Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
Inter Press Service
KUALA LUMPUR, Malaysia, Jul 26 (IPS) – Currency values and foreign exchange rates change for many reasons, largely following market perceptions, regardless of fundamentals. Market speculation has worsened volatility, instability and fragility in most economies, especially of small, open, developing countries.
US Fed pushing up interest rates
For no analytical rhyme or reason, US Federal Reserve Bank (Fed) chairman Jerome Powell insists on raising interest rates until inflation is brought under 2% yearly. Obliged to follow the US Fed, most central banks have raised interest rates, especially since early 2022.
Jomo Kwame SundaramThe US dollar or greenback’s strengthening has been largely due to aggressive Fed interest rate hikes. Undoubtedly, inflation has been rising, especially since last year. But there are different types of inflation, with different implications, which should be differentiated by nature and cause.
Typically, inflationary episodes are due to either demand pull or supply push. With rentier behaviour better recognized, there is now more attention to asset price and profit-driven inflation, e.g., ‘sellers inflation’ due to price-fixing in monopolistic and oligopolistic conditions.
Recent international price increases are widely seen as due to new Cold War measures since Obama, Trump presidency initiatives, COVID-19 pandemic responses, as well as Ukraine War economic sanctions.
These are all supply-side constraints, rather than demand-side or other causes of inflation.
The Fed chair’s pretext for raising interest rates is to get inflation down to 2%. But bringing inflation under 2% – the fetishized, but nonetheless arbitrary Fed and almost universal central bank inflation target – only reduces demand, without addressing supply-side inflation.
But there is no analytical – theoretical or empirical – justification for this completely arbitrary 2% inflation limit fetish. Thus, raising interest rates to address supply-side inflation is akin to prescribing and taking the wrong medicine for an ailment.
Fed driving world to stagnation
Thus, raising interest rates to suppress demand cannot be expected to address such supply-side driven inflation. Instead, tighter credit is likely to further depress economic growth and employment, worsening living conditions.
Increasing interest rates is expected to reduce expenditure for consumption or investment. Thus, raising the costs of funds is supposed to reduce demand as well as ensuing price increases.
Earlier research – e.g., by then World Bank chief economist Michael Bruno, with William Easterly, and by Stan Fischer and Rudiger Dornbusch of the Massachusetts Institute of Technology – found even low double-digit inflation to be growth-enhancing.
The Milton Friedman-inspired notion of a ‘non-accelerating inflation rate of unemployment’ (NAIRU) also implies Fed interest rate hikes inappropriate and unnecessarily contractionary when inflation is not accelerating. US consumer price increases have decelerated since mid-2022, meaning inflation has not been accelerating for over a year.
At least two conservative monetary economists with Nobel laureates have reminded the world how such Fed interventions triggered US contractions, abruptly ending economic recoveries. Although not discussed by them, the same Fed interventions also triggered international recessions.
Friedman showed how the Fed ended the US recovery from 1937 at the start of Franklin Delano Roosevelt’s second presidential term. Recent US Fed chair Ben Bernanke and his colleagues also showed how similar Fed policies caused stagflation after the 1970s’ oil price hikes.
De-dollarization?
However, the US dollar has not been strengthening much in recent months. The greenback has been slipping since mid-2023 despite continuing Fed interest rate hikes a full year after consumer price increases stopped accelerating in mid-2022.
Many blame recent greenback depreciation on ‘de-dollarization’, ironically accelerated by US sanctions against its rivals. Such illegal sanctions have disrupted financial payments, investment flows, dispute settlement mechanisms and other longstanding economic processes and arrangements authorized by the World Trade Organization, International Monetary Fund and UN charters.
Even the ‘rule of law’ – long favouring the US, other rich countries and transnational corporate interests – has been ‘suspended’ for ‘reasons of state’ due to economic warfare which continues to escalate. Unilateral asset and technology expropriation has been justified as necessary to ‘de-risk’ for ‘national security’ and other such considerations.
Horns of currency dilemma
For many monetary authorities, the choice is between a weak currency and higher interest rates. With growing financialization over recent decades, big finance has become much more influential, typically demanding higher interest income and stronger currencies.
Central bank independence – from the political executive and legislative processes – has enabled financial lobbies to influence policymaking even more. For example, Malaysia’s household debt share of national output rose from 47% in 2000 to over four-fifths before the COVID-19 pandemic, and 81% in 2022.
There is little reason to believe recent exchange rates have been due to ‘economic fundamentals’. Currencies of countries with persistent trade and current account deficits have strengthened, while others with sustained surpluses have declined. Instead, relative interest rate changes recently appear to explain more.
Thus, both the Japanese yen and Chinese renminbi depreciated by at least six per cent against the US dollar, at least before its recent tumble. By contrast, British pound sterling has appreciated against the greenback despite the dismal state of its real economy.
Even as they face their own challenges abroad, Zimbabweans living overseas say they can not consider heading back home to face the economic challenges – especially now with hyperinflation. Credit: Jeffrey Moyo/IPS
by Jeffrey Moyo (dordrecht, netherlands)
Inter Press Service
DORDRECHT, NETHERLANDS, Jul 05 (IPS) – They have high-paying jobs, a high standard of living, and almost everything they need, but for Zimbabweans abroad, all that glitters is not gold.
Twenty-eight-year-old Gift Gonye, based in Germany, is one such Zimbabwean, and he is apparently not satisfied with his life abroad.
Homesickness is one disease that has hit Zimbabweans like Gonye, but despite this, they are afraid to wade back into the suffering in the southern African nation.
“On my behalf and the behalf of other Zimbabweans in the diaspora, yes, we miss home, but even then, there is nothing we can do about it because there is suffering back home. We can’t go back home to face poverty,” Gonye told IPS.
“You just find yourself with no choice except to endure the challenges here in the diaspora in order to survive.”
Based on the latest figures from the Zimbabwe National Statistics Agency (Zimstats) in the 2022 national housing and population, less than one million Zimbabweans have left the country since 2012, looking for greener pastures abroad.
Records from Zimstats have indicated that 908,914 left the southern African country in the last decade, with South Africa, Botswana and the United Kingdom being the preferred destinations for Zimbabweans.
South Africa has accounted for 773,246, Botswana 74,928, Britain 23,166 and the USA 8,565.
Gonye and several other Zimbabweans that have fled from the economic hardships in their African country have had to endure some difficulties in their stay abroad.
“The life we live here is expensive. We pay high taxes. The tough life back home in Zimbabwe complicates our lives in the diaspora, for we have to support the people back home because people there look forward to our help, and this results in us here in the diaspora not investing in terms of our future and for ourselves at old age,” Gonye said, referring to a system often referred to as “black tax” where wealthier and more successful people are expected to assist their families.
While many Zimbabweans back home have high regard for diaspora nations, many like Gonye see otherwise, thanks to the daily pressure migrants endure to survive.
“I want to let people back home know we have no social life here. It’s not easy living here. The money we earn is enough for rent and food and other basics, and it ends there. It is hard for us in the diaspora,” said Gonye.
“If you see someone sending you some bit of money back in Zimbabwe—some 30 dollars or seventy dollars, that person would have endured saving that amount.”
As a result, Zimbabweans abroad live under pressure from their kith and kin back home and meet their needs as well.
Despite official government figures about people that have relocated overseas, about 4 to 5 million Zimbabweans are said to be abroad, largely forced abroad by a fractured national economy since 2000 when authorities seized white-owned commercial farms.
Ellen Mazorodze, based in Australia, as elections loom in Zimbabwe on August 23 this year, migrants like herself would like to have a chance to change things in their country. However, only those residents living in the country can vote, and she encouraged them to vote.
“If you want to choose a person to represent you, go and vote. Your vote will be counted. It will help you to have a person fulfilling your wishes get in office,” Mazorodze told IPS.
Privilege Kandira (30), living in Norway, says: “Diaspora life is a mixture of both good and bad.”
“On one side, I can testify that I have enjoyed the opportunity of coming to a better life here in the diaspora, but on the other side, let me hasten to say that I have met lots of challenges, amongst which is racial discrimination,” he told IPS.
Kandira is not alone in battling racial discrimination.
In the UK, many Zimbabweans, like 29-year-old Tariro Muungani, a professional social worker, have had to face racial discrimination.
“I will give an example of where I live here in England. It’s a place where there are few black people. When you walk the streets, white people look at you curiously. When you board a bus, for instance, and sit next to a white person, they may drift away from you because they don’t want to be in contact with you, which makes living in such areas painful,” she (Muungani) told IPS.
Like Gonye in Germany, Muungani said, “Zimbabweans back home look at us in the diaspora as people who have made it in life and think we have no problems, and they look forward to us with trust that diaspora people can help them.”
Muungani said most people back in her home country do not believe people abroad can sometimes lack money.
Yet other Zimbabweans overseas say they miss the social unity back in their country as they fight to earn a better living abroad.
“What comes to mind is the togetherness we had back home, the spirit of neighbourliness, which is not there here. Nobody really cares for the next person. Children live just anyhow with no strangers bothering to discipline them, unlike what happens back home culturally,” Sophia Tekwane, a Zimbabwean woman based in Sweden, told IPS.
But Tekwane also said with the suffering in Zimbabwe, many like herself have no choice except to endure being abroad.
“The suffering in Zimbabwe makes things tough for all of us in the diaspora because it forces us to work even harder to support the loved ones back home.”
“You end up having no choice. Sometimes you end up sacrificing – starving yourself to support the people back home. You end up working abnormally long hours,” added Tekwane.
Long wait at the border between Sudan and Egypt. Credit: Hisham Allam/IPS
by Hisham Allam (cairo)
Inter Press Service
CAIRO, May 25 (IPS) – The conflict in Sudan is impacting the economy in Egypt, and those who make their living moving goods across the borders have spent weeks hoping the situation will normalize.
Muhammad Saqr, a truck driver, left Cairo with a load of thinners on April 13, heading to Khartoum. By the time he had arrived at the border, the battle had flared up. Saqr remained, like dozens of trucks, waiting for the borders to be reopened.
On April 15, 2023, clashes erupted in Sudan between the army led by Lieutenant General Abdel Fattah al-Burhan and the Rapid Support Forces led by Lieutenant General Muhammad Hamdan Dagalo, known as “Hamidti.” According to the UN, the clashes have resulted in hundreds of deaths and displaced more than a million people, with 840,000 internally displaced while another 250,000 have crossed the borders.
Saqr was stuck at the border for 28 days.
“We began to run out of supplies, and we reassured ourselves that the situation would improve tomorrow. Twenty-eight days passed while we slept in the open. The information we received from the bus drivers transporting the displaced from Sudan to Egypt convinced us that there would be no immediate relief. We knew that if we entered Khartoum alive, we would leave in shrouds,” Saqr told IPS.
“The merchant to whom we were transferring the goods asked us to wait and not return (home), particularly because he could not pay the customs duties due to the banks’ closure.”
Muhammad Saqr at the border of Sudan and Egypt.
Eventually, they returned with the goods to Cairo, Saqr said.
Mahmoud Asaad, a driver, was stuck on the Sudanese side of the border. Due to customs papers and permits, the livestock he was transporting had already been stuck in the customs barn in Wadi Halfa, Sudan, for thirty days. Then when the conflict broke out, the cows were trapped for another thirty days.
“We used to transport shipments of animals from Sudan to Egypt regularly,” Asaad explains. The average daily transport of animals to Egypt was roughly 60 trucks laden with cows and camels. This trade has stopped, and many Sudanese importers have fled to Egypt while waiting for the conflict to end.
“Sudan is regarded as a gateway for Egyptian exports to enter the markets of the Nile Basin countries and East Africa, and the continuation of war and insecurity will reduce the volume of trade exchange between the two countries, negatively impacting the Egyptian economy, which is currently experiencing some crises,” Matta Bishai, head of the Internal Trade and Supply Committee of the Importer’s Division of the General Federation of Chambers of Commerce, told IPS.
According to Bishai, commodity prices have risen significantly in recent months as the Egyptian pound has fallen against the US dollar. He also stated that the current situation in Sudan would result in additional price increases in the coming months, particularly for commodities imported from Sudan, such as meat.
Bishai explained that while Egypt had an ample domestic meat supply, it was nevertheless reliant on imports. Importing it from other countries such as Colombia, Brazil, and Chad would take longer and be more expensive than importing it from Sudan, as land transport is more convenient and cheaper than transporting the goods by sea.
According to Bishai, Sudan is a major supplier of livestock and live meat to Egypt, supplying about 10 percent of Egypt’s requirements. Higher meat prices will put additional pressure on Egypt’s inflation rates.
“Rising commodity prices, combined with the current situation in Sudan, are expected to result in higher inflation rates in Egypt in the coming months,” said Bishai.
According to data from the General Authority for Export and Import Control on trade exchange between Egypt and the African continent during the first quarter of this year, Sudan ranked second among the top five markets receiving Egyptian exports, valued at USD 226 million.
According to Ahmed Samir, the Egyptian Minister of Trade and Industry, the volume of trade exchange between Egypt and African markets amounted to about USD 2,12 billion in the first quarter of this year, with the value of Egyptian commodity exports to the continent totaling USD 1,61 billion and Egyptian imports from the continent totaling UD 506 million.
Mohamed Al-Kilani, an economics professor and member of the Egyptian Society of Political Economy, said: “The negative consequences will be felt in the trade exchange, which has recently increased and reached USD2 billion. Egypt has attempted to expedite the import process from Sudan by expanding the road network and building a railway.”
Credit rating agency Moody’s warned that should the conflict in Sudan continue for an extended period, it would have an adverse credit impact on neighboring countries and impact multilateral development banks. Moody’s added that if the clashes in Sudan turn into a long civil war, destroying infrastructure and worsening social conditions, there will be long-term economic consequences and a decline in the quality of Sudan’s multilateral banks’ assets, as well as an increase in non-performing loans and liquidity.
As the conflict entered its sixth week, attempts at a ceasefire have failed – with both sides accusing each other of violating agreements.
SYDNEY, May 15 (IPS) – The Reserve Bank of Australia (RBA)’s latest interest rate hike comes before the ink of the much-awaited review of the RBA, released on 20 April, has dried. The threat of more increases to come is a clear sign of an emboldened RBA as the government accepts all of the panel’s utterly disappointing 51 recommendations.
Anis ChowdhuryRBA Review
The Treasurer, Hon Dr Jim Chalmers, announced the Review in July 2022, designed to ensure that Australia’s monetary policy arrangements and the operations of the RBA continue to support strong macroeconomic outcomes for Australia in a complex and continuously evolving landscape.
The recommendations of the three-person panel, charged with reviewing the structure, governance, and effectiveness of the RBA, range from creating a separate board to make decisions on interest rates, to giving the Bank a simpler dual mandate to pursue both price stability and full employment.
Utter disappointment
The Review report fails to question the long-held taboos about inflation and Central Bank’s role in a social democracy. While the Review panel leaves the RBA’s 2-3% inflation target unchanged, it outrageously recommends dropping from the RBA’s mandate “economic prosperity and welfare of the people of Australia” and the removal of government’s power to intervene in the RBA’s decisions.
This will make the RBA more inflation hawkish, and more aggressive in its use of the blunt interest rate tool without much regard for the consequences on jobs, especially when the RBA’s full employment mandate is left vague.
Without the power to intervene in the RBA’s decisions, such hawkish interest rate hikes will force the government to cut its expenditure as it has to pay more on interest for its debts while its tax revenue shrinks when the economy slows.
Thus, the well-being of ordinary citizens, especially those who will lose jobs, will worsen as the government struggles to find money for targeted budget support. No wonder the Treasurer termed the latest RBA interest rate decision as “Pretty brutal”.
Voodoo of 2-3% inflation target
In accepting the RBA’s current 2-3% inflation target, the Review panel ignores the fact that the 2-3% inflation target has become a “global economic gospel” without any empirical or theoretical basis.
The recommendation ignores the changed circumstance since the 2-3% inflation target was first adopted. In the wake of the 2008-2009 Global Financial Crisis, many, including the then IMF’s Chief Economist, Olivier Blanchard suggested a 4% inflation target would be more appropriate.
The inflation-unemployment trade-off relationship (i.e., the Phillips curve) has become flatter over the years due to labour market deregulations, off-shoring and other developments. This means trying to dogmatically achieve such a low inflation target would require a much higher unemployment rate as recognised by the former Fed Chair and current US Treasury Secretary Janet Yellen. That is, the interest rate must rise more steeply inflicting serious damages to the business finances, household spending and government budget.
Full employment, a poor cousin
The Review panel recommends “full employment” mandate along with inflation target. However, while the inflation target has a numerical figure (2-3%), there is no such specific target mentioned for unemployment that may be consistent with the concept of full employment. When asked during a press conference, the Treasurer said, “It’s a contested concept”.
The report mentions full employment 100 times! But does not say what it means; instead, the panel accepts the current RBA’s definition and measure of full employment based on a contestable concept of a “non-accelerating inflation rate of unemployment” (NAIRU). That is, full employment is consistent with an unemployment rate below which inflation will accelerate.
Social democracy sacrificed
The panel thinks, there are too many factors that affect prosperity and welfare. So, it recommends removal of the RBA’s third mandate “economic prosperity and welfare of the people of Australia”, enshrined in the 1959 RBA Act.
Furthermore, the panel seeks to remove the government’s ability to overrule an RBA decision because it “undermines the independent operation of monetary policy”.
With these recommendations implemented, the RBA will not be bound to the commitment to build a fairer society, although economic prosperity and people’s welfare can remain as an “overarching purpose”.
The Winner
A super independent RBA will have all the power it needs to use its sole weapon, interest rate rises, to keep inflation at 2-3%. The emboldened RBA will declare the consequences to its actions on the job markets as consistent with a vaguely defined full employment, and economic prosperity and welfare of the people.
It can simply assert that job and income losses are short-term pains for long-term gains, without having to provide any evidence. There are no such things as short-term pains.
For many, job loss may cause permanent damages to their mental health, self-esteem and social life often leading to suicides. IMF research shows that the scarring effects of recessions can be permanent.
Thus, the clear winner of the recommended reforms, is the RBA, not the ordinary people struggling to find decent jobs to enable them to put a roof over their heads and two square meals on their tables.
Meanwhile, the RBA’s ideological anti-inflationary fight with a blunt interest rate tool benefits the big four banks. They are “tipped to rake in record $33 billion” in profits from rising interest rates when everyday Aussies and small businesses battle rising bankruptcies and job losses.
Anis Chowdhury is Adjunct Professor, School of Business, Western Sydney University. He held senior United Nations positions in the area of Economic and Social Affairs in New York and Bangkok.
Egypt plans to sell shares in 32 state-owned businesses, including three banks. Credit: Hisham Allam/IPS
by Hisham Allam (cairo)
Inter Press Service
Cairo, Apr 06 (IPS) – Egypt intends to sell shares in 32 state-owned businesses within a year, including three banks, two military-owned businesses, and numerous businesses in the energy and transportation sectors. This is part of the administration’s efforts to reduce the role of the state in the economy and attract foreign capital.
That also follows the government’s December USD 3 billion deal with the IMF to resume privatization initiatives.
The IMF approved the USD 3 billion loan to strengthen the private sector and reduce the state’s footprint in the economy.
Egypt planned to sell 23 state-owned enterprises in 2018, but the plan was postponed due to the worldwide crisis.
The Russia-Ukraine conflict has put pressure on the Egyptian economy and currency, making the proposal more urgent.
According to Rashad Abdo, head of the Egyptian Forum for Economic Studies, Egypt had already received sovereign loans from many donors, including international institutions, such as the International Monetary Fund and Gulf countries, and these parties either set harsh lending conditions or would be reluctant to lend due to increased risks.
The State Ownership Policy Plan, adopted by President Abdel-Fattah El-Sisi in December, outlines how the government would participate in the economy and how it would increase private sector involvement in public investments. Egypt wants to increase the contribution of the private sector to the nation’s economic activity from 30 percent to 65 percent within the next three years. One-quarter of these enterprises will be listed by the government within six months.
Egypt announced the offering of these companies, intending to sell them to strategic investors, specifically Gulf sovereign funds. Egypt is expected to sell enterprises worth USD 40 billion within three years, including those held by the army.
Attracting foreign investment requires strengthening the investment climate, lowering inflation rates, and expanding anti-corruption efforts, Abdo told IPS.
The State Ownership document states that 32 Egyptian state companies will be listed on the Egypt Exchange (EGX) or sold to strategic investors within a year, beginning with the current quarter and ending in the first quarter of 2024. Stakes in three significant banks, Banco du Caire, United Bank of Egypt, and Arab African International Bank, are among the scheduled transactions. Insurance, electricity, and energy companies, as well as hotels and industrial and agricultural concerns, will also be on the market. Prime Minister Moustafa Madbouly announced that the first stakes would be offered in March and a quarter by June, and more businesses could be added over the next year.
Abdo pointed out that the Monetary Fund affirmed the Egyptian government’s commitment to implementing the State Ownership Document when it agreed to grant it this loan and the Egyptian government saw it as a favorable opportunity to implement the terms of the document set by the Organization for Economic Cooperation and Development.
Mohamed Al-Kilani, professor of economics and member of the Egyptian Society for Political Economy, said the privatization effort seeks to eliminate the dollar gap in Egypt and thus provide indirect compensation in the form of services and benefits from the International Monetary Fund’s debt.
The state would also send a message to foreign investors that it responds to the private sector and is willing to withdraw from certain sectors to benefit the private sector.
“The state is attempting to exploit this proposal to stimulate and revitalize the Egyptian Stock Exchange while taking into account the fair valuation of these companies in comparison to the global market. However, the state was unclear about the details of this offering and whether it is a long-term or short-term investment, and it has not clarified the size of employment or the percentages offered in terms of ownership and management,” Al-Kilani told IPS.
“The state is trying to create new types of foreign investment to attract foreign currency due to the fluctuation in exchange rates and high-interest rates,” Al-Kilani added.
According to external debt data published on the central bank’s website in mid-February, Egypt’s external debt fell by USD 728 million to USD 154.9 billion at the end of last September, but its foreign exchange reserves remain low, prompting renewed demand for state assets. The Russia-Ukraine conflict has further pressured the economy and local currency, prompting the proposal for new urgency.
Despite its relatively modest improvement in the latest data from the central bank at the beginning of February (USD 34.2 billion), it lost about 20 percent of the level of USD 41 billion at the end of February last year.
Last January, the IMF suggested that the volume of the financing gap in Egypt would reach about USD 17 billion over the next 46 months in light of its decline in foreign exchange resources and the high cost of its imports as one of the largest countries in the world to import its food and the first importer of wheat in the world.
Queues and frustration met the changes to the currency and withdrawal limits in Abuja. Credit: Abdullahi Jimoh/IPS
by Abdullahi Jimoh (abuja)
Inter Press Service
ABUJA, Mar 06 (IPS) – Nigerians confronted by hardships over the scarcity of the newly redesigned naira notes in conjunction with the country’s cashless policy introduced by the apex bank have had a last-minute reprieve from a policy that had disrupted their lives and exacerbated hunger.
On Friday, March 3, 2023, the country’s Supreme Court temporarily suspended the March 10, 2023, deadline for use of the redesigned naira and said the imposition of such a tight deadline was an affront to the 1999 constitution.
Trying to get money from the ATMs of accredited commercial banks had created so many difficulties that people had put their lives on hold. Artisans, teachers, and other professionals could not go to work, many school children were loitering at home, itinerant traders were stranded, and families were now hungry and, on occasion, resorted to violent protests because they had not been able to access their money.
Experts had warned that the situation could trigger a cash-induced recession because the country’s economy is chiefly cash-based.
In October last year, the Central Bank of Nigeria Governor, Godwin Emefiele, announced that three major denominations would be redesigned on the Federal government’s orders.
Emefiele announced that Nigeria’s last redesign was in 2014 when the N100 note was redesigned to mark the country’s centenary.
“In line with sections 19, subsection a and b of the CBN Act 2007, the management of the CBN sought and obtained the approval of President Muhammad Buhari to redesign, produce and circulate new series of banknotes at N200, N500 and N1000 levels,” he said.
In November last year, Buhari launched the new naira notes and said they would be in circulation from December 15, and the deadline for swapping old notes for new ones in the Deposit Money Banks (DMBs) was slated for this year on January 31. But the mass objection and the banks’ inability to swap the money forced it to be extended to February 10, 2023. On February 17, the old notes ceased to be recognized as legal tender.
To add to the woes on December 6, the apex bank, in an attempt to push a cashless economy, introduced a cash withdrawal limit and directed the lower banks to limit over-the-counter amounts to be withdrawn by individuals and corporate entities to N100,000 and N500,000 (about USD 207 and USD 1085. 5) per week. This order was expected to take effect on January 9, 2023, and ATMs and point of sale (PoS) terminals would dispense a maximum of (N20,000) (USD 43.4) at a time.
The cashless policy’s first phase was introduced in April 2012 in Lagos to encourage electronic transactions and enhance the efficiency of Nigeria’s payment system. It was successful there, and the policy was then extended to five other states in July 2013. For the expansion of financial access points and financial inclusion and proliferation of electronic transactions, the CBN gave full implementation in September 2019 before the nationwide implementation was recently announced to commence on January 9 this year.
Like many other developing African countries, Nigeria’s economy was greatly affected by the Russian/Ukraine war. In 2016 the country hit a recession, which caused her economy to contract by 1.6 percent due to a fall in the price of oil in the international market.
Also, in the third quarter of 2020, its economy plunged into recession over the negative impact of COVID-19 on travel and the supply chain of goods worldwide.
Moreover, the growth of her inflation rate climbed to 21.82 percent in January 2023.
The CBN justifies the cashless policy in the banking system, saying it could defuse kidnapping for ransom, armed robbery, graft terrorism financing, extortion, advance fee fraud, and other crimes, while the compulsory withdrawal limit will cause deflation to the country’s economy.
Inflation occurs when there is too much money in circulation. The central bank’s findings showed that as of October last year, currency in circulation was N3.23 trillion naira, but there was only 500 billion naira in various banks’ custody, and 2.7 trillion naira was permanently undeposited. Observers have projected that with the decision to take the money out of circulation, inflation would decrease.
Not Enough Money in Circulation
News analysts questioned whether the Nigerian Security Printing and Minting (NSPM) could print the money. It was created in 1963 with authority to produce currencies and security documents for ministries, agencies of government, and companies.
In addition, a World Bank survey revealed that there were 16.15 ATMs per 100,000 adults in Nigeria in 2021 – which means that for a population of over 200 million people in Nigeria, there are only 32,000 ATMs across the federation. Each ATM would need to dispense a minimum of 1 million naira daily.
But the problem was exacerbated because the commercial banks were short of cash and unable to get the newly printed naira from the central bank because the NSPM could only print 4 billion banknotes per year.
The central bank’s deputy governor, Aisha Ahmad, said in December that 500 million new notes had been ordered, which a financial analyst describes as insufficient.
“The intention for the naira redesign and adoption of cashless transactions is to reduce vote buying and terrorism in the country, but the CBN needs to release more cash into circulation,” a Lagos-based analyst from KPMG Babatunde Babajide told IPS in an interview.
The Vote Buying
As enticing voters with cash was a phenomenon in previous Nigerian elections, the CBN insisted on retaining the notes in the banks and kicking against any further extension of the swapping of the old currency to check vote buying during the February election.
However, many members of the All Progressive Congress (APC), the ruling party, said the cash crunch is a plot against their candidate Bola Ahmed Tinubu. Last week Tinubu was declared the winner of the election – despite allegations that the poll was flawed, and is now contested by both the main opposition leaders Peoples Democratic Party (PDP), Atiku Abubakar and Labour Party’s Peter Obi.
A political scientist from the University of Nigeria, Adilieje Chukwuma, also affirmed that the naira redesign was principally for economic gain but may also have had political undertones.
“Looking at the timing, it could have a political undertone. But I prefer to view the situation mainly as an economic recovery,” he told IPS.
While some believe the programme to replace the naira was designed to impact the poor, Babajide, the financial analyst, views it as beneficial to the majority.
“Nigerians just need to adopt electronic transactions. The CBN action is intentional, mainly to reduce the supply of cash and curb inflation,” Babajide says.
The analyst, however, added that hopefully, after the country’s general election, things would start to return to normal.
In July 2021, widespread civil unrest spread across KwaZulu Natal and other South African provinces. While it followed the incarceration of former President Jacob Zuma, analysts also attributed it to widespread unemployment and inequality. Credit: Lyse Comins/IPS
by Lyse Comins (durban)
Inter Press Service
DURBAN, Mar 01 (IPS) – South Africa’s almost record level food price inflation, load shedding, rising energy costs, and further fuel and interest rate hike forecast have eroded workers’ disposable incomes and further disadvantaging the poor – leaving analysts predicting that the country was at heightened risk, including civil unrest.
Head of Policy Analysis at the Centre for Risk Analysis, Chris Hattingh, cautioned that the lower fuel price, which the latest Statistics SA data showed last week, had largely contributed to driving annual consumer inflation down from 7,2 percent in December 2022 to 6,9 percent in January, could prove to be only a temporary reprieve. The fuel price index declined by 10.5 percent between December 2022 and January, the data showed.
United Trade Union of SA (UASA) spokesperson Abigail Moyo said the state’s failure to supply food producers and retailers with sufficient water and electricity to run businesses efficiently had fuelled inflation that eroded workers’ disposable income.
“Economically driven financial stress through no fault of their own has been a factor in workers’ lives for years. With items such as maize meal going up 36,5 percent since January last year, onions up 48.7 percent, samp up 29.6 percent, and instant coffee up 26.4 percent, it is clear that difficult times are not nearly over for households,” she said.
Hattingh added: “This inflation relief afforded by the lower fuel price could prove to be temporary. The reopening of the Chinese economy will likely drive international oil prices higher, impacting down the line in the form of higher fuel prices. South Africa is also more exposed to imported inflation. Should the costs and prices of manufactured and consumer goods and inputs increase, this will then drive inflation higher locally.”
“Of great concern regarding pressure on consumers is that the food and non-alcoholic beverages inflation rate was recorded at 13.4 percent (annually) in January. The previous time this reading was so high was April 2009, at 13.6 percent,” he said.
Additionally, the category of bread and cereals recorded the biggest increase of any product group at 21.8 percent, while meat inflation rose from 9.7 percent in December 2022 to 11.2 percent in January.
“A fundamental weakness in the economy – unreliable electricity supply – could likely push prices and inflation higher throughout the year. This will result in more pressure on consumers and businesses and add to the potential for civil unrest,” he said.
He said load shedding was now a priced-in “feature of South African life,” as shown by the Rand weakening to R19 against the US Dollar.
Annual inflation, at 6.9 percent, was also outside the South African Reserve Bank’s (SARB) target range of 3 – 6 percent.
“With the latest data for January now in, the SARB could continue its rate hiking cycle with another 25 basis points increase at the next meeting of the Monetary Policy Committee,” Hattingh said.
Independent crime and policing expert and a former senior researcher at the Institute for Security Studies, Dr Johan Burger, warned that signs of potential unrest due to the rising cost of living and disillusionment were visible across the country.
He said most households in the middle and higher income brackets had been forced to cut back on spending due to higher interest rates and the rising prices of basic foods.
“Those of us with a relatively stable income are already finding it increasingly difficult and have to think twice before we buy something, so one can only imagine the pressure people in lower income groups must be feeling,” he said.
“For many, this has been the situation for many years, and it has become worse. Unemployment is at 32,9 percent, and the unofficial unemployment rate is even higher. High levels of unemployment lead to high levels of poverty, creating all sorts of social problems,” he said.
Burger said during the looting in July 2021, much of what was stolen was foodstuffs and goods that could be sold for cash.
“In some cases, people who went out to shop for food were attacked and robbed of their food. Other instances that we see now are when a truck breaks down on the road near a community, and all of a sudden, a flood of people come in and strip it of whatever it’s carrying – whether food or something they can exchange for food,” he said.
Burger said these incidents showed a “general instability” against the backdrop of a weakened criminal justice system that cannot deal effectively with criminals.
“The potential for large-scale disruptions and looting and for large groups of people to come together and engage in popular uprisings could happen. When large groups of people are exposed to extreme levels of property over a long period of time, they build resentment and feel neglected by the state. They feel their needs are not acknowledged, and with this resentment comes a disregard for the state, its laws, and the police, and they feel they have the right to rise up and take what they need,” Burger said.
“And if they rise up in large enough numbers, it will be very difficult for the state to suppress this kind of uprising. The potential for this to happen is very real – it’s almost visible; it’s just beneath the surface,” he said.
Burger said all that was needed to spark unrest was a potential trigger, as had occurred in KwaZulu-Natal with a pro (former president Jacob Zuma campaign ahead of the July 2021 riots.
“The danger is it could spread very quickly because those levels of poverty and deprivation exist in almost all our communities across the nation. In 2008 the Xenophobic riots spread in a question of days, and we saw 69 people killed and many more injured and displaced,” he said.
He warned that localized protests about service delivery had been occurring for years, and if left unattended, these could also get to a point where “resistance will explode.”
“It is growing dissatisfaction with their situation, and many of poor communities see themselves as the neglected part of South Africa. They have not shared in anything promised when democracy came in terms of employment and service, and they go hungry once this happens; there is a division between a part of our population and the institutions that govern us, which is why there is real potential for large scale insurrection,” Burger said.
Head of the Justice and Violence Prevention Programme at the Institute for Security Studies, Gareth Newham, said rising food security and hunger, with around 60 percent of the population now living in poverty and a large proportion of households facing hunger weekly, created a high level of despair and frustration.
“This challenge has been around some time, and increasing food prices could make that worse,” he said.
However, he said the current causes of most public violence were labor-related disputes and service delivery failures.
“We historically don’t have an issue where food insecurity has been a major driver of public violence, but it doesn’t mean it won’t be. There could arguably be a level of hunger that does lead to it,” he said.
Opinion by Anis Chowdhury, Kate Lappin (melbourne and sydney)
Inter Press Service
MELBOURNE and SYDNEY, Feb 06 (IPS) – Australia is set to become the first country or jurisdiction to require large multinational corporations (MNCs), with a global consolidated income of at least AU$1 billion, to publicly report country-by-country (CbC) tax information. The new Labor Government announced on 25 October, 2022 in its budget paper that MNC’s public CbC tax reporting will begin from 1 July, 2023. Australia’s public CbC reporting rules will apply to all companies headquartered in Australia and companies headquartered elsewhere with sufficient nexus in the country.
Kate Lappin
The announcement received very little media attention, perhaps overlooked as a technical amendment. Yet public CbC reporting could be a vital weapon in the fight against corporate tax avoidance in Australia and, more importantly, in low-income and highly indebted countries that lose even greater proportions of public revenue to tax havens.
All countries in the Organisation for Economic Cooperation and Development (OECD), including Australia and the US, have required large MNCs to privately report CbC tax data under Action 13 of the OECD/G20 project against Base Erosion and Profit Shifting (BEPS). In November 2022, the European Parliament approved a directive to mandate public CbC reporting for large MNCs within the bloc, with a range of limitations discussed below, from 22 June, 2024.
The Australian move comes a month before a new push at the United Nations to convene a global tax body to set international taxation standards, after years of faltering efforts among the world’s richest countries at the OECD.
Losing billions
The Paradise Papers and the Luxembourg Leaks of the International Consortium of Investigative Journalism (ICIJ) shed light on tax manoeuvres of more than 100 MNCs. Apple alone shifted profits around the world to accumulate US$252 billion offshore. A 2021 ICIJ study revealed that, in one year alone, MNCs shifted US$1 trillion offshore, depriving governments of hundreds of billions in revenue.
Research by the Centre for International Corporate Tax Accountability and Research uncovered tax dodging by MNCs that bled money from public services and workers including in scandal ridden aged care homes in Australia. It exposed how Microsoft receives billions in outsourced government IT Contracts, while lodging over AU$2billion in profits via its Bermuda based subsidiaries where it pays little tax.
The 2021 ICIJ study finds African countries the most “vulnerable” to profit-shifting. In 2017, the Tax Justice Network found that low-income countries were the biggest victims of profit shifting.
In some countries such as Zambia and Argentina, losses exceeded 4% of GDP. In Pakistan the losses due to profit shifting were 40% of total tax revenues, and in Chad, the estimated losses were larger than all taxes collected (106.2% of total tax revenue)!
The State of Tax Justice 2021 finds that low-income countries collectively lose the equivalent of 48% of their public health budgets.
Low-income countries rely more heavily on corporate income tax for the revenue required to fund cash-starved public services, making corporate tax transparency vital in addressing global poverty and inequality.
Rich countries serving corporate interests
International taxation rules have been designed by rich nations, especially by their club, OECD. Tax justice activists, such as the African Tax Administration Forum allege that developing countries are “not at the table” at the OECD, but on the menu, with OECD rules designed to allow multinationals to continue to extract profits in the global south, without making fair contributions.
The OECD’s standards for MNCs tax reporting are riddled with loopholes. As Oxfam points out, the OECD rules do not allow people in low-countries to have access to information about MNCs’ profit made or tax paid in their countries and nor do most tax authorities in low-income countries.
Similarly, the European Union’s CbC reporting is seriously watered-down. Tax transparency is only required for the 27 EU member states and the 21 black-listed or grey-listed jurisdictions on their flawed list of tax havens. Oxfam points out this means secrecy is retained for more than 75% of the world’s nearly 200 countries. The EU also provide a “corporate-get-out-clause” for “commercially sensitive information” for 5 years; and limit reporting to companies with consolidated turnover above EUR 750 million, excluding 85 – 90% of MNCs.
Unions’ play a critical role
The Labour movement has taken on the fight to end corporate tax avoidance. Labour’s share in GDP has been declining since the early 1970s in advanced countries and since the early 1980s in developing countries. Some unions have recognised that corporate tax avoidance erodes the public services workers need and undermines collective bargaining, while increasing corporate power.
The global union federation, Public Services International (PSI), co-ordinated union action to in support of public CbC reporting amongst other tax reforms. PSI joined the technical committee that drafted new Global Reporting Initiative (GRI) Tax Standards and worked with union pension funds to back the standards, which are now widely regarded as the best benchmark for corporate tax accountability.
In Australia PSI and affiliates exposed corporate tax avoidance in aged care, labour hire companies and corporations receiving large government contracts and worked with unions to shape the Labor party’s policy platform.
In addition to setting new tax transparencies standards, the Albanese Government should support the push by African countries for a truly inclusive UN tax convention – which could slash the scope for tax abuse by MNCs and wealthy individuals. Together, these contributions would deliver more to low-income countries than Australia’s entire development aid budget.
Kate Lappin is the Asia Pacific Regional Secretary for Public Services International (PSI), the Global Union Federation representing more than 30 million workers who deliver public services in 154 countries and territories. Kate headed the Asia Pacific forum on Women, Law and Development (APWLD) for eight years and has worked across labour, feminist and human rights movements for more than 20 years.
Anis Chowdhury is Adjunct Professor, Western Sydney University. He served as Director of Macroeconomic Policy & Development and Statistics Divisions of UN-ESCAP (Bangkok) and Chief, Financing for Development Office of UN-DESA (New York).
Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
Inter Press Service
KUALA LUMPUR, Malaysia, Feb 02 (IPS) – Few policymakers ever claim credit for causing stagnation and recessions. Yet, they do so all the time, justifying their actions by some supposedly higher purpose.
Now, that higher purpose is checking inflation as if it is the worst option for people today. Many supposed economists make up tall tales that inflation causes economic contraction which ordinary mortals do not know or understand.
Jomo Kwame SundaramInflating inflation’s significance
Since early 2022, like many others in the world, Americans have been preoccupied with inflation. But official US data show inflation has been slowing since mid-2022.
Recent trends since mid-2022 are clear. Inflation is no longer accelerating, but slowing. And for most economists, only accelerating inflation gives cause for concern.
Annualized inflation since has only been slightly above the official, but nonetheless arbitrary 2% inflation target of most Western central banks.
At its peak, the brief inflationary surge, in the second quarter of last year, undoubtedly reached the “highest (price) levels since the early 1980s” because of the way it is measured.
After decades of ‘financialization’, the public and politicians unwittingly support moneyed interests who want to minimize inflation to make the most of their financial assets.
War and price
Russia’s aggression against Ukraine began last February, with retaliatory sanctions following suit. Both have disrupted supplies, especially of fuel and food. The inflation spike in the four months after the Russian invasion was mainly due to ‘supply shocks’.
Price increases were triggered by the war and retaliatory sanctions, especially for fuel, food and fertilizer. Although no longer accelerating, prices remain higher than a year before.
To be sure, price pressures had been building up with other supply disruptions. Also, demand has been changing with the new Cold War against China, the Covid-19 pandemic and ‘recovery’, and credit tightening in the last year.
There is little evidence of any more major accelerating factors. There is no ‘wage-price spiral’ as prices have recently been rising more than wages despite government efforts ensuring full employment since the 2008 global financial crisis.
Despite difficulties due to inflation, tens of millions of Americans are better off than before, e.g., with the ten million jobs created in the last two years. Under Biden, wages for poorly paid workers have risen faster than consumer prices.
Higher borrowing costs have also weakened the lot of working people everywhere. Such adverse consequences would be much less likely if the public better understood recent price increases, available policy options and their consequences.
With the notable exception of the Bank of Japan, most other major central banks have been playing ‘catch-up’ with the US Federal Reserve interest rate hikes. To be sure, inflation has already been falling for many reasons, largely unrelated to them.
Making stagnation
But higher borrowing costs have reduced spending, for both consumption and investment. This has hastened economic slowdown worldwide following more than a decade of largely lackluster growth since the 2008 global financial crisis.
Ill-advised earlier policies now limit what governments can do in response. With the Fed sharply raising interest rates over the last year, developing country central banks have been trying, typically in vain, to stem capital outflows to the US and other ‘safe havens’ raising interest rates.
Having opened their capital accounts following foreign advice, developing country central banks always offer higher raise interest rates, hoping more capital will flow in rather than out.
Interestingly, conservative US economists Milton Friedman and Ben Bernanke have shown the Fed has worsened past US downturns by raising interest rates, instead of supporting enterprises in their time of need.
Four decades ago, increased servicing costs triggered government debt crises in Latin America and Africa, condemning them to ‘lost decades’. Policy conditions were then imposed by the International Monetary Fund and World Bank for access to emergency loans.
Globalization double-edged
Economic globalization policies at the turn of the century are being significantly reversed, with devastating consequences for developing countries after they opened their economies to foreign trade and investment.
Encouraging foreign portfolio investment has increasingly been at the expense of ‘greenfield’ foreign direct investment enhancing new economic capacities and capabilities.
The new Cold War has arguably involved more economic weapons, e.g., sanctions, than the earlier one. Trump’s and Japanese ‘reshoring’ and ‘friend-shoring’ discriminate among investors, remaking ‘value’ or ‘supply chains’.
Arguably, establishing the World Trade Organization in 1995 was the high water mark for multilateral trade liberalization, setting a ‘one size fits all’ approach for all, regardless of means. More recently, Biden has continued Trump’s reversal of earlier trade liberalization, even at the regional level.
1995 also saw strengthening intellectual property rights internationally, limiting technology transfers and progress. Recent ‘trade conflicts’ increasingly involve access to high technology, e.g., in the case of Huawei, TSMC and Samsung.
With declining direct tax rates almost worldwide, governments face more budget constraints. The last year has seen these diminished fiscal means massively diverted for military spending and strategic ends, cutting resources for development, sustainability, equity and humanitarian ends.
In this context, the new international antagonisms conspire to make this a ‘perfect storm’ of economic stagnation and regression. Hence, those striving for international peace and cooperation may well be our best hope against the ‘new barbarism’.
SYDNEY, Jan 27 (IPS) – As the year 2022 drew to an end, the United Nations Conference on Trade and Development (UNCTAD) warned, “Developing countries face ‘impossible trade-off’ on debt”, that spiralling debt in low and middle-income countries (LMICs) has compromised their chances of sustainable development.
Anis ChowdhuryIn early December, an opinion piece in The New York Times headlined, “Defaults Loom as Poor Countries Face an Economic Storm”. And the World Bank’s International Debt Report highlighted rising debt-related risks for all developing economies—low- as well as middle-income economies.
Debt on the rise
Debt build-up accelerated in the wake of the 2008-2009 global financial crisis (GFC). The World Bank’s, Global Waves of Debt reveals that total (public & private; domestic & external) debt in emerging market and developing economies (EMDEs) reached an all-time high of around 170% of GDP ($55 trillion) – more than double the 2010 figure – by 2018, before the onset of the COVID-19 pandemic.
Total debt in low-income countries (LICs), after a steep fall from the peak of around 120% of GDP in the mid-1990s to around 48% ($137 billion) in 2010, increased to 67% of GDP ($270 billion) in 2018.
Pandemic debt
The COVID-19 pandemic greatly lengthened the list of EMDEs in debt distress as rich nations and institutions dominated by them, e.g., the World Bank, failed to provide any meaningful debt reliefs or increase financial support to adequately respond to the health and economic crises.
The World Bank’s International Debt Statistics 2022 reveals that the external debt stock of LMICs in 2021 rose to $9.3 trillion (an increase of 7.8% compared to 2020) – more than double a decade ago in 2010. For many countries, the increase was by double digit percentages.
Riskier debt
Over the past decade, the composition of debt has changed significantly, with the share of external debt owed to private creditors increasing sharply. At the end of 2021, LMICs owed 61% of their public and publicly guaranteed external debt to private creditors—an increase of 15 percentage points from 2010.
The private creditors charge higher interest rates, and offer little or no scope for restructuring or refinancing at favourable terms, as they maximise profit. The private creditors also usually offer credits for shorter duration, while development financing needs are for longer-terms.
Failed aid promises
Development needs of developing countries have increased many-folds, especially for meeting internationally agreed development goals, such as the Millennium Development Goals (MDGs) and now Sustainable Development Goals (SDGs). The LMICs’ estimated aggregate investment needs are $1.5–$2.7 trillion per year—equivalent to 4.5–8.2% of annual GDP— between 2015 and 2030 to just meet infrastructure-related SDGs. But the rich nations spectacularly failed to honour their promises of finance made at the 2015 UN conference on financing for development (FfD) in Addis Ababa.
In fact, they failed all their past aid promises, e.g., to provide 0.7% of their gross national income (GNI) as aid, a promise made over half a century ago. While aid hardly reached half the promised percentage of GNI, it in fact declined from the peak of around 0.55% of GNI in the early 1960s to around 0.34% in recent years. Oxfam estimated 50 years of unkept promises meant rich nations owed $5.7 trillion to poor countries by 2020!
At their 2005 Gleneagles Summit, G7 leaders pledged to double their aid by 2010, earmarking $50 billion yearly for Africa. But actual aid delivery has been woefully short. G7 and other rich OECD countries also broke their 2009 pledge to give $100 billion annually in climate finance until 2020.
Promoting private finance
Meanwhile institutions dominated by rich nations – the World Bank and OECD, in particular – promoted private financing of development. The World Bank, the IMF and multilateral regional development banks, e.g. Asian Development Bank jointly released From billions to trillions, just before the 2015 FfD conference.
The document optimistically but misleadingly advised governments to “de-risk” development projects for enticing trillions of dollars of private capital in public private partnerships (PPPs). While de-risking effectively meant governments bearing financial risks, or socialise private investors’ loss, PPPs are found to have dubious impacts on SDGs, especially poverty reduction and enhancing equity.
Meanwhile the OECD donors advocated “blended finance” (BF) to use aid money to leverage, again trillions of dollars of private capital. But as The Economist noted, BF is struggling to grow, stuck since 2014 “at about $20 billion a year…far off the goal of $100 billion set by the UN in 2015”, despite suspected double counting. Like PPPs, BF has effectively transferred risk from the private to the public sector. On average, the public sector has borne 57% of the costs of BF investments, including 73% in LICs.
Collateral damage
In the wake of the GFC the rich countries followed so-called unconventional monetary policies that kept interest rates exceptionally low – in some cases at zero – for a decade. This saw capital flowing from rich countries to EMDEs in search for higher returns, as exceptionally low interest rates enticed EMDE governments and businesses.
The opportunity to borrow at low rates also made the EMDE governments lazy in their domestic revenue mobilisation efforts. Such policy complacency was rewarded by the donor community, especially the World Bank, through its now discredited Doing Business Report, encouraging a harmful race to the bottom tax competition among countries to cut corporate and other direct taxations. The World Bank and IMF also advised to remove or lower easier to collect indirect taxes, e.g., excise duties in exchange for regressive and difficult to implement goods & services or value-added tax in poorer countries.
Bleeding revenues
Meanwhile transnational corporations (TNCs) continue to avoid and evade paying taxes using creating accounting, aided by tax havens, mostly situated in rich nations’ territories. Developing countries lost approximately $7.8 trillion in illicit financial flows from 2004 to 2013, mostly through TNCs’ transfer mispricing, or the fraudulent mis-invoicing of trade in cross-border tax-related transactions.
African countries received $161.6 billion in 2015, primarily through loans, personal remittances and aid. But, $203 billion was extracted, mainly through TNCs repatriating profits and illegally moving money out of the continent.
International tax rules are designed by the rich nations. They continue to oppose developing countries’ demand for an inclusive international tax regime under the auspices of the UN.
Perfect storm
Global supply-demand mis-matches due to the pandemic, the Ukraine war and sanctions are a perfect recipe for a perfect storm. The advanced countries’ inflation fight is causing adverse spill-over on developing countries.
Higher interest rates have slowed the world economy, and triggered capital outflows from developing countries, depreciating their currencies, besides lowering export earnings. Together, these are causing devastating debt crises in many developing countries, similar to what happened in the 1980s.
In October 2022, a United Nations Development Programme (UNDP) report estimated that 54 countries, accounting for more than half of the world’s poorest people, needed immediate debt relief to avoid even more extreme poverty and give them a chance of dealing with climate change.
Rich nations fail again
As pandemic debt distress became obvious, the G20 countries devised the so-called Debt Service Suspension Initiative (DSSI) for 75 poorest countries, supposedly to provide some modest relief between May and December 2020. DSSI does not cancel debt, but only delays re-payments, to be paid fully later with the interest cost accumulating – thus effectively “kicks the can down the road”. As the private lenders refused to join the G20’s initiative, unsurprisingly only 3 countries expressed interest in DSSI. Moreover, the G20 initiative does not address debt problems facing MICs, many of which also face debt servicing, including repayment issues.
Although the IMF acted innovatively at the start of the pandemic debt distress with debt service cancellation for 25 eligible LICs (estimated at $213.5 million), the World Bank’s Chief refused to supplement, let alone complement the IMF’s debt service cancellation for the most vulnerable LICs. Nonetheless, the Bank’s President hypocritically advocates debt relief as “critical”. He wants to have the cake and eat it too; apparently wanting to increase lending, but without sacrificing the institution’s AAA credit rating.
China debt trap diplomacy?
Meanwhile the rich nations accuse China of “debt trap diplomacy” that China is deliberately pushing loans to poorer countries for geopolitical and economic advantages. Less than 20% of LICs external debt is owed to China as against more than 50% to the commercial lenders.
Most Chinese loans are concessional, and China has provided more debt relief than any other country, bilaterally negotiating around $10.8 billion of relief since the onset of the pandemic.
Damaging trade-off
Rising debt servicing in the face of higher import costs, falling export revenues and declining remittances, are forcing developing countries to a damaging trade-off. They are forced to service external debt owed to rich nations and international financiers at the cost of development.
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