Point of View: The Low-Income Trap

Author:Fanwell Kenala Bokosi

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

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
The Low-Income Trap
Urgent steps are needed to end the cycle of poverty and debt
Fanwell Kenala Bokosi

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