New York: Spiralling debt in low and middle-income countries has compromised their chances of sustainable development, the head of UN trade facilitation agency UNCTAD has warned.

Speaking in Geneva, Rebeca Grynspan said that between 70 and 85 per cent of the debt that emerging and low-income countries are responsible for, is in a foreign currency.

This has left them highly vulnerable to the kind of large currency shocks that hit public spending – precisely at a time when populations need financial support from their governments.

Ms. Grynspan – speaking at the 13th UNCTAD Debt Management Conference - explained that so far this year, at least 88 countries have seen their currencies depreciate against the powerful US dollar, which is still the reserve currency of choice for many in times of global economic stress.

And in 31 of these countries, their currencies have dropped by more than 10 per cent.

Debt burden equivalent to health spending total

This has had a hugely negative impact for many African nations, where the UNCTAD chief noted that currency depreciations have increased the cost of debt repayments “by the equivalent of public health spending in the continent”.

The event, which runs from 5 to 7 December in Geneva and online, takes place as a wave of global crises has led many developing countries to take on more debt to help citizens cope with the fallout.

Government debt levels as a share of GDP increased in over 100 developing countries between 2019 and 2021, said UNCTAD. Excluding China, this increase is estimated at about $2 trillion.

“This has not happened because of the bad behavior of one country. This has happened because of systemic shocks that have hit many countries at the same time,” Ms. Grynspan said.

With interest rates rising sharply, the debt crisis is putting enormous strain on public finances, especially in developing countries that need to invest in education, health care, their economies and adapting to climate change.

“Debt cannot and must not become an obstacle for achieving the 2030 Agenda and the climate transition the world desperately needs", she argued.

UNCTAD advocates for the creation of a multilateral legal framework for debt restructuring and relief.

Such a framework is needed to facilitate timely and orderly debt crisis resolution with the involvement of all creditors, building on the debt reduction programme established by the Group of 20 major economies (G20) known as the Common Framework.

Vicious debt circle

“We must support UNCTAD's call for a reform of international monetary and financial governance,” Bolivian President Luis Acre said in a statement delivered by the country’s finance minister, Marcelo Montenegro.

Mr. Montenegro called for re-examining key aspects of the international financial architecture, including the debt sustainability assessments that serve as a basis for negotiations between debtors and creditors in relation to debt restructuring.

As debt burdens rise, developing country governments end up in a vicious circle, unable to invest in achieving the Sustainable Development Goals (SDGs) and grow their economies, making it even harder to pay their debts.

If a country defaults, the terms of debt restructuring are usually set by groups of creditors competing to get the best terms, rather than giving priority to economic and developmental concerns, or how sustainable it is to keep up with payments.

“To resolve these issues equitably, this needs to be done in a manner that maintains the debtor countries’ ability to grow and meet its current and future debt obligations, while also fulfilling its commitments to the SDGs,” Sri Lankan President Ranil Wickremesinghe said in a statement delivered by the country’s permanent representative in Geneva, Ambassador Gothami Silva.

“I believe that the United Nations is best placed to find solutions to this end,” Ms. Silva said.

Deflecting from the climate crisis

UNCTAD said that if the median increase in rated sovereign debts since 2019 were fully reflected in interest payments, then governments would pay an additional $1.1 trillion on the global debt stock in 2023, estimates show.

This amount is almost four times the estimated annual investment of $250 billion required for climate adaptation and mitigation in developing countries, according to an UNCTAD report.

“The anachronistic global financial architecture inhibits timely access to affordable development and climate finance,” Belize’s finance minister, Christopher Coye, said ahead of the conference.

At UNCTAD’s debt management conference, Barbados’ finance minister, Ryan Staughn, said the world needed to find a solution to the debt crisis “that allows countries to be able to continue to respond to the climate crisis without getting ourselves into trouble.”

“I need not tell you the difference between borrowing to build a school or polyclinic versus borrowing to build an airport or a seaport, which have totally different objectives,” Mr. Staughn said in a statement delivered on behalf of Prime Minister Mia Amor Mottley.

Multilateral solutions

UNCTAD promotes multilateral solutions in the areas of capacity-building, debt transparency and debt crisis resolution and relief.

The organization is supporting countries through its Debt Management and Financial Analysis Programme (DMFAS), one of its most successful technical assistance initiatives.

The initiative offers countries proven solutions for managing debt and producing reliable data for policymaking, said UNCTAD. Since its establishment over four decades ago, DMFAS has supported 116 institutions – mainly finance ministries and central banks – in 75 countries.

One example is Chad, which in January 2022 became the first country to officially request debt restructuring under the  G20’s Common Framework.

On debt transparency, UNCTAD supports the establishment of a publicly accessible registry of debt data for developing countries.