Image by rupixen.

When Germany borrows from the international loan market, it is charged a modest interest rate of 0.8 percent per annum. The same is 2.5 percent for the US. But if one comes to the southern nations, the rate spikes. For Asian countries, for example, the average rate is 5.3%, for Latin America and Caribbean (LAC) it’s 6.8 percent, and for African countries, it’s 9.8% – a whopping 12 times of the rate for Germany!

Why is this discriminatory rate? Who decides the rates? What are the implications?

About 54 low-income countries (LICs) and lower-middle income countries (LMICs) are in debt crisis. In this context, ActionAid, an international civil society body, brought out a paper, “Who Owes Who?” sharing discussion on international debt with a historical perspective. This comes on the eve of the fourth UN Financing for Development conference in Seville, Spain scheduled from June 30 to July 3 to discuss the ways to finance the SDGs and climate action.

74 LICs and LMICs of a total of 77 (data from 3 countries not available), owe a total external debt of USD 1.45 trillion to their debtors: Blackrock, Goldman Sachs, HSBC etc., the private creditors headquartered in New York or London or other rich countries, and the IMF. In 2023 they paid a sum of USD 138 billion in debt servicing, for which they have to cut their public service spending including in key sectors like health and education leading to a severely debilitating impact on the people, specifically on the women doing most of the unpaid care work that rises when public services fail.

The interest rates charged to countries are decided by the risk associated with them in an open market system which is influenced by the private credit rating agencies like S&P global ratings and Moody’s based in the US and Fitch headquartered in New York and London. With no public regulations on the rates, strange logic is adopted, attaching a high rate to the countries that are conflict-ridden and have high climate vulnerability. These are in fact the countries which need support from the International Financial Institutions (IFIs) like the IMF and the World Bank to salvage the situation. And many of these countries which are facing the impact of climate change are not responsible for the same. Instead of addressing the systemic injustice, the IFIs, created in the colonial era, brutally enforce the loan recovery even in countries like Eritrea, Ethiopia, Malawi, Yemen, Burundi, Angola, DR Congo, Zimbabwe and Pakistan etc. that are most climate vulnerable countries!

There is a clear connection between the debt crisis and the climate crisis, as countries in debt have to earn foreign currency quickly – required for debt servicing – which is only achieved by extracting fossil fuels and investing in industrial agriculture that accelerate the climate crisis. Meanwhile the same private creditors, mostly the banks, have invested more than USD 3.2 trillion in fossil fuels in the southern countries since the Paris climate deal in 2015, thus imperilling the world.

Rich countries agreed under a UN resolution in 1970 to contribute 0.7 percent of their gross national product as Official Development Assistance (ODA) to the developing countries and the LDCs. Their contribution in practice has been far less than what is promised. In the last 50 years, a cumulative deficit of USD 7.2 trillion is owed by the rich countries under ODA commitments. Had this money come to the LICs and LMICs, they would not have needed any external loan, thus making the debt crisis dispensable.

Under the ‘Economic Justice Mobilisation’, the civil society organisations like GCAP, Oxfam, Action Aid and others demand a cancellation of illegitimate debt and transformation of the International financial architecture to make it inclusive. The civil society engaged in the ‘Financing for Development’ mechanism calls for a UN framework Convention on Sovereign Debt to develop a fair debt mechanism and prevent future debt crisis. It should establish: a. fair and transparent multilateral sovereign debt resolution mechanism, b. principles of responsible sovereign lending and borrowing, c. a new approach to debt sustainability framework and analysis aligned with human rights, gender equality, sustainable development and climate needs, d. an automatic debt service cancellation mechanism in certain emergencies and e. a binding global debt registry to promote transparency.

In the United Nations every member state has equal voting rights. Therefore, this is a better platform to address the issues of the debt crisis than to leave it to the IMF and the World Bank where the rich countries have a majority of votes.

The post Debt Trap by Design? appeared first on CounterPunch.org.