It’s already here, from Africa to America, from Morocco to Mexico; the unthinkable, the unimaginable, and the unprecedented debt crisis are eating the fruits of developments. Moreover, the current state of global debt paints frightening images and makes alarming forecasts about the future state of the economy. This time around, however, the issue is not confined to affecting the economy of a single nation or area; rather, it is having an effect on the economy of the whole world. A growing number of nations are struggling to pay their debts in this frightening period, and the breaking point is drawing near. Around 25% of developing economies and 60% of low-income nations are already experiencing debt crisis or are at high risk of it. A major debt crisis is also now affecting around 54 emerging economies. In spite of the fact that they account for just more than 3% of the global economy, they make up 18% of the world’s population and more than 50% of those who are living in conditions of severe poverty. In addition, these nations have an annual debt payment obligation of $62 billion to official bilateral creditors, a 35% rise from 2021, raising concerns about the likelihood of rising debt loads.
Why is the crisis?
One of the most significant developments in global finance over the past ten years and a major risk factor for economic slowdown, financial market volatility, and global financial instability in borrowing countries has been the worsening scale of external debt, particularly in emerging and developing market economies and poor countries. The coronavirus pandemic’s economic effects and the outbreak of the Ukraine war have fueled this predicament. Based on a growing number of indicators and events anticipated to have a direct impact on the debt landscape, the projection anticipates that the debt problem will continue to deteriorate throughout 2023 notwithstanding the present economic constraints. In 2022, the world experienced a cascade of extraordinary occurrences, the majority of which will trigger a domino effect. First, the world economy is undergoing a broad-based, more severe than anticipated slump, and inflation is at its highest level in many years. The cost-of-living has made financial circumstances more difficult in most areas. This makes it more difficult for the government and enterprises to pay their debts.
Second, the year 2022 has witnessed a number of political upheavals and the reappearance of earlier crises that have undermined investor confidence and made it more difficult for a government to make more debts. Along with the Taiwan issue, coups in Africa, and political unrest in Latin America, the Ukraine conflict in particular was a huge structural upheaval that hindered the overall economic situation.
Third, 2022 witnessed a number of currency changes, with the most significant currencies suffering abrupt depreciations. It is more costly for certain nations to pay back debts with foreign currency due to the direct effects of currency depreciation. Furthermore, the majority of the nations that amassed significant debt compared to their GDP are having trouble repaying it as a result of their governments’ recent increases in bank rates. Currency devaluation and rising bank rates as a consequence had a big impact on the debt crisis.
Fourth, a lot of emerging nations are “overinvesting” and spending a lot of their money on these overinvestments. These nations now lack the resources necessary to pay down their debt as a consequence.
2023 Debt Crisis; What will happen?
Several unfavorable political and economic consequences might result from worsening global debt rates, especially in poor and emerging nations. Firstly, the developed countries, multilateral development institutions, and creditors in the private sector are owed $200 billion by developing nations. A catastrophic debt crisis for developing nations is predicted for 2023, which will be made worse by a confluence of high interest rates, fast inflation, weak growth, and a strong currency. This implies that even if the economic problems in borrowing nations worsen, attempts to reduce debt will have a very tough time succeeding. This will probably result in a fresh wave of defaults. An economic slowdown will become more evident in 2023 as companies and individuals reduce spending and investment.
Secondly, negative supply shocks and stagflation are anticipated to persist in 2023, and they will create a much more challenging scenario than excessive demand for goods because they will slow economic growth in borrowing countries, and decreased production capacity will decrease those countries’ ability to repay debt. Governments may also be compelled to curtail expenditure in order to pay off debt, which might result in cuts to crucial initiatives like healthcare and education.
Thirdly, the root of the global debt problem is that recessions are frequently accompanied by a string of financial crises in emerging markets and developing economies, which would result in slower GDP growth, less foreign cash and cash liquidity in those nations, and a consequent reduction in their capacity to pay back debts, leading to an increase in payment defaults. The 2023 debt crisis may also result in a decline in economic confidence, which may deter foreign investors from making investments in that nation.
Fourthly, investors anticipate central banks to raise interest rates to roughly 4% in 2023, which is more than a two-point rise above the 2021 average, given the inability of the current interest rate hike to return global inflation to pre-pandemic levels. This would cause national currency exchange rates to become unstable, particularly for developing economies with large debt levels. This would be followed by a devaluation of those countries’ currencies as they were compelled to make repayments in hard currency.
Fifthly, in developing or impoverished nations, inability to pay debts and engagement in additional obligations may cause public resentment and outrage, or, at the very least, may allow for greater criticism of the actions of such governments and undermine their political stability. Street protests and rallies against the challenging economic circumstances may develop as a result, and in certain nations, the government may fall.
Sixthly, given the anticipated economic unrest in 2023, many individuals may be compelled to leave their home countries in quest of hard money and a better way of life, while increasing migratory flows to affluent nations may have a detrimental effect on those economies.
Lastly, businesses may fire employees as they try to stay afloat, which would raise unemployment. On the other side, banks and other financial institutions would start to exercise greater caution when making loans, which might make it difficult for companies and people to get credit.
How can we stop the disaster?
The parties with the capacity to stop or lessen the effects of the debt crisis are those in the developed world, while there are many other options as well. Therefore, the world should start by ending the war in Ukraine if it wants to find a solution to the economic crisis and the debt issue. Since the beginning of the Ukraine War, all economic indices have been increasing in an odd manner. There are also some other strategies from the textbook that may be used, such as reducing government expenditure to lower the budget deficit and maintain the debt-to-GDP ratio. This can include actions like tax increases or social program cuts.
Second, reworking a country’s debt agreement with its creditors to make it more manageable It could also mean lowering the interest rate or delaying the debt’s maturity. Thirdly, central banks may conduct monetary policies like decreasing interest rates to boost economic development and make it simpler for borrowers to pay back their obligations.
Fourth, to help it satisfy its debt commitments, a nation may get financial aid from other nations or from international institutions like the International Monetary Fund (IMF).
Last but not least, enacting fundamental economic changes, such as labor market and product market reforms, may aid in boosting growth and raising the economy’s potential output. Additionally, in rare circumstances, a substantial percentage of the debt may be wiped off by creditors in order to increase the debt’s viability.
To conclude, the impending debt crisis has been a long-brewing issue that has taken more than ten years to develop; the ultimate shock emerged shortly after the Ukraine conflict, which served as a catalyst. There are rising concerns of a fresh wave of debt defaults given the unfavorable outlook for global economic trends, especially the more complicated global debt crisis, particularly for emerging and impoverished nations, because those economies are minor in comparison to the global economy. There are, nevertheless, a few possible alternatives or remedies that may shorten the time period during which the disaster would occur; yet, once again, the choice to take action is completely up to the developed world. Therefore, the moment has come for the developed world, also known as the “guardians of humanity,” to demonstrate that they are responsible and sane in order to put an end to the insane, unfathomable, and disastrous destiny of humankind!
[Mohamed Hassan / Pixabay]
*S. M. Saifee Islam is a Research Analyst at the Center for Bangladesh and Global Affairs (CBGA), Dhaka, Bangladesh. The views and opinions expressed in this article are those of the author.