By Bodo Ellmers (18 August 2016):
This Eurodad disussion paper analyses the evolving nature of developing country debt and solutions for change. It aims to identify relevant reform processes on an international level, and more practically to keep progressive actors that want to drive change informed about existing opportunities.
The nominal debt burden of developing countries has reached the highest level ever seen. While relative debt burdens decreased between 2000 and 2010, these trends have reversed in 2011. Since then debt is on an upward path, when measured in relative terms.
Most striking is the change in debt composition and debt instruments being used. Public debt in developing countries is increasingly being borrowed from private lenders. And private lenders have changed too: Bonds have replaced loans as a predominant form of private lending.
The evolving nature of debt implies that the new debt crises will be different from the last. The old debt regime that the 2030 development agenda inherited has never been fully able put loans to work for development, to prevent debt crises, or to resolve them in a fair, speedy and sustainable manner. The bad news is: the situation is getting worse.
In an era when debt came predominantly from official creditors, there were some institutions that were developed specifically to deal with this issue, even though they were very slow, dominated by creditors and, as a result, created a lot of harm along the way.
Some lenders introduced safeguards to prevent harm, however, these lenders are providing a decreasing share of finance. An increasing share of credit is not covered by any effective form of regulation. It falls into a regulation gap. The debt landscape has changed substantially while the modernisation of institutions to prevent and resolve debt crises has not kept up.
The evolving nature of debt requires up-to-date solutions for a development effective debt regime and for debt crisis prevention and resolution that must be able to reach the whole debt stock. The good news is: this is not news.
Substantial conceptual work has already been done on what a development effective debt regime for the 21st century could look like.
The United Nations (UN) Human Rights Council has adopted Guiding Principles on Debt and Human Rights that attempt to embed the debt regime in a human rights framework.
The UN Conference on Trade and Development (UNCTAD) Principles on Promoting Responsible Lending and Borrowing provide a model for how to increase the development effectiveness of loans, safeguard people and development and prevent debt crises.
To resolve debt crises in a fair, speedy and sustainable manner, several attempts have been made at both the IMF and the UN to create an insolvency regime, or debt workout mechanism, for sovereign debtors.
What mainly remains to be done is to strengthen these initiatives, overcome political deadlocks and put these proposals into practice. In all of these cases, citizen action will have a key role to play.