdeveloped countries, particularly those in Africa, are often charged high interest rates on their loans. Debt payments therefore constitute a huge drain on national finances and periodically, lenders are forced to provide some forms of relief to prevent debtor defaults.
The onset of the coronavirus pandemic and its devastating impact on vulnerable economies have prompted fresh discussions about the need for another round of debt relief for the developing world. University of California at Berkeley economist Barry Eichengreen recently added his voice to that debate. Last month, the G20 countries agreed to suspend debt payments by the world’s 76 poorest countries for one year. That initiative is expected to free up $20 billion to be spent on pandemic-related economic rescue efforts in the affected countries. The G20 finance ministers and a host of other advocates have urged private creditors and multinational development banks to take similar actions to help alleviate financial distress in impoverished countries.
In a recent open letter, a group of 138 prominent economists, including several Nobel laureates, appealed to Argentina’s creditors to restructure the country’s debt to make it sustainable and help Argentina fight the pandemic. Reportedly at stake is $66 billion of foreign debt that has to be renegotiated to avoid imminent default.
Due to the enormity of the pandemic’s impact, even the richest nations are struggling mightily to keep their economies afloat. Worryingly, a lot still remains unknown about the ultimate cost of this systemic shock to the global economy. But the one certainty is that the citizens of poorer countries will disproportionately bear the brunt of its long-term effects. For that reason, those countries need all the help they can get now, wherever they can find it, to somewhat shore up their economies and hopefully stave off the worst-case scenarios. That is why the current interventions by those economists and activists are particularly welcome.
Such calls for shared sacrifice, though, should be accompanied by appeals for mutual responsibility. Argentina, unlike many African countries, is not poor. It is deeply in debt and unable to pay its bills because of profligate spending by successive governments, behavior that is perhaps best symbolized by the country’s super-sized energy subsidies.
In 2015, Argentines reportedly paid 95 pesos per megawatt-hour for electricity that cost 606 pesos to generate. That meant the government absorbed 86 percent of energy costs. In 2014, energy and other subsidies were said to have amounted to 3.8 percent of Argentina’s GDP.
There are good reasons sometimes for governments to provide targeted energy and other price subsidies. They can lessen financial burdens on the poor. There is no way, however, to justify the extent of the practice in Argentina. Comparative electricity price data for 2018 show that Argentines paid $0.01 per kilowatt-hour, the lowest rate globally. Germans paid the highest rate at $0.33 per kilowatt-hour. It is no wonder that in times of crisis, some citizens of countries like Germany are reluctant to come to the rescue in places like Argentina.
Ironically, governments of some of the poorest nations in the world that are supposed to tighten their belts and focus intensely on priorities in normal times are often the most wasteful. Ghana was considered a heavily indebted poor country in 2005, and thus had nearly all of its external debt cancelled under an agreement brokered by leaders of the G7 countries at the Gleneagles summit in Scotland that year. It was meant to provide the fiscal space that Ghana needed to make badly needed investments in education, healthcare, and infrastructure.
That opportunity was largely squandered. A lot has been written over the last decade about excessive borrowing by recent Ghanaian governments. At first glance, Ghana’s projected debt-to-GDP ratio of 63.5 percent this year does not seem overly disturbing. However, in 2018, the country is reported to have spent a shocking 41 percent of revenue to service its external government debt.
The most troubling aspect of Ghana’s borrowing binge is that much of the money is wasted on a bloated bureaucracy. Upon assuming office in early 2017, the current president doubled the number of ministers to 110. Each of those appointees is said to receive a salary of about $4,000 per month, at least two cars, free fuel, a house, free utilities, and personal security. All that, in a country where a quarter of the population lives on less than $1 a day, with millions more unemployed.
The IMF, which as of 2019 had bailed out Ghana 16 times in the country’s 62-year history, is the single global body that, in theory, should be capable of policing such wasteful national spending. Unfortunately, it has largely been ineffective. Its efforts are often successfully blunted through accusations by those same profligate governments—and frequently segments of their populations—of meddling in their internal affairs.
Poor nations are being ruined by the recklessness of their leaders. The interests of the suffering masses in those countries would be far better served by the economists, celebrities, and activists using their influential and trusted voices to help bring about the urgently needed disciplined governance. That should happen in normal times, and ideally must begin soon after this storm passes. It would help make those countries more economically resilient and better able to withstand future crises. Waiting till the next one hits before stepping in again to ask for debt relief, as is so often the case, will only perpetuate the socio-economic decay.