June 2022

Submission to IDC Debt and Development Inquiry

This evidence is submitted by Christian Aid

For further information please contact Sophie Powell, Chief of UK Advocacy and Policy spowell@christian-aid.org

Word Count: 2919

Christian Aid is the official relief and development agency of 41 Christian churches in the UK and Ireland and has been working since 1945 to support sustainable development, eradicate poverty, support civil society and provide disaster relief in South America, the Caribbean, Africa and Asia. We have supported debt justice movements since the 1990s and are currently working alongside partners to advocate for debt relief for low income countries in order to provide governments the fiscal headroom to finance their Covid-19 recovery, invest in social protection and build climate resilience.

Since 2020, we have published two reports relating to the debt crisis, Passing the Buck[1] and Under the Radar[2].

1           The urgency of taking action

1.1          In 2019, UNICEF estimated that, after a decade of rising debt levels, around 1 in 8 countries spent more on debt servicing than on education, health and social protection combined. Since then, the world’s poorest have faced an unprecedented two years, the economic shocks triggered by Covid-19 set off a ‘global debt pandemic’, exacerbated by the Russian invasion of Ukraine and further worsened by rising interest rates, these combined effects are estimated to push an additional 75 to 95 million people into extreme income poverty.

1.2          The global debt landscape will have human rights implications. Debt Justice now estimates that debt payments are undermining the ability of governments to protect the basic economic and social rights of their citizens. Many governments do not have the fiscal space required to deliver critical public services such as healthcare, including Covid-19 vaccines, and other social protection measures that are vital to protect the most vulnerable and marginalised communities in the global South. In addition, the growing global food crisis is leaving many households unable to afford to eat and many farmers are dealing with failed harvests. Increasing food prices will result in higher household costs and increasing indebtedness for low-income countries.

1.3          The World Bank is now warning that as many as a dozen countries are at risk of defaulting on their debt payments this year, following Sri Lanka’s sovereign debt default in May, the first in its history. The default of Sri Lanka may have a domino effect on the region and could set a precedent of unsustainable debt crises resulting in defaults in the absence of debt restructuring. Debt unsustainability is “one of the most serious issues faced by low-income countries” and without addressing it, households, companies, and governments in lower income countries will be squeezed; those with fewest resources will be hit worst.

1.4          In fact, the severity of the current economic environment and the policy conditionality from lenders is leading to many countries enacting devastating austerity measures. As many as 159 countries are committing to undertaking fiscal consolidation measures this year up until at least 2025, expected to affect 6.6 billion people or 85% of the global population. 

1.5          If urgent action is not taken to resolve the unfolding debt crises the humanitarian disaster currently unfolding will only continue to escalate. It is all but certain we will forego the achievements of the Sustainable Development Goals, and set back decades of development progress, including on women’s rights. The debt crisis will also impede the much-needed investments in climate action urgently required to keep the rise in global temperatures under 1.5C.

1.6          This crisis is man-made and is the result of inadequate policy decisions and inaction by the world’s most powerful governments, including the UK government, as well as by lenders and borrowers more widely. The current debt crisis is not a symptom of the current global economy, but of political choices which have been crippling low-income countries for decades.

2           The impact on development of rising debt levels

2.1          Across the countries Christian Aid works in, our partners report that governments are finding it increasingly difficult to service debts, and this is having huge economic impacts. In El Salvador, current debt levels are unsustainable with a $800 million Eurobond payment due in 2023[3]. In Nigeria, growth projections have already been revised down due to spiralling debt[4].

2.2          Kenya is currently experiencing its worst economic crisis in decades, triggered by the pandemic, locust infestations and ongoing climate crises including one of the worst droughts on record[5]. Together, these are rendering over 2.9 million people food insecure and many more in need of urgent humanitarian assistance. Yet, the ability of the government to adequately respond is severely hampered by its rising debt obligations[6][7]. In 2020/21, Kenya spent five times as much on debt repayments than on health. Even amidst the humanitarian crisis, the government increased regressive taxes that disproportionately fall on the poor and those least able to pay by reinstating a higher VAT rate and implementing an e-levy, risking[8] driving the poor out of the digital economy.

Figure 1: Kenya Central Government External Debt, 2000-2021 in KES Billions

2.3          Kenya is also facing pressure from institutions such as the World Bank and the IMF. Under its loan programme with the World Bank, the government has introduced new water conservation levies and increased regulatory charges for water companies. Meanwhile, in its loan programme with the IMF, the government committed to rationalising public wage allowances and streamlining spending on goods and services. With inflation on the rise due to the war in Ukraine and increasing drought and food insecurity, these added conditions will impact the poorest and further risk restricting access to critical public services and increasing user costs of those who can least afford it.

2.4          Our partners such as Tax Justice Network Africa (TJNA) advocate for tax policies and systems which have pro-poor outcomes and enhance domestic resource mobilisation through challenging harmful tax policies. TJNA  also works on issues of economic justice including debt and the Covid-19 response in Kenya[9], where the high degree of debt risks will undermine the country’s recovery.

2.5          While lack of transparency over privately held sovereign debt continues to hamper public scrutiny, it is increasingly clear that Kenya’s debt servicing costs are so high in part because the debt held by private creditors is becoming increasingly expensive. Over the last year alone, yields on Kenya’s Eurobond doubled from 6% to 12%.

Debt and climate

2.6          Climate change plays a significant role in the vulnerability of those living in poverty and debt compounds the impact of climate change and the ability for climate vulnerable and low-income countries to confront the climate crisis.

2.7          In many countries, high debt servicing is also crowding out critical public investment that is urgently required for climate adaptation and resilience, including to support resilient food systems. Climate risks are in turn influencing interest rates, with interest rates on debt of V20 countries[10] already reportedly being higher than they would otherwise be due to climate vulnerability.

2.8          Many V20 countries are already dealing with climate impacts, often requiring governments to provide emergency and long-term support to households affected by disasters from cyclones to slow-onset events such as coastal erosion. Many of the assets damaged by climate change are uninsured and uninsurable meaning governments must spend public money addressing these impacts, often incurring more debt to do so. Complex financial instruments designed to encourage effective climate action – such as ‘debt for climate swaps’ should be treated extremely cautiously since they effectively impose extra conditionality on any debt relief.

2.8.1         Alongside other countries in East Africa, Kenya is facing the worst drought in decades, with at least 3.5 million Kenyans affected. Levels of food insecurity are on the rise with 2.7 million people estimated to be acutely food insecure. In 2018, 28.3% of climate finance[11] came from domestic public resources. With further constraints on public spending due to the heavy debt burden, this could have serious implications on Kenya’s capacity to finance climate resilience and support communities affected by climate change.

3           The complexity of the debt landscape

The role of private creditors 

3.1          Since the 2008 Global Financial Crisis, private sector creditors have played an ever more important role in lending to developing country governments. Research conducted by Christian Aid and our partners in 2020 demonstrated that in 73 of the lowest income developing countries – those eligible for the G20’s April 2020 Debt Service Suspension Initiative (DSSI) – 27% of foreign debts were owed to private creditors. The IMF recently reported that between 2006 and 2020, the share of DSSI countries’ Eurobonds sold to private creditors increased from 3% to 11%. In 2020 alone, 69% of all debt payments due in Zambia were owed to private creditors, that share was 59% in Ghana, 55% in Nigeria and 45% in Senegal.

3.2          Privately held external debt is rapidly changing the landscape for developing countries. Private external debt entails higher borrowing costs for developing countries, increased instability as interest rates are determined in volatile global markets, and a challenging environment for the prospect of debt resolution as multiple creditors are involved. This results in private creditors holding a disproportionate amount of power over developing countries as they can act collectively against individual countries, while governments are required to deal with their private creditors alone.

3.2.1         In Kenya, public debt is on a sharp rise, growing from 48.6% of GDP to 69% of GDP by the end of 2020, and a growing proportion of external debt is owed to commercial creditors. In 2015 commercial borrowing was $3.6bn and increased to $25.9bn in 2021. Furthermore, projections suggest that between April 2021 and June 2022 the volume of new debt owed to private creditors, including loans for debt management operations, will increase by $7.3bn, with the majority (59%) of new borrowing from private creditors[12] .As highlighted in our report, the failure to include the private sector in debt relief initiatives will have immediate and long term consequences which will further erode Kenya’s ability to ramp up spending on health and social security.

3.3          Debt relief initiatives that have occurred to date have been woefully inadequate and have mostly failed to compel private creditors to participate in negotiations. The Debt Service Suspension Initiative (DSSI) postponed some debts for some low-income countries; however this initiative did not include private creditors, despite the IMF anticipating economic collapse in several countries unless private creditors ‘implement debt relief’. In 2020, developing countries ultimately paid their external creditors 70 times the amount of debt suspension afforded under the DSSI.

3.4          We are currently working with partners in Kenya, Nigeria, El Salvador, and Guatemala to better understand the implications of the rising share of private sector debt for fiscal space and public spending to finance the Covid-19 recovery and build climate resilience.  Our research will inform activities to build civil society awareness on these issues and challenge the lack of transparency surrounding debt and private creditors especially.

3.5          It is increasingly concerning that, of the 73 countries eligible for debt relief under the DSSI, 30% of the debt is owed to private lenders in the UK.[13] In the context of a debt crisis that is largely driven by the rise of private creditors, this places the UK in a unique position to use all legal, political and financial mechanisms available to compel private creditors to suspend debt payments and write-down developing country debts.

The gaps in debt relief

3.6          Debt relief received under the IMF’s Catastrophe Containment and Relief Trust was so minute that it was interpreted as merely a symbolic gesture, and the DSSI postponed only a quarter of debt promised to low-income countries. Only three countries so far have applied to the Common Framework introduced by the G20 in October 2020. The Common Framework also excludes most middle-income countries, many of which are also facing debt crisis. Nearly two years after its introduction, the Common Framework has failed to provide any debt relief, in part because some private creditors are refusing to participate in the negotiations, despite a myriad of pleas from the G20.

3.7          The majority of multilateral financial support provided to developing countries in response to the pandemic came in the form of loans, rather than grants, further contributing to rising debt levels including the channelling of unused Special Drawing Rights (SDRs) by advanced economies. The failures of the multilateral financial response to the pandemic demonstrated the transformed debt landscape, and this has had a toll on the world’s poorest. The declared ‘decade of delivery’ for the SDGs has become a decade of loss for development. In order to manage the multiple crises and support a path to poverty eradication and self-sustaining development more must be done to pursue alternatives to current relief measures.

4           The role of the UK - What must we do better

4.1          Despite the recognition in the recently published International Development Strategy (IDS) that countries are in debt distress, and the UK Government’s engagement with countries such as Zambia facing debt crisis, we are yet to see urgent action to support debt vulnerable countries.

4.2          It is critical that the FCDO engages in debt resolution measures avoiding additional private sector loans to enable countries to effectively achieve their development needs and reduce poverty. This will ensure the effectiveness of UK Aid delivered to debt vulnerable countries by enhancing fiscal space to enable countries to invest in their social infrastructure including health systems.

4.3          The FCDO should be working in collaboration with the Treasury to advance the following recommendations for a whole-of-government response to the current global debt crisis:

4.3.1         The UK must pass legislation to strengthen the position of developing countries facing debt crisis towards private creditors.

• Debt Justice has identified that approximately half of international private debt contracts and 90% of bond contracts of DSSI countries are governed by English law.[14] This uniquely positions the UK to incentivise private creditors to participate in debt relief measures and strengthen the ability of developing country governments to protect the fundamental human rights of their people. Both the IMF Managing Director and World Bank President have called on the UK to enact these legislative reforms.

4.3.2         The UK should leverage its diplomatic position and work with counterparts to support immediate measures to strengthen the Common Framework. These include:

• Supporting expanding access to the Common Framework to additional heavily indebted vulnerable countries, including middle income and climate vulnerable countries,
• Supporting provision of debt standstills throughout debt restructuring negotiations for private as well as bilateral and multilateral creditors,
• Clarifying and enforcing comparability of treatment by private creditors,
• Committing legislative protection and financial support to debtor countries who need to default on recalcitrant creditors, while debt cancellation and restructuring from other creditors should go ahead,
• Supporting the strengthening of the IMF’s lending-into-arrears policy to incentivise private creditors to participate in good faith.

4.3.3         The UK must stop blocking and start championing the establishment of a sovereign debt workout mechanism.

• The establishment of a multilateral sovereign debt workout mechanism is the only long-term, comprehensive, and sustainable solution to preventing future debt crises by creating a predictable, rules-based international system that disincentivises risky lending and borrowing across all relevant stakeholders.
• In the lead-up to the Fourth World Conference on Financing for Development, now scheduled to take place in 2024, the UK should vocally support and engage in negotiations for a debt mechanism. The FCDO has a role to play in ensuring the establishment of a sovereign debt workout mechanism will firmly be on the agenda and support its establishment.

4.3.4         The UK must safeguard debt relief decision-making from undue private creditor influence and champion private creditors transparency. This includes:

• Not providing privileged access to the IIF and private creditors or financial sector representatives to debt relief negotiations, but rather ensuring that all stakeholders, especially countries and representatives of those affected by the debt crisis, have access, and are consulted on debt relief negotiations.
• Supporting regulations that target debt underwriters to collect and make publicly available information on sovereign bond contracts and require commercial and investment banks, as well as hedge funds, to disclose their sovereign bond positions holdings to national authorities. This also includes supporting a permanent, publicly available registry of loan and debt data that includes information on sovereign bonds, to be established.
• Moving beyond the IIF / OECD voluntary transparency initiative towards legally binding disclosure, given only two IIF members bank have disclosed loans to the OECD registry.

4.3.5         UK aid spending levels must be restored, with 0.7% of GNI seen as the target, not the ceiling, in our approach to the debt crisis. It is critical that debt cancellation is utilised for unpayable debts as a measure to enable the effectiveness of UK aid spend.

4.3.6         Debt-for-climate swaps

• In our joint brief, A Perfect Storm, we noted the links between the debt and climate crises and that debt-for-climate swaps have been proposed as ‘win-win’ solutions that will both relieve some of a country’s debt burden and free up resources at a national level to address the climate crisis. The UK Government should not use debt-for-climate swaps, and instead should support climate finance, which is provided in the form of grants, not loans, so that it does not create further debt distress.