Friday, July 12, 2024

Preventing developing-economy debt disasters


Skyrocketing food and energy prices, together with widening sovereign bond spreads, have placed balance sheets in emerging-market and developing economies under severe strain. To avoid disaster, the international community must urgently support bold debt restructuring.


The world’s breadbasket is being wrecked by war. Ukraine and Russia together account for 30% of global wheat and barley exports, and they are leading exporters of other grains. The two countries also are the source of nearly 70% of the world’s sunflower oil exports, while Russia accounts for 13% of all crude petroleum exports. As the conflict in Ukraine rages and sanctions on Russia escalate, food and energy prices which were rising even before Russia invaded Ukraine are spiking in countries far away from the front lines, with devastating implications for the world’s poor.
The Ukraine war is having two distinct effects on food markets. First, it has caused prices to soar. Last month alone, world wheat prices surged by nearly 20%. This trend will be exacerbated by the second effect: likely shortages of food supplies and agricultural inputs from Russia and Ukraine.
Since the conflict began, Ukrainian farmers have lacked access to crucial resources – from fertilizer to fuel – not to mention facing insecurity and violence. With the wheat planting season fast approaching, there is good reason to expect significantly reduced crop yields. And, given that Russia is a leading fertilizer exporter, other producers’ yields might suffer as well.
Even the supply that is available will not necessarily make it to the countries that need it. Port closures and other transport barriers have impeded Ukrainian exports, while sanctions on Russia threaten to impede its trading activities. For countries that import directly from Russia and Ukraine, severe food-supply disruptions are likely, as it will be difficult to secure replacements from alternative suppliers quickly. Meanwhile, oil and gas prices have risen sharply.
Ultimately, it is the world’s poor – 70% of whom live in Africa – who will bear the brunt of these shocks. Refugees across Africa and the Middle East, and people in post-conflict or conflict-affected countries, are particularly vulnerable. But in any low-income country, energy and food expenditures account for at least half of total expenditures for most households, meaning that the current crisis could well increase global poverty.
Moreover, while rural populations are typically less vulnerable to food-import shortages than their urban counterparts, a series of droughts, including in Madagascar and the Horn of Africa, have already left people in many food-producing areas hungry. The World Food Programme estimates that 13 million people are facing hunger in the Horn of Africa alone.
Governments are responding to this emerging crisis with a combination of policies. Countries with universal consumer subsidies or price controls are enforcing them. Others are implementing targeted subsidies, including cash transfers, in order to support their most vulnerable citizens. The effort to bolster food security at home has also led to limits on food exports. And countries with strategic reserves of food might deploy them, though many have already exhausted their stocks.
All of these schemes carry a price. Food-export bans threaten to drive up international prices and weaken local producers’ incentives. And cash transfers can prove costly, especially if private companies have oligopoly power; in the face of inelastic demand for food, these firms might decide to raise prices beyond international market rates.
There are better options. In the medium term, many African countries can develop better-functioning food systems and transform the agricultural sector to limit food dependency and bolster food security. The key will be to address long-standing issues relating to land, access to capital, and competition, including in the transport and distribution sectors.
But perhaps the single best way to protect people from poverty and food insecurity is to build a more inclusive and efficient social-protection system. The problem is that most developing and emerging-market economies lack the necessary fiscal space, especially after years of strain from the COVID-19 pandemic.
Even countries that are benefiting from higher prices in one area are largely suffering from higher prices in another. Oil-exporting countries, such as those in the Middle East and North Africa, are heavily dependent on food imports. Likewise, major food exporters tend to depend on energy imports, leaving them with few gains from rising food prices.
But countries that are net importers of both food and energy are in the most difficult position. Their external deficits are now set to widen, and their already-elevated debt levels will rise further a trend that lower global GDP growth will exacerbate. The spread on sovereign borrowing has doubled for many developing and emerging-market economies. And unlike the advanced economies, these countries cannot typically borrow in their own currencies.
Making matters worse, the United States Federal Reserve is expected to accelerate its interest-rate hikes, thereby tightening global financial conditions. As a result, borrowing costs for developing and emerging-market economies are set to soar, potentially triggering balance-of-payment and debt crises.
To avoid disaster, the international development community should increase financial support to vulnerable countries. At the same time, the world must urgently support much bolder debt restructuring for emerging-market and developing economies. The G20 Common Framework for Debt Treatments has thus far not provided the impetus for debtors and creditors alike to embark in debt restructuring.
The invocation of force majeure which the United Nations International Law Commission defines as an unforeseen or foreseen-but-inevitable event, which makes it impossible for the debtor to meet its obligations can help here, by precluding creditor holdouts. Otherwise, most of developing countries’ resources including any international financial support they receive could end up in the pockets of foreign bondholders.

Rabah Arezki, former chief economist and vice president at the African Development Bank and former chief economist of the World Bank’s Middle East and North Africa Region, is a senior fellow at Harvard Kennedy School.
Mahmoud Mohieldin is UN Special Envoy on Financing the 2030 Sustainable Development Agenda.

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