Point of View: The Low-Income Trap

• Author: Fanwell Kenala Bokosi
• Pages: 16-17

16 FINANCE & DEVELOPMENT | March 2018

A SHARP INCREASE in the foreign debt of developing

economies has raised c oncern that another crisis

is looming. is is par ticularly true in A frica,

where external debt in many cou ntries has reached

unsustainable levels. e burden of adjustment,

when it comes, will inevitably fa ll on the most

vulnerable—women, children, and the poor.

at is why the international communit y must

develop and implement new ways to restructure

debt and measures to protect heavily indebted

nations from the vicissitudes of the internationa l

credit markets. Borrowers and cred itors alike must

agree on responsible lending practices t hat have

the support of democratically elec ted governments

and civil society.

Developing economies in Africa and elsewhere

benef‌ited from debt relief under two programs

sponsored by international lending institutions—

the 1996 Heavily Indebted Poor Countries Initiative

and the 2005 Multilateral Debt Relief Initiative.

When debt relief allowed low-income countries to

resume borrowing, they quickly took advantage

of low global interest rates to sell securities on

international capital markets. But the sharp decline

in commodity prices has dealt a f‌inancial blow to

countries that depend on exports of farm products,

oil, gas, and other natural resources to generate the

revenue they need to repay their obligations. e

countries of sub-Saharan Africa are now struggling

to service external debt that in many cases has risen

above 90 percent of GDP. An IMF debt sustain-

ability analysis (2018) lists 14 African countries

in distress or at high risk of distress, including

Burundi, Cameroon, the Central African Republic,

Chad, Ghana, Sudan, and Zimbabwe.

Still struggling

To be sure, many countries have done much to

improve their debt management capacity since t he

Heavily Indebted Poor Countries Initiative. ey

have computerized debt records, established debt

management of‌f‌ices that consolidate previously

scattered functions, adopted medium-term debt

management strategies, i mproved analytical capac-

ity in debt sustainabi lity, and attempted to develop

domestic debt markets. Low-income countries are

still strug gling though. Re venue shortages keep

them from paying down debt, which forces t hem

to borrow even more to meet basic needs. Budget

cuts only make matters worse by slowing e conomic

growth, thereby reducing ta x revenue.

e next crisis will be more d if‌f‌icult to prevent

and resolve than the la st one because the debt

landscape has g rown more complex. In t he past,

developing economy debt was held mainly by

sovereign creditors represented by the Paris Club

and by international lending inst itutions, so

negotiating debt relief was relat ively straight-

forward. Today, debt is held by private, bilat-

eral, and multilateral creditors, and there are

new f‌inancial in struments to contend with.

Speculators target c ountries in crisis, which has

forced nations such as Ghana a nd Mozambique

to return to the IMF for help. Countries that

PHOTO: DANIEL GOODMAN

The Low-Income Trap

Urgent steps are needed to end the cycle of poverty and debt

Fanwell Kenala Bokosi

POINT OF VIEW