Back to the complete issue
Wednesday, 13 March 2019

Developing countries could be in for a 1980’s-style debt crisis

Developing countries could be in for a 21st century debt crisis, senior executives from policy advisory firm Dalberg write for the Financial Times’ BeyondBrics blog. More than 100 emerging markets witnessed government debt-to-GDP ratio hikes between 2013-17, and debt-servicing burdens have risen enough to draw parallels with the lead-up to the 1980’s debt crisis. At the time, Zambia, Cameroon and Malawi had to spend some 40% of state revenue to service debt, diverting much-needed funds away from social development and healthcare.

The bulk of new debt comes from the external loan agreements of 16 low and lower-middle-income countries. China — the single largest bilateral, country-to-country, creditor — loaned out 44% of the funds, while the World Bank, and other large multilateral lenders including the IMF, accounted for 35%. China has previously come under fire for its Belt and Road Initiative, which some countries have criticized as the “new version of colonialism” that has lured countries into debt traps. Loans to lower-income nations caused the IMF to rate in 2017 public debt as “unsustainable” or “at high risk of unsustainability” in 32 countries, as opposed to only 15 in 2013.

Egypt was the only country to improve its public debt risk rating between 2013 and 2017, according to IMF ratings cited by the otherwise gloom-ridden piece. The authors provided no explanation for Egypt standing out, despite government debt increasing in virtually every other developing economy (and our own debt-to-GDP ratio reaching 98%). This could have been a base effect from the aftermath of the 2011 revolution, and maybe because we were the only Arab Spring country to apply for a loan as large as USD 12 bn from the very institution doing the risk rating. While borrowing for development is an effort toward the UN’s Sustainable Development Goals, the FT piece says, equal efforts should be made to improve the sustainability of the financing itself.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2021 Enterprise Ventures LLC.

Enterprise is available without charge thanks to the generous support of Commercial International Bank (tax ID: 204-891-949), the largest private-sector bank in Egypt; EFG Hermes (tax ID: 200-178-385), the leading financial services corporation in frontier emerging markets; SODIC (tax ID: 212-168-002), a leading Egyptian real estate developer; SomaBay (tax ID: 204-903-300), our Red Sea holiday partner; Infinity (tax ID: 474-939-359), the ultimate way to power cities, industries, and homes directly from nature right here in Egypt; CIRA (tax ID: 200-069-608), the leading providers of K-12 and higher level education in Egypt; Orascom Construction (tax ID: 229-988-806), the leading construction and engineering company building infrastructure in Egypt and abroad; and Act Financial (tax ID: 493-924-612), the leading activist investor in Egypt; and Abu Auf (tax ID: 584-628-846), the leading health foodmaker in Egypt and the region.