Good news: Progress made to solve future debt crisis

Good news: Progress made to solve future debt crisis

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For the past two decades, campaigners have been fighting for justice for countries enduring burdensome and unsustainable debt. And Tuesday, 9th September 2014 marked an important step in the fight.

The Jubilee 2000 and Drop the Debt campaigns of the past decade and a half resulted in unprecented debt relief for many of the worst-suffering countries. Through the Highly Indebted Poor Country (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI), these two schemes freed up significant government resources that would have otherwise gone to unsustainable debt service payments, and have enabled governments in poor countries to use this money instead to invest in education and health for their own citizens. For example, Tanzania’s government was able to abolish primary school fees in 2002 following debt relief – as a result, primary enrolment increased dramatically from 49% in 1999 to 98% in 2008.

However, the HIPC and MDRI schemes are now coming to an end, and there is no international process in place for dealing with any future government debt crisis.

The good news is that on Tuesday, the United Nations overwhelmingly supported the launch of negotiations to establish a new legal system to solve government debt crises when they arise. The resolution was submitted last week by more than 130 developing countries, following Argentina’s second default in just 13 years after losing a lawsuit with hedge funds that bought Argentina’s debt at very low prices during the country’s financial crisis.

The world is in strong need of a new globally-agreed debt restructuring mechanism to work out in a fair, transparent and independent manner governments’ debt that can no longer be paid. Debt vulnerabilities are a serious barrier to development in many poor countries, when government budgets are tied up making debt payments rather than supporting their own citizens. While the adoption of a UN resolution does not necessarily guarantee a new mechanism will be established, this is a strong signal as governments begin negotiations on the post-2015 agenda and its financing framework.

Debt vulnerabilities in poor countries are on the rise, due in part to the financial crisis and growing costs for essential imports like fuel and fertilisers, as well as an increasing proportion of development assistance being given as loans instead of grants. In 2012, for example, Kenya spent $569 million servicing its debt, which is equal to a third of the aid it received the same year. A significant number of countries which benefited from the first rounds of debt cancellation are now accumulating new debts. Over half of the countries that were included in HIPC and MDRI are now at risk of debt vulnerabilities. Some countries, such as Ethiopia, Mozambique and Niger, could be spending as much of their government revenue on foreign debt payments in a few years as they were before debt relief. In addition, the private sector is increasingly lending to developing countries. This leads to higher interest rates for developing countries and a fragmentation of lenders, which makes it very difficult to coordinate action to prevent debt crises. The lack of data on privately-owed debt also makes it very difficult for regulators and policymakers to make informed decisions.

Tuesday’s vote is an important step forward. The international community should build on this momentum and establish a fair, impartial and transparent international debt workout mechanism that would ensure efficient restructuring of debts when a debt crisis arises and reduce the chance of them happening in the first place. Such a mechanism would significantly contribute to the post-2015 agenda and its overarching goal to eradicate extreme poverty by 2030.

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