Cash crunch hits poorer nations

(Patria) - The punishing wave after the Covid-19 virus pandemic has finally peaked, with Ghana, Sri Lanka and Zambia ending years of painful debt restructuring, VOA reports.

However, the International Monetary Fund (IMF) and others are concerned that a dangerous cash crunch could take its place in many emerging economies - slowing development, climate change mitigation and fostering distrust in governments and Western institutions.

The question of what to do about it when Western countries are increasingly loath to send money abroad is a key topic at the World Bank and IMF’s autumn meetings taking place this week in Washington.

"It's a challenge in that for many, debt servicing has grown, borrowing has become more expensive, and external sources have become less secure," says Christian Libralato, a portfolio manager at RBC BlueBay.

The US Treasury’s top economic diplomat has called for new ways to provide short-term liquidity support to low- and middle-income countries to prevent debt crises.

A roundtable on global sovereign debt - an initiative that brings together representatives from countries, private lenders, the World Bank and the G20 - has also tried to address the issue, and it will be on the agenda when they meet in Washington on Wednesday.

But with limited budgets and crises around every corner, Vera Songwe - president of the Liquidity and Sustainability Fund, a group aiming to lower debt costs for Africa - said current fixes lack the necessary scale and speed.

"Countries are foregoing... education, health and infrastructure to service their debt. Even in developed economies there are stresses in the system," Songwe said.

The capital question

Data from the non-profit advocacy group ONE Campaign shows that in 2022, 26 countries - including Angola, Brazil, Nigeria and Pakistan - paid more to service external debts than they received in new external financing.

Many first gained access to bond borrowing about a decade ago, meaning large debt repayments became due just as global interest rates were rising, putting affordable refinancing out of reach.

ONE estimates that these flows became net negative for developing countries as a whole in 2023, estimates supported by experts from the Finance for Development Lab.

"The global social safety net of global financial security run by the IMF is simply not deep enough anymore," Ishak Diwan, research director at the Finance for Development Lab, told Reuters.

Diwan, who spent two decades at the World Bank, said that while full official data is not yet available, net negative transfers for 2023 and 2024 are likely worse.

New funding from the IMF, World Bank and other multilaterals has failed to offset the rising costs, he said.

World Bank and IMF officials seem to agree. The World Bank aims to increase its lending capacity by $30 billion over 10 years.

The IMF has reduced surcharges, lowering costs for its most overburdened borrowers by $1.2 billion annually.

Use the market

Bankers say many countries are now able to tap markets again, easing cash flow concerns.

"I don't think there are any limits to access. The market is really wide open," said Stefan Weiler, head of CEEMEA debt at JPMorgan.

Weiler expects bond issuance in Europe, the Middle East and Africa to reach a record $275 billion to $300 billion this year - with more countries, even Nigeria and Angola, possibly issuing bonds next year.

But the price remains high. Kenya, struggling to repay maturing dollar bonds, borrowed above 10%, a threshold considered unsustainable.

Finance Minister John Mbadi said Kenya cannot finance infrastructure investments through the budget.

"Kenyans are constantly complaining that they don't have money in their pockets. That in a way just tells you that we have liquidity challenges in the economy," Mbadi told a press conference.

China's pullback in lending has also hit developing countries hard, turning what had become a major source of incoming cash into a net negative flow for those repaying old debts.

What next?

Development banks are already working hard to cooperate to maximise lending. The Inter-American Development Bank and the African Development Bank are in the midst of a global campaign to get countries to donate their IMF reserve assets, which they say could turn every donated dollar into $8 of loans.

But the World Bank and others are still struggling to persuade Western countries to put up more money to increase their lending; debt-laden France plans to cut €1.3 billion in foreign aid, following previous government cuts in the UK.

A strong dollar means that key donor Japan would have to significantly increase its contributions to stay at the same level. The mix is toxic for developing countries.

"We are seeing protests from Kenya to Nigeria and elsewhere. It's a very dangerous situation. At this stage, we are losing the entire global south," Diwan said.