The submerging market debt crisis

Last week, Ghana’s central bank announced its biggest ever interest-rate hike as it sought to slow rampant inflation that threatens to create a debt crisis in one of West Africa’s largest economies.  The Bank of Ghana raised its main lending rate by 250 basis points to 17% as consumer inflation reached 15.7% year-on-year in February, the highest since 2016. The war in Ukraine will likely make things worse. Ghana imports nearly a quarter of its wheat from Russia and around 60% of its iron ore from Ukraine.

Ghana is just one example of the economic stress being placed on small, low-income economies around the world from food and energy inflation, rising interest rates and a strong dollar.  The island nation on the south east coast of India, Sri Lanka, has begun talks with the IMF for a ‘debt relief’ package after protests over a deepening economic crisis forced Gotabaya Rajapaksa’s government into a policy U-turn.  Sri Lanka has for months faced mounting economic pain as its depleted foreign currency reserves triggered shortages of imports and fuel, power blackouts and double-digit inflation.  It has debt and interest repayments worth about $7bn due this year against usable foreign currency reserves as low as $500mn. 

Sri Lanka is Asia’s largest high-yield bond issuer, borrowing heavily in the years following the end of its 2009 civil war. It has never defaulted.  But it looked set to do so before it turned to the IMF.  About one-third of its debts are owed to international bondholders while other large creditors include countries such as China and India. It is expected to finalise a $1bn credit line with India. And even with IMF money, it will probably have to default and ‘restructure’ its debts with creditors. 

In doing so, Sri Lanka will join countries such as Suriname, Belize, Zambia and Ecuador that have already defaulted on their debts during the pandemic.  Pakistan too is on the brink of default, with its government under Imran Khan forced into calling elections.  

Egypt has also asked for support from the IMF, as the country struggles to weather the economic impact of Russia’s invasion on Ukraine. Egypt is the Arab world’s most populous nation and has ‘benefited’ from previous IMF loans and programmes. In 2016 it secured a $12bn loan over three years after a crippling foreign currency crisis as it emerged from the political upheavals that followed its 2011 revolution. It also received $8bn in 2020 to deal with the impact of the pandemic, making it one of the biggest borrowers from the IMF after Argentina. At the time of the 2016 agreement, it devalued the currency, which lost half its value against the dollar.  Foreign debt investors have also pulled billions of dollars from Egypt in recent months, adding to pressure on its currency.

I’ve raised this before, and both the IMF and the World Bank have warned, many countries are emerging from the COVID pandemic slump with a large debt overhang that could crippled their economies if they are forced by creditors, both private and public, to repay.  And while many of these countries are small in GDP size, they are huge in population.  The IMF’s debt database shows that the external debt stock of low- and middle income countries in 2020 rose, on average, 5.6 percent to $8.7 trillion. However, for many countries the increase was in double digits. The external debt stock of countries eligible for the Group of Twenty (G-20) Debt Service Suspension Initiative (DSSI) rose, on average, 12 percent to $860 billion and in some of them by 20 percent or more.  And that debt initiative, which just suspends payments on debts for a few years, has now come to an end.

The combined debt service paid by DSSI-eligible countries in 2020 on external public and publicly guaranteed debt, including the IMF, totalled $45.2 billion, of which principal accounted for $31.1 billion and interest for $14.1 billion. The 2020 debt service comprised $26.4 billion (58 percent) paid to official bilateral and multilateral credi­tors and $18.8 billion (42 percent) to private creditors, that is, bondholders, commercial banks, and other private entities.  Many small countries have external debt levels well above 100% of annual GDP.

Prior to the start of the Russian invasion of Ukraine, the impact of the pandemic on low-income countries’ public spending and revenues had produced an increase in their gross sovereign borrowing equivalent to about 25 per cent of their GDP.

Capital flows to the poorer countries of the world by the imperialist core has been falling since the end of the Great Recession, another indicator of the decline in globalisation.  In 2011, $1.3trn went into the ‘Global South’ from the Global North.  In 2020, that annual figure had fallen to $900bn, a 30% fall.  And remember that over half of all financial flows to the Global South go to China.  Excluding China, the fall in capital flows to the poorest countries is even greater.  Over the past decade almost 60 percent of net aggregate financial flows to low- and middle-income countries from external creditors and investors went to China. Over this period China received inflows close to $4 trillion, of which 40 percent were debt-creating flows and 60 percent were foreign direct investment and portfolio equity flows. In 2020, aggregate financial flows to China rose 32 percent to $466 billion, driven by a 62 percent increase in net debt inflows to $233 billion and a 12 percent rise in net equity inflows also to $233 billion.

Private creditors (investment funds etc) have cut back on their investment in the government and corporate bonds of the poor countries and international banks have stopped lending.  Much of the capital flows into these poor countries was not even for productive investment but merely to cover previous debts or for speculation by foreign investors in local financial markets.  Foreign direct investment (FDI) has fallen from $600bn in 2011 (or about 40% of all capital flows) to $434bn in 2020.  You might argue that financial investments by foreign multinationals and investment speculators is the last thing these countries need.  But if foreign capitalists are reducing their investments, what is to replace it, either for productive investment in these poor economies or just to cover existing debt repayments?  The answer is IMF-World Bank money with all sorts of conditions; and increased remittances by those who left their countries and got jobs and incomes working abroad.  For all the data – see the table below.

One controversial issue in capital flows to the Global South is the role of China.  China has become an important creditor to many poor countries, starved of funds by the ‘West’ and desperate for credit to cover existing debts and to carry out infrastructure and productive projects. Low- and middle-income countries’ combined debt to China was $170 billion at end-2020, more than three times the comparable level in 2011. To put this figure in context, low- and middle-income countries’ combined obligations to the International Bank for Reconstruction and Development were $204 billion at end-2020 and to the International Development Association $177 billion. Most of the debt owed to China relates to large infrastructure projects and operations in the extractive industries. Countries in Sub-Saharan Africa, led by Angola, have seen one of the sharpest rises in debt to China although the pace of accumulation has slowed since 2018. The region accounted for 45 percent of end-2020 obligations to China. In South Asia, debt to China has risen, from $4.7 billion in 2011 to $36.3 billion in 2020, and China is now the largest bilateral creditor to the Maldives, Pakistan, and Sri Lanka.

Some argue that this shows China is just as ‘imperialist’ as the West and that China is putting poor countries into a permanent ‘debt trap’.  But the evidence for this is weakMost Chinese credits are on no worse terms than that offered by the IMF and other bilateral creditors, and in many cases are much better. China is supposed to use ‘debt diplomacy’ against the interests of debtor nations.  But debt diplomacy is actually used by the West more, as the examples of Argentina and Ukraine show. 

In sum, debts to foreign investors and financial institutions owed by the Global South have accelerated during the COVID pandemic and ‘debt relief’ has been no such thing.  Now the Ukraine conflict is increasing the risk of defaults and economic recession for these countries as inflation spirals, interest rates rise and economic growth falls away.

Net transfers of financial resources from developing to developed countries far exceed any compensation by net overseas development aid (ODA) flows to developing countries, which averaged less than $100bn a year In 2012, the last year of recorded data, developing countries received a total of $1.3tn, including all aid, investment, and income from abroad. But that same year some $3.3tn flowed out of them. In other words, developing countries sent $2tn more to the rest of the world than they received. If we look at all years since 1980, these net outflows add up to an eye-popping total of $16.3tn.

What’s the answer?  Well, the obvious global one is to cancel the debts owed by all these poor countries.  Based on the amount their governments are spending on debt payments which leave the country, the Jubilee Debt Campaign estimates that people in 54 countries are currently living in debt crisis, up from 31 in 2018 and 22 in 2015. As well as the 54 countries in debt crisis, Jubilee Debt Campaign estimates that 14 countries are at risk of a public or private debt crisis, 22 at risk of just a private sector debt crisis, and 21 just a public sector debt crisis. 

Then there are national solutions.  First, governments need to put in place capital controls to stop the reckless flow of speculative capital that destroys national currencies and provokes financial crises.  Capital controls are also needed to stamp out illicit and criminal capital flows.  US-based Global Financial Integrity (GFI) calculates that developing countries have lost a total of $13.4tn through unrecorded capital flight since 1980.


Even the IMF has admitted that capital controls should be a weapon available to a national government to protect its financial assets and household savings from asset stripping and rich individual and corporation capital flight.  The IMF now says that countries should have “more flexibility to introduce measures that fall within the intersection of two categories of tools: capital flow management measures (CFMs) and macroprudential measures (MPMs)”.  And controls could be “applied pre-emptively, even when there is no surge in capital inflows, to the policy toolkit.”

Ultimately, the only way poor countries can reduce their exploitation by multi-nationals and international finance is through state control of their banking and strategic sectors of their economies.  That, of course, is anathema to international capital.

25 thoughts on “The submerging market debt crisis

  1. The conclusion that China’s credits “are on no worse” (than other capitalists) is not particularly reassuring. Chinese capital investments extract surplus value from these countries just like any other imperialist country. “No worse” also runs counter to the article that is cited, which concludes, “The ‘no Paris Club’ provision, which was found in nearly 75% of the contracts, is particularly relevant because it ‘clearly runs counter to commitments to the G-20 Common Framework on Debt’ “. Further, in 30% of contracts, China uses “special accounts with cash balance requirements that China can seize in case of default”, which are “highly unusual” for sovereign loans.

    1. I put that report in to show some balance on the debated question. But I also included several articles that show this charge against China does not hold water. Even the study quoted admits that escrow accounts are not unusual for foreign creditors to set up and China has not made any seizures on defaults based on such accounts.

    2. This is an empiricist argument.

      If China simply gave free money to those countries, it would simply go bankrupt, while the capitalist countries would only get richer. We would not have advanced one step towards socialism (on the contrary, we would go back by decades).

      The Third World countries are, at the end of the day, capitalist nation-states indebted to other capitalist nation-states (First World). It would simply make no sense for China to make socialist deals with capitalist countries – no matter how dire their situation is – for the simple fact they would use such resources to solve their capitalist (not socialist) problems, therefore strengthening (not weakening) capitalism.

      Cuba – which is a socialist country which had debt with China – had all its debt forgiven by China (and China continues to effectively donate it money). If the country is socialist, China is indeed being extremely generous.

  2. The Credit Suisse Global Wealth report, 2020, shows average wealth per adult, worldwide, is just under $80,000/adult. Unfortunately 45.8% of all wealth is held by 1% of adults. Total wealth worldwide stands at $418 trillion, and it has increased from $119 trillion in 2000, a multiple of 3.5 between 2000 and 2020. On page 17, full report, a pyramid shows that 55% of adults own 1.3% of all wealth, individually less than $10,000, and their average wealth is $1,910. The top 1%, or 56 million adults, own 45.8% of wealth which averages to $3.4 million /adult. The solution lies in democratic-socialist government cooperation seizing the power of finance. In the 1950s in the U.S. a policy of “financial repression” existed, I think though I’m not positive, and it required financial entities to deposit a fraction of their resources in government bonds that paid below inflation rates of return — a form of taxation. I may be wrong, but it sounds like a good idea. That money collected from rich countries could form the basis of “Special Drawing Rights” currency that could be distributed among poorer nations. I’m dreaming. The imagination can easily produce solutions to this under-development problem, but it requires rejecting the libertarian capitalist mindset. I’m reading a good book, The 99/% Economy, How Democratic Socialism Can Overcome the Crises of Capitalism, by Paul S. Adler, 2019, Oxford Press. Page 134, “The socialization of property will allow us to eliminate the subservience of government to private-sector business interest and thus to overcome the main reason for the government’s unresponsiveness. The structural power of the private enterprise business sector and its ability to threaten a capital strike and capital flight will be eliminated.” Very complex and interesting problem.

    1. Adler’s argument would not work because such State – which would socialize property – must necessarily be a capitalist State, given peacefully and democratically to the so-called democratic socialists. There’s no subservience of the State (“government”) to the “private-sector business” – one is symbiotic to the other.

      The problem here is that a capitalist State can only work in capitalism, therefore with capitalist rules, over the capitalist mode of production. It would be the classic case of “this is not how this thing was projected to work”.

  3. “You might argue that financial investments by foreign multinationals and investment speculators is the last thing these countries need. But if foreign capitalists are reducing their investments, what is to replace it, either for productive investment in these poor economies or just to cover existing debt repayments?”

    This contradiction can be easily solved by simply taking into account that nation-states are mere administrative subdivisions of capitalism. You still have one single capitalist society (the “world market”), subdivided into nation-states, where the USA serves as the HQ and the First World serves as its “center”.

    In this context, it is not that multinationals are forces of good, but merely envoys from the center of the system extracting and exploiting the periphery of the system. The Third World, therefore, are the provinces of the American (Capitalist) Empire, not equal nation-states.

  4. I have arguments all the time with people on the Chinese debt issue. For a non-economist layperson, the understanding I have is that China does largely offers loans at 2% with very few strings attached. Their investment is almost always related to infrastructure. The IMF offers at 1%, but their loans feature “structural adjustment”, which again is a fancy euphemism for accepting some awful strings like:

    liberalization of markets to guarantee a price mechanism
    privatization, or divestiture, of all or part of state-owned enterprises
    creating new financial institutions
    enhancing the rights of foreign investors vis-à-vis national laws
    focusing economic output on direct export and resource extraction
    increasing the stability of investment (by allowing foreign investors) with the opening of companies
    reducing government expenditure e.g. reducing government employment

    It’s a road map for colonial resource extraction, corporate takeover, and reduction of government employment and power. China simply charges 1% more and requires non of this- and therefore it’s been a no brainer for most developing countries.

    Interesting to note that the IMF has 90% of the exposure in loans to developing nations, while the World Bank has the IDA (International Development Association) with a total of only about 40 billion dollars of investment. So when we speak of developing nations the IMF is the real creditor. Even then the middle income nations IRDB (International Bank for Reconstruction and Development) carries only about 230 billion total. IMF total available is 1 trillion.

    BRI total investment according to CSIS is $1 trillion, so we see the nature of the dueling forces. It’s a competition for who gets to develop the world, which is in shorthand industrialization.

    Interesting to note that IMF and World Bank are both Breton Woods institutions, and that it’s founder, Harry Dexter White, was accused of being a Communist and mysteriously died in 1948 of a heart attack at age 55. He had defeated Keynes in many debates leading up to the formation of the IMF.

    To those that constantly insist that China is capitalist and therefore not worthy of any support, they need to read Deborah Bräutigam’s work on the subject. The “debt-trap diplomacy” idea is a recent one and corresponds with a coordinated effort of the western world to make up for the growing investment differential.'debt-trap_diplomacy'_the_rise_of_a_meme

    Obviously orthodox Marxists who view the basic building block of Imperialism to be the export of capital and the extraction of profit from it’s surplus aren’t going to be convinced, but this simply shows how the “white tower” attitudes of western Marxist academics seems to covertly support American Hegemony. In a stagiest view, the race to industrialize the world takes precedent over economic systems analysis. Calling the industrialization “capitalist” or “socialist” is usually meaningless. In as far as the west can hope to remain competitive, it needs to return to an earlier Breton Woods style of lending, one focusing on development rather than debt. This is already being heralded by western think tanks.

    Chinese investment is more akin to a “socialist” industrialization because it focuses on infrastructure and the fact that most profits extracted from surplus value ultimately end up in the State Capitalist sector in China. But either or, the world needs to be industrialized and the age of the lazy “de-growth” debt based strategy of American Hegenomy from 1970-2022 is over.

    1. Why should (or how could?) the core imperialist countries fully industrialize the comprador countries of the “global south” when their own off-shored industrial capital was unprofitable? Comprador states have to be super-exploited by strategically limited industrial development. Only socialist countries like China can can use capital investment to fully industrialize (fight capital with capital) relative to their (not capital’s) needs. The (deus irea!) God’s of Capital promised to never make that mistake again. They’ve chosen war instead.

      1. Yes I agree that is a historical materialist synopsis. But there is nothing about the current 1970-2022 timeframe that describes, with certainty, that what we are experiencing as a global system is capitalism. By what metric do we call this system capitalist when it’s profits aren’t completely derived from extraction from surplus value? Nearly a third of corporate profits have been printed in the last 15 years, or more accurately they have been QE’d,

        If the very point of capital is to organize around profit as a goal, what do you call a global economy based around debt with three oligarchies of finance, energy, and military spending and the insurance of it’s profit at all costs?

        During Breton Woods the IMF/World Bank outcomes were much better. The Marshal Plan, although expressly not a part of any IMF lending, was a huge success. We baby sat countries industrialization as we allowed their currency to be pegged to the dollar. Given a high level shift in the American elite, spurred on by intense populist political pressure, why can’t they go back to this now? Surely it requires a huge effort and a near revolutionary historical change but it offers the same thing that the New Deal did.

        Whether or not this can be used for a vehicle for Communism is the oldest of American Leftist debates.

        Obviously China simply leads the way in the same direction as they bid to industrialize/develop the world.

    2. Hi, thank you for your comment. I am trying to learn more about Chinese international lending, I would be grateful if you would please share a link to information about the interest rates of Chinese loans around the world. Thank you

  5. Reblogged this on Socialist Fight and commented:
    Serious stuff here from Michael Roberts. Solutions like governments of the Global South stopping capital outflows highlights the needs for revolutionary solutions to the debt crisis. The old Bolshevik programme for world revolution anyone?

    1. Bolsheviks had at least four different & contradictory phases?
      Which period & phase is the “authentic” one?
      Throwing out cliches & mythical narratives doesn’t advance the discussion.
      Clarity & clarification would be so useful.
      Spell out exactly what do you mean by radical approach to Debt crisis.
      David Graeber had a novel solution for the debt problem: Jubilee!
      Graber’s Communism is often overlooked.

  6. The most important point you make is the one in the article which concerns 2012 when $1.3 was invested in the dominated economies but $3.3 trillion was sucked out which of course is only part of the ransom these kidnapped countries paid out. This is why we should always argue against the myth, that Western Countries, via their foreign aid programms are donor countries.

    What is now replacing supply chain breakdowns is financial breakdown. It not only applies to the relationship between imperialist nations and dominated countries but everywhere. It applies as much to European farmers as it does to African farmers. Everywhere insolvency is raising its head as producers can no longer pass on price rises because consumers are bust. This Michael rather than the localised event of the mortgage crisis in 2008 is the making of a real slump of epic proportions.

  7. Mortgage crisis 2008 an “isolated event”? You can’t be serious. Unfortunately you probably are. The collapse of 2008-2009 produced the single largest contraction of world trade since WW2. From Q108 to ‘Q109 international trade dropped 15% while global GDP dropped 4 percent.

    IMF estimates bank losses in the US and Europe exceeded one trillion dollars.

      1. The above contradicts your original statement that the mortgage crisis was a localized incident. You now state that if the FED and UST HAD rescued AIG and Lehman, they could have limited the crisis. Well they didn’t rescue AIG or Lehman, but you earlier claimed the mortgage-initiated crisis was “isolated” anyway.

        I know it’s bad form around here to point out self-contradictory positions, but……..go ahead, sue me. Just make up your mind before you file the papers.

        Regardless, the FED and UST did act; they made AIG’s counter-parties WHOLE, redeeming all of those positions.
        Their actions– particularly the SIVs and the open ended currency swap lines– did contain the crisis, and world trade still plummeted. Lehman would have tied up too much money, $600 billion, for too long and had to be left to twist in the wind.

        No, it’s not a matter of perspective. The magnitude and breadth of 2008 are real and have had a sustained impact of capitalism these 14-15 years later.

      2. You know I have written at length about 2008 which was primarily a financial crisis which of course paralysed the system. But what capitalism faces is systemic a different level.

  8. Joseph Stiglitz said in an article in the Argentine newspaper “La Nación”: Given the possibility that interest rate hikes and Russia’s war in Ukraine could provoke large-scale capital flight and a global debt crisis, it is crucial that the IMF accepts capital controls and recognizes that they can help member states mitigate financial instability. It may well be that the world economy depends on it. Even if the IMF took action, I don’t think it could control the chaos inherent in the nature of the capitalist economy. Very good, as always, your article Michael.

  9. I must communicate that I regularly go through your article and it has helped me immensely.
    I found that from 2015 onward growth rate of Sri Lanka became downward till 2020. Thus a roundabout conclusion can be made that the average rate of profit in Sri Lanka was falling and that also helped to aggravate the crisis in Sri Lanka. I want to know your opinion in this regard. I like to know whether you can share any graph or document in this regard. It may be added that the entire debt problem of a large number countries at present further reveals a contradiction between an inherent tendency of capital to become global and the state acting in a geopolitically limited space. This contradiction flared up in Latin America in 1980s, in India in 1990. I also eagerly wait for your

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