As the world grapples with economic uncertainties, the rising global debt crisis demands our attention. It raises questions about the stability of international finances and the sustainability of debt financing as a way for governments to fund their development projects. Reliance on external lenders, be it other countries or international financial institutions like the International Monetary Fund (IMF), has seen a significant increase over the past decade, pushing global debt levels to historically record-breaking heights. However, as is the case with most global economic shockwaves, it is most heavily impactful on growing or emerging economies, mainly in the global south. A 2023 research study on the increase in accumulated debt from Boston University showed that the debt held by developing countries rose from $1.3 trillion to $3.6 trillion between 2008 and 2021. While the COVID-19 pandemic contributed greatly to the global economic stagnation, and the increasing financial needs of governments required to stabilize their economies as they recover, debt levels had already been on the rise even before the pandemic shut down the world.
At its core, a debt crisis occurs when a government or an entity finds itself unable to meet its debt obligations, triggering a cascade of economic challenges that can impact various sectors and hinder overall national development. According to reports by the IMF, 70 countries are currently at risk of defaulting on their loans, meaning their economic growth has been unable to achieve the necessary rates needed to cover the countries’ debt servicing needs. The economic instability in developing countries, like Lebanon, whose catastrophic debt levels have plunged their economy into a seemingly never-ending recession, should serve as a cautionary tale for emerging market economies worldwide on the perils of an overreliance on borrowing as a sole financing option to cover budget deficits, public and development expenditure. Lebanon’s financial institutions have been crippled by the unsustainable levels of public debt that the country has been racking up since the ’90s, a large portion of which is dedicated to repaying existing foreign debt. As a result, inflation surged, local infrastructure deteriorated and the value of the Lebanese Lira crashed. This led to aggravating the existing economic challenges, quickly depleting the foreign currency reserves, and adding to the strain on the government’s ability to provide reliable public services. People were locked out of accessing their foreign currency accounts or saw their value fall almost in half, further damaging their local economy, the country’s collective purchasing power, and their participation in the world economy.
Despite this, countries continued to turn to the IMF and other international financial institutions for bailouts both before and after the pandemic, and with skyrocketing international interest rates, the cost of borrowing has only increased. While the shockwaves of the COVID-19 pandemic on the global market are still a factor in the economic downturn, with lower consumer demand, supply chain disruptions, and uncertain investor sentiments, it is important to note that emerging economies are simply more vulnerable to the negative outcomes of the global debt accumulation. While the U.S. and Japan can continue to secure seemingly endless debt financing and still maintain relatively stable economies, countries like Egypt, whose current focus relies heavily on external debt to finance the development of commercial mega-projects, should proceed with more caution. The 2016 economic reform program that Egypt agreed to in exchange for a $12 Billion loan came with many strings attached, namely subsidy cuts, tax reforms, and changes to the business environment that would make it more attractive for foreign direct investment. All this was done to promote sustainable economic growth and address the mounting fiscal deficit the country faced. Although economic indicators marginally improved since 2016, the standard of living has drastically deteriorated.
An increasing number of Egyptians are struggling to afford basic necessities due to subsidy cuts imposed by the International Monetary Fund (IMF) deal. Over the past eight years, subsidies on electricity, water, and gas have been gradually reduced with the ultimate goal of eliminating them entirely. This, coupled with record-high inflation rates, has resulted in a significant portion of the population falling below the poverty line. Given Egypt’s ongoing foreign currency crisis, it appears that this trend will continue.
This is not to say that debt financing is completely to blame. The amounts dedicated to crucial developmental sectors like healthcare and education have been negligible in comparison to the numerous energy, tourism, real estate, and infrastructure projects that Egypt has undertaken since 2014, and the ramifications of that have begun to show. Further aggravating this, is the IMF program’s stipulations in exchange for loan disbursement, which have forced Egypt to privatize state-owned public enterprises and achieve a free-floating currency, among other conditions. Moving forward, emerging economies should rely more heavily on encouraging entrepreneurship and investing in local production, not only to achieve the desired outcome of GDP growth but also to compete more efficiently and successfully in international trade and improve the status of their current accounts.
The IMF’s standard approach to economic development has been criticized by development theorists for being a one-size-fits-all solution that fails to consider the economic hardship and social context of the countries it is implemented in. This is especially true for emerging economies which are further pushed into debt without any clear direction. The worst impact of these reform programs is on the average citizen, as they prioritize short-term economic indicators over the well-being of the community. Even more frustrating is their disregard for basic economic development theories that heavily emphasize the importance of investments in education and healthcare to achieve sustainable levels of development. It is crucial for emerging economies to invest in, and innovate within their local industries, to both decrease reliance on imports and to expand the economy’s productivity and ability to contribute to and benefit financially from the global market. Industrialization is what enabled South Korea to transform its agricultural-based economy into one of the top-ten economies with one of the highest domestic gross products in the world, raising its exports as a percentage of GDP from 25.9 percent in 1995 to 56.3 percent in 2012. The success of their policy implementations to incentivize tech innovations and create a more hospitable business environment should encourage other developing economies to do the same.
The global debt crisis, exacerbated by the pandemic, emphasizes the vulnerabilities of emerging economies relying on external financing, particularly when this external financing comes with strings attached. Emerging economy countries’ contributions to the world economy should not be trivialized, as their populations make up a significant portion of the world’s consumer base. Facing increasing economic hardships, the effects of the degrading purchasing power of these populations have already affected global demand in the wake of the pandemic, the rate at which the world economy can return to a sense of normalcy, and raising the question about the sustainability of current development methodology.
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