Fed rate hikes will intensify a global debt crisis, research warns

Fed rate hikes will intensify a global debt crisis, research warns

Egyptian President and African Union Chairman Abdel Fattah al-Sisi delivers a speech during the African Union summit in Niger.
Issouf Sanogo | AFP | Getty Images

Interest rate hikes from the U.S. Federal Reserve and other central banks are likely to worsen a global debt crisis, particularly for developing countries, according to a new report from U.K. non-profit the Jubilee Debt Campaign.

The Federal Open Market Committee meets this week to decide the path for its tightening of monetary policy as it looks to contain soaring inflation. Some analysts are expecting the central bank to hike rates four times from their pandemic-era lows in 2022.

In a report published Sunday, the Jubilee Debt Campaign highlighted that developing countries’ debt payments rose 120% between 2010 and 2021, and are currently at their highest since 2001. The average portion of government revenues channeled toward external debt payments increased from 6.8% in 2010 to 14.3% in 2021, with payments shooting up in 2020.

The sharp increase in debt payments is hindering countries’ economic recovery from the pandemic, the report suggested, and rising U.S. and global interest rates in 2022 could exacerbate the problem for many lower income countries.

Kristalina Georgieva, managing director of the International Monetary Fund, said last week that Fed rate hikes could “throw cold water” on already weak recoveries in certain countries. Higher U.S. interest rates, and thus a rise in the greenback, could make it more expensive for countries to meet their dollar-denominated debt obligations.

“The debt crisis continues to engulf lower income countries, with no end in sight unless there is urgent action on debt relief,” said Heidi Chow, executive director of the Jubilee Debt Campaign.

“The debt crisis has already stripped countries of the resources needed to tackle the climate emergency and the continued disruption from Covid, while rising interest rates threaten to sink countries in even more debt.”

Chow called on G-20 leaders to stop “burying their heads in the sand” and argued that the global economy urgently needs a “comprehensive debt cancellation scheme which compels private lenders to take part in debt relief.”

The organization’s debt data portal indicated that 54 countries around the world are currently facing debt crises, insofar as debt payments are hampering governments’ ability to preserve citizens’ economic and social rights.

A further 14 countries are at risk of both public and private debt crisis, while 22 are in danger of a solely private sector debt crisis and 21 a public sector crisis.

Of all external debt payments owed in 2022 by low and lower middle-income governments, 47% are to private lenders, 27% multilateral institutions, 12% China and 14% other governments, according to JDC figures.

In a tweet last week, World Bank President David Malpass called for urgent debt relief, enhanced debt transparency and a rebalancing of creditor and debtor powers. The G-20 created the Common Framework in 2020, intended to aid countries facing insolvency and protracted liquidity problems.

However, none of the countries admitted to the framework have yet had any debt canceled. The African Forum and Network on Debt and Development (AFRODAD) has long warned that many African countries were facing a debt precipice, and Zambia in November 2020 became the continent’s first pandemic-era default.

“Covid-19 accelerated an already deteriorating situation and will reverse the socio-economic gains of the past decade,” said Jason Braganza, executive director of AFRODAD.

“We have consistently said the current debt relief measures aren’t good enough and have called for a truly inclusive debt relief program with all creditors; and a comprehensive debt cancellation program.”

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