- Borrowing costs for developing country governments has increased sharply
- Commodity price falls and declines in tourism could have major economic impact on many poor and vulnerable countries
Borrowing costs for poor countries have increased substantially, and their income from commodities is falling, in the wake of the coronavirus outbreaks across the world.
Research released today by Jubilee Debt Campaign shows that interest rates on new government borrowing have increased by an average of 3.5 percentage points for low- and lower-middle income countries since late-February. The average yield for these governments, which is an indication of the cost of new borrowing, is now 10%.
Commodity prices have plunged, with the Bloomberg commodity price index falling 27% since the start of 2020 and now at its lowest level since 1986. Since the start of 2020 the price of copper has fallen 21%, oil 61%, and coffee 15%. Furthermore, many countries will be hit by falling tourism revenues, with small island states being particularly affected because of their size and economic reliance on tourism.
Many poor countries are already suffering from debt crisis. According to the IMF, 34 out of 70 countries it assesses are now in debt default or at high risk of being so, up from 17 in 2013. Lebanon defaulted on its debt last week, Argentina is in debt restructuring negotiations, and Zambia is expected by financial markets to default soon. Emerging markets are experiencing their worst period of short-term capital outflows on record.
Tim Jones, Head of Policy at Jubilee Debt Campaign said:
“Urgent action is needed to support poor countries being hit by the economic impacts of coronavirus, including a complete moratorium on debt payments for those most affected. Where economic shocks have pushed countries into debt crisis, the IMF needs to help restructure debt with previous lenders. Otherwise, its loans will just be used to pay off reckless lenders and maintain the debt crises. And the IMF itself needs to cancel debts owed to it by countries suffering the impact of the pandemic.”
In its budget on 11 March the UK government announced it is contributing £150 million to the IMF’s fund for cancelling debt payments for poor countries in response to pandemics. The IMF has not yet announced that any country will qualify for debt cancellation. Prime Minister of Pakistan Imran Khan has called for debt cancellation for Pakistan and other developing countries in response to coronavirus.
Country examples
Zambia is already in a debt crisis, with debt payments taking up more than 30% of the government’s revenue, and public spending having fallen by 18% since 2015. The price of copper, Zambia’s main export, has fallen by 21% since the start of the year with the global economic slowdown following coronavirus. Speculators have been selling the government’s debt, expecting a default soon.
Chad in Central Africa already has a debt crisis caused by loans from oil traders. This debt was restructured as part of an IMF programme in 2018. Jubilee Debt Campaign criticized this at the time because it did not reduce the debt enough to protect the country from further economic shocks. Such a shock has now arrived, with the oil price falling by 61% since January.
The Maldives and other small island states are heavily reliant on tourism. The cost of new borrowing for the Maldives government has increased to over 8% since the sell-off in financial markets began in late February. This could be a very worrying sign of what’s ahead for many small island states.