Debt, Growth & Implications for the Current and Future Economy

Day 5: April 20

Today we were back at the IMF and World Bank headquarters to hear talks regarding debt and growth in developing countries. What I really appreciated about these talks is that they actually had representatives from developing countries that are economically growing while taking on debt. It wasn’t just the “wise” western European countries.

The first panel was titled Debt & Growth: A Balancing Act? It was really interesting to hear the different ways that developing and emerging countries are using debt to push growth and create economic change. The following is a summary of my major takeaways from each panellist:

Kenneth Ofori-Atta: Finance Minister, Ghana:
– In recent years, Ghana’s financial situation has not been stable and they have borrowed billions of funds, but the country is starting to turn this around
– Debt/GDP 2016 = 73%, 2017 = 69.5%
– Since 2003 the country has been running a primary deficit, but this changed last year
– 2009 debt stock = $9 Billion, 2016 = $30 Billion
– the country didn’t come to the international markets last year in order to take stock of their debt
– the challenge to the recent improvements in the country’s financial situation is making these improvements and changes irreversible if/when a new government comes in
– has reduced the budget deficit from 9.3% -> 5.9&, and growth has risen from 3.7% to 8.5%
– there is a balancing act between being fiscally disciplined while also creating growth
– 4% of GDP is interest payments and this needs to change

Matthew Rycroft: Permanent Secretary, Department for International Development, United Kingdom:
– debt isn’t an obstacle to growth, certain debt (quality & structure) is an important step to growth
– a new trend of South-to-South lending
– borrowing countries need to be transparent with the international community and their citizens
– suggested lenders to use the G20 Guidelines for Sustainable Financing
– lending mechanisms need to adapt to an increased number of financing options increase

Imad Fakhoury: Minister of Planning & International Cooperation, Jordan:
– The country’s Debt/GDP increased, but not because of financial mismanagement, but because of external shocks (i.e. the Arab Spring and taking in refugees)
– to account for these shocks and the impacts on the country’s economic and financial system, the country:
– implemented strong fiscal programs that cut ALL subsidies
– turned the refugee crisis into a development opportunity — pushed for a global public good that warrants new spending for middle-income countries*
– resumed development and growth agenda
*- instead of turning refugees away and closing Jordan’s border in order to protect its economy, the country did the right thing of letting the refugees in. Jordan brought to light the fact that middle-income countries are surrounded by conflict and take in an increased amount of refugees compared to developed high-income countries. Minister Fakhoury asked the question: What kind of world todo we want to create? This let to incentivizing countries to bring refugees in instead of closing borders and being protectionist

Torsten Slok: Chief International Economist – Managing Director, Deutsche Bank Securities, Inc.
– after the 2008 Global Recession, interest rates in the United States, Europe and Japan were at ~0%, there was a hunt for yield around the world that led to developing and emerging countries to receive an influx of investments since interest rates were low. But what happens when interest rates start to increase?
– Investors are about to re-assess risk and how they buy in the future. This will result in developing countries and emerging markets to receive funding as risk-free investments interest rates increase
– Countries that issued long-term bonds (i.e. 50 years) was very clever
– Why isn’t the US dollar increasing while interest rates increase??
– EU countries that had debt issues had higher income countries help bail them out. Developing and emerging economy countries don’t have this ability.

Mauricio Cardenas: Minister of Finance & Public Credit, Republic of Columbia:
– debt is relative to your own GDP, make sure you accelerate growth as you borrow
– need to ensure that what you borrow is sustainable, that you give pay back your loans but the debt also gives you dividends
– COMPOSITION OF DEBT MATTERS: borrow in the currency you have, debt in foreign currency is a huge risk
– ensure the debt you are taking on isn’t funding current expenditures (this is the responsibility of institutions in your country) and instead funding new investments
– Columbia is also facing the economic stresses of taking in refugees (~700,000 Venezuelans in Columbia with ~45,000 crossing/day)
– wants continued access to multilateral deals/relationships
– a national law that Columbia can only borrow 3% of GDP
– Columbia lost 1/2 of its exports with the price of oil dropping, but this hasn’t resulted in a recession because having a flexible exchange rate has been a key and first line of defence. This flexible exchange rate is possible because the country hasn’t borrowed much in foreign currency

The second meeting of the day was entitled “Global Renewal: Debt Relief & Financial Investment towards a Sustainable Future”. The panel included representatives from the IMF, Jubilee-Puerto Rico, AFRODAD and EURODAD. My big take away from these representatives included:

• IMF Low-Income Country Report: 50% of countries have debt: GDP levels of +50%. The median country in this list has a debt: GDP level of +60%
• the creditor structure has changed from banks and the Paris Club to commercial creditors and regional/plurilateral lenders
• 8% of countries globally meet standards in debt coverage and transparency
• Before the 2017 hurricane season, Puerto Rico had a public debt of $72 billion, pension plans were at zero, 60% of children are in poverty, 12% unemployment and there is mass migration to mainland United States
• In 2016, PR government declared debt unpayable, but a 2013 law doesn’t allow PR to declare bankruptcy
• The African continent has received two previous debt relief programs (1996: Heavily Indebted Poor Countries Initiative, 2005: Multilateral Debt Relief Initiative)
• African countries that have graduated to middle-income status can no longer access concessional loans, so they are now going to new sources of financing. Additionally, many countries will be seeking refinancing options as they will not be able to pay back the debt owed this year
• Public-Private Partnerships are becoming more popular
• Creation of the African Borrowing Charter
  • sustain debt levels
  • transparency and accountability
  • debt borrowing needs to happen within a constitutional and legal framework
  • disclosure and publications
  • avoid incidents of over-borrowing
• AFRODAD will now push for governments to adopt this charter
• 2014: commodity prices dropped almost 50%, and despite this, the lending boom continued to developing countries. The US and EU quantitative easing policies led to these lending booms.
• Need to look at lending and borrowing from a human rights perspective!
• clauses can be added to bonds that can change debt payments and restructure debt if an external shock happens (i.e. natural disasters”. Need the “use of state-contingent debt instruments’
• UNHCR: Principles of Debt and Human Rights

For further information on topics and publications listed, please visit:

AFRODAD Borrowing Charter
Development of guiding principles for assessing the human rights impact of economic reform policies and its mandate
Puerto Rico’s Debt Crisis

MY PERSONAL FAVOURITE:

Lin-Manuel Miranda, creator of Hamilton the Musical and In the Heights, appeared on John Oliver’s Last Week Tonight and concluded Oliver’s monologue with a rap, pleading Congress to help Puerto Rico’s Debt Crisis. (Link 1 and Link 2).

Additionally, after the tragic effects of Hurricane season on Puerto Rico, and lack of support given from the US government, Miranda and many other Puerto Rican and Latinx artists joined together to create the song “Almost Like Praying (featuring Artists for Puerto Rico)”. All proceeds from this song go to help Puerto Rico rebuild. I urge you to go onto iTunes and purchase this song. Not only is it for a good cause, but it’s a good song!!!